Earnings Call Transcript - BANC Q4 2021

Operator, Operator

Hello and welcome to Banc of California's Fourth Quarter Earnings Conference call. All participants will be in listen-only mode. Today's call is being recorded, and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures, and the reconciliation for these, along with additional required information, is available in the earnings press release. The reference presentation can be found on the company's Investor Relations website. Before we begin, we would like to direct everyone to the company's Safe-Harbor statement regarding forward-looking statements included in both the Earnings Release and the Earnings Presentation. I would now like to turn the conference call over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer. Please go ahead.

Jared Wolff, President, Chief Executive Officer

Good morning, and welcome to Banc of California’s Fourth Quarter Earnings Call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. We had a very strong fourth quarter that capped a tremendous year for Banc of California. We substantially grew core earnings, while also making investments that have strengthened our franchise and positioned us very well for continued growth in the years ahead. We are quite proud of what we accomplished in 2021. We exceeded our growth targets as our new business development efforts produced high quarter loan and deposit relationships that enabled us to grow our balance sheet, realize more operating leverage, and improve our level of returns. We continue to reduce our deposit costs and built the type of deposit franchise that we believe is the foundation of high-performing banks. We attracted substantial new talent to the company, which has not only strengthened our business development capabilities but also increased the breadth and depth of our presence across the State of California. We laid the groundwork for our verticals in payments and tech, while bolstering our capabilities in real estate, healthcare, media and entertainment, treasury management, and other core verticals. And we continue to optimize our use of capital to increase earnings and enhance franchise value; first, with the redemption of our Series D preferred stock, and then with the acquisition of Pacific Mercantile Bancorp. We were able to do all these things while managing through the continuing impact of the pandemic. I want to thank all of our colleagues at Banc of California for their extraordinary efforts that enabled us to achieve all these goals that we set for 2021. During the fourth quarter we completed our acquisition of Pacific Mercantile, an integration that proceeded in line with our expectations. The system conversion was completed in mid-November and by the end of the year we had put in place all measures necessary to achieve our target of 40% cost savings, which should be fully realized by the end of Q1 2022. Of course, we will continue to look for other opportunities where we can enhance efficiencies and realize additional cost savings. It is worth noting that the tangible book value dilution we expected from the transaction has come in much better than previously announced, and accordingly our earn back will also occur much faster than originally anticipated. Our fourth quarter earnings were impacted by the merger-related costs and data provision expense for the Pacific Mercantile portfolio, which Lynn will discuss later in the call. But the core performance of the business was very strong as our adjusted pre-tax, pre-provision income increased by 18% from the third quarter, due to our continued organic growth and a partial quarter revenue contribution of Pacific Mercantile, which impacted the cost savings to be realized in a more meaningful way in 2022. We ended the year with our largest quarter of new loan fundings and total loan fundings, which reflects our revenue growth engine, the strength of our commercial banking team we have built over the past few years, and the initial impact of the bankers we added from the PMB deal. Our production continues to be broad based with good contributions across market, asset classes, and industries. We had total loan fundings of $906 million in the fourth quarter, including $583 million of new fundings and $323 million of line advances, of which only $80 million related to net warehouse line advances. This represents an increase of 16% in new funding and 19% of total loan fundings compared to the third quarter. However, we also saw a substantial increase in loan payoffs and pay downs, which were up by approximately $300 million from the prior quarter and impacted our level of organic net loan growth this quarter. Our loan production engine remains strong and accordingly we anticipate meaningful loan growth in 2022. We also had another solid quarter in terms of bringing in new low-cost deposit relationships. During the fourth quarter we opened more than $200 million in new non-interest bearing and low-cost checking accounts. We used a portion of the excess liquidity we added from Pacific Mercantile to reduce approximately $300 million of higher cost deposits, which further improved our mix of deposits. With the continued improvement in our deposit base resulting from our business development efforts, and the acquisition of Pacific Mercantile, we finished the year with a spot rate cost of deposits at 7 basis points. A key driver of the improvement in our cost of deposits is our increasing mix of non-interest bearing deposits, which represented 37% of total deposits at year-end, up from 32% at the end of the third quarter.

Lynn Hopkins, Chief Financial Officer

Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our Investor Relations website as I review our fourth quarter performance. I’ll start by reviewing some of the highlights of our income statement and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the third quarter of 2021. With the impact of closing the Pacific Mercantile acquisition during the quarter, net income available to common stockholders for the fourth quarter was $4 million, or $0.07 per diluted share, down from $21.4 million, or $0.42 per diluted share for the third quarter of 2021. The fourth quarter results included on a pre-tax basis $13.5 million of merger-related costs, and $11.3 million of provision for credit losses related to the non-purchased credit deteriorated loans and unfunded commitments acquired from PMB. Given the noise created from the Pacific Mercantile acquisition, we’ll focus on our adjusted pre-tax, pre-provision numbers this quarter, which are more reflective of our core performance. Our adjusted pre-tax, pre-provision net income totaled $32.6 million, an 18% increase compared to $27.6 million for the prior quarter. This $5 million increase was due to higher net interest income of $10.1 million, driven by higher average loans from both organic growth and acquired loans, offset by lower non-interest income of $659,000 and higher operating costs of $4.5 million as we included PMB's operations since the date of acquisition. Our annualized adjusted pre-tax, pre-provision return on average assets increased 4% to 139 basis points from the 134 basis points achieved in the third quarter. Our net interest margin remained steady at 3.28% during the quarter, as our overall asset yield decreased by 7 basis points and our total cost of funds decreased by 8 basis points. Our earning asset yield decreased to 3.66% due mostly to an increase in lower yielding, other interest earning assets as a result of the level of cash balances acquired from Pacific Mercantile and then subsequently deployed in the quarter. Our average loan yield increased 2 basis points to 4.2% during the fourth quarter, due in part to higher prepayment fees and a greater mix of commercial real estate, multi-family and construction loans. Our average cost of funds decreased 8 basis points to 41 basis points, due mostly to lowering our average cost of deposits by 4 basis points to 11 basis points for the fourth quarter and a reduction in other borrowings. The decrease in our average cost of deposits reflected an increase in our mix of non-interest bearing deposits, which averaged 35% of total average deposits during the fourth quarter compared to 30% during the third quarter. During the fourth quarter, $330 million of high-cost deposits with a weighted average rate of 53 basis points repriced or matured, including deposits acquired from Pacific Mercantile. This is reflected in our lower period end deposit spot rate and we expect to receive a full quarter's benefit in the first quarter. Our adjusted expenses increased $4.5 million from the prior quarter, due mostly to higher salary and benefits, occupancy and equipment, data processing and other expenses associated with adding Pacific Mercantile operations since the October 18 acquisition date, followed by the system conversion in mid-November. In addition, we incurred $13.5 million in merger-related costs and have $642,000 in indemnified professional fees during the quarter. The effective tax rate for the fourth quarter was 32.4% compared to 27.2% for the third quarter. The increase in the effective tax rate during the fourth quarter was due mostly to the impact the Pacific Mercantile acquisition had on our annual effective tax rate and other permanent items. Our annual effective tax rate is approximately 25%. Turning to our balance sheet, our total assets increased by $1.1 billion in the fourth quarter to $9.4 billion, and total equity increased by approximately $220 million. In the Pacific Mercantile acquisition, we issued approximately 11.9 million shares increasing equity $222 million, and we recorded goodwill and other intangible assets of $62 million. At December 31, our tangible book value per common share was $13.88, down from $13.99 at the end of the third quarter. The PMB acquisition reduced our tangible book value per share by $0.10, which was less than we had previously estimated. Our gross loans held for investment increased by $1 billion, or 16.4%, during the fourth quarter with growth across all lending categories attributable to the impact of the acquired Pacific Mercantile loans and organic production.

Jared Wolff, President, Chief Executive Officer

Excluding the $905 million of loans added in the Pacific Mercantile acquisition, and outstanding at year-end, loans increased by $170 million. This growth included $696 million in production and $210 million in SFR loan purchases offset by $789 million in payoffs, pay-downs, and other reductions. The overall activity increased the mix of commercial-related loans to 79% of total loans, up from 77% at the end of the third quarter. As of December 31, we had $123 million in PPP loans consisting of $27 million from Round 1 and $96 million from Round 2. Deposits increased $896 million during the fourth quarter, due mostly to approximately $1.1 billion of deposits added from the Pacific Mercantile acquisition and outstanding at year-end, offset by utilizing excess liquidity to fund outflows of higher cost deposits. We acquired $479 million in cash and cash equivalents, which gave us the flexibility to exit higher costing deposits during the quarter. Demand deposits, non-interest bearing, plus low cost interest checking increased by 20% from the prior quarter. This represents our 10th consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. We expect this favorable shift in our deposit mix to further support our net interest margin in the first quarter. Over the past year, demand deposits increased to 70% of total deposits, up from 60%, reflecting the improvement we have made in our deposit base. This increase, combined with our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 36 basis points in the fourth quarter of 2020 to 11 basis points achieved in the fourth quarter of 2021. We believe we are very well positioned to benefit from the coming cycle of rising interest rates. Due to the transformation and the franchise to our relationship-based banking model, with higher percentages of non-interest bearing deposits and variable rate commercial loans, our one year GAAP ratio which compares the percentage of earning assets that are scheduled to mature or reprice within one year to the percentage of rate-sensitive term liabilities that are scheduled to reprice or mature within one year has steadily increased. At the end of 2021, our one year GAAP ratios stood at 38%, up from 7% at the end of 2019. This is one measure of asset sensitivity, and with a significant increase in this ratio, we expect to see some expansion in our net interest margin as short-term rates increase. Our credit quality remains strong in the fourth quarter and we saw positive trends in most categories, excluding the impact of the loans added from Pacific Mercantile. Non-performing loans increased $6.9 million to $52.6 million in the fourth quarter, including the addition of $21.6 million of loans acquired in the Pacific Mercantile acquisition that was largely offset by payoffs, pay-downs, charge-offs, and sales. The non-performing loans acquired in the Pacific Mercantile acquisition included $12.8 million C&I loans and $5.5 million in PPP loans, which were all known to us through our acquisition due diligence. At December 31, 55% of non-performing loans are either in a current payment status that are classified non-performing for other reasons or our SBA loans guaranteed through the PPP or 7(a) Programs. Let me turn to our provision for the quarter. The provision for credit losses was $11.3 million in the fourth quarter compared to a reversal of $1.1 million for the third quarter. The fourth quarter provision for credit losses included an $11.3 million charge related to non-purchased credit deteriorated loans and unfunded commitments added as of the Pacific Mercantile acquisition date.

Lynn Hopkins, Chief Financial Officer

In addition, we recorded no provision expense related to other loan portfolio and unfunded commitment activity during the quarter. We determined that the impact of the quarter's net loan growth was offset by improving economic forecast utilized in our model, improved credit quality in our loan portfolio and lower unfunded commitments. Our allowance for credit losses at the end of the fourth quarter totaled $98.2 million and our allowance to total loans coverage ratio stood at 1.35%. The increase in the coverage ratio from 1.26% at the end of the third quarter is due to the general and specific reserves established for the acquired Pacific Mercantile loan portfolio. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.7% at December 31. Our ACL coverage to non-performing loan ratio remained healthy at 187%. Our capital position remains strong and has benefited from the strategic actions completed over the past several quarters. We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value. At this time, I will turn the presentation back over to Jared.

Jared Wolff, President, Chief Executive Officer

Thank you, Lynn. I’ll wrap up with a few comments about our outlook for 2022. With the banking talent we have added and continue to add, the impact of the PMB acquisition, and the way our entire organization is executing at a very high level, we believe we are extremely well-positioned to deliver another strong year in 2022, particularly given the strength of the attractive California markets in which we operate. We have positioned this company to continue generating top line growth and to benefit from rising rates. With interest rates expected to rise in 2022, we think we'll be in a good position to benefit from the improvements we've made in the composition of our balance sheet over the past few years that have made us more asset-sensitive. Building a superior deposit franchise has been our top priority and the robust deposit gathering engine we have developed consistently brings in low-cost deposits to fund our growth and earning assets. We've seen the benefit of lower deposit costs over the past two years and as rates rise, the value of the deposit base we have built will become even more apparent. At the end of 2021, non-interest bearing deposits increased to 37% of total deposits, up from 15% when I joined the company in early 2019. And with the addition of PMB’s loan portfolio, our percentage of variable rate loans has also increased, making us even more asset-sensitive. This should provide yet another catalyst for earnings growth and improve returns as our net interest margin benefits from the higher level of asset sensitivity we expect in a rising rate environment. As we enter 2022, we're focused on fully realizing the synergies from the PMB acquisition, including opportunities to expand relationships with our new clients that have larger financing needs to support their growing businesses. Additionally, in 2022, we will be accelerating investment in technology, as the greater scale we have following the PMB deal enables us to increase our investment while still realizing improved operating leverage. Our goal is to be the hub of the financial services ecosystem for our clients and we want to be able to make innovative solutions available to them either directly through our own platform or through partnerships with fintech companies like our recent investment in Finexio, a B2B payments platform. The technology roadmap that we are developing is designed to elevate the client experience and ensure that we meet all of our clients' banking needs in a rapidly evolving marketplace. Finally, we will continue to be very focused on optimizing our use of capital. As we previously indicated, subject to regulatory approval, we would like to redeem our Series E preferred stock, which has a 7% after-tax coupon, sometime during the first half of this year, which would increase our net income available to common stockholders. Following that redemption, we will continue to be opportunistic in evaluating other ways to optimize our return on capital for shareholders. In closing, we believe we have significant levers to pull in 2022, from top line growth, expanding operating leverage, growth in our verticals, investment in our core systems and technology, and continued optimization of our capital. As always, our focus remains on creating true franchise value for shareholders in 2022 as well as the years ahead. As always, thank you for listening. I look forward to sharing more about Banc of California's progress in the coming quarters. With that operator, let's go ahead now and open up the line for questions.

Operator, Operator

Our first question will come from Timur Braziler of Wells Fargo. Please proceed.

Timur Braziler, Analyst

Hi! Good morning!

Jared Wolff, President, Chief Executive Officer

Morning!

Timur Braziler, Analyst

Maybe starting Jared on your last point there about technology investments. I mean if you could talk us through some of the types of projects you're looking or capabilities you're looking to add on here beginning in '22 or I guess building on in '22. And then as we look at the 40% expected cost saves from PMB, how should we be thinking about how much of that flows through to the bottom line versus gets reinvested back into the business?

Jared Wolff, President, Chief Executive Officer

Thank you. I’m really pleased with this quarter and, as we've mentioned before, we're continuing to make progress. Sometimes we achieve all our goals, and other times we focus on just a few, but this quarter felt like a significant achievement. The ability to acquire, complete the acquisition, and integrate it all within the same quarter was impressive, and I am especially proud of our team for accomplishing that. I want to express my gratitude to our colleagues in California who contributed to this success. There are specific areas where we believe investment is vital to maintain our focus, particularly in becoming the central hub for our clients' financial services. We understand we cannot cover everything, but we aim to provide access to a wide range of solutions. Consequently, we'll be making choices about what to own or invest in, such as with Finexio, or seeking partnerships to enhance our offerings to clients. A key aspect for us is ensuring we can perform digitally, which is why we are currently optimizing our end-to-end loan origination system. We are in the final stages of selecting a partner for this and expect to roll it out by mid-year, enabling a comprehensive digital solution for our clients. Additionally, we aim to enhance our understanding of our clients, ensuring our California team has the optimal insights to serve them effectively. We are adopting a holistic strategy that considers the entire client lifecycle, from initial contact to continued service, and assesses the services we provide. We have discussed Finexio as a B2B payments platform, which also serves as a program to optimize receivables and payables, aiding clients in managing their cash flow. We are in the process of white labeling this product for our clients. There are several initiatives we are considering. We'll provide more updates as we advance, but I prefer not to reveal too much too soon, as these projects take time. However, I am optimistic that in 2022 we will see significant developments in this area and will share more information as we reach our milestones. Lynn, would you like to discuss the potential reinvestment of the 40% savings in technology?

Lynn Hopkins, Chief Financial Officer

Sure. Hi Timur! I would say that we do expect to receive the full 40% cost benefit or savings when I kind of reflect on PMB’s historical expense base. I think that there's an opportunity for maybe that 40% plus that we would look at investing. I think there's also an opportunity to invest some of our own cost efficiencies that we've continued to identify and rationalize, and then repurpose those dollars as investment in client experience, technology. And so to that end, I think we're looking at our run rate, including our investment in technology and client experience into 2022 to be fairly reflective of 2021 and what we were able to accomplish; plus I would say 55% to 60% of PMB's historical expenses. So that's where we are right now.

Jared Wolff, President, Chief Executive Officer

One additional point is that we are implementing all of these changes, and our internal theme for 2022 is the client experience. All of our colleagues are very focused on optimizing and delivering the client experience for our clients. As we establish new relationships, we aim to demonstrate the significant impact that Bank of California can have on their financial services delivery.

Timur Braziler, Analyst

Okay, that's great color. Thank you for that. And then maybe switching to the client experience or some of the growth you saw this quarter, total funding is very impressive as were the payoff activity. Maybe just talk through kind of where you're seeing the growth on the funding side, if there's any particular verticals that your seeing incremental strength and then similarly on the payoffs. Was that kind of the abnormalities as given maybe a fallout from the third quarter, getting pushed into the fourth quarter and then similarly first started being pulled forward into the fourth quarter?

Jared Wolff, President, Chief Executive Officer

The payoffs were high, but I don't worry too much about it because my focus is on what we can control. As long as our production engine remains strong, I believe that fluctuations will balance out, leading to net growth. I'm pleased with the quality and balance of our production. Comparing the fourth quarter to the third, commercial real estate improved, multi-family also saw an increase, construction decreased, and warehouse activity went up slightly. Overall, everything was well balanced, and growth was not excessive. We recently made a hire to head our media and entertainment sector, bringing on someone with a strong background to complement our already excellent team. We anticipate growth in our media and entertainment vertical. Additionally, we will soon announce a new hire for the non-profit and education segments, which have been performing very well. We expect core commercial and industrial growth to continue this year, and our strong performance in real estate should persist. I participated in a pipeline call recently, and I am very satisfied with the insights shared; currently, I don't see any challenges on the horizon for us.

Timur Braziler, Analyst

That’s great color. Thank you for the question and congrats on getting there. You’re up close and wrapped up.

Jared Wolff, President, Chief Executive Officer

Thank you. Thanks Timur.

Operator, Operator

The next question comes from David Feaster of Raymond James. Please go ahead.

David Feaster, Analyst

Hey! Good morning everybody!

Jared Wolff, President, Chief Executive Officer

Good morning.

Lynn Hopkins, Chief Financial Officer

Good morning.

David Feaster, Analyst

Just I just wanted to follow up on that last discussion. You know it's great to see a new hire and I believe as you called in the presentation that you had created a talent magnet. Just curious how you are thinking about the hiring market; you're hiring pipeline near term. It seems like there could be a real opportunity for you considering the disruption around you. Just any commentary on hiring and where you are most interested in adding talent?

Jared Wolff, President, Chief Executive Officer

So we're getting hires, we’re getting new talent. First of all, we have exceptional people here at Banc of California and our desire to add people is really to support our growth. We need to do that both in the back office and on the front lines to deliver the Banc of California experience and the difference that we make here to as many people as possible. We do think that the market for us is very positive, so we're finding new colleagues from all of our competitors. I will say it is a very, very, very competitive market and we're finding that the cost to bring in talent is higher than we've seen in the past, but for the right people we’re willing to make those adjustments and bring them in and we're trying to make sure that our existing team is supported as well, and you know they are working hard and they deserve to get the benefits of our growth and so we're looking to share that with them as well. We haven't really had a problem finding the people that we've been looking for, but we've been very selective on the people that we've been looking for, and these are surgical and very targeted hires as opposed to opening the floodgates and just grabbing whoever walks in the door. We are very careful on who we hire and I'm grateful to our – we have a tremendous talent recruiting team who has really supported us these last several years and they really understand our bank and what it takes to be successful here. We like to say that everybody here carries a shovel and maybe a toolkit as well, maybe a hammer and some nails. There are very few people who get to walk around and basically move traffic without driving a vehicle too, and so everybody here plays a role and so now it's not the right bank for everybody, but I think our team has done a great job of finding the right people.

David Feaster, Analyst

Okay, that's helpful. And then just maybe touching on the loan pipeline, could you just talk about how that’s seen as we head into '22 and you know how that compares quarter-over-quarter and just any expectations for growth as we look into next year and just how new loan yields are trending. It looks like the new rate on production declined a bit. I'm just curious if that was a mix issue or whether you’re seeing more.

Jared Wolff, President, Chief Executive Officer

That was a mix issue. In terms of production yield, CRE remained flat quarter-over-quarter, while multifamily saw a slight increase. Construction decreased, and we experienced significant construction activities during the quarter. C&I also remained flat, indicating it was primarily a mix issue. Typically, when interest rates rise, there tends to be a pause in the market, and it will be interesting to see how long that persists. Generally, rising rates mean that deposit costs will lag, resulting in a hold in the loan market, as buyers may be reluctant to pay higher prices for properties that become more expensive to finance. For instance, in C&I, potential equipment buyers may wait to see if higher financing costs will be permanent, while sellers may not be fully prepared for the changes that new interest rates will bring. Consequently, we often see a lag in new activity following a rate increase. We will monitor whether this occurs now. Our overall expectation for 2022 is robust loan growth. We aim for net loan growth in the high single digits to low double digits, though I am hesitant to guarantee that, as we cannot predict payoffs. Nevertheless, I am confident in our asset sensitivity and would like everyone to pay attention to page 17 of our presentation, which outlines our sensitivity to deposit data and reflects how we expect to benefit from rising rates. I anticipate strong loan growth and production. The exact outcome is uncertain, but I hope we can reach high single digits or low double digits. From an earnings standpoint, we will find a way to achieve our targets, making this a productive year. Ideally, high net loan growth coupled with rising interest rates and asset sensitivity would yield fantastic results. If net loan growth is somewhat lower, in the mid to upper single digits without hitting double digits, we will still strive to make our earnings robust. Lynn and her team have demonstrated exceptional capability in optimizing our cash use and creating operating leverage, and I am confident we will continue to do so while reinvesting in technology. David, I'm not trying to avoid your question; I simply don't have a definitive answer. I’m sharing my goals, but we will see if we can achieve them.

David Feaster, Analyst

Yeah, that's helpful. I know that’s right on the rate sensitivity using the different betas was extremely helpful. But just circling back maybe to the expense side, it sounds like you got a decent amount of the Pacific Mercantile savings in there. Just curious what might be a good core expense run rate as we come out of the first quarter once everything's integrated, and just how you think about expense growth, just in light of the inflationary pressures, the new hires that you're talking about and some of the tech initiatives that you got going on?

Jared Wolff, President, Chief Executive Officer

Lynn, you want to take that?

Lynn Hopkins, Chief Financial Officer

Sure, I can start. I think just kind of following on from my comments earlier, you know they reflect back and you're able to probably see these as well, looking back at Pacific Mercantile. You know their expenses, I mean if they were running maybe around just over $8 million a quarter, so you know we are looking at our expense savings which is at 40 plus, so you know based on what we've been able to achieve, plus our desire to continue investments in our initiatives, including those expense saves, and I will say that in the fourth quarter given the system conversion was in November, you know we will get the full benefit of a full quarter of the combined operations starting in the first quarter. So, you know I’ll save you all a little bit of math there. I think we would target our operating expenses to be in the range of about $45.5 million to $47 million a quarter. You know first quarter tends to be a little bit higher as you kick off the year. I definitely appreciate your comment about inflation, you know the competitive landscape for recruiting talent. You know we're trying to take a hard look at that and incorporate all that into our expenses and how we continue to leverage our investment in those resources. So I think that's what we're looking at. I think there's still opportunity to create operating efficiencies.

David Feaster, Analyst

Okay, that's helpful. Thank you very much.

Jared Wolff, President, Chief Executive Officer

Yeah, I mean we see ourselves expanding our operating leverage even as we make these reinvestments in technology and see our ROAA going up in our EPS going up. I mean all the top line growth gives us a lot of flexibility and we see a lot of top line growth ahead.

Operator, Operator

The next question comes from Andrew Terrell of Stephens. Please go ahead.

Andrew Terrell, Analyst

Hey! Good morning!

Jared Wolff, President, Chief Executive Officer

Good morning, Andrew!

Lynn Hopkins, Chief Financial Officer

Good morning!

Andrew Terrell, Analyst

Hey, Jared or Lynn, I was maybe hoping to start on the $5.5 million in net charge-offs this quarter. I think some of it was related to Pacific Mercantile, but was the remainder just kind of year-end cleanup if you will or just any kind of color you can provide on the charge-offs this quarter?

Jared Wolff, President, Chief Executive Officer

Sure, I’ll begin and then Lynn can add if she'd like. We reviewed several loans that we had the chance to sell, which were non-performing, and we received a premium on many of them. Our team did an excellent job completing this by the end of the quarter, and we felt it was an opportune time to act. It's not common to see premiums on such loans, so we aimed to take advantage of that while being aware of our plans with Pacific Mercantile. We proceeded with caution and ensured that we took the necessary reserves, so we wanted to maintain appropriate levels. There's a bit of that happening.

Lynn Hopkins, Chief Financial Officer

I can add that we experienced about $30 million of delinquent loans returning to non-delinquent status after the quarter ended. This is quite common with the SFRS as they tend to fluctuate significantly. Delinquency can be temporary because of how people manage their finances, and once they pay their fees, they revert to normal status. Therefore, as long as we maintain our SFR portfolio, we may see slightly elevated delinquencies at the end of the quarter, but they tend to normalize shortly thereafter. This pattern has persisted for many quarters, particularly as we have expanded our SFR portfolio. I just wanted to highlight that. Oh no, it's fine. So when I look at the loans charged off and the recoveries in the quarter, through both acquisition accounting and plus our own activity, that's what comprised the numbers. That is absolutely correct with our few non-performing loans that we decided to exit. We were able to yield some gains on time and then we did take some charge-offs on the – I’m going to say the smaller piece. Also included in charge-offs for the quarter was a loan that we had specifically reserved for in prior quarters and took the – and wrote that off or charged that off in the fourth quarter. I’d say the other large numbers in there relate to loans that were acquired in the Pacific Mercantile acquisition. They were fully reserved through purchase accounting, and then they were offset also by a known recovery and the timing of when we received the cash relative to the acquisition date, so that's the majority of the charge-offs and the recovery numbers.

Andrew Terrell, Analyst

Okay, all right, great. That's really helpful color, I appreciate it. Maybe Jared, just moving back over to some of the loan growth, I saw the announcement for the Head of media and entertainment business. I think that portfolio represents a relatively smaller portion of the overall balance sheet today. Can you maybe just give us some color on how this new hire expands that business line and kind of what it adds for you and then what kind of market opportunity you see in that segment?

Jared Wolff, President, Chief Executive Officer

Sure! Well, pleased to add Ian to our team. He's got a great background and I know he's going to make great contributions. He's joining an already very talented team led by Adrian and others that have been there on the team for many years and Randy and others who have done just a superb job for us. We expect us to – we've primarily been playing in the streaming space, so we've been – as we’ve talked about before, we’ve financed streaming production in content. So when a producer has the idea for a show they might go to Netflix or Hallmark and run the idea up the flagpole and then if they like it, the streaming service, the production company will buy the content, they'll buy the script and they'll basically sign a contract and state ‘if you make it, we’ll buy it.’ And so then they come to us with the contract and we then help them finance the production of the show. That's primarily what we've been doing, but there's opportunities in the whole ecosystem to do more financing without taking – you know we’re not taking any Box Office or distribution risk with streaming, right? We're not getting repaid based on how many people show up at the theater. We have a contract from Netflix which we know is good money from Amazon or whomever. And so, how do you play in this ecosystem and without expanding your risk profile? Well, there are a lot of supportive services that are not in the same ecosystem that we're not currently serving, that we can continue to serve and a lot of the different players that are there, we think are people that we can reach out to for similar financing. There is the ability to finance distribution that's already at the content that’s already been made, where people have already signed a distribution deal, and a whole host of other things that are in that ecosystem, as well as in the related areas of television and music. And so without going into too much detail about specifically what we're going to do, I hope that gives you some color for what we could do.

Andrew Terrell, Analyst

I appreciate your help. I just have a quick question for Lynn. I think I heard you mention the expenses for 2022 would be between $45.5 million and $47 million per quarter. I'm curious if that includes any reduction in legacy litigation expenses, or if there’s a possibility that could positively impact the 2022 run rate.

Lynn Hopkins, Chief Financial Officer

Sure. The legacy litigation expenses, which have mostly been resolved or clearly identified, are referred to as the indemnified professional fees, and they are not included in that number.

Andrew Terrell, Analyst

Okay, perfect. Thanks for taking my questions.

Lynn Hopkins, Chief Financial Officer

Yep.

Jared Wolff, President, Chief Executive Officer

Thank you.

Operator, Operator

The next question comes from Kelly Motta of KBW. Please go ahead.

Kelly Motta, Analyst

Hi! Good afternoon. Thank you so much for the question. I really appreciate all the additional color in the slides on your asset sensitivity post PMB. I was hoping if you could just give us a sense of how you expect, given all the changes you’ve made on the funding side, how do you expect to see funding to react to the first couple of rate hikes? Do you expect it to be relatively resistant now given the nice shift you’ve had?

Jared Wolff, President, Chief Executive Officer

Yeah, good morning Kelly. Good afternoon I guess to you. So, with all the liquidity in the market, we don't know what the deposit betas are going to be, but my expectation is that the early rate hikes are going to show no appreciable change on the deposit side. We're not going to see any sort of movement of money. We've moved really, really hard out of money market and so when you look at our deposit break downs, the detail of it, we have money markets that have been shrunk dramatically and that was very, very intentional. So we wouldn't expect to see, obviously non-interest bearing deposits aren’t going to react. You wouldn't see low cost checking expected to react and so then it's just about kind of you know money market would be the one that would react and then you would expect to see these to obviously react at maturity which you can control. Even there though, I just, with so much liquidity in the market, we don't see rates influencing depositors. We don’t see us participating and providing higher rates to depositors anytime soon, we don't see the need. And so hard to know, but that's why we want to provide the sensitivity chart on the bottom of page 17 about what could happen in an up rate environment based on historical betas or zero betas?

Kelly Motta, Analyst

Thanks so much Jared. Maybe just a quick one on capital. I appreciate the additional update on the preferred redemption. Just wondering if there is any changes on how you're thinking about maybe to point the buyback given where the stock is trading. Thanks.

Jared Wolff, President, Chief Executive Officer

Well, look, you know obviously, we don't like our stocks trading today, and hopefully it rebounds and hopefully this communication helps in some way to let people know about our story. We think the first thing we need to do with our capital is redeem our preferred stock and we want to give ourselves the benefit of – and the regulators the benefit of giving enough time to do that, because we do need approval, but we're optimistic that it'll be done in the first half of this year and if we can get it done in the first quarter that would be super, that would be fantastic. From there then it's always the question of where are we trading, and we think our investors would prefer a return on capital versus return of capital, but that's not to say that we wouldn't put in place a buyback program if it made sense, so that we can be opportunistic about where our stock is trading. We just got to look at that versus all the other uses of our capital including reinvestment in our company for growth, and we have some – we see robust growth and we know we need to reinvest in technology; it's not to say we couldn’t do all those things, but I think it's probably that kind of how we stack them. Lynn, do you have any other thoughts there?

Lynn Hopkins, Chief Financial Officer

No, I think you summarized it well thanks.

Kelly Motta, Analyst

Right, thanks. Thank you so much for the update Jared. Appreciate it and Lynn, thank you.

Jared Wolff, President, Chief Executive Officer

Thanks Kelly.

Operator, Operator

The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Gary Tenner, Analyst

Thanks. Good morning. My questions have largely been answered. I just wanted to ask the loan yield adjustments I think that we're following, either the press release or in the deck added 12 bips this quarter versus 11 last quarter. I'm assuming lower PPP fees this quarter and presumably some increased this kind of accretion benefit. Can you kind of break out the relative impacts of both of those items, third quarter versus fourth quarter for us?

Lynn Hopkins, Chief Financial Officer

Sure Gary, this is Lynn. So, I think as we step back, especially as the PPP program has wound down, there's less of that in the numbers and rightfully so. So that's a smaller portion of it this quarter relative to last quarter. I think the variation is mostly related to prepayment fees that we see coming though given the elevated levels of prepayment activity. So while I didn't mean to create much of variance between the loan yield between quarters, there is a small component that's always associated maybe with prepayment fees based on that activity. So, as you look at the numbers for the fourth quarter, the majority of the 11 basis points is the prepayment fees and the loss to do with PPP amortization or accelerated accretion and then I would say the same is true for the last quarter. So less prepayment fees and a little bit more PPP acceleration. So those are the pieces. I think my general comment is there is always some piece of either now that we have an acquired portfolio, discount accretion as we bring that through and prepayments, and maybe a little bit of PPP. So net is a couple of million dollars every quarter, which is what that 12 basis points represents.

Gary Tenner, Analyst

Great! Thanks very much.

Jared Wolff, President, Chief Executive Officer

Thanks Gary.

Operator, Operator

The next question comes from Tim Coffey of Janney. Please go ahead.

Tim Coffey, Analyst

Thanks. Morning guys!

Jared Wolff, President, Chief Executive Officer

Good morning!

Tim Coffey, Analyst

I got on the call a bit late, so I apologize if you have already covered this, but if you look at kind of your legacy deposits, it looks like there was some churn in the quarter, perhaps a bit of a decline. I wanted to – is that seasonally or targeted?

Jared Wolff, President, Chief Executive Officer

I think it was Lynn is that the – you want to discuss why we moved out. Yeah.

Lynn Hopkins, Chief Financial Officer

Sure yeah. Tim good morning. I would say it was by design. We recognized as we were working together towards the Pacific Mercantile close dates, the high levels of cash and we started to look at what opportunities we have within our own deposit mix, and we were able to identify. I’m going to say, you know gave us the flexibility to go ahead and exit some that were maybe less relationship, a little bit higher costs typically available in the market if you want to go bring those in. So I would say less season and more strategic reduction.

Tim Coffey, Analyst

Okay. And in relation to kind of the excess liquidity you brought on balance sheet from the transaction, do you feel comfortable or confident with the deposit you have right now to invest that excess liquidity or do you still have more to do working on the mix of deposits?

Lynn Hopkins, Chief Financial Officer

I can start by saying that based on our liquidity profile at the end of the year and how we plan to deploy our cash, we feel very confident in our ability to invest our liquidity. There's a lot of excess liquidity in the marketplace, and we see our spending base as stable. We've experienced real growth, which is well recognized. While some of the liquidity may be utilized, we are also expanding our deposit base. We believe our current mix is indicative of our future direction, even if some liquidity is withdrawn. Therefore, we are comfortable investing our liquidity at this time.

Tim Coffey, Analyst

Okay. And then Jared, just a follow-up on the hiring questions. Are any of the – are you opposed to hiring outside your geographical footprint at this time?

Jared Wolff, President, Chief Executive Officer

No. So we have a couple of hires up in the bay area that Ahmed ran that market for Wells and so was a couple of people here he had good relationships with there that he knew either had worked for him or that he knew well and that are coming to work for us. So we have a team up there that's doing a superb job, and we don't have any branches up there. And then in terms of more broadly, we are open to hiring people based on their skill set and what we think would be a good fit with our company. It matters to the job. Not every position in this company is ripe for kind of a remote hire. But we're absolutely open to it for the right people.

Tim Coffey, Analyst

Is opening branches in the bay area in the cards?

Jared Wolff, President, Chief Executive Officer

I think it's possible. We want to look at what sort of, what I would call footings, which is loans and deposits that we have in the market. We have deposits from all the clients that we lend to, so that the folks that are up there have their deposits and branches that are down here. We would look at what the scale was and make sure that it was appropriate. I wouldn't build something hoping that people would come to it. I would build it if I knew I had enough space to have a profitable branch from day one.

Tim Coffey, Analyst

Very good. Those are the questions. Thank you very much.

Jared Wolff, President, Chief Executive Officer

Thanks Tim, appreciate it.

Operator, Operator

The next question comes from Matthew Clark of Piper Sandler. Please go ahead.

Matthew Clark, Analyst

Good morning!

Jared Wolff, President, Chief Executive Officer

Good morning Matthew!

Matthew Clark, Analyst

Do you happen to know how much in the way of cost saves you’ve realized to-date with the PMB after the conversion in November, maybe on an annualized basis and dollars and what might be left?

Lynn Hopkins, Chief Financial Officer

At the top of my head, I don't know that I have that number, but I can probably answer it a different way. I think that given that we effectively operated both organizations through, from the October 18 close date to the middle of November and then you know needed to rely on the teams to finish up with the integration. There is probably, I’m going to say 0.5 million to 1 million that maybe included as we kind of work through that last portion of the year. I don’t know if that’s helpful.

Matthew Clark, Analyst

It is, it is thank you. Okay and then Jared maybe strategically thinking about your kind of financial goals that you are striving for maybe in another year or so. What's your sense for what you're trying to achieve on an ROA and maybe return on tangible perspective?

Jared Wolff, President, Chief Executive Officer

We are aiming to reach a one, then progress to 1.10, 1.25, and eventually 1.40 ROA. Lynn and I reviewed some numbers recently regarding our standalone projections after PMB, and we've seen an acceleration from last year. We believe we have already surpassed the one, and it’s reasonable to expect that we will be between 1.10 and 1.25 for this year on a full-year basis. We are considering how to achieve this in an interest rate-neutral environment, and if interest rates improve, that would be an added benefit.

Matthew Clark, Analyst

Got it, okay. And then…

Jared Wolff, President, Chief Executive Officer

But we are obviously not happy with that and look, it’s tremendous from where we were, but we have high aspirations for where we are going and I think we've shown that we have quite a bit of urgency about it. And so on the return on tangible comment, it’s obviously a super important number. It might be even be more important than ROA at some point, and so I think the question is do we have too much stock outstanding, and is that pulling us back. And so you know all those things play in, but we want to be in you know – we don’t want to be in the low double digits, we want to be in the mid to upper.

Matthew Clark, Analyst

Okay, great! And then not sure if you discussed this in your prepared remarks, but just switching gears to the loan pipeline, you know where does that stand at year end; how does it compare to the prior quarter and whether or not you still feel good about kind of mid to high single-digit organic loan growth going forward this year.

Jared Wolff, President, Chief Executive Officer

So, you might not have heard my comments earlier. Our pipeline is as strong as it's been, and so I feel very, very good about it. I don't know what the payoff situation is going to be, but let’s assume that that kind of normalizes. There is – I don’t see any reason why we shouldn't be in the mid-upper single digits, but we would aspire to be higher than that. As I mentioned, I think sometimes when rates rise, the market takes a pause, because there’s a delta between the bid and they ask for the buyers and sellers for whatever services they are looking for or whatever properties or products and that definitely happens, I've seen it every time. And so I think that might disrupt kind of the pace of lending activity, but it might not, it might not. The economy is very strong. It's holding up really, really well. I mean nobody seems to recognize that like war is about to break out on the tip of Ukraine and hopefully it doesn't, but – and hopefully that doesn't happen and it doesn't revert back to our economy. But everything locally seems very, very strong, and notwithstanding the variant which kind of slowed things down at the beginning of the year and the end of last year. With omicron, everybody seems to be pushing through it now and things seem pretty robust. So in terms of the level of pipeline, it's high, and our teams have a high degree of confidence and I do as well. What the net loan growth number ends up being, I don't know, but we would like to – you know we are going to aspire for it to be in the upper single digits and hopefully it will get into the double digits. And as I mentioned earlier, if that doesn't happen for some reason, we have a whole bunch of ways to pivot to get our earnings to where we need them to be. But we believe that this year for us is a – our top line growth is going to be pretty strong.

Matthew Clark, Analyst

Okay, great! And then just last one for me on the media and entertainment hire. Can you give us a sense for how large his book of business was and whether or not there is an opportunity to cherry pick some of that or is he going to be you know starting…

Jared Wolff, President, Chief Executive Officer

We hire people based on their experience and their industry relationships, and so it was less about a book and more about helping us design our strategy going forward and then rolling out that strategy. You know I don't see if we have $100 million book today; I don't see any reason why over the next two to three years we couldn't double or triple that portfolio. I see no reason why we couldn't do that if not more than that. We have – I think this is going to be an important sector for us and we want to continue to capitalize on the market position that we have.

Matthew Clark, Analyst

Great! Thank you.

Jared Wolff, President, Chief Executive Officer

Thanks Matthew.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines now, and we appreciate your participation.