Banc of California, Inc. (BANC) Earnings Call Transcript & Summary

Good day, and welcome to the Banc of California's Second Quarter of 2024 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Ann DeVries, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining Banc of California's Second Quarter Earnings Call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would like to remind everyone that today's call may include forward-looking statements which are subject to risks, uncertainties and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation as well as the Risk Factors section of our most recent 10-K. Joining me on today's call are Jared Wolff, President and Chief Executive Officer; and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared.

Thank you, Ann. Good morning, everyone, and welcome to Banc of California's Second Quarter Earnings Call. I'd like to start off by highlighting our successful core system conversion that was completed this past weekend. As we have previously discussed, we made the decision to move on to the Legacy PacWest System, FIS, and convert Banc of California customers. Our rationale was three-fold. First, we would control risk by converting the smaller customer base. Second, we were able to negotiate with FIS to deliver some outstanding enhancements that would benefit all of our customers and ensure we maintain a leadership position with our digital offerings. And third, the overall price was compelling and resulted in key savings for the combined company. Our team in collaboration with FIS has dedicated an extraordinary amount of effort over the past 7 months and have successfully converted nearly 20,000 clients and over 55,000 accounts. We have had minimal disruptions to date. And while we continue to be vigilant, I'm very pleased with the conversion, and I want to congratulate our teams on another successful effort. We effectively integrated a $10 billion bank onto a new system, and our team did an outstanding job. With this important merger milestone behind us, we are energized about bringing the full power of our platform to our expanded client base, new prospects. Additionally, last week, we completed the sale of approximately $1.95 billion of CIVIC loans through a process we ran with Morgan Stanley, who had deep familiarity with the portfolio. Due to the quality of the portfolio, we received numerous bids and ultimately sold it at a price above 98% of the unpaid principal balance, which was at the higher end of our target range. As a result, we have received net proceeds of approximately $1.9 billion and have freed up approximately $100 million in Tier 1 capital. We used about $545 million of the proceeds to pay down the outstanding portion of the BTFP and expect to use remaining proceeds to retire expensive funding and support growth. Additionally, we expect that some of the capital may be used to help us reposition a portion of our securities portfolio into higher-yielding securities. We have several options we are evaluating, and we'll be able to share this more fully when we announce third quarter earnings. Again, I want to congratulate our team on the terrific execution of this sale. As we turn to discussing the quarter, these 2 initial efforts highlight our active transformation efforts doing the work necessary to create a strong, well-positioned balance sheet that generates high quality and sustainable earnings. During the second quarter, we continued to execute well and made solid strides toward driving long-term profitability. We paid down $1 billion in higher-cost BTFP funding, which contributed to our NIM expansion during the quarter. Our bankers' efforts to deepen and expand client relationships have resulted in steady growth in new noninterest-bearing deposits from new relationships to the bank with $230 million generated in just 2 quarters. Our bankers also originated over $1 billion in loan commitments during the second quarter alone. We are on track to realize our expense saving targets, and we expect our operating expenses to continue to come down through the remainder of the year with the greatest part of this impact showing up in Q4. Restructurings take time, and we are moving at a fairly good pace. During the second half of the year, we will continue to optimize the balance sheet bring down expenses to achieve our cost targets, build pipelines and maintain strong credit quality, all while building up capital and growing earnings. We expect these efforts will position us well to generate profitable consistent growth as we look into next year. With respect to pipelines, while the overall climate for lending remains sluggish, we are seeing growth in certain areas and pipelines are building, notably warehouse, fund finance, construction and some core C&I continue to show momentum while traditional real estate lending remains slower. As was the case in the prior quarter, new loans are coming in the books at higher rates than what is paying off, so our loan production is accretive to our net interest margin. Our efforts to bring new relationships to the bank and capitalize on our market position continues to bear fruit as we grew average NIB 3% quarter-over-quarter. Our end-of-period balances of NIB were slightly lower than the prior quarter as we saw some volatility late in the quarter. But so far in the third quarter, we have seen balances continue to grow. During the second quarter, we also made the decision to move lender finance back to our core portfolio and resume efforts to grow this business line. Historically, the lender finance book performed well with strong credit quality. PacWest made the decision to discontinue the portfolio due to some liquidity issues, as we all know. But this is an asset class that provides attractive risk-adjusted yields and we have ample opportunities to steadily grow the portfolio by adding loans that meet our disciplined pricing criteria and underwriting. The movement of CIVIC loans to held for sale had a positive impact on nearly all of our asset quality metrics in the quarter with significant declines in nonperforming loans and delinquencies as our loan portfolio continues to perform well on a broad basis. We did see an increase in criticized and classified loans as we downgraded several rate-sensitive loans in light of the current environment and as we had forecasted, we were likely to do. Past due and delinquent loans have remained at a relatively low level, which reflects the solid underlying credit quality that we have. We're being vigilant, and we'll continue to monitor our credit portfolio carefully to look for signs of stress. Our net charge-offs were elevated in the second quarter due to charge-offs related to the CIVIC portfolio moving to held for sale, as the sale price discount to book value runs through charge-offs. We also had $27 million in other net charge-offs, which were primarily related to several commercial real estate loans secured by office properties that had previously largely been reserved for in prior quarters. We maintained a solid level of reserves at 1.19% of total loans, which, together with the decline in nonperforming loans resulted us ending the quarter with an NPL coverage ratio of 235%. Importantly, our ACL coverage ratio of 1.19% reflects an improvement from 1.15% at March 31, if you adjust for the CIVIC loan sale. I think it's also important to note that our economic coverage ratio, which incorporates the loss coverage from our credit-linked notes as well as the unearned credit mark from purchase accounting is substantially higher at 1.83% of loans. Now let me hand it over to Joe, who's going to provide some more financial information, and then I'll have closing remarks before opening up the line for questions. Joe?

Thank you, Jared. We reported earnings per share of $0.12 for the second quarter. There were a number of noteworthy items that impacted our reported results, and we laid out these items on Slide 30 of the earnings presentation. Importantly, these items mostly cancel each other out so that there wasn't really much net impact to EPS. Putting aside these items, our core earnings drivers improved in Q2, resulting in an increase in pretax pre-provision income. As a result of our financial performance and balance sheet management strategies, we also continue to build capital and further increased our tangible book value per share in the quarter. We generated $229 million in net interest income, which was slightly up from the prior quarter. While we had a smaller average balance sheet in the second quarter, this impact was offset by an increase in our net interest margin. Our net interest margin in the quarter increased 14 basis points to 2.80% due to higher average loan yields as new loans are coming on the books at higher rates than what is running off as well as a further reduction in our cost of funds, partially due to a higher average balance of noninterest-bearing deposits resulting from the addition of new commercial deposit relationships. Our net interest margin trended higher throughout the quarter, with a June rate of 2.83%. During the quarter, we originated $1 billion of new loan commitments and an average yield of 8.12% and we funded $382 million of new loans on our balance sheet at 7.8%. Our yield on gross loans increased 10 basis points in the quarter to 6.18% and our yield on total earning assets increased 9 basis points to 5.65%. During the quarter, we repaid $1 billion of our outstanding balance in the bank term funding program and added some FHLB putable advances, which are at a lower rate than the BTFP. We also added some short-term broker deposits to support our near-term liquidity, which we plan to run off with part of the proceeds from the sale of the CIVIC loans. Overall, for the quarter, our cost of funds was down 7 basis points to 2.95% and our cost of deposits was down 6 basis points to 2.60%. With the positive trends we are seeing in both average yield on earning assets and our cost of funds and the benefit we anticipate achieving from repurposing the capital freed up from the CIVIC transaction, we expect further improvement in our net interest margin as we move through the year. Our noninterest income was $29.8 million, down from the prior quarter primarily due to a lower level of other income from elevated mark-to-market adjustments on our credit-linked notes and our SBIC equity investments. These markets can fluctuate from quarter-to-quarter. Other key drivers of noninterest income were relatively consistent. Our total noninterest expense was $203.6 million and was impacted by several items, including adjustments to our acquisition-related costs. Our repurchase reserve related to the Pacific loan sale continued elevation in our FDIC expenses. Our tax rate was elevated at 32% for the quarter as a result of a couple of one-off tax items related to compensation. As noted, you can find greater detail on these items on Slide 30 of the investor presentation. Putting these items aside, our controllable operating expenses declined 5% quarter-over-quarter primarily due to a reduction in compensation and occupancy costs as we continue to progress with the merger integration. We expect our total noninterest expense to approach $195 million to $200 million in Q4 of this year, and this represents a 30% reduction year-over-year when normalizing 4Q '23 to include a full quarter of combined company expenses. Our target range anticipates significant reductions in both controllable and other expenses. Turning to the balance sheet. Our total loans held for investment were down from the prior quarter, primarily due to the movement of $1.95 billion in CIVIC loans to loans held for sale during the second quarter in which the sale was completed last week. Along with lower balances and other discontinued portfolio loans and runoff we are seeing in low-yielding CRE and multifamily loans. This was partially offset by the increase we had in mortgage warehouse and construction loans. Our total deposits were down slightly in the quarter as we continue to utilize our high level of liquidity to let higher cost deposits run off, which we are partially replacing with noninterest-bearing deposits generated from our new business development efforts. As I mentioned earlier, we added some short-term brokered deposits to support our near-term liquidity, which we plan to run off as part of the proceeds from the sale of the CIVIC loans. As we look ahead, we believe we are well-positioned for potential rate cuts with over 90% of our term deposits maturing in 1 year or less. Given the repositioning actions we are continuing to take with our balance sheet and the continued execution of our core strategy, we expect our net interest margin and overall profitability to expand in subsequent quarters. At this time, I will turn the call back over to Jared.

Thanks, Joe. Looking ahead to the remainder of the year, our primary focus will be on continuing to execute well on the repositioning initiatives that we believe will lead to improved profitability. As we've said before, we expect to consistently move the ball down the field each quarter as we have consistently done over the last several years. Pacific loan sale is a terrific example of how we are repositioning our balance sheet to rightsize and optimize yields. This loan sale will provide significant benefits to our capital and liquidity ratios and will improve our core earnings power as we redeploy this capital and liquidity. As mentioned earlier, this includes using the capital relief to reposition our investment securities to improve yields and to use proceeds from the transaction to also pay off higher cost funding. With the expansion in our margin and reduction in our operating expense, we expect to see steady improvement in our level of profitability. Our actions will result in the bank ending this year in a position that will drive profitable growth in 2025 and lead us to our profitability targets. Importantly, as we improve the balance sheet, we have taken an approach that rewards long-term profitability over short-term gains. Each quarter, we have the opportunity to improve profitability in the short term by extending duration on some of our deposits. However, we have stayed intentionally very short, which means we are paying a higher cost today than we otherwise would. We believe the future benefit is much greater than the benefits we could realize today. Given our deposit profile and liability-sensitive position, we are well poised to benefit significantly as interest rates move lower. I understand that it is perhaps challenging from the outside to see the profitability profile as we undertake these important steps, particularly when quarterly results have multiple moving parts. However, we have visibility to our goals and remain focused on our targets. What is important to us is not the specific quarter in which we achieve it, but the quality and sustainability of our profitability so that when we are there, we cross that threshold and then have the strong balance sheet to keep moving beyond it with flexibility in various rate environments. We are doing that hard work now. In the meantime, we are focused on growing low-cost deposits, building solid pipelines, increasing operating efficiency through expense discipline and ensuring credit quality remains strong. Further, as we continue to build capital, we will be looking for ways to deploy it when we are confident our balance sheet moves are largely accomplished and capital growth will continue. Our vision is to be a leading and a high-performing commercial bank, with strong core business deposits, excellent credit quality and solid profitability. California is one of the most vibrant, attractive markets in the country, and we are proud to be the third largest bank headquartered here. Now that the conversion is complete, we'll begin stronger marketing efforts as a combined company to grow our client base and recruit talent in all of our markets and further the reputation we have built for providing a superior level of expertise, service and technology, including robust treasury management and payment solutions. We continue to see opportunities to take advantage of our market position and strong balance sheet and to add attractive new client relationships with commercial customers. Above all else, our business is a people business, and we benefit from having talented and dedicated colleagues across our company and across the country. I want to thank them for their continued efforts to build our company. We like to say Banc of California -- we'd like to say at Banc of California that banking is a team sport, and I couldn't be more proud of our team and all that we have accomplished together in just 2 full quarters. I am very confident in our success ahead. With that, operator, let's go ahead and open up the line for questions.

[Operator Instructions] And our first question today will come from Matthew Clark with Piper Sandler.

First, on the FDIC assessment costs. I mean they have been elevated for a while. Legacy PacWest, I think it was running $37 million in the last quarter before you all merged. And I think before the turmoil, there was high single digits. So what are you assuming in terms of relief around FDIC assessment costs in the fourth quarter? And then how much do you think you might be able to eliminate assuming you get things rightsized by year-end. And you also get brokered CDs down to some normal level. It sounds like it's going to take a little bit of time, but just trying to get a sense for how much are you assuming in the fourth quarter? And how much is -- would you still consider as excess in 2025?

Yes. Good question. So a couple of things. First of all, this quarter, you probably noticed that the increase was both on the normal assessment plus a catch-up for the special assessment. So there's those things. When you may -- and just to remind everybody, when you -- when we make our accrual in this period as we're changing the company, we don't have a history of consistent FDIC assessment. So we have to make an estimation of what our assessment will be, and we accrue for that and then we have a catch-up. As we get to normal levels, it's going to be kind of a more predictable assessment. And so that accrual will be probably much closer to the actual numbers. PacWest in normal times, and let's call that early 2023 -- excuse me, early 2022, mid-2022. And when they were larger than us, had a quarterly assessment of $10 million approximately. They ran at the end at about $36 million. We think we're going to get down to that $10 million level, maybe $12 million because there's been some increase in FDIC costs that they've applied to all banks. So I think a $10 million to $12 million number is fair, and we think we can get there by the fourth quarter. But if it's the first quarter, it's the first quarter. But as of right now, we think we can get there in the fourth quarter.

Okay. But that sounds like it's not baked into your 4Q expense guide. Is that fair?

I think it is, Joe, is that baked into our number?

Yes, we assume we can get down to the high end of that range by the fourth quarter.

Okay. Got it. And then just on CIVIC, how much of noninterest expense relief will you get from selling that portfolio? I think there were some expenses tied to that book on a noninterest expense.

Yes, there's headcount expense and other expense. We are still servicing those loans, and we have commitments to -- for -- on some of the loans that we sell that will require some of that expense to continue. We think the relief is going to come at the end of the year. And it's -- you can think about it as a lot of the expense is gone, but you can think about it as maybe $2 million, $3 million that will continue to draw out and probably show up in the fourth quarter?

Okay. And then on that loan sale of $1.9 billion, how much do you think will go to pay down brokered CDs?

I think we're going to use probably somewhere north of half of that to pay down brokered CDs. It just sort of depends on some of the other actions we might want to take with our balance sheet.

Okay. And then just on credit can you isolate the charge-offs tied to the 2 previously identified office credits and whether or not you think there's anything else behind that within that portfolio? And then I'll just ask a quick 1 on classified, too.

I don't expect it as of now, Matthew. I mean, look, we've been doing as much as we can on the portfolio to get ahead of things. I think we've signaled that we were going to be appropriately aggressive in terms of looking at credit and viewing things and moving -- migrating credit. But with the whole goal of making sure that credit in future periods doesn't become a headwind when we're done with restructuring and become an earning asset story and start showing higher profitability. So we're trying to get ahead of it as much as we can. Obviously, we're environment dependent. And if there is some sort of economic downturn if there's some sort of broader events in office or in the credit environment generally, we're going to be subject to that. Some people think that rates are going to come down only if there's a recession. Meaning rates will come down, but we're probably not going to escape a recession. I currently think that's probably not going to happen. It looks like they're going to stick the landing, but it's hard to know. I mean, we are trying to be appropriately aggressive in looking at credit, migrating now which should be migrated so that we don't have headwinds when we want to show greater profitability.

Okay. Great. And then just the increase in classified, it sounds like you're being a little proactive there on repricing risk. It looks like some of it showed up in commercial real estate, but can you just speak to kind of specific types of businesses or industries that drove that and your view on loss potential?

Yes. It's mostly real estate. And it's repricing risk if we think that we do the modeling, and we say, look, even if these loans are well secured and even if they have strong guarantors and strong support what does it look like when rates go higher before they come down relative to where they are now. And that doesn't mean we're going to lose a dime on them, but it means that we had to rate them differently in the current environment, and I think it was a proactive thing that our team did, but it's primarily real estate loans.

Our next question will come from Jared Shaw with Barclays.

I think maybe to start off, when we look at where we exit 2024 from an earning asset point of view, with all the puts and takes from loan sales and some of the restructuring, where do you think a good spot from an earning asset standpoint would be to start 2025?

I think it's going to be hard to say because it's going to depend on growth in some of the other portfolios and the pace of runoff, right? We -- I'll try to give you an answer this way. This quarter, we originated -- we have $1 billion of new commitments this quarter. Only about 38% of it funded, which is a very low percent from my perspective relative to what I've seen in past periods. So we expect loan growth and outstandings to pick up as we get closer to '25 and obviously, through '25 if the economy holds up. However, for now, it feels like runoff is going to outpace originations, which is what we said from the beginning of the year. If that's the case, and we just sold down $2 billion of CIVIC, loans could go lower from where we are right now. . The other part of it is, though, we have about $1 billion of loans that are going to reprice higher that carry coupons of about 4%. And those are going to come out of their fixed rate period and have to reprice higher. So we do have some good news on existing loans that are going to reprice higher as opposed to just on the origination side. But it's hard to know -- it's hard to peg exactly what that number is. Joe, I don't know if you have a sense for what number we could guide to.

Yes. I'm going to give you a range to say anywhere from like $31 billion -- $30.5 billion up to like maybe $32 billion is a good range of earning assets.

Okay. Okay. And as sort of a year-end starting or as a starting point for next year, year-end this year?

Yes. As Jared said, it's going to depend upon how loan growth manifest in the fourth -- in the rest of the year.

Yes. Okay. And then going -- looking at the lender finance, you talked about reengaging there. How much of a challenge is that going to be, if that's an area that you sort of telegraphed that, that's -- you're exiting and you're stepping back. Is there a challenge to retain those relationships and reengage with those relationships? Or did it not really get to that point in terms of actual relationship management?

I don't think it got to that point. I mean we have about -- just for perspective, I mean, I think with the $350 million that we bought that portfolio, I'm doing this from memory, so I'm going to look at the exact number is going to be close to $700 million. So we have a good starting point in terms of a portfolio, yes, it was $438 at the end of the second quarter, we bought $350 million. So we're close to -- we're $750 million, $800 million. We think that's a very strong base that we can grow from with great relationships I don't want to talk about the team too much, but more to come on that. And I think it's something we're going to be looking at expanding along with some other areas that we think will expand, I think, warehouse is going to continue to pick up. We have a strong team there and seeing good momentum. Construction has been picking up, and that's obviously loans that are funding that previously have originated and are starting to go vertical because usually the equity of the client goes in first, and then our piece picks up. But we're seeing some demand on new construction loans right now, and we're leaning into that. And I think there are some other good C&I areas that seem to be picking up. But specifically on lender finance, I think we're starting with a strong base. And I think the word is out that we're in the market. And especially with buying back that Ares portfolio was pretty competitive and we got it, and there was a lot of news around us getting that. So I think the new -- the word will help us.

Okay. And then on deposits, obviously, still a lot of movement there with different components as we go through this year. But for 2025, how should we be thinking about sort of the longer-term growth trajectory of deposits, sort of keeping in mind the guide that you're laying out in terms of the loan-to-deposit ratio and the DDAs as a percentage of deposits. Like what's the view for longer-term deposit growth rate?

I just think we're going to be able to maintain our loan-to-deposit ratio around the band that we talked about. And so loans and deposits are going to move in relative to tandem. Obviously, we're closer to 85% now with the sale of CIVIC on a core basis. So I think that we're obviously going to let our loans float up without deposits keeping pace. But once we're there, I think they're going to keep pace with each other. It's important to me that we don't get out above our -- beyond our skis and that we always maintain growth in deposits and keep some balance there, which I'm confident that we can do.

Okay. And then just finally for me, with the expectation that we're in that expense range of $195 million to $200 million in the fourth quarter, are you feeling optimistic around positive operating leverage for next year? Should we be seeing a more measured moderate pace of expense growth with the backdrop of the broader growth.

No, I think we're in a good spot to continue to show operating leverage and expand from there. One thing that we're trying to do, Jared, and I think this is probably coming across pretty clearly is set the bar pretty low. I mean we obviously came out of the gate fairly hot, and I've been specific about this that we gave that guidance for fourth quarter of '24. There were a whole bunch of reasons why when we announced the deal, we chose to do that and hindsight is 2020. What it did is it focused people on a specific event in a specific period as opposed to the company that we're creating. And people ended up creating estimates off of that, that backed into quarterly guidance that we didn't provide, but people are like, "All right, if they're going to get there, this must be in this and this must be in this", which basically set us up for kind of negative delivery regardless of what we try to do. And we're trying to reset it. And I think it's really important that we reset the narrative about the franchise that we're creating. We have a history of doing really good work and creating a really valuable franchise, both the Banc of California and the teams at PacWest. And I'm very, very confident in what we're doing here. And the things that we've pulled off in a short amount of time are pretty damn heroic, and our team is fantastic. And so we are trying to reset the narrative. We're trying to set the bar lower. We're trying to set expectations lower so that we don't have to fight against kind of the narrative that we might have been properly created the first time out of the gate. And again, hindsights 2020, we have not moved off our targets. I think it's important that those profitability targets be established. And we did say that as we got through the year, we would try to give better guidance. But it was very hard to do when we signed up the merger and when we had just closed the deal. And so hopefully, people understand what we're trying to do here.

And our next question will come from David Feaster with Raymond James.

We've talked a lot about creating a higher quality bank. And obviously, you've been very active executing on that. But the challenge is the earnings trajectory, just in the short run is there's a lot of loans and securities that we need to reprice. I just was -- you touched a bit about it. I think you said about $1 billion in the back half of the year. But I'm just kind of curious how you think about the repricing dynamics of the book. If you could walk through some of the timing especially heading into next year, whether we should expect that pace of repricing to maybe accelerate?

Sure. First of all, I think our margin is unique in that we -- both our cost of deposits are going down, our cost of funds are going down and our margin is expanding at a time when others are doing the opposite. And this is not dissimilar to what we did at Banc of California. When we went in exactly the opposite direction when everybody else is trying to expand their margin, it was contracting and ours was expanding. This is the same thing. We've done this before. Our deposits are really short right now. Our term deposits are all under a year. We're keeping them there. Like I said, we could pull forward a lot more profitability by just choosing to go longer duration on deposits and locking in 2-year money. And we -- it's worth millions of dollars every quarter, but we don't think that's the right thing for the long term. We think it's better to stay short, wait for rates to come down and gradually reprice deposits for the long term. And so I think the repricing of deposits is going to be an important story for us over the next 12 months. The timing of it is rate dependent. It depends on when rates -- obviously, we're bringing in NIB and that's bringing us down. But the accelerator will be when rates come down and some people think it's going to happen this quarter. I don't know, but we have it happened in the back half of the year, maybe it's September, maybe it's November, December. But when it happens, it happens, and I think we'll continue from there. And on the loan side, there's so much stuff running off that our loan yield is going to continue to climb even as rates come down in my view because the stuff that's running off is just so low that even as rates in this current environment, we have enough buffer even with rates coming down slightly, that our loans are still going to reprice higher than what's coming off the books. So overall, I feel like our margin will continue to expand for those reasons. It's hard to see it not expanding the pace at which it expands as a function of rates, but we've been able to make very steady progress on our margin. I don't know that I can be more specific than that, David, because it will depend upon the timing of rate cuts.

Jared, I'll just offer that on Page 10 of the deck, you can see that about 40% of our assets are either floating rate or will we be repricing within a year.

Okay. That's helpful. And then you talked a lot about bringing new relationships to the bank. You've obviously had a lot of success. I'm curious from your perspective, what's attracting these new relationships to the bank. Where are you having success bringing these relationships from? And what segments are kind of driving it? I think we've talked in the past about HOA and venture being a focus. But I'm just kind of curious where you're having success and what do you think some of the drivers are?

Yes. Well, first of all, I'd say it's very broad-based. Second, I would say that I hope that we achieve more momentum because we've been a little bit -- the last 2 months, I would say, we've been very cautious about it because we didn't want to bring over customers and then have them go through a conversion. And so our marketing efforts are going to pick up now that conversion is through the gate, and it's going to allow us to really unlock the full value of this combined franchise as 1 company on 1 system. And so it's going to make it a lot easier for our teams across the country to do what they're doing. But there's a couple of differentiators, and I can tell you where we're getting it. So 1 is we're competing a lot with the disruption that is occurring at some of these larger banks. I like to say that for many of our competitors, their clients ended up with them, they didn't choose them. If you're a Union Bank client, formerly Union Bank, you ended up at U.S. Bank, you didn't choose Union Bank. If you're a First Republic client, you ended up at Chase, you didn't choose Chase. I realized some people could say the same things about PacWest clients ending up at Banc of California, but we were much more similar as companies. And we had a much more common, I would say, DNA and threat across our company than those other banks that I described ending up in these larger banks. So there's been a lot of disruption in our markets, especially in California. You guys have heard me read off the list of banks that no longer exist. And therefore, we're going after those disruptive relationships. They're all good targets for us, and I would say it's a target-rich environment. And our treasury management folks are deeply experienced and are brought in with our business teams across the company to help leverage kind of the tools that we have and the technology that we have and provide a compelling case of why they should be banking with us to bank with somebody that knows you and understands you is meaningful. Another thing that I've shared, and this is in our market, but it might be -- it might exist in other markets for other banks is the nature of the relationship managers that we have. They're very, very experienced. And so a company that has $5 million of revenue, $50 million of revenue, $100 million revenue, $100,000 in deposits or $5 million in deposits or more than that, they're going to work with somebody that's very experienced that's fundamentally not an entry-level employee. The levels that I just described at some of our larger competitors, they will be relegated to employees that are talented but are probably much more junior in that organization overall. And that really stands out when we speak with clients as they realize that they're working with very seasoned individuals. And so I would say that it's broad based. We're just getting started. I like the momentum that we have. But again, we've held off on marketing and because we didn't want to bring people into a bank that was going to get converted. So let's see where we go from here, but I like the momentum so far.

Okay. That's great. That's helpful color. And then I know you've made a bunch of new hires lately and you've focused part of the strategy is focusing on being more tech forward and expanding the tech offerings. I'm just kind of curious maybe what are some of the things that you guys are working on right now. And the -- just kind of any thoughts on the digital strategy, just the tech initiatives that you're primarily focused on.

I could talk about this for hours. I love the topic. We are constantly investing in our company. We have a very focused list of objectives. And so you can get overwhelmed by your tech initiatives, and you can fill up more hours than you have in terms of bodies and multiplied by the hours in the week, and you'll never get it all done, and you'll divide and you will never conquer. And so we are very focused on what we're going to do and how we're going to do and we have a priority list of things that we think are really going to move the needle. And it's divided among internal projects things that will help our colleagues be more efficient. We deployed ServiceNow. We have Salesforce up and running -- getting up and running. We have nCino, that's doing -- that's a full workflow program for our employees and some other specific back office and digital enhancements. In addition, we have client-facing things and things that are really going to help our clients. So on the payment side, our team has done a really good job of launching our credit card platform and rolling out credit cards to clients. We are an issuer of cards and we have a digital platform that accompanies it. And the adoption of cards is something that will make a bigger impact down the road. We rolled out deep stack for HOA. So now deep stack is the power behind our HOA platform accepting payments for credit cards for those who want to pay their HOA payments. More initiatives like that are coming. And obviously, deep stack is something that we said is going to have a bigger impact in '25. I hope to have some announcements later in the year about that. But we had to get through conversion first, and we have other tech initiatives which are going to follow.

And our next question will come from Chris McGratty with KBW.

The rate component of your guidance or your long-term target is fairly important. If the forward curve comes in as we expect 1 to 2 this year and roughly 3 to 4 more next year. Can you get close to those targets by the end of next year?

Chris, can you say your question you cut out on my end a little bit. Could you repeat your question.

Yes. So rates are a big piece of the timing of getting to your guide. If you get -- if the forward curve is right, which it generally is not. But if the forward curve is right this year and you get 1 to 2 and then a few more next year, I guess, how close can you get to those long-term targets by maybe exit '25 into '26.

The 1% on ROA and the 13% return on tangible common, if we -- like -- because we have just kind of a -- well, it's definitely going to accelerate us for sure. We're being as conservative as we can right now. We're hell-bound on hitting our targets. And by the end of '25, I think that's fully reasonable.

And then on capital, over time, can you just remind us the binding ratio when you might look at a given your stocks below book and any other considerations?

We've said that we think we need to show capital sustainable, get to 11% and then we can start those conversations in terms of CET1. So -- and then the question is, do you need to maintain it at 11%? Do you need to be -- is it around 11%, and so we're prepared to have those conversations when we're there and ahead of time, obviously, with our regulators. And then Joe maybe wants -- okay, sorry, Joe.

I was going to say we're looking at lots of different options in those scenarios as we generate capital from the CIVIC sales from other actions, how best to utilize that capital.

Okay. That was the bond repositioning comment. Okay. And how about the tax rate, Joe, going forward after this quarter's elevated number?