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

Great. Thanks, everybody. We'll keep the mid-cap bank track going. We have Banc of California, Jared Wolff to join us next. We're excited to hear a little bit of an update. You've had a busy last 12 months. So I'm not sure if you want to maybe just give a quick update on how things are going with you right now through the -- after the big integration.

Sure. Well, thank you for having us here. We're thrilled to be here. So I appreciate it, Jared. Banc of California closed its acquisition with PacWest Bancorp on November 30 of last year after announcing the deal in late July. Following the acquisition, we sold a huge amount of assets, shrunk the balance sheet, paid off expensive borrowings and then prepared for conversion. We got conversion done in late July. We converted over 20,000 customers and approximately 55,000 accounts over a weekend. It was Crowdstrike weekend, of all weekends, but our team did an excellent job. And fortunately, that was successful. So we've transitioned the company. We're one company today, working on one system with a tremendous group of employees from both companies.

Great. I guess the systems integration, all that seems like it went off without a hitch. How's the broader cultural integration going as you combine these 2 pretty different companies?

Yes. It's been one of the biggest initiatives that we've had is to make sure that, culturally, we are operating as one. We have a saying at Banc of California -- we have a lot of sayings, but one of them is banking is a team sport, and together we win, are two of our sayings. And so we're out there with combined teams operating as one company today. Because we competed so closely in Southern California, our teams have a lot of familiarity with each other. And as many of you know, I came from Banc of California. I came -- excuse me, I came from PacWest Bancorp. I was there from 2002 to 2014. And so that connectivity that I had with a lot of the people that are there at the time of acquisition really helped us transition this company much, much faster perhaps, and I think today we're effectively working with one culture.

Now that you've been under the hood for a little while, are there areas that I guess we're you've been positively surprised with maybe some incremental opportunities and where there's still some areas of work?

So I think in terms of areas of things that have moved faster, I would say, culturally, we're able to bring these companies together and make it feel like one. And you look at the PacWest Bancorp history, a tremendously powerful franchise that in March of 2023 really had a near-death experience. And these folks were incredibly resilient, very talented. They could have got jobs, but they really stuck around and tried to keep this company alive, and they succeeded and now they get to thrive as part of this new company. So I would say that culturally it went faster than maybe it might have under other circumstances. Where we still have work to do, I think, is just in terms of overall systems. I'm not talking so much to the system integration, but I'm talking about processes, making sure that we are not getting in our own way and making sure that things that we -- rules that we set, processes that we set at conversion, you have to constantly look at those things and make sure that they're not getting in your way. So I do -- I travel across the country, we are offices in 9 states. I meet with our teams and I ask them what's going on, what could I do to help you, what's getting in your way. What changes have we made that might have been more challenging now than before the merger. And you really listen to those answers and make changes. It could be something as simple as somebody's wire approval limit was set too low after conversion relative to what it was, so you need too many approvals to get something done. Things like that can really unlock the franchise, and I think we have to keep doing that. And it's a process of continuous improvement, but I think it's something that we'll keep doing.

You mentioned the -- some of the structural changes that you've put in place. When you look at the sale of the Civic loans, how are you thinking of using the proceeds from that? I think in the past you talked a little bit about potentially doing some -- the chance for securities repositioning or other uses of proceeds. How should we be thinking about that going forward?

Yes. So really pleased with the sale of Civic loans. We've sold approximately $1.9 billion of loans. Got a very high price for those loans. We're very pleased with the execution. It resulted in about $1.9 billion of liquidity, and we also unlocked about $100 million of capital that was associated with those loans. In terms of the liquidity, we're using it first to pay down the bank term funding program. We paid that off. Second, we paid off high-cost borrowings [ in ] brokered products. And third, we're reserving some in cash and other forms of liquidity to support growth. On the capital side, we said we would use approximately half, maybe a little bit more of that capital to absorb the losses to reposition our securities portfolio. And we did that successfully late in the -- so far this quarter, and we expect to get a pickup of at least 200 basis points.

Are there any other restructurings that you're contemplating? Or do you feel pretty good at the balance sheet position now?

I'd say we feel good with where we are right now with the exception of continuous progress and continuous efforts to reposition our deposits, and that will take some time. We are particularly liability sensitive right now, and we've stayed very, very short. So our interest-bearing liabilities, 90% have maturities of a year or less. Obviously, that's CDs and money marketing savings accounts and some interest checking accounts, really, really short. We know that we could grab a lot of savings -- a lot of earnings and pull them forward by locking in longer-term fixed rate liabilities. We could save maybe 100 basis points. But if we're patient and ride the curve down and wait, I think we'll have -- we'll be better positioned over the long term. And so we're trying to stay -- our liability sensitivity is going to help us as the curve starts to -- and interest rates start to come down.

On deposits, you've had some good momentum growing with relationships and growing DDA balances. As we look out over the next year, 1.5 years, what are some guideposts we can expect to see or look for as investors on the outside?

I think one of the most important guideposts has to do with our percent of noninterest-bearing deposits. And so if you remember Banc of California before the merger, we had gone from 12% to 40% NIB in about 4 years. And then in March of 2023 when the crisis hit, our NIB held in at 36% because it was real NIB. It was businesses that were using treasury management services from our company that relied on our company to help them execute on their business every day. Today, at the combined company, we're about 27%. That's an increase from 25% that we saw when we closed the merger. Over time, we will get to 30% and ultimately 35% and hopefully grow from there. It's a much bigger balance sheet, it takes a little longer to move the ship, but I'm confident that we're going to get there through the efforts that we've put in place. And then our percent of wholesale funding should come down meaningfully over time. And I think, obviously, the liquidity created from the Civic transaction is going to help us with that as well other efforts.

When we look at the brokered deposits and some of that wholesale funding, should we be thinking that that's going down as a percentage of funding, or will that come down on an absolute dollar basis? If we're seeing good loan growth, is there still a role for that level of funding over the next few years, or is it really the priority to bring the absolute dollars down?

So today it's both. You'll see the absolute -- you'll see the dollars and the percent of funding come down. Over time, though, there's absolutely a role for brokered. We're going to have brokered. We're trying to keep it -- wholesale funding below 10%. But if there's growth and the prices are good, I think you can see us tapping that market as an alternative source of funding. There's some very attractive opportunities today, 10-year putable advances with the FHLB are around 3%. It depends on the lockout period that you choose, but 10-year money at 3% has pretty much always been good funding in terms of pricing. And so we're not opposed to it, but we want to make sure that we're prudent with it and we don't have more than we need.

Yes. Maybe looking at the growth opportunity, you're now the third biggest bank headquartered in California, which is amazing to think of how far you've come over the last few years. You were able to really do a lot more on the commercial and wealth side than you could just a few years ago. What excites you the most about the position you're in now, and how will that impact the long-term growth objectives?

We are very well positioned in our major markets. The landscape of banks that we're competing with has shifted more dramatically in the last couple of years than it has in my entire banking career. I think about the banking crisis in '08, and you saw -- you had some major banks that went under at that time. You had the WaMus and the Wachovias and some others. But fundamentally, the banks that we acquired from the FDIC were much smaller banks, and they were banks that were easily absorbable. What we saw over the last 1.5 years to 2 years has been a seismic shift in the landscape of banking when you think about the number of sizable banks that have really left the market. So particularly in California, us being the third largest bank, at $35 billion to $40 billion, headquartered in California, we're mostly competing with the large banks today. And that's what gives me a lot of excitement in terms of the opportunity set. Our clients and prospects who might have accounts at the large banks, most of them didn't choose to be there. Most of them ended up there. If you were a Union Bank customer, you are now a U.S. Bank customer, not by choice, but because that merger happened. If you were a First Republic customer, you ended up at Chase. Many of them are at U.S. Bank or at Chase. They're good banks. They serve a lot of clients really, really well. But the clients that we target, more often than not, are not going to find the nature of a relationship and the customized offering that we're going to provide at those larger banks. They're going to be working with people that might not be as seasoned as the people they would meet with our -- at our bank. And so that gives me a lot of excitement in terms of the opportunity set that we have.

How are you going out and targeting those potential customers and, I guess, where do you see the biggest opportunity?

So -- we have a couple of different strategies, but you have to do some sort of marketing to make sure that your name is front and center. We like to think that the purpose of our marketing and our branding is to open the doors for our relationship managers before they walk in the building of the prospect or client. When clients are -- when prospects are out there thinking about changing their relationship because they're frustrated for some reason, we want Banc of California to be at the top of the list of banks that they reach out to. So it's got to be a dual effort of us being out there actively reaching out, having the right relationship managers that are known in the market and are proactively targeting the right segments, and then we have to do some branding to make sure that we are front and center on their behalf. And so we're doing both of those things right now.

When you look at the opportunity you've mentioned in the past, the opportunity from the City National franchise and some of the wealth management opportunities, do you have everything in place that you need from a systems standpoint now to bring those on? And are you able to really scale once you've had success on the relationship-building side?

Yes. I think the lending side is probably easier to adapt and to be prepared for. It's are you really prepared on the treasury management side. And you need a couple of things to do treasury management well. You need the right people, you have to have the right systems, and you have to have the right incentive plans that motivate and encourage the right behaviors. And those are things that we put in place at Banc of California and have since re-upped with this combined company, and it's working very well. And I would say that the digital offerings that we have today and the technology that we have are superior to most banks that are our size and in many cases superior to banks that are much larger than us. We are continually investing in technologies and make sure that we can be front and center in terms of our digital account opening offerings as well as our payments business that's growing and it will be a source of future revenue and deposits. All of those things are helping us compete. We have a credit cards now that we're offering directly to our clients. All these things are helping us compete and win.

Maybe shifting and looking at the tech and innovation market. Obviously, huge disruption with the exit of Silicon Valley and the combination of PacWest with you. How are you looking at that vertical? How has that dynamic changed the relationship between the banks and customers and the broader risk management of liquidity and relationship management?

So our venture business is really 3 businesses, which I'll break out to provide the background to answer your question. So our business is 3 businesses: it's fund finance, which is capital call lines of credit; private equity and venture capital firms; and then it's lending into life sciences and technology companies that are fundamentally backed by these private equity and venture capital firms. And the lending that we do on the venture, on the tech and life sciences side is fundamentally bridging rounds of capital. So we might lend to a company, provide a line of credit who's done a Series B, and that line of credit is probably not going to get tapped unless they come to us and say, hey, we're raising Round C, our cash burn as such that we might want to tap this as a safety valve, and then we approve it and they tap it and give them a little bit more time to finish their fundraising. And it's worked out very well. I'm very pleased with the business. The business overall has over $4 billion in deposits and $1.5 billion of loans. So it's a good loan-to-deposit business. And the cost of those deposits are pretty low. The market, as you mentioned, has shifted with the elimination of certain competitive entities, but those teams have showed up in other locations. They've showed up in -- whether it's at HSBC or at JPMorgan, and in some cases the Silicon Valley Group, to be placed in its own name. And so we've competed very effectively as one of the most stable teams in the market and holding our place there. And in fact, what we like to say is growing our logos, which is increasing our market share among private equity and venture capital firms that we want to target. From a liquidity and concentration standpoint, I think the issue that PacWest had back in the day was they had some very large deposits that they had on balance sheet that were heavily concentrated from a couple of customers. And we have an asset management business that's a corporate asset management business where we move concentrated deposits so we don't have them on balance sheet. So we're not lending against them. And that's the way we're managing that concentration risk.

How has the expectations on the part of customers in that vertical changed over the past year from what they expect from the bank and the dynamics of that relationship?

I would say that the largest dynamic shift is that those clients -- there's an expectation today among the clients and a realization among the banks that they're going to have more than one relationship. And prior to the crisis, these firms all had dominant single relationships. And they've all diversified now into having multiple relationships. So most of our term sheets in this particular sector will say something to the effect of you must maintain no less than 75% of your deposits at Banc of California. We don't say that in other verticals. We expect to have their banking relationship with us. And it's more common in that space.

Have you seen changes in pricing?

Not dramatically. No.

[indiscernible]. Broadly, as you implement these new strategies, what's in your mind, a good long-term sustainable growth rate for lending at Banc of Cal given your [indiscernible]?

Look, in normal times, when the economy is humming and we're kind of -- GDP is growing, and you see a lot of stability, we see high single-digit growth as kind of the target. Think about 8% to 10%, and maybe you achieve 10% to 12% because you're having a great year in terms of top line growth. We project for 2025 it's going to be low single digits because it just doesn't look certain enough right now. That doesn't mean that we're not going to aspire to something higher and certainly take the market share if it materializes. But right now, we see 3% to 5% as a reasonable target for 2025 based on what we know today. And we would certainly aspire to that 8% to 10%. Banking generally, banking businesses and banks are generally businesses that run with the economy. And if you're running much faster than the economy, maybe you're getting contribution from M&A or something like that, but you're taking pretty sizable risk if you were running much faster. And that's why we think that that's the right target.

Great. We have a couple of questions for the audience. Maybe we can pull those up, and we'd love to take any audience questions, if you have any. The first question: what's your current position in the shares of Banc of Cal? Overweight; market weight; underweight; or not involved? [Voting] So 57% not involved, number 2, overweight at 29% and 14% short. That seems to be consistent with the trend we've seen so far today and yesterday, with a lot of people not really in the space. It feels like [indiscernible] underinvested, but maybe getting some new level of interest. Second question: will 2025 quarterly expenses be lower than the fourth quarter run rate, yes or no? So we can get into expenses a little bit after this. [ Read out ] some good guideposts for that. [Voting] A 50-50 split, all right. Third question.

I wonder how my CFO answered that question.

After the industry liquidity scare and the CRE focus, what do you expect banks to have as a longer-term CET1 target? Getting back down to the 9.5%, 10%; 10% to 10.5%; 10.5% to 11%; or greater than 11% for a long-term CET1 target? [Voting] Yes. So the 10.5% to 11% the biggest. So a chunk were over 11%. So it definitely feels like the long-term expectations are [indiscernible]. And final question: which would have the most impact on improving Banc of Cal's valuation? Above-peer loan growth; better relative margin performance; stronger fee growth; better expense control; credit quality outperformance; more active share repurchase; or an accretive bank acquisition? [Voting]

[indiscernible] a choice of one?

Yes, you pick one. Yes. So a little bit of a mix -- so better expense control, margin performance and loan growth.

I'm excited that we're going to -- we agree. So those are our focus areas.

Yes. And then margin has definitely been the main focus for most of the companies. Let's see if there's any questions in the audience, happy to take some.

Jared, going back to the expense topic. When do you think you'll be able to hit kind of like a clean expense quarter? And what type of efficiency ratio do you envision this franchise kind of having longer term?

Is that Dave? All the way in the back. So we're obviously in the middle of a restructuring right now. And this quarter, we'll have the sale of Civic as well as the restructuring of our securities portfolio. In the fourth quarter, we might have some expenses that come out from further restructuring through the end of the year that we identified previously, but I'm not anticipating anything major in Q4. Looking at my team here in case there's something I'm missing, but is there anything in Q4 that we're expecting that's significant? [ A little ] decrease, all right. So from a normalization standpoint -- you asked for when there's going to be a clean quarter -- it could be as early as Q4 would be the earliest I would expect it. It's not going to be this quarter because of the restructuring that we're doing. From a guidance standpoint, we said that we are targeting 2% expense-to-assets from a ratio standpoint in terms of average assets. And you can think of average assets as $34.5 billion to $35 billion, given that we sold Civic. We were at $36 billion. We sold about $2 billion, so $34 billion, $34.5 billion. That 2% expense ratio is really talking about pure operating expenses. So one of the things that we're going to highlight in Q3 when we announce our earnings is we're going to back out and lay out in detail a line item called customer-related expenses. If you noticed in our second quarter Q, we have a line item in our income statement under expense called customer-related expenses, it's $32 million. 75% or more of that is really amounts that we pay on deposits that are tied to Fed funds, really associated with our HOA business. It's 100% beta. So that is going to -- that's really a deposit expense that's coming through operating expense. So if you take that out, I think we're there for our OpEx ratio, and we'll show even more improvement. We -- our target of $195 million to $200 million for OpEx by the end of the year is a 30% improvement of operating expenses over the course of the year. It's a pretty substantial change. So Dave, I think we're going to have a clean quarter as soon as the fourth quarter. And I think our OpEx ratio is going to come in line, and then we're going to improve it from there. And then in terms of an efficiency ratio, I think an efficiency ratio is a fair thing to look at once you're through a restructuring. I think it's too hard to look at when there's a lot of moving parts on the balance sheet. I think we would aspire to have an efficiency ratio in the mid-60s to start and then see how good we can do from there. And so I'd like to get to a stable place and then start focusing on efficiency.

Any other questions from the audience? Maybe sticking with the topic of expenses, you talked about the lower FDIC expense opportunity. What are some of the other longer term -- once we get beyond the clean up this quarter, what are some of the opportunities for that drive [ further ] efficiency?

Yes. FDIC expense, just as a reminder, PacWest was paying, before we closed the acquisition, $36 million a quarter. We're down to about $20 million. We think it should get to down to about $12 million per quarter. And we said we thought we would achieve that clean quarter, as Dave was just asking, in Q1. And if we can achieve it earlier, we will. And so we're optimistic about that. There are still some related costs that will come through from our system conversions. They're going to keep coming out through the end of the year. That will help us. And then there's kind of the ongoing process of rationalizing our facilities, rationalizing the proper head count expense and other systems that we have that you can't really take out until you improve the process to get rid of them. And so we're constantly working on those things. There's also another initiative that we have on vendor expense. We literally are going through every single vendor line item in the company and making people justify whether they need it. Restructuring of BOLI. We've got that done this quarter. It probably won't show up for another quarter in terms of savings and improvement of earnings, but might bring a couple of million of earnings. So there's a whole list of things that we have, and those are some of them: FDIC expense, conversion, among the most significant; head count expense, ongoing; and then other systems would be fourth.

Once we get beyond the cleanup on the expense cuts, where would you like to see some investments once you get to that point of being able to put some more money back into the franchise? What's the target?

They're not mutually exclusive in that you get to -- sometimes some of these expenses get expensed over a much longer period time I think, capitalized, so you can amortize them over a longer period of time. So we are making investments. First of all in people. Our single most important asset are the people that we have who -- we bring over as high-quality people who can really work well in the culture of Banc of California, and you may have seen that we hired a lending team to go back into lender finance, and they're going to make some, I think, some positive hay by the end of the year and other teams that we're focused on, making sure that we have high-quality people throughout our company. Second, our integrated systems. We have Encino. We're now finalizing our installed sales force for 2 purposes: one, to provide a single view of the client. So it's a true CRM in terms of customer relationship management. It handles all the customer service inquiries that we get, so we can pass a ticket from a frontline RM to a back-office person who might be handling that account management. So this is going to be very helpful. And it's also going to do online account opening for us and really seamlessly improve the way that we open online accounts. We have a national SBA platform. And before we merged these companies, the SBA group was not looking to open deposit accounts, they were basically purely a lending function. Well, our focus at Banc of California is on deposits first. And that's one of the reasons we were able to go from 12% to 40% NIB. We are really a deposit-first culture, and we don't make loans without deposits, very rarely. So our SBA teams now, to their credit, are grabbing deposits. We might not have a branch in those areas, so the ability to open accounts online and bringing those deposits from these businesses that we're lending to, I think, is going to make an important impact going forward. And then I would say our payments business. It's going to show up, as I mentioned earlier, on stand-alone Banc of California, the ability of that business to improve our financials was much easier because we didn't have any fee income. And if it grew $10 million or $15 million or $20 million of fee income, that would have been significant to Banc of California on a stand-alone basis. We have $10 million to $12 million of fee income a month on this combined company. And so it's going to take a much higher bar to move the needle, which is why I'm not sharing the numbers yet, but we are making a lot of improvements in that business, and I think it will show benefits down the road. We have a high degree of confidence in it. I just had dinner with Stephanie Ferris, the CEO of FIS, which is one of the largest owners, as you know, of Worldpay -- they just spun off a little bit more than half of it, but they still have an outsized influence in that -- and they're partnering with us on some important stuff. So we're excited about that.

Great. And maybe shifting [indiscernible] the areas of focus people highlighted for improving valuation is margin outperformance. You talked about being liability-sensitive. How should we be thinking about some of the dynamics as we go through the first few rate cuts? You obviously have a big tailwind on some of the accretion as well. Can you just sort of walk us through how you're looking at the margin build over there?

So we see our margin expanding meaningfully, not only because of deposits, but even though loan yields are coming down, the loans that are paying off are at such a lower rate than the loans that we're bringing on that loan yield is still going to expand fairly dramatically. And so our margins should meaningfully improve. There's always the question of how much benefit are you going to get from rate cuts. And our model is fairly conservative in terms of how we expect that benefit to flow through. We expect the adoption of rate cuts or the beta that we take earlier will be lower than what it will be later. So there's a bit more of a lag in terms of deposit cuts for some of our deposit base. There are some depositors who -- the rate cut will be 100%, you'll get 100% beta. If somebody's at 55 basis points in a checking account, it's probably going to be 100% beta. If somebody's at 4.5% in a money market account, you're probably having a conversation with them. Were they at 5% and you already brought them down to 4.5%? And they say, hey, you kind of brought me down earlier, I don't want to take 100% of that cut. Or have they been sitting at 4.5% for 1.5 years, and now it's time to get 100%? So you don't know what your beta is till afterwards. But you go through that analysis and you go through that exercise. Our teams are prepared for it. We've asked them to make sure their customers are prepared for it. And so we're going to get as much as we can. But we think from a conservative -- we've been conservative and expect deposit rates to lag a little bit coming down, but our NIM will expand. We gave a NIM of 2.90% to 3.00% by the end of the fourth quarter. I think we'll be comfortably -- and probably ahead of that.

When you look at the loan yield component of that, and you talked about -- as rates are going down, you're still seeing that loan pick up. How should we think about the trajectory of loan and asset yields within that?

So it's a rate and volume question. And in terms of our new production, we can talk about what the yields are, but in terms of our overall loan yield for our portfolio, it is a volume question as well. And we're seeing, like many banks, demand being very slow right now. And it's hard to keep loan balances flat. And so there's probably a little bit of runoff before you start picking back up and growing through it. And so loan yields have actually been holding up very well. In some of our segments that are growing, like warehouse and lender finance, yields are extremely high. And so -- but lender finance doesn't necessarily fund right away. You're making your commitments now, not setting -- warehouse is funding and growing. And so I think loan yields will probably -- I don't know if they're going to stay flat. Hopefully they will. Whether they pick up overall is likely because of the runoff in some lower-yielding stuff in terms of the overall portfolio yields. New stuff is probably going to come down, but it's still higher than what's running off.

Okay, right. Maybe we can shift over to credit. You've seen really strong credit quality at the legacy Banc of Cal and you've been cleaning up some of the weaker segments acquired from PacWest. What areas are you watching most closely today?

We continue to watch -- we're vigilant across the bank. We're continuing to watch office. I think we've tried to be appropriately aggressive in marking credit and making sure that we have reserves and a credit buffer that's substantial so that there are no headwinds when we start growing earnings through next year. We want to make sure that we put a large enough buffer that there's no surprises. We're trying to be, as I said, appropriately aggressive. When your balance sheet is flat or even slightly down, it's hard to justify larger provisions, but we're finding the subjectivity to do it and, we think, within our program. Also, it matters what loan segments are growing. And some of our higher-yielding and more conservatively underwritten -- it's probably the wrong way to put it -- I would say the lower CECL application of fund finance and warehouse justify lower provisions than some of the other areas. And so our reserve right now is 1.19%. That's up from 1.15% ex Civic in the second quarter. We also have, that doesn't show up in that headline number, the first loss position in the single-family portfolio of $2.6 billion single-family portfolio. The first loss position was sold through a credit-linked note that PacWest did. And then we also have the marks on the Banc of California portfolio. So our actual total buffer is closer to 1.8% versus the 1.19%.

How are you thinking about the credit-linked notes going forward? Is that a tool you'll continue to utilize? Has that served its purpose and going forward it will be more...?

PacWest was looking for some capital, some liquidity, when they did that risk transfer. It absorbs the first 5% loss position on a relatively safe portfolio of single-family loans, but it has a huge benefit in terms of reducing the risk weighting of those assets from 50% to 25% or 20%. It brings it way down. So it gives you that relief. But it's pretty expensive, especially given how safe those assets are. So I don't know that we need it. We don't have a need for capital liquidity, particularly, right now. And I think those are some of the reasons to do it. I think if you try to do it in an area where you really want to transfer the risk, like office, it would be exorbitantly expensive and nobody could afford it. And so for right now, I think we're open to looking at it, but I don't see another one.

Okay. In the office book, you have charged off some or moved to NPAs. What part -- where are you seeing the stress in office?

We fortunately don't have much. It's 4%, under 4% today of our portfolio. Where we saw stress was in, really, suburban office buildings that were in isolated markets, and they didn't -- these aren't large towers. They're just areas where they can't really get any absorption at all. There was one up in San Francisco in an area that was outside of -- in the East Bay. And that one we wrote off almost completely. When we did the deal, PacWest had 2 New York office buildings that were charged off. I'd say it's pretty -- it doesn't fall into 1 category. They're kind of unique properties in this case. And we have properties that are performing really, really well in office. Office is a little bit like retail in that in COVID we thought retail was dead and it was never coming back. Well, it just kind of transformed. And now there's really good retail and we'll do retail, and it's performing really well in many, many areas. Office is probably going to go through a similar transformation. It might take a little bit longer. But it's going to go through -- it's not going to completely go away. It's going to transform and people will figure out the right makeup of office again. And right now, we're just in that really uncomfortable transition.

And then maybe in the last 1.5 minutes we have, just your thoughts longer term on capital. You obviously have some unique dynamics with the accretion coming out of the deal that -- where would you think that your long-term capital rate should be?

Yes. So I agree with the audience before, I think 10.5% to 11% is kind of the new kind of CET1. We've said that when we have excess capital, we're going to be really prepared to deploy it, whether it's buybacks, buying back the preferred or other capital actions that we can take. We need to get to a place where we have excess capital. We expect to accrete capital in a very healthy way going forward, building it up about 100 basis points every 12 months, hopefully, if not faster than that. And so we're going to be prepared to use it. You have to kind of always be doing your analysis and then be prepared to do something, because you have to have thought about it ahead of time. But it's really an at the moment analysis of what you want to do based on where things are trading. You can't today decide that the preferred is better than the common or vice versa, because you don't know where they're going to be trading when you're prepared to pull that lever, but we'll be looking at all of it.

Great. Well, thanks very much. Please join me in thanking Jared and the team for joining us today.

Thanks for having us. Appreciate it.