Bank of California (BANC) Q1 2024: Non-Interest Deposit Mix Rises to 27.1%, Accelerating Margin Shift
Bank of California’s first full quarter post-merger delivered rapid progress on deposit mix optimization and cost reduction, spotlighting a methodical shift toward profitability targets for year-end. The company’s disciplined runoff of high-cost funding and intentional growth in non-interest-bearing deposits (NIBs) drove a material improvement in net interest margin, even as overall loan growth remained muted. With execution levers intact and management signaling confidence in margin expansion, the franchise is positioned for further cost and funding mix gains despite a tepid macro backdrop.
Summary
- Deposit Mix Shift: Non-interest-bearing deposits grew, improving funding costs and deposit composition.
- Expense Discipline: Merger-related cost savings are materializing faster than planned, supporting profitability targets.
- Margin Expansion Path: Higher-yielding new loans and strategic runoff of low-yield portfolios underpin further margin gains.
Business Overview
Bank of California is a regional commercial bank focused on business and consumer banking, with a core presence in California. The company generates revenue primarily from net interest income (the spread between interest earned on loans and paid on deposits), supplemented by non-interest income from fee-based services. Major segments include commercial lending, specialty finance, and consumer banking, with a recent merger expanding its scale and deposit base. The business model emphasizes relationship-based deposit gathering, prudent balance sheet management, and disciplined credit underwriting.
Performance Analysis
First quarter results reflected the first full period of combined operations following the PacWest merger, with management emphasizing methodical execution on funding cost reduction and expense control. The company’s core loan book grew at a 4% annualized rate, offset by intentional runoff in discontinued and lower-yielding portfolios such as premium finance and Civic, which collectively reduced less profitable assets from the balance sheet. Net interest margin (NIM) expanded sharply as the balance sheet repositioning and increased NIB deposits reduced overall funding costs, despite industry-wide pressure from elevated short-term rates.
Non-interest expense trended lower, outpacing management’s initial expectations for merger-related cost synergies. Deposit runoff was largely intentional, with the bank prioritizing profitable relationship deposits over high-cost brokered funds. Credit quality remains sound, though non-performing loans (NPLs) increased, primarily due to a handful of commercial real estate (CRE) credits, which management described as a normalization rather than a sign of broad deterioration.
- Funding Cost Leverage: Declining cost of deposits and reduction in wholesale funding drove margin improvement.
- Intentional Asset Runoff: Strategic runoff of non-core portfolios and high-cost deposits improved overall profitability.
- Expense Synergy Realization: Operating expense reductions are ahead of schedule, providing cushion for future quarters.
Overall, the quarter demonstrates the benefits of a disciplined, balance sheet-driven approach as the bank leverages merger synergies and deposit franchise strength to drive toward stated profitability goals.
Executive Commentary
"We executed well in our first full quarter as a combined company... realized the benefits of the balance sheet repositioning we executed following the closing of the merger... resulting in significantly higher levels of net interest income in Q1, and an expansion in our net interest margin."
Jared Wolf, President and Chief Executive Officer
"Our non-interest expense was $210.5 million, down $73 million versus the December 2023 quarterly run rate. Our other expense initiatives are gaining traction and deliver results in excess of expectations for the quarter."
Joe Cowder, Chief Financial Officer
Strategic Positioning
1. Deposit Franchise Optimization
Bank of California is deliberately shifting its deposit mix toward non-interest-bearing and relationship-based accounts, reducing reliance on high-cost brokered and wholesale funding. This shift is central to margin expansion and long-term funding stability, with NIB deposits rising to 27.1% of total deposits this quarter and management targeting further gains using a proven relationship banking playbook.
2. Cost Synergy Execution
Merger integration is ahead of schedule on cost savings, with operating expenses trending lower due to normalization of FDIC assessments, branch and facilities rationalization, and system conversion. Management expects expense reductions to be back-end loaded, with further savings materializing as integration milestones are completed through the year.
3. Margin Accretion from Asset Repositioning
Loan portfolio management is focused on replacing runoff from lower-yielding, discontinued portfolios with higher-yielding new originations, supporting ongoing NIM expansion. New loans are being booked at yields north of 8%, well above runoff rates, providing a positive glide path for margin even in a flat rate environment.
4. Prudent Credit and Capital Management
Credit discipline remains a hallmark, with targeted reserves taken on select CRE credits and conservative management of legacy portfolios like Civic. Capital build-up is prioritized over capital return, with management signaling no near-term preferred redemption until capital ratios are comfortably above targets.
Key Considerations
This quarter’s results reflect Bank of California’s methodical approach to integration and profitability, with management leveraging multiple execution levers to offset external rate headwinds. The focus is on sustainable margin improvement, cost control, and relationship-driven deposit growth.
Key Considerations:
- Deposit Mix Leverage: Continued NIB growth is expected to drive further funding cost reductions, a key differentiator versus peers facing deposit pressure.
- Expense Reduction Momentum: Faster-than-expected realization of cost synergies creates flexibility to absorb potential revenue or credit shocks.
- Asset Quality Normalization: The uptick in non-performing loans is attributed to a handful of CRE credits, with reserves and collateral coverage described as adequate; further normalization is possible but appears manageable.
- Non-Core Portfolio Options: Management remains open to further sales of legacy or discontinued portfolios, such as Civic, to accelerate balance sheet repositioning and profitability.
Risks
Key risks include rising short-term rates or delayed Fed cuts, which could slow funding cost improvement and margin expansion. CRE credit normalization may continue, though management’s conservative reserving and collateral positions appear adequate for now. Execution risk remains around realizing full cost synergies and sustaining relationship deposit growth in a competitive California banking landscape.
Forward Outlook
For Q2 2024, Bank of California guided to:
- Continued net interest margin improvement as higher-yielding loans replace runoff and funding costs decline
- Further reduction in non-core, high-cost deposits and completion of key merger integration milestones
For full-year 2024, management maintained guidance:
- Targeting ROA of approximately 1.1% and ROTC of 13% in Q4 2024
Management highlighted several factors that will drive results:
- Deposit pipeline momentum and NIB growth supporting funding cost leverage
- Expense reductions accelerating in the second half as system conversion and facility rationalization complete
Takeaways
Bank of California’s Q1 results show disciplined execution on post-merger integration, with margin and cost trajectories trending favorably. The franchise is positioned to outperform peers on deposit mix and expense control, though macro and credit normalization risks remain.
- Margin and Funding Cost Gains: Execution on NIB growth and runoff of high-cost deposits is driving sustainable NIM expansion, even in a challenging rate environment.
- Expense Synergy Realization: Faster-than-expected cost reductions provide a buffer for future quarters and support the path to year-end profitability targets.
- Watch for Deposit and Loan Mix Evolution: Investors should monitor the pace of NIB growth, runoff of non-core assets, and credit normalization, as these will determine the sustainability of margin and profitability gains.
Conclusion
Bank of California’s first full quarter as a combined entity demonstrates tangible progress on funding mix and cost structure, setting the stage for further margin and profitability improvement through 2024. Execution on deposit franchise optimization and cost synergies will be the key watchpoints as the year unfolds.
Industry Read-Through
Bank of California’s ability to grow non-interest-bearing deposits and reduce funding costs stands in contrast to broader industry trends, where many regional banks are facing margin compression and deposit outflows. Disciplined runoff of non-core portfolios and aggressive cost management offer a playbook for peers navigating post-merger integration or seeking to optimize profitability in a flat-to-rising rate environment. The normalization of CRE credit quality and conservative reserving may serve as a bellwether for other banks with legacy office or retail exposures. Overall, the quarter highlights the value of a relationship-driven deposit franchise and operational discipline in the current banking landscape.