Banc of California, Inc. (NYSE:BANC) Q2 2023 Earnings Call Transcript July 26, 2023 12:00 PM ET
Company Participants
Jared Wolff – President and Chief Executive Officer
Joseph Kauder – Chief Financial Officer
Paul Taylor – President and Chief Executive Officer of PacWest
Kevin Thompson – EVP, Chief Financial Officer of PacWest
Conference Call Participants
Matthew Clark – Piper Sandler
Christopher McGratty – KBW
Andrew Terrell – Stephens
Gary Tenner – D.A. Davidson
Timothy Coffey – Janney
Kelly Motta – KBW
Timur Braziler – Wells Fargo
David Feaster – Raymond James
Operator
Hello, and welcome to the conference call to discuss Banc of California and PacWest Merger and Second Quarter Earnings. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this call is being recorded.
Today’s presentation will include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press releases, which are available on each company’s Investor Relations website. The reference presentation is also available on each company’s Investor Relations website.
Before we begin, we would like to direct everyone to the safe harbor statement on forward-looking statements included in both the press releases and investor presentations published today.
I would now like to turn the conference call over to Mr. Jared Wolff, Banc of California’s Chairman, President and Chief Executive Officer.
Jared Wolff
Good afternoon, and thank you for joining us. With me on the call today is Joe Kauder, the new CFO of Banc of California and Paul Taylor, Kevin Thompson and Bill Back from PacWest. Each company is going to provide a brief review of their second quarter financial results with more limited commentary than usual so that we can spend the majority of the call discussing the merger that was announced today.
Let me start off by saying how thrilled we are to announce this transaction. We are very excited to discuss the tremendous benefits to stockholders, clients, communities and colleagues that this merger will bring. The transaction will result in the third largest bank headquartered in California, with day one tangible book value per share accretion and significant EPS accretion in 2024 when expense savings have been realized. The transaction is accompanied by $400 million of capital from two very sophisticated bank investors, which will accelerate the transformation of the combined company.
Paul and his team have done an outstanding job transforming the balance sheet in a short amount of time through the initial restructuring efforts they have undertaken. Paul and I are both committed to making this successful, and I know this will be a powerhouse franchise. We have worked extremely closely to bring this deal together and it’s going to be highly successful.
Let me turn it over to Paul.
Paul Taylor
Thank you, Jared, and good afternoon, everyone. I want to start off by saying on a great job Jared has done with the Banc of California. He took over a bank a few months before I took over Opus Bank, so we’ve known each other for many years. Having turned around a few banks myself, I’ve been impressed with the transformation he has led at that institution in a short period of time. With that backdrop, it makes me excited about what’s to come with this combination. This is a great deal with very compelling economics, the ability to reposition the combined balance sheet and set the stage for growth. We are clearly better together.
I believe this merger will be beneficial for all of our stakeholders, with clients having access to an expanded set of products and services, employees having more opportunities for career advancement as part of a larger institution.
The merger creates a premier California banking franchise which will be well positioned to capitalize on market opportunities and broaden the channels and customers and serves through increased scale and expanded product offerings. This is an opportunity to assemble a world-class team from both banks.
I would like to thank all of the hard work people at PacWest that they do every day, and they’ve done through this year, and they will continue to do so in the years to come in the new combined organization.
With that, I will turn it back to Jared.
Jared Wolff
Thank you very much, Paul. I’m now pleased to introduce Joe Kauder, our new CFO. As you know, we conducted a national search and saw many, many talented candidates. And of course, he stood out on top. I know you’ve all seen his background having served in very senior finance positions at Wells Fargo for a long period of time, including as CFO of their wholesale bank, which had hundreds of billions in assets. Joe just started his third week on the job, and he couldn’t have come at a more exciting time. He’s been instrumental in bringing this tension together, and we’re certainly grateful to have him here.
Before turning over to Joe, I really do want to thank our Deputy CFO and Chief Accounting Officer, Ray Rindone, who did a truly outstanding job as Interim CFO. So thank you very much, Ray.
And let me now turn it over to Joe.
Joseph Kauder
Thank you, Jared. Of course, I’m very excited to be here at Banc of California. Having spent my entire career at much larger organizations, I’ve been highly impressed with the caliber of talent at Banc of California as well as the culture that exists that is well grounded in banking fundamentals and delivering high-quality service to clients. It has been a fantastic and exciting start.
Let me turn to a few comments about the quarter’s financials. Our earnings release and Investor Presentation provide a great deal of information, so I will limit my comments to some areas where additional discussion is warranted. Please feel free to refer to our investor deck, which can be found on our Investor Relations website as I will review our second quarter performance. Unless otherwise indicated, all prior period comparisons are with the first quarter of 2023.
Our net income for the second quarter was $17.9 million or $0.31 per diluted share. On an adjusted basis, net income totaled $18.4 million for the second quarter or $0.32 per diluted common share when net indemnified legal costs are excluded. This compared to adjusted net income of $21.7 million or $0.37 per diluted common share for the prior quarter.
Overall, our second quarter performance was fairly straightforward with loan growth in core C&I and warehouse and improved asset margins driven by loan and securities repricing in the higher rates and our deposit balances remained stable. However, our net interest margin decreased 30 basis points from the prior quarter to 3.11%, largely due to the impact of the higher levels of cash that we carry during the first two months of the quarter in response to the recent banking turmoil. The cost of the excess liquidity in the quarter was 12 basis points, and we saw a strong NIM recovery in June, subsequent repayment of the associated FHLB and FRB advances.
Our overall earning asset yield would increase by 21 basis points to 5.20%. Our average loan yield increased 21 basis points to 5.28%, which was largely attributable to variable rate loans in the portfolio continuing to reprice higher rates on new loan production and the increase in warehouse line balances, which is one of the highest yielding asset classes in the portfolio. The average yield on securities increased 17 basis points to 4.83%, mainly due to CLO portfolio resets.
Our total cost of funds increased by 52 basis points to 2.20%. Our average cost of deposits was 167 points for the — basis points for the second quarter, up 45 basis points. However, compared to the average Fed funds rates, which increased 48 basis points over the same time period. The net interest margin drivers page in the investor presentation deck further illustrates this information.
Our noninterest income decreased $1.8 million from prior quarters, primarily due to the inclusion of certain nonrecurring items in the first quarter, including recovery of a loan acquired in the Pacific Mercantile transaction and the timing of games recognized on CRA investments. Excluding those items, the other areas of noninterest income were relatively consistent with the prior quarter.
Our adjusted noninterest expense decreased $825,000 from the prior quarter as the full benefit of cost savings from the headcount reduction made last quarter were realized and more than offset the continued investment in other areas of the company such as our new payments processing business.
Turning to our balance sheet. Total assets were $9.4 billion at June 30, a decrease of approximately 7% from the end of the prior quarter, which was largely due to the reduction in excess liquidity held in cash and a corresponding reduction in FHLB and FRP borrowings. Our total equity decreased by $1.9 billion during the second quarter as $18 million in net earnings were offset primarily by capital actions, which included both common stock dividends and the repurchase of approximately $16 million of our common stock.
Our total loans increased approximately $102 million from the end of the prior quarter, primarily due to increases in our core C&I and warehouse portfolios. Our total deposits decreased $81 million from the end of the prior quarter due primarily to lower interest-bearing checking and noninterest-bearing deposits, partially offset by higher certificates of deposit. However, after an initial decline, total deposits increased as we moved through the quarter and our end-of-period balances were $102 million higher than our average balances in the quarter. Importantly, our noninterest-bearing deposits were 36% of period-end balances. And as noted in our earnings release, we had substantial inflows of new deposits from new client relationships.
Our credit quality remained solid in the second quarter. We had increases in both delinquent loans and nonperforming loans, but this was largely due to our asset borrowed loans, which are well reserved for and have low loan to value, so we view the loss potential as remote. We recorded a provision for credit losses of $1.9 million, which included a $1.7 million provision for credit losses, which was largely to replenish the reserve for charge-offs of a loan acquired from Pacific Mercantile and other small C&I loans.
Our allowance for credit losses at the end of the second quarter totaled $84.9 million compared to $89.4 million at the prior quarter, and our allowance to total loss coverage ratio stood at 1.19% compared to 1.27% at the end of the quarter.
At this time, I will turn the call over to Kevin.
Kevin Thompson
Thanks, Joe. At the beginning of the year, we announced a renewed strategic plan to focus on our core community bank franchise and to deemphasize noncore businesses. We accelerated these efforts during the second quarter in light of the turmoil in the banking market. We’re very proud that Europe’s executed on the sale of our national construction loan portfolio, selling $2.6 billion of loans and $2.3 billion by the funded commitments at a discount of 4.5%. We also sold $2.1 billion of lender finance loans and $200 million of unfunded commitments at a 3% discount with another $1.1 billion of unfunded commitments to be transferred over time to the buyer as funding.
Since the beginning of the year, we also wound down our CIVIC operations. We sold $521 million funded and $24 million of unfunded commitments of the CIVIC loan portfolio this quarter. As a result of this divestiture, we also anticipate annualized compensation savings of $53 million and other expense savings of $17 million.
As part of our efforts to improve our operational efficiency, we have closed and subleased a number of our facilities. We’re simplifying and improving our business processes. We are consolidating contracts, and we are working to reduce expenses around the company. The swift actions of our team this quarter resulted in increasing our capital and improving our liquidity position. We are very pleased that our deposit base stabilized in the quarter and has now begun to grow.
The loan-to-deposit ratio decreased to 81% with immediately available liquidity of $18 billion and a coverage ratio of uninsured deposits of 335%. We are holding a large amount of cash on balance sheet at the end of the quarter. Much of which, we plan to use to pay down the wholesale funding. Our CET1 capital ratio increased dramatically from 9.21% to 11.16% in the quarter.
The diluted earnings per share was a loss of $1.75 in the quarter. Adjusting for onetime items associated with loan sales and restructuring, the adjusted earnings would have been $0.22 per share, which is just ahead of analysts’ estimates for the quarter. We are very proud of the PacWest team members who bring passion to work every day as we serve our loyal customers and communities.
With that, I’ll turn the call back over to Jared.
Jared Wolff
Thanks a lot, Kevin. We’re now excited to discuss the highly strategic merger and capital raise we announced this morning — or I should say this afternoon.
We’ve provided a great deal of information regarding the transaction on the investor deck that was published today, and I’m going to spend a few minutes discussing the highlights of the merger. The merger of Banc of California and PacWest is a transformational combination and a unique opportunity to deliver significant value to all of our stakeholders.
When I joined Banc of California as CEO nearly 4.5 years ago, we had to undertake our own restructuring and journey to build a relationship-focused business bank that would prioritize three things: First, the high level of noninterest-bearing deposits and core deposits; two, a healthy level of capital; and three, low credit noise. We set out to do this by being best-in-class, delivering great deposit strategies and lending to businesses in our footprint. We achieved those three objectives and completed the transformation of Banc of California faster than most had expected and many would say with better results in terms of deposits, capital and credit quality. As a result, the work we have done put us in a position to enter into this transformational merger with PacWest that will create the leading commercial bank in California with strong, well-capitalized and a highly liquid balance sheet.
We believe this transaction is highly compelling for both company’s shareholders. In addition to creating the leading California franchise, the combination bolsters capital and liquidity is highly accretive to EPS and tangible book value results in attractive profitability and has limited execution risk given that significant cost savings opportunities and the familiarity between the two organizations. Our combined strategy will continue to focus on in-market relationship banking with a primary objective of providing superior level of customer service, expertise and robust treasury management solutions.
As both Banc of California and PacWest have demonstrated, providing superior treasury management services paired with lending expertise will enable us to attract low-cost commercial deposits that we utilize to fund high-quality lending opportunities. On a combined basis, we will be the third largest commercial bank headquartered in California, which is absolutely one of the most attractive banking markets in the country. As we all know, over the past 18 months, the competitive environment in California has changed dramatically. During this time period, we have seen many other banks either completely exit or significantly pull back from California.
As a result, there is a sizable opportunity for a skilled commercial bank with a high level of service and expertise to capitalize on this disruption, by adding clients and increasing market share. The combined company will be well positioned to do this. And as a larger institution with increased scale, we will have even more resources to invest in technology, continue to attract the best talent and further elevate the client experience, enhance overall efficiencies and support our communities. Warburg and Centerbridge, two highly sophisticated bank investors have signed commitments to invest $400 million concurrently with the closing of the transaction.
The merger and concurrent capital raise will enable us to take advantage of several strategic actions designed to create a very strong balance sheet, and enhance the capital and liquidity profile of the combined institution. These actions include selling liquid assets and utilizing excess cash to pay down $13 billion of wholesale funding. We have derisked these transactions by entering a number of hedges to protect the balance sheet and pricing through close. These actions will reduce the wholesale funding ratio of the combined institution to below 10% while maintaining 8% cash to assets and 10% CET1.
We will also enhance our funding profile with a pro forma loan-to-deposit ratio of approximately 85% and a deposit base that will be comprised of 90% core deposits and 30% noninterest-bearing deposits. This transaction is immediately accretable to tangible book value per share and 20-plus percent accretive to EPS on 2024 expected EPS of $1.65 to $1.80. We believe there is low execution risk in achieving these projections as most of the upside will be driven by the balance sheet repositioning and reduction of PacWest non-run rate expenses. We estimate the combined company will produce the run rate — will produce a run rate return on assets exceeding 1.10% around Q4 in 2024 when the expense savings have been achieved, return on tangible equity of at least 13% and generate 100 basis points of capital annually. This does not include additional upside opportunities that we have identified but did not model.
An important and particularly unique aspect of this merger is the high degree of familiarity that our two institutions have, which we believe significantly minimizes the execution risk. One of our guiding principles in M&A is to only do deals where we have a high degree of confidence in the success of the transaction, and this is certainly in the case with this transaction. As most of you know, I previously served as President of Pacific Western Bank, and during my 12 years plus there, I helped to lead more than 20 acquisitions. We also have a number of other executives at Banc of California who have leadership roles or worked at PacWest, including our Chief Credit Officer, Bob Dyck, who was Chief Credit Officer at Pacific Western Bank. Accordingly, we know the culture of the organization and the businesses that they operate. We know the true depth of talent that exists at the organization and have tremendous respect for their employees.
During the diligence process and evaluation of the transaction, our ability to discuss issues on a deeper level was evident. We believe the high degree of familiarity and the foundation of trust will lead to a very smooth integration and enable us to effectively capitalize on the projected synergies for this merger that will enhance our ability to serve commercial clients and create additional value for shareholders of the combined company.
With that, let me turn the call over to Paul.
Paul Taylor
Thanks, Jared. I couldn’t get off of mute there. Sorry about that. Over the past few months, we have spent a great deal of time evaluating the best path forward for PacWest, and we believe this merger is a tremendous opportunity for the company, our clients, our employees and our shareholders.
Over the last few quarters, we’ve laid out a plan to reduce our reliance on wholesale funding, increase capital and improve profitability. This merger meaningfully accelerates our stand-alone plan while putting the combined company into a position of strength within the market. With the increased scale, expanded capabilities and robust capital and liquidity, we will be able to better serve the needs of our clients. And given the complementary nature of our franchises, similar cultures, shared value and vision along with the senior management team that will be a combination of executives from both companies, we believe that we will have a smooth integration that will enable us to quickly realize the synergies that we project for this transaction.
Simply put, we believe this merger will be beneficial for all stakeholders, with clients having access to an expanded set of products and services, employees having more opportunities for career advancement as part of a stronger institution and most importantly, long-term shareholder value being created to a greater extent than what we believe we could create as a stand-alone PacWest.
With that, Jared, I’ll turn it back to you.
Jared Wolff
Thanks, Paul. I would just like to add, it’s been a real pleasure to work with you and the rest of the management team at PacWest through this process. It’s been a truly collaborative process, and we couldn’t be more excited to bring our two organizations together and begin realizing the benefits that we all anticipate for our stakeholders. We are fortunate to have attracted the most talented colleagues in banking and look forward to bringing them all together. Thank you to all of our colleagues for the tremendous dedication and hard work.
Operator, we’d now be happy to answer any questions and open up the lines.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark
Hi. Good afternoon everyone. Maybe just first on the cost saves, the $130 million, it seems a little low to me, just thinking through what legacy PacWest might have been able to extract from their franchises on a stand-alone basis. Can you just give us a sense for where that $130 million is coming from? Is it predominantly all legacy PacWest? Or is there also some coming out of legacy bank?
Jared Wolff
Well, there’s really two buckets for our expense savings assumptions. The first is there are temporary elevated expenses that exist at PacWest that they have identified, including higher FDIC assessment consultants and some legacy costs that will run for a little while that have to do with the closing down of some of the businesses they’ve exited, including the runoff portfolio for CIVIC.
Additionally, there’s a lot of expense saving overlap that we’ve identified for the combined company going forward. And so as a result, we believe that on the model, we modeled getting to 190 — 1.90 expense ratio, which we believe is very conservative, and very achievable. So there isn’t going to be more in there, Matthew, but that’s what we felt comfortable modeling and we like the output that’s on a highly conservative basis.
Matthew Clark
Okay. And then kind of a related question, you guys have been under $10 billion, but PacWest has been above it for a while, do you have any — are there any investments that you make to cross $10 billion or do you feel like you can leverage what PacWest has done?
Jared Wolff
We were over $10 billion as you mentioned previously. We have the infrastructure that really was there built to a large organization. I think between the two of us, we’re going to be fine. And we’re going to have a substantial transition leadership team and integration team combined of folks within the organization, and so I think we’ll be good there.
Matthew Clark
Okay. And I’m just thinking kind of longer term in the strategic merits and kind of what you’re left with after all this, is it fair to assume there will not be any national lending volume once this is — once you are combined? And can you maybe speak to I think single family resi, multi-family. It looks like legacy bank is going to have some loan sales on that front and whether or not you’ll still be in that business.
Jared Wolff
Yes, the heart of the combined company is going to be the community bank franchise. And Paul and Kevin and the team has done a great job of building progress towards converting PacWest into a strong community bank with a couple of other lending niches, but they had largely exited the national lending businesses already.
Banc of California at its heart is a community banking franchise. We don’t have any national lending businesses. So these two franchise together are going to make a really strong partnership in California in the markets that we continue to serve. There are some niches that we both have that we really like. We have some niches on the deposit side. We have some interesting verticals that we use to gather deposits, and they do too. They have a great HOA business that Alan DeTata leads, they have a fund finance and venture funding business that Sean Lynden leads that are really strong. They’re very low loan-to-deposit businesses with low credit.
And so we believe that it’s worth holding on to those businesses as long as we can live within our means and reduce concentration. This bank pro forma day one is going to be 85% loan to deposit with very low wholesale funding. And I think it’s going to be a very strong franchise. We’re going to make sure that we look to avoid the concentration risk that I think all banks experienced over the last several years. And with the low wholesale funding ratio that we have, the capital we have, the excess liquidity, we’re going to be well positioned to do that.
Matthew Clark
Okay. And then just on the merger…
Jared Wolff
You had another question there about SFR. So as part of the restructuring of the balance sheet, we plan to sell, and these are not — we’ve identified the assets that we may sell, but we have not determined which ones they will be, but we put in place hedges to protect the likely outcome. And so it includes our SFR portfolio at Banc of California, our multi-family portfolio at Banc of California, those are $1.8 billion and $1.6 billion are available for sale securities and PacWest available for sale securities. And so in doing so, we’re going to create a tremendous amount of liquidity and be able to pay down wholesale funding at PacWest and on the combined institution, ending with less than 10% wholesale funding at close. Neither of us originate single-family today. So that was just purchases that we had done to add assets in a low rate environment. I think those portfolios performed really well. But in this design, we would sell them down and pay down borrowings.
Matthew Clark
Okay. Great. And then just on the merger charge, it looks a little high, but it includes the cost of hedging and deal-related costs and the capital raise. I mean if you stripped out the cost of the capital raise and hedging, what would that number look like relative to the deal value?
Jared Wolff
It’s about 1.5% to 2% of cost savings, which is where these things end up being and some comparable deals that we looked at. So you’re right, it’s highly elevated because it has the cost associated with the capital raise as well as the hedging costs, which were substantial. Those two things combined were substantial.
Matthew Clark
Okay. And then were there any other bidders in this process? Or is it just you two for the most part?
Jared Wolff
Well, there is going to be a robust description in the proxy about the background of the merger, but I think this combination is going to be fantastic, and we’re excited to get it done.
Matthew Clark
Okay. Great. Thank you.
Jared Wolff
Thank you.
Operator
The next question comes from Chris McGratty with KBW. Please go ahead.
Christopher McGratty
Great. Thanks. I just wanted to dig into the deposit assumptions for a moment. Slide 10 and Slide 20 give a slightly different starting point for the core deposits. I guess what I’m getting after is, if you combine the two companies, noninterest-bearing deposits, I think to get to that 30% mix, you’re assuming some growth of NIBs from the second quarter. So I’m interested in commentary there to start, please. Thanks.
Jared Wolff
Yes. I mean there’s going to be a little bit. We both know what we’re expecting to do. We are expecting to close. This is pro forma [9/30] (ph) because we expect to close late Q4 early Q1, so we based it on 9/30. And we, the plan is to be approximately 30% noninterest-bearing at close, and we hope to exceed that, of course.
Christopher McGratty
Okay. And then maybe a question on credit. PacWest has historically had a little bit volatility in the credit numbers you’re not marking their balance sheet. Maybe a comment or two on how you see the portfolio today. I think there is a little bit of migration like banks in the second quarter, but just color on the assumed loss rates maybe on a combined basis.
Jared Wolff
Sure. I’m happy to talk about the robust diligence we did and kind of what we’re modeling going forward. But before we do that, Kevin or Paul, do you guys want to comment on the quarter at all?
Kevin Thompson
You bet. First, I’ll mention we executed on a number of balance sheet restructuring initiatives, including selling national lending portfolios as part of that with our CIVIC portfolio since the portfolio had some, a little bit of credit deterioration. According to GAAP accounting rules, we had to count those losses on sale as a credit loss rather than a loss on sale. So that shows up in our provision. So to your point, Chris, it does create a little bit of noise in that provision, but those are true losses charge-offs in our mind. They’re just losses on sales that happen to be in that geography.
And then from a credit perspective in the quarter, there are some ups and downs. Past due loans are down. Our nonaccruals are up because of specific loans. Our special mentions are down, get classified throughout. So some are normal ins and out that we’ll see over time. But as a reminder, we did sell our national construction portfolio, which is very in credit quality. But I think it adds even a better credit profile for the combined bank.
Paul Taylor
And then it’s important to mention on the CIVIC portfolio that we’ve seen ever since our involvement in CIVIC. It will push past dues, they’re more of a sloppy loan, for lack of a better term. They seem to always pay. It’s just more of a slow pace. So we’re not concerned that there’s a systemic trend or anything in that portfolio.
Jared Wolff
So let me just jump in…
Christopher McGratty
That’s helpful.
Jared Wolff
Yes, Go ahead, Chris.
Christopher McGratty
No, no, keep going, Jared. I’m sorry to interrupt.
Jared Wolff
Yes, no problem. I mean we did substantial diligence on each other, of course, but substantial diligence on the credit portfolio. I mean, those are the things that you got to really make sure you look at very carefully in these sorts of transactions because of the potential risk. First of all, I would say that PacWest has done an excellent job of de-risking their balance sheet. And through the sales that they undertook, not to say that those portfolios were necessarily risky, but they were the national lending portfolios that I think where larger loans didn’t generate deposits and put some pressure on the balance sheet and had the — they had exposure even if there was no loss content. So I think they’ve done an excellent job of reducing that risk, and the remaining loan portfolio is far more granular than it was before they started engaging in that.
As it relates to CIVIC, it’s $2 billion-plus of loans that are in runoff that are primarily for rental housing. It acts more like a consumer portfolio, even though it’s not. It’s going to have some delinquency, but it pays. And we’ve seen that transaction — we’ve seen those transactions over time. And as I mentioned, we did very deep diligence. We brought in third parties. As did these very two sophisticated investors came in that put in a lot of money in this deal that’s been committed, they did substantial diligence on both banks, and we were able to leverage that as well. And I think we both feel very comfortable about the credit portfolios of each other.
Like I said, going forward, the portfolio is going to be more akin to the community bank lending that we both do lending in market with some opportunity to do other types of lending on a niche basis. And it’s not to say never is never, but I think at its core, this bank will be lending in its footprint primarily. So we feel good about that.
In terms of the coverage ratios, we typically run 120 to 125 — PacWest is closer to 90 basis points. Obviously, we can’t prejudge what the numbers are going to be, but I can tell you from a modeling perspective, we assumed that we were going to have a coverage ratio that was closer to ours than theirs. And we’re obviously going to have to run this through CECL, but there’s plenty of extra support in the numbers for us to get there.
Christopher McGratty
Great. And then maybe just one more. The $1.65 to $1.80, I just wanted to confirm, that’s a pro forma number. And then I think that’s a full year. So I’m interested in kind of the cadence of that as you get the savings. And I think, correct me if I’m wrong, the $140 million goes through the accretion — accretable yield, is that life of loan, I assume that’s just 2024? Just any color on the marks and the noise there?
Jared Wolff
I’m going to let somebody else comment on the marks, who has advanced degree. But in terms of the $1.65 to $1.80, that is our — we thought it would be helpful to put out an estimate for 2024 estimated earnings.
In terms of the cadence of getting there, obviously, expense savings are going to, you’re going to get the full year benefit at the end of the year, not earlier in the year. For example, 18% of PacWest facility charges, their costs associated with their facilities, 18% mature or expire at the end of 2024. So without any termination, we’ll have to assess whether we want to terminate them early and pay some fee or just wait until they expire. But it’s stuff like that, that we’re going to realize at the end of 2024. We do estimate that we think we’re going to get the whole benefit of our savings estimates through the end of 2024. They’ll be closed out by then. So that $1.65 to $1.80 is for 2024 estimated EPS. Hopefully, I gave you guys enough time to figure out what the accounting numbers are. Joe or Kevin. Joe, do you want to take that?
Joseph Kauder
Yes. So I’d just like to clarify specifically your question.
Christopher McGratty
I guess the $140 million, the mark that Slide 22, gets accreted back into earnings the timing of that? And then, there’s usually — yes.
Joseph Kauder
Yes. That’s over six years. That’s a core deposit intangible that comes back in over six years.
Christopher McGratty
Pardon?
Joseph Kauder
And then the loan, so the loan marks, if you think about it, most of the Banc of Cal loan portfolios we intend to sell. So those will not be accretive back into earnings, all the accretions on the CDI.
Christopher McGratty
The only accredible yield is the $140 million. Okay.
Joseph Kauder
Yes.
Jared Wolff
And you had the non-PCD loans that will be accretable as well, and the $140 million rate marks.
Christopher McGratty
Thanks.
Operator
The next question comes from Andrew Terrell with Stephens. Andrew. Please go ahead.
Andrew Terrell
Hey, good afternoon.
Jared Wolff
Hi, Andrew.
Andrew Terrell
Just quickly on the planned asset sales, just to make sure of the forward contracts you’ve put in place fully hedged for the potential of rate volatility between now and close. And then can you discuss just the comfortability with any kind of discount you’d expect on the asset sales or maybe what’s baked into the pro forma assumptions in terms of non-rate-related discount?
Jared Wolff
So we have hedged for interest rate risk. That’s right. And I’m going to turn it over to Joe because he’s the expert on the hedges, but we have hedged for interest rate risk, and we’ve accounted in our model for potential variation. But let me mention a couple of things. The timing of the sales is something which is within our control. So if there’s a noninterest rate dislocation in value supply and demand, we don’t have to sell at that moment. We could sell later. Again, we’re getting down to below 10% wholesale funding, but we could keep it higher if we wanted to, for timing purposes, to make sure that we hit the numbers that we are targeting in our projections. But Joe, do you want to walk through kind of exactly what we’ve done.
Joseph Kauder
Yes. So on our single-family loan portfolio, which was about $1.8 billion, we entered into a contingent forward sale agreement. It’s contingent that if for some reason, the deal did not close, the contract terminates and doesn’t survive that event, but the contract was right at — right on top of our mark on those assets, which was largely a rate mark, so there’s no incremental credit or spread really in there. And then on the rest of the balance sheet, what we were hedging is the interest rate risk between now and close to protect the capital of the entity between now and the close of the transaction. So those were just interest rate swaptions, which we used calibrated to the tenor of the appropriate portfolios so that we could make sure that we were protected.
Andrew Terrell
Understood. And then on modeling assumptions on Page 13 of the slide deck, the 2.4% pro forma funding costs, does that just take the 2Q run rate funding costs for both companies and then back out the planned restructuring? So said another way, would not account for any incremental funding cost increase from here?
Joseph Kauder
I believe that’s correct. We do — it does take into account the current yield curve — projection using the current yield curve. Kevin, do you have any other perspective on that?
Kevin Thompson
I apologize. I missed that part. Andrew, what was the question?
Andrew Terrell
Just on the 2.40% pro forma cost of funds, does that assume any incremental funding cost or deposit cost increases in the back half of the year? Or does it just use 2Q and then pro forma for the structure.
Kevin Thompson
No, it does have — yes, Joe’s right, it has the forward curve in it. So there’s one expected rate hike. That’s right.
Andrew Terrell
And then, Jared, it sounds like, I mean, you made a comment earlier in the prepared remarks, just additional upside and maybe some additional earnings that you don’t really include in the pro forma assumptions here and its expenses. You’re fairly optimistic about achieving the expense saves that are being presentation. I was just curious if you could talk kind of outside of that other opportunities or areas you’ve identified that could be sources of earnings upside here?
Jared Wolff
Well, look, in terms of being highly conservative, we were targeting expense ratio that we thought was easily achievable. PacWest has done a great job of de-risking the balance sheet and then it has a stand-alone plan that had already identified both cost savings that were going to go away because they were no longer run rate and then other cost savings that they thought would be more efficient in terms of how they would handle themselves as a franchise going forward. With that, with just the way you would do it in a normal merger where you look at your core provider and all the other large expenses that to run the business, it was pretty easy to get to a 190 number. So I think — and 190 is I don’t think that’s exceptional, but it’s good. I think 185 is probably and below that is where we would like to get to longer term. So that’s certainly on the expense side, we think there’s a lot.
On the growth side and on the revenue side, we were very conservative in our assumptions going forward. Looking ahead, I don’t like pressing on the gas where I’m seeing brake lights and the economy right now is slow. And so we’re not projecting a ton of growth going into 2024. And if you listen to what Powell says, he doesn’t see hitting target inflation until 2025. So it’s — we’re all wondering when rates are going to come down, but we’re not trying to get ahead of that. We just think that the economy is going to be slow. There’s going to be some shrinkage and runoff in the portfolio. We’ll have the opportunity to grow. I mean this PacWest has not been lending as much as their probably demand has been because of the number of things that they’ve done been doing. So I think as a combined institution, we’re going to have some opportunities to lend, but it’s not going to be expansive unless the economy picks back up and the deposits are there to support it. And then 2025 is when we see growth starting.
And historically, we would run our bank with low single digits but probably try to — we would project high single-digit loan growth and probably end with low double digits, and PacWest was there or maybe higher. And there’s no reason why this franchise can’t do that, but we projected much lower growth.
Paul Taylor
And I would say that as you look at the overall model, I mean, that’s got PacWest forecast in there. And due to our liquidity issues we’ve had this year, I mean, just to sort of reiterate what Jared already said is that, our growth is well below our demand. There’s a decision as to whether you do it with the economy and everything. But it is — demand is much, much higher than we have in the plan.
Andrew Terrell
Got it. Okay. Thank you for the question and congrats on the deal.
Jared Wolff
Thanks, Andrew.
Operator
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner
Thanks. Good afternoon. Just a couple of points of clarification. On that Slide 22, again, where you highlight the fair value marks, the $500 million pretax, $140 million goes into earnings. Is that delta the multi-family and single-family discount that’s locked in effectively on the sale at closing?
Kevin Thompson
Yes, because you’re selling a number of the loan portfolios there. So those are the laps are being accreted back into earnouts.
Gary Tenner
Okay. I just want to — wanted to clarify it. Thank you. And then secondly, on Slide 12, where you note an additional $2 billion of cash generated at closing. Just help me out with the mechanics of that cash generation?
Jared Wolff
So PacWest…
Kevin Thompson
You’ve got this. Go ahead, Jared.
Jared Wolff
Go ahead, Kevin, please take it. Go ahead.
Kevin Thompson
Okay. I would say PacWest on our side, we do plan to sell some of our available for sale securities after closing as well as one has some excess cash, we both hold high levels of operating cash and working quite as much at this level of balance sheet. So that leaves us $2 million excess there at the end.
Gary Tenner
Got it. Thank you. And then the third question I had was just in terms of the — actually, that question was answered. Guys, thanks you for taking my questions.
Jared Wolff
Thank you.
Operator
The next question comes from Tim Coffey with Janney. Please go ahead.
Timothy Coffey
Yes. Good morning, gentlemen.
Jared Wolff
Good afternoon, Tim.
Timothy Coffey
Jared, given the — talk a little bit at the timing of the merger approval, have you received any assurances that this can happen within that kind of timeframe you’ve laid out?
Jared Wolff
So we’ve said in the documents that we are looking for to close the transaction at the end of Q4 or early Q1. Of course, we previewed this transaction with regulators. And based on those conversations and the specifics of this transaction, we believe that timeframe is achievable. So look, we’re not going to pin the regulators down. They have to go through their process, and that process is well laid out, but we believe that, that timeframe is achievable.
Timothy Coffey
Okay. Can you comment on how long ago you bought the regulators in?
Jared Wolff
We have made the regulators aware of this process from a very early phase.
Timothy Coffey
Okay. That’s fair enough. And then on, going back to the $200 million pretax charge, that includes — does that include change in control?
Jared Wolff
So both parties have a double-trigger changing control. We’ve got a plug in there for severance that would be paid to people who are terminated as part of the deal. Most people don’t have contracts, right? So there’s normal severance, but we have based on our estimates and numbers in that number.
Timothy Coffey
Okay. That’s right. And then just your thoughts on the venture banking business. Jared, are you planning to establish any kind of concentration limits in terms of customers or capital or things of that nature?
Jared Wolff
Let me start off on concentration limit topic generally, because I have very strong feelings about this. But let me say, without any pause that I think the venture business is a great is, and the way that they do it the way they do fund finance, I think they know exactly what they’re doing, they’re doing it very, very well. But concentration is an issue in banking across all banks. And every bank has some level of concentration. We all have these legal lending limits, that say, you cannot lend more to single customer or a group of related customers above a certain percentage of your capital.
There’s no corollary on the deposit side, and we all need to live within our means and make sure that we’re not overly concentrated by customers either on the asset or the liability side. So I’m in favor of reducing concentration where it makes sense. And you can do it in a couple of ways. You can do it by making sure that they’re time-based, or have some contractual obligations so that they can’t pull their money without giving you notice. So you can convert liquid stuff in something that acts more like a time-based deposit. We do that with some of the larger deposits at Banc of California. There are money markets with institutions, but we have a contract with them. So if the money wanted to leave, it was scheduled — it would be scheduled to leave out over time and we can plan for it.
But overall, I believe that concentration risk is something we have to manage throughout the entire bank, not just at venture or HOA or Community Bank or the San Diego region or the L.A. region or anywhere. We just have to manage it overall. And it’s something that obviously we’ll look at. But I think PacWest would tell you, they feel the exact same way. And that’s something that all banks are going to have to manage better going forward.
Timothy Coffey
Okay. And then last question for me.
Paul Taylor
You’re right on, Jared.
Jared Wolff
Sorry, Paul, please.
Paul Taylor
Yes. No, I think you’re right on, Jared.
Timothy Coffey
And then for Jared and Paul, any sense of how much customer overlap you have between your two institutions?
Jared Wolff
Just, I mean, we haven’t done the math, but anecdotally, we know that it’s some — this is a massive market. So you’re not going to have significant overlap because there’s just too much business here, but we do share some customers today, and we’ve done business together on a couple of customers. And of course, given my history at PacWest, where I really learned banking, and I again, have such deep respect for the people I work with there that are still there and those that have left. There are some customers that we share.
Paul Taylor
I spoke to one of our customers right before this call, Jared.
Jared Wolff
You did? Great. Well, great.
Timothy Coffey
Thank you very much. Those are my questions.
Jared Wolff
Thanks, Tim.
Operator
The next question comes from Kelly Motta with KBW. Please go ahead.
Kelly Motta
Hi. Congrats on the deal.
Jared Wolff
Thank you, Kelly.
Kelly Motta
I wanted to circle back on your outlook for deposits and your disclosures there. Jared, I know DDAs have been a focus for you and you’ve kept them at a nice level. I do think that 30% of total deposits implies some slight growth. And I know you’re working on some things with Deepstack and HOA coming on. Just wondering what gives you confidence in being able to get to that 30% level potentially modestly growing those DDAs? And maybe any color around what you’re seeing in terms of trends both at your bank and at legacy PacWest would be very helpful.
Jared Wolff
Sure. So first of all, deposits at both banks are — have been highly stable. We both experienced obviously a different magnitude, but we both experienced kind of the initial shock and then deploy the strategies and stabilize deposits. And certainly, for Banc of California, I know what our line looks like. And we brought in a lot of money from new customers this quarter and last quarter. And we are doing it primarily through serving people with really high-value treasury, not high cost but high-value treasury management solutions, which are primarily noninterest-bearing deposits.
PacWest has always had an excellent franchise in terms of building a core deposit base. And for the longest time, they had a very high percentage of noninterest-bearing deposits. When I came to Banc of California, we were at 12% or 13% non-interest-bearing and we got it up to 40%. We’re currently at 36% right now.
Everything about the way that, that PacWest is set up and the way that we’re set up will drive greater growth in noninterest-bearing deposits and low-cost DDA. It’s just at the heart of both of our franchises, and we’ll make sure that we achieve that. Some of the tools that they have are fantastic. I mean the HOA business that they’ve pulled together is really a strong business, and I think it’s going to do very well. But the core community bank at PacWest is fundamentally under loaned. You have some really strong lending areas in L.A. and in San Diego, but you’re in the Central Coast or other areas where they’ve got great loans, but really, really good deposits and they’re under loaned.
Based on the prospects that I have looked at with them, and I’ve talked to many of the leaders at PacWest, who I know well, I think we both believe deposit growth is something we’re going to be able to do well. And remember, this franchise is going to be very dominant in the market that we’re in, not dominant from an HSR standpoint, but dominant in terms of we’re going to be highly visible. There are some massive banks in this market. But when you get back the top 250 and First Citizens is in there, too, if you look at the top four banks in terms of presence below the money center banks First Citizens is first, we have the chart in the deck, but they’re not based here. And so if you look at the banks that are based here, City National, East West and us, and I think where all of us are going to be able to compete well against the money center banks and the larger banks to bring deposits over.
Kelly Motta
Appreciate that color. I’ll step back.
Jared Wolff
Thanks, Kelly.
Operator
The next question comes from Timur Braziler with Wells Fargo. Please go ahead.
Timur Braziler
Hi. Good afternoon.
Jared Wolff
That was really a short suspension of coverage, Timur. You are back?
Timur Braziler
Yes. Back and better than ever. Following up on the Deepstack commentary, I guess, how does this deal affect the rollout of Deepstack and that integration? And any kind of commentary you can provide on what this combination means for the magnitude of the Deepstack contribution?
Jared Wolff
Yes. So first of all, we’re on track with Deepstack. We said that we’d get it live the end of second quarter or early this quarter, and that’s happening. So we’ve got customers lined up. We have our pipeline. We’re going slow. As I mentioned, we’re making sure we get all of the risk monitoring and transaction monitoring right, but I like the progress that I’m seeing. We’re up to 20 people plus we started with 11, so we’ve been able to build out teams and do what we thought we would do.
What’s really exciting about this opportunity to combined is the businesses that PacWest have are going to thread really nicely with Deepstack. So whether its HOA or the clients of their venture and tech businesses, they need a solution like this. And they would love to be able to direct clients to an in-house solution as opposed to some third party. And so we both believe that this is going to accelerate the progress for Deepstack. Again, we got to get the transaction monitoring, right? And that plan is going to continue through the end of this year. We’re going to go slow and make sure we get it right. But as we talked about, we thought it would contribute meaningfully to earnings next to fee income next year. And it will be great to do it on a combined basis.
Timur Braziler
Got it. And then decision to sell SFR in the multi-family books, the SFR sale seems to make quite a bit of sense. I guess I was a little surprised on the sale of the multi-family book, just given kind of the strength of that portfolio in the Southern California market. I’m just wondering kind of the rationale there. And then as you look at additional repositioning from PacWest standpoint, is this an indication that their restructuring is more or less complete? Or is there anything else that you’d like to divest or maybe trim back on the loan side there?
Jared Wolff
So you were to look at the portfolios of — the loan portfolios of both banks and just decide what makes sense without looking at any other factors to sell, the top two things would be the single-family and the multi-family. Multi-family are — they’re longer term fixed rate, they’re transaction-based with low relationship deposits. Every bank has them in this market, but it’s really easy to build back, and you’re not giving up much given the rate that those were on. And it’s a transaction like this that allows it to happen. So on a stand-alone basis, it would be a little bit punitive. But when you put two balance sheets together, and you can create the opportunity to de-risk and kind of delever the lower-yielding portfolios, I think it’s the perfect thing to shed. And it’s not going to affect relationships with clients like SFR on either the way bridge stuff will.
In terms of other things to look at exiting, I think PacWest has already done that, and they’ve left the roadmap. They’ve done the roadmap really, really well. So CIVIC is running off. As we talked about, we don’t think there’s loss content there. And if it is remote, and they, every time there’s kind of something that spikes up, they’ve got a third party that they’ve been able to lay it off on at pretty close to par. So I think that they’ve kind of laid it out pretty well.
Timur Braziler
Great. And then just lastly for me. Looking at Slide 14, the $155 million of other adjustments in runoff. I just want to make sure that’s the loan sales, the security sales. Is there anything else embedded in that number? Or does that comprise the entirety?
Jared Wolff
I think it might have some other stuff in there. Kevin?
Kevin Thompson
It would have some legacy PacWest. I’ll just add, it would have some legacy PacWest portfolios that we’ve wound down and the emphasize that we’ll wind down over time.
Timur Braziler
Okay. Great. Thanks for the questions and congratulations on the deal.
Jared Wolff
Okay. Thank you very much, Timur.
Kevin Thompson
Thank you.
Jared Wolff
Welcome back to coverage, I guess.
Timur Braziler
Thanks.
Operator
The next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster
Hi. Good afternoon, everybody. Congrats on the deal.
Jared Wolff
Thanks, David.
David Feaster
These types of transactions, obviously, well, they can be really financially compelling, but tough from a cultural and a personnel perspective. And I know, Jared, you talked on this about how close the cultures are aligned, but I was hoping you intimately know both of these, obviously, and you’ve done a lot of M&A in the past, but I was hoping you could maybe elaborate a bit on the cultural alignment. And then maybe just touch on some of the guardrails or strategies that you put in place to help retain talent, lock up lenders and just kind of ensure that seamless integration minimize disruption as you alluded to.
Jared Wolff
Sure. Let me take the back half of that first. So on the retention piece, all of these transactions involve identifying what could be at risk and making sure that you put guardrails around that. I would say that this transaction is unique in that we structured it. So all restricted stock is staying outstanding and will continue to invest over time. So we are not accelerating any restricted stock on either side of this deal. And so the people that have the restricted stock are people that obviously were given it initially because you wanted to keep them. And so we feel that there’s already an embedded retention tool that exists, and we’ll be looking at others. We’ll be smart about it and make sure that we’re judicious, and we’ll do what makes sense to protect the franchise on a go-forward basis.
But David, I cannot say enough about the uniqueness of this overlap and the familiarity that we both have with each other. I mean I can start with Chris Blake, who is the President and CEO of the Community Bank and his key regional presidents that report to him, we all work together. I mean we’re going back 20 years together. Bob Dyck was the Chief Credit Officer of PacWest and then Chief Credit Officer of the Bank; Bryan Corsini, who’s the Chief Credit Officer of PacWest was there when Bob and I were there. He came out of capital. He’s a terrific guy. We all know each other very, very well, including his top lieutenants that are there that are doing a great job on portfolio management and credit management.
And I mean I can just go down the list because I can go down to the individual people, but also, I would say that Matt and John have just really done an exceptional job over many, many years to build what I think was an exemplary franchise. And while I understand that today, people are looking at things and saying, look, this is different. It changed dramatically. I have a different perspective and it’s not sympathetic. It’s actual, which is that getting caught in the headlines could have happened to any bank and the liquidity run could have happened to anybody. And it wasn’t because they had credit problems. It wasn’t because they were bad managers. It was because somebody did a screen of venture deposits, and they came up on a screen and they couldn’t get out of the headlines. And a lot of shareholders made a lot of money on that franchise for a very long amount of time. And fundamentally though, today, I think the way that they’ve derisked the franchise and moved it more toward a community bank and layered on some bolted on some pieces that are really good deposit generators is going to be a really good fit for us.
In terms of just kind of day-to-day culture, I mean, we’re very focused on relationship lending and a high-touch way to serve clients. And I know this because we compete with them frequently on deals. Southern California is fundamentally a real estate market. It’s 70% real estate, 30% C&I. We’ve been able to diversify and do a little bit more C&I than they have. They have a little bit higher concentration. So one of the things that this deal does is it kind of balances out both of us and gives us a better mix overall in terms of loans and deposits. And I think the charts lay that out.
So I can go on and on about the cultural fit here. I don’t think there’s been a deal that, I can’t say that because there have been a lot of deals done, but in all the deals that I’ve done, I’ve never seen one that has this amount of overlap and commonality between the two institutions.
David Feaster
That’s helpful. I appreciate that color. And then maybe just a quick question on the technology platform and the conversion there, could you just touch on kind of the respective platforms and how you see them together? Obviously, technology has been a big initiative for you both. But I guess as you talk about the core back office in your systems, how do you think about the platform? And do you need — do you have the infrastructure to really support a much larger entity?
Jared Wolff
So I think when you look at tech today, you have to look at it more broadly than core because you’re looking at IT infrastructure as well as the core operating system that provides the services to clients. We’re a Fiserv bank. They’re an FIS bank. We both have contracts that come up pretty similar timeframes. Their contract actually ends in April 2024 with notice in October 2023. So opportunity there, as I mentioned, in terms of termination fees and things like that.
We’re going to have a talented transition leadership team that will be made up of leadership from both organizations to kind of define the organization going forward and look at those key decisions and give direction to our integration teams, which we will be doing it on the ground.
And so look, it’s a big opportunity. But beyond the core, and staying there for a second, when you’re looking at core, you’re also looking at how you’re integrating APIs because most of us today are relying on outside services from not just from Fiserv or FIS to deploy really good solutions to your clients. You’re not just looking at — you’re no longer taking that as the package and delivering that out alone. You’ve bolted on other things that deliver things to your clients. So we have our payments hub through Volante. There are things that we’re doing through a Deepstack, and there are things that are — I give Fiserv a lot of credit because they’ve opened up to APIs perhaps faster than most realized and they can’t be a one-stop shop. And it’s better to partner than to push away. And so we’ll be looking at that really closely and try to figure out what the best solution is going forward.
And then on the IT architecture side, I mean we’re both trying to be cloud first. and make sure that we have the right infrastructure that can support us in the changing environment that we’re in, which is highly mobile. I think they’ve done a great job of thinking about how to be tech forward in terms of providing solutions to their clients.
We’ve been — I think we punch well above our weight class in terms of the technology delivery to our clients. There are specific systems that they have that we’re going to have to keep the HOA system as unique. And we’re going to have to make sure that we build on that and make sure we support it for the growth that’s there. There’s tons of deposit growth I think that we see through HOA as well. So those technology solutions decisions are going to be very, very important. And we’ve obviously made some initial attempts at assessing that, and we have some initial ideas, but we’re going to obviously starting now, as they say is one of the real work begins.
David Feaster
Got it. And then last one for me. Fee revenues haven’t been a big part of either institution. I’m just curious how you think about fees going forward. Obviously, Deepstack can play into that to some regard. But I’m just curious, think about how you think about the fee. The fee revenue generation, especially as you become a much larger institution.
Jared Wolff
Yes. I mean we’re both not having the fee side, right? And PacWest did a better job than we did in terms of making up for it because they had — they were earning a lot more than we were. So it made up for it.
I think Deepstack is going to be. They are an issuer of cards and they generate some fees there. We are going to be an issuer of cards beginning in the fourth quarter. And so I think that’s going to be a good opportunity for degeneration.
I think the payments business and the ecosystem that we’re building around payments through Deepstack, through issuing and through partner programs through BaaS is going to be, probably the initial place where we’re going to see fee income grow faster than other parts of the company.
David Feaster
That’s helpful. I appreciate it. Thanks everybody.
Jared Wolff
Thank you, David.
Operator
This concludes our question-and-answer session. The call has now concluded. Thank you for attending today’s presentation. You may now disconnect.
