Banc of California, Inc. (NYSE:BANC) Q1 2022 Earnings Conference Call April 21, 2022 1:00 PM ET
Company Participants
Jared Wolff – President and CEO
Lynn Hopkins – CFO
Conference Call Participants
Timur Braziler – Wells Fargo
Matthew Clark – Piper Sandler
Gary Tenner – D.A. Davidson
David Feaster – Raymond James
Kelly Motta – KBW
Andrew Terrell – Stephens
Operator
Hello, and welcome to Banc of California’s First Quarter Earnings Conference call. [Operator Instructions] Today’s call is being recorded and a copy of the recording will be available later today on the company’s Investor Relations website.
Today’s presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release. which is available on the company’s Investor Relations website. The reference presentation is also available on the company’s Investor Relations website.
Before we begin, we would like to direct everyone to the company’s Safe-Harbor statement on forward-looking statements including in both the Earnings Release and the Earnings Presentation.
I would like to now turn the conference over to Mr. Jared Wolff, Banc of California’s President and Chief Executive Officer. Please go ahead, sir.
Jared Wolff
Good morning, and welcome to Banc of California’s first quarter earnings call. Joining me on today’s call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results.
We had a great start to the year with many positive trends in actions that have continued to drive our financial performance forward high quality loan growth, solid inflows of noninterest-bearing deposits, margin expansion, higher levels of noninterest income and strong asset quality. These efforts directly resulted in an increase in our adjusted pretax, pre-provision income, which was up 10% from the prior quarter. While our adjusted pre-tax pre-provision return on average assets increased 16 basis points to 1.55%.
The increased level of returns reflects our franchise momentum, representing both our ability to continue generating profitable organic growth and the accretive benefits of the Pacific Mercantile acquisition. As always we will also remain focused on growing and deploying capital to enhance our franchise value.
As previously reported, we recovered over $31 million related to a loan previously charged off in 2019, which contributed to growth in our tangible book value. We also successfully redeemed all of our Series E preferred stock in the quarter, an authorized and initiated an opportunistic stock repurchase program.
We had a solid quarter of business development with $679 million in new loan fundings and total production increased 7% compared to the prior quarter. Loan demand was partially impacted by some level of seasonality that we typically experience at the beginning of each year.
We also had some commercial clients delaying planned investments in expansion due to the sudden surge in Omicron that hit early in the year. While several opportunities in real estate lending were put on pause, this clients digested the rising rate environment and how it could impact pricing on properties.
Notwithstanding these temporary factors, we still grew our total loans at a double-digit annualized rate while also keeping our warehouse line balances relatively stable despite the higher mortgage rates that have impacted production volumes across the industry. This reflects the outstanding job that our team has done developing numerous relationships and giving us many levers to pull in order to achieve our targets. Even as warehouse loan balances may moderate a bit, we expect our balance sheet to expand and earnings growth to meaningfully follow.
We saw some firming up of loan pricing during the quarter, which resulted in higher average loan yields on both core C&I loans in bridge and permanent CRE loans. We are always disciplined about loan pricing but ahead of the interest rate increases, we have been more selective in adding long-term fixed-rate loans to our balance sheet. Our momentum has been strong, notwithstanding the rate environment and our loan pipeline is currently more than double what it was at the same time last year.
On the liability side, we saw further improvement in our deposit mix, driven by continuing inflows of low cost deposits, resulting from our business development efforts. During the first quarter, we opened 122 million in noninterest bearing and low cost checking accounts for new clients, in addition to inflows from existing clients.
These new relationships helped to drive a $170 million or 6% sequential increase in noninterest bearing deposits, which brought noninterest-bearing to 40% of total deposits at the end of the quarter. As many of you know, this is a threshold we targeted from the moment I got to the bank, and I’m truly proud of our team for reaching this milestone.
More importantly, I am proud of how we reached this milestone. There is no shortage of hard work and we’ve built a terrific deposit engine. While I expect in the coming quarters we might move above or below this level, our overall trajectory will be to keep increasing our percentage of noninterest bearing deposits.
As we mentioned on our last earnings call, following the Pacific Mercantile acquisition, we took a number of balance sheet management actions including running off their higher cost deposits and beginning to redeploy the cash balances that were added in the transaction. The full quarter impact of these actions along with the continued growth in noninterest-bearing deposits further reduced our cost of deposits and contributed to a 23 basis point increase in our net interest margin from the prior quarter. This benefit began before the Fed started to increase the Fed funds rate.
Given our asset sensitivity, we expect our margin to react positively, albeit, not necessarily at the same pace that we enjoyed in the first quarter. That said, as I mentioned before, our margin is an output of many items and while our yearly trend will be upward, various factors could cause it to move up or down during a given quarter.
In addition to our strong financial performance, we’d a very productive quarter in terms of executing on key strategic initiatives to optimize our balance sheet, accelerate our earnings growth, strengthen our franchise and create value for shareholders.
First, we’ve mentioned in the past, the Banc of California has become a talent magnet. And in the first quarter, we were able to add some exceptional bankers to support the strong growth opportunities we are seeing in many areas. These hires are bringing additional expertise, relationships and skill sets that complement our existing teams and will enable us to continue expanding our business development capabilities in both CRE and C&I, particularly in some of the large attractive vertical industries where we have built good momentum and see the potential to substantially grow these portfolios over the next few years.
Second, consistent with our expected timing, we were able to redeem our Series E preferred stock which simplifies the balance sheet and will positively impact net income available to common stockholders by approximately $7 million annually.
Third, through the successful efforts of our legal team, we were able to recover over $31 million on a loan previously charged off in the third quarter of 2019. We continue to pursue a number of other recovery opportunities both the credit and insurance related. If successful resolutions are obtained, we will benefit shareholders and add to our tangible book value down the road.
And fourth, given the substantial progress we have made in both strengthening our balance sheet and growing earnings over the past few years, we enhanced our capital allocation strategy with the authorization of an opportunistic $75 million stock repurchase program. That’s equivalent to approximately 6% of our current shares outstanding and should further optimize our balance sheet and create value for shareholders.
As we said before, our goal is to continue moving the ball down the field every quarter. Some quarters will make more progress than others, but every quarter we want to execute and deliver in a way that grows our financial performance and strengthens the franchise. Through the positive trends we continue to see in our financial results and our strong execution on other initiatives that positively impact earnings and shareholder value, we had an exceptional quarter of moving the ball down the field and creating shareholder value.
Now, I’ll hand it over to Lynn, who will provide more color on our financial performance and then I’ll have some closing remarks before opening up the line for questions. Lynn?
Lynn Hopkins
Thank you. Jared.
First, as mentioned, please refer to our investor deck, which can be found on our Investor Relations website as I review our first quarter performance. I’ll start by reviewing some of the highlights of our income statements and then will move to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the fourth quarter of 2021. I invite you to read our earnings release, which provides a great deal of information, so I will limit my comments to some of the areas where additional discussion is warranted.
Net income available to common stockholders for the first quarter was $43.3 million or $0.69 per diluted share, up from $4 million or $0.07 per diluted share for the fourth quarter of 2021. Fourth quarter results included on a pretax basis to $31.5 million reversal of provision for credit losses, of which $31.3 million related to a recovery from the settlement of a loan previously charged off in 2019, and the $3.7 million after-tax expense related to the preferred stock redemption.
There were no similar items in the prior quarter’s results. However, the fourth quarter included on a pretax basis $13.5 million of merger costs and $11.3 million of provision for credit losses related to loans and unfunded commitments acquired in the Pacific Mercantile acquisition. Given the noise created from these items, we will focus on our adjusted pretax pre-provision numbers this quarter, which are more reflective of our core performance.
Our adjusted pretax pre-provision income totaled $35.8 million, a 10% increase from $32.7 million from the prior quarter. This $3 million increase was due higher net interest income of $3.4 million, driven by higher average loans and an increase in net interest margin, as well as higher noninterest income of $1.1 million, offset by higher operating costs of $1.3 million. A portion of these increases related to the impact of including Pacific Mercantile operations for a full quarter.
Our net interest margin increased 23 basis points to 3.51% during the quarter as our overall earning asset yield increased by 21 basis points and our total cost of funds decreased by 2 basis points. Our earning asset yield increased to 3.87% due to a favorable shift in the mix of our earning assets as we deployed our excess liquidity and increased average loans, both from the impact of including PMB’s balance sheet for a full quarter and our own net loan growth.
In addition, the yield on loans and securities increased during the first quarter. Our average loan yield increased 6 basis points to 4.26%, primarily due to higher average yields in our commercial real estate, C&I and SFR portfolios. This increase also includes the lower contribution from PPP related income, which was measured at 2 basis points of our net interest margin this quarter, compared to 5 basis points in the prior quarter.
Our average cost of funds decreased 2 basis points to 39 basis points, due mostly to lowering our average cost of deposits by 3 basis points to 8 basis points for the first quarter. The decrease in our average cost of deposits reflected an increase in our mix of noninterest bearing deposits, which averaged 38% of total average deposits for the first quarter compared to 35% for the fourth quarter.
Our adjusted expenses increased $1.3 million from the prior quarter, which was primarily due to including PMB’s operations for a full quarter, the seasonally higher salaries and benefits expense that are typical of the beginning of each year, and the additions we have made to our banking teams to support our continued balance sheet growth. As of the end of the first quarter, we had met our goal of realizing cost savings of greater than 40% of Pacific Mercantile operating expenses.
The effective tax rate for the first quarter was 27.9% compared to 32.4% for the fourth quarter. The decrease in the effective tax rate was due mostly to the impact the Pacific Mercantile acquisition had on our annual effective tax rate and other permanent items in the fourth quarter of 2021. Our annual effective tax rate for 2022 is estimated to be approximately 28%.
Turning to our balance sheet. Our total assets increased by $189.8 million in the first quarter to $9.6 billion and total equity decreased by $86.3 million. The decrease in total equity was due mainly to the full redemption of our Series E preferred stock, higher net unrealized losses in the investment portfolio and other capital actions, all offset by our net earnings for the quarter.
Our other capital actions included our preferred and common stock dividends, as well as repurchasing $4.3 million in common stock under the program we announced in mid-March. At March 31, our tangible book value per common share was $14.05, up from $13.88 at the end of the fourth quarter.
The change in our AOCI resulting from higher unrealized losses in the investment portfolio reduced our tangible book value per common share by $0.43 and the impact of the redemption of our Series E preferred stock, reduced our tangible book value per common share by $0.06.
We positioned the balance sheet for potential increases in market interest rates and to insulate our tangible book value from the impact of further decreases in AOCI. We transferred $329 million of longer duration assets consisting of agency collateralized mortgage-backed securities and municipal securities with high credit quality, from available for sale to held to maturity. The unrealized loss from the data transfer totaled $16.6 million and will be deducted from the amortized cost.
Our gross loans increased by $200 million or 2.8% during the first quarter. The growth in the first quarter included $968 million in fundings, including $364 million in SFR loan purchases, as we continue to opportunistically leverage our relationships with mortgage warehouse clients to add high quality earning assets.
Total commercial loans, which includes CRE, multifamily construction, C&I and SBA, decreased $10 million. However, when PPP loans and warehouse lending are excluded, this portfolio increased $83 million or 8.3% on an annualized basis. Deposits increased $40 million during the quarter, with all of the growth coming from noninterest bearing deposits.
Demand deposits, noninterest bearing, plus low-cost interest checking, increased by 3% from the prior quarter. Over the past year, demand deposits increased to 72% of total deposits, up from 62%, reflecting the improvement we have made in our deposit base.
This increase, combined with our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost deposits down to 8 basis points in the first quarter. This compared to 28 basis points in the same quarter a year ago.
Our credit quality remains strong in the first quarter. Total delinquent loans decreased to $11.8 million to $61 million, while non-performing loans increased $2 million to $54.5 million in the first quarter. At March 31, 36% of non-performing loans were either in a current payment status, but were classified non-performing for other reasons or SBA loans guaranteed through the PPP or 7(a) programs.
Let me turn to our provision for the quarter. We recognized a negative provision for credit losses of $31.5 million in the first quarter, which included the impact of the $31.3 million recovery of a previously charged off loan as a result of a legal settlement. In 2019, we had recognized the $35.1 million charge-off for this loan, and we are extremely pleased we were able to recoup the stockholder value.
Excluding the impact of this recovery, we had a negative provision of $200,000, due mostly to changes in the portfolio mix, improved macroeconomic variables used for modeling purposes and the general credit quality of the portfolio, all offset by overall loan growth.
Our allowance for credit losses at the end of the first quarter totaled $98.6 million and our allowance to total loans coverage ratio stood at 1.32%, which is lower than at the end of the prior quarter as we continue to see positive trends in asset quality. This enabled us to release the portion of the reserves built up during the height of the pandemic.
Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.63% at March 31. Our ACL coverage to non-performing loan ratio remained healthy at 181%.
At this time, I will turn the presentation back over to Jared.
Jared Wolff
Thank you, Lynn.
I’ll wrap up with a few comments about our outlook. As mentioned, since the start of the year, our loan pipeline has been steadily building and is now more than double the size it was at the same time last year, with good contributions coming from all asset classes and markets. While some of the external factors that I mentioned earlier, may still impact the pace of loan closings, the size of the loan pipeline and the increase we typically see in production volumes as we move through the year, point to a higher level of fundings than we saw in the first quarter.
Our banking teams are doing a great job of developing new relationships and expanding existing relationships, and the new bankers that we have added, are steadily increasing their productivity and generating high quality lending opportunities for us that we can fund with our consistent inflow of low cost deposits.
We have also had a very focused effort on engaging with the new clients we added through the Pacific Mercantile acquisition, and demonstrating how Banc of California can provide increased support for their continued growth and expansion.
As we knew from our due diligence, this is an attractive client base, with healthy, growing operating companies, that will present many opportunities to expand relationships over the coming years and contribute to our continued growth in commercial loans and low-cost deposits. The colleagues we added from Pacific Mercantile have done a terrific job integrating and are thriving at Banc of California.
We had a solid start to the year and we are on pace to achieve the goals that we set for 2022. We see many catalysts for driving higher earnings and returns as we move through the year, continued growth in earning assets from our business development efforts, additional margin expansion as the Fed increases the interest rates and continued focus on growing noninterest-bearing deposits, realizing more operating leverage as we continue to effectively manage expenses while growing revenue and the additional earnings resulting from the redemption of the Series E preferred stock and share repurchases.
We are also making good progress on our initiatives related to technology and fee income and we look forward to sharing more on these initiatives in the months to come.
On our earnings call in January, we indicated that we felt we were extremely well positioned to deliver another strong year in 2022. Given our growing pipeline, our momentum in business development, and our visibility and other catalysts that should lead to consistently strong financial performance, we continue to be confident in our ability to deliver another year of profitable growth.
I want to thank all of our colleagues at Banc of California for their contributions and dedication, which helped us deliver a very solid quarter. Thank you for listening today. I look forward to sharing more about Banc of California’s progress in the coming quarters.
With that, operator, let’s go ahead now and open up the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question will come from Timur Braziler with Wells Fargo. Please go ahead.
Timur Braziler
Maybe starting on the loan pipeline, certainly encouraging to hear that the pipeline remains very strong even following a strong first quarter. Can you just provide where you’re seeing most of that pipeline build coming from? Is it continued momentum in C&I? Is it built up CRE? Just kind of what the composition of that pipeline is?
Jared Wolff
You know, surprisingly, it’s very balanced. So, there is still a lot of CRE production, both on the bridge side and the multifamily side, we are not fixing rates longer than about five years right now, except very selectively. So, there is still an active market on the permanent financing side for 10 year loans, where the rates aren’t fixed longer than five years for apartment loans in California.
And that market is still robust – is much as rates have moved, we still have to remember that rates are still very, very low on a historical basis. And so, there is still benefits for people refinancing and properties are coming up off maturities all the time and so people are going to need to seek refinancing and that’s just an active transactional market. So that’s going to continue.
And then on the C&I side, we’ve put a lot of emphasis on growing our C&I portfolio and Pac Merc certainly contributed there. And I think we’re seeing the benefit of the larger lending opportunities, we’re able to provide with our bigger balance sheet. And there’s just a lot of activity. The economy is holding up very, very well in Southern California. The jobs report that came out this morning was obviously very encouraging. And so we’re benefiting from all of that.
And so, Timur, it’s not really in one area, we’re seeing it fortunately, across all of our asset classes. And as we mentioned, generally, we think warehouse is relatively stable. It could temper a bit and come down a little bit, but we’re growing through that with our – the growth in our other areas.
Timur Braziler
Okay, thanks for that. And I guess in context of that larger pipeline, how should we think about SFR purchases going forward, that portfolio being 22% of the overall loan book. Are you looking to get that closer to 30% where you might see peers or I guess how would you frame –
Jared Wolff
So here’s the balancing act. We originally were buying loans through our relationships to offset runoff. We didn’t intend to grow the portfolio in and of itself. But as we looked at that we thought, this is really a very good risk adjusted yield in a very state asset class and so it was a good return for shareholders.
We’re not actively buying a lot right now. We have a pipeline that we’ve committed to, that we’re holding onto. But it’s probably going to slow down as the refinancing slowed down in the single-family. So, everything else is providing a pretty big engine on a core basis. We obviously, aren’t getting any deposits from that business and so it’s not self-funding the way some of our other lines of business are. So we’ll continue to look at it selectively, but probably more to backfill runoff than to grow.
Timur Braziler
Okay. And last one for me, just looking at the funding side, it’s been a tremendous transformation and driving 40% DDA. How are you thinking about future deposit growth in a rising rate environment? Is there a high level of confidence that you continue to grow deposits, kind of despite what may be happening industry wide, just given our continued market share gain in Southern California? Or do you foresee having to lean maybe more heavily on borrowings to help fund near term loan growth?
Jared Wolff
It’s a good question. It’s one of the things I think we’re – as I mentioned in the call, we’re most proud of is, is getting to that 40% and it could go down any given quarter and then go back up, but it will continue to grow as a percent of overall deposits. And what is really special about hitting that threshold was the amount of money that came from new relationships to the bank. As I mentioned, was over $120 million in the quarter, that came from new relationships as opposed to just grabbing money from existing relationships and as liquidity builds up.
So, we are bringing in new relationships to the bank. So, we do expect our deposits to grow as our loan balances grow faster than our deposit growth, which could happen, then obviously we will need to rely, make sure that we stay close to our target of 95% to 100% loan to deposit and not get too hot and make sure that we’re funding appropriately and matching duration with the loan portfolio, which means we could – we hardly have any broker deposits to speak up. And we really haven’t tapped the CD market either. So we have those opportunities.
We think that our margin will continue to expand and we assess kind of how we do this. So, the flows every quarter of noninterest-bearing and transactional accounts, which include low cost checking accounts, that’s what we lead with and then we have all these other levers to pull to lead – to fill in, should we need it.
Lynn, I don’t know if you have any other thoughts there?
Lynn Hopkins
I think those are consistent with where we ended the first quarter and our views on the pipeline and some trailing SFR purchases. I think that, to the extent that fundings are a little bit higher in the second quarter, we would continue to use some borrowings in the short term. But, I think that the deposit growth and the pipeline we have there, looks strong as well. We are – and we still remain very, very focused on the mix.
So, to the extent that total deposits go up, maybe the pace of noninterest bearing deposit growth is a little bit tempered. So, as Jared mentioned, maybe the ratio moderates more like the average that we saw in the first quarter. But, we – I think look like it’s going to be strong as well.
Jared Wolff
We have dual tax going on at all times of our loan and deposit pipeline and they’re both very, very strong. And – but, it just happens that our loan pipeline move to really, really well right now and we got to make sure that we funded appropriately. And so, we’re keeping an eye on that.
Operator
The next question will come from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark
Maybe one for Lynn. Any updated thoughts on your expense guidance that you provided last quarter came in a little bit lighter. I think, of the high end of the range that we probably all expected $45.5 million to $47 million, any updated thoughts there?
Lynn Hopkins
Thanks, Matt. I think that it’s been a big topic related to inflation and maybe the impact on salaries and overall services. So we’ve been watching that closely. I think with fully integrating Pacific Mercantile’s operations and continue to see those benefits and leverage our expense base, I think we continue to stay comfortable with that range. We might be towards the higher end of it, given what we are seeing in the wage pressure a little bit, and then ongoing investments back into our operations and technology.
So, I think we look more to the our adjusted noninterest expense to average asset ratio. We’re at about just over 2%, which is lower than we were a year ago, up a little bit from the fourth quarter. But I think that’s something that we look at closely.
Matthew Clark
Okay. And then on the deposit pricing outlook, I think the last earnings call, there was an expectation that you could probably hold the line on deposit costs for the first 100 basis points. Any updated thoughts there, given the outlook for more Fed rate hikes relative to the last time. last earnings call. And whether or not you’re getting any kind of requests from customers yet?
Jared Wolff
So, we’ve gotten very – surprisingly very few requests from customers and we have calls on this frequently and have a feedback loop to make sure that we’re sharing information and thinking about our strategy and have avoided making kind of large wholesome move across our pricing grid for now. Again, when you’re focused on noninterest bearing and service and solutions for clients, they’re not focused on interest rates. So that can – and low cost checking accounts, that are fundamentally transactional accounts.
They’re really not focused on rate. You get rate most on the money market and CD which we’ve pushed out some of those higher cost and rate sensitive clients from PMB which was why we didn’t show more growth in the quarter, while the net number was little bit lower because we’ve selectively put stuff out. So, I expect we will get it.
I mean, the institutional clients that are in contracted accounts that kind of are like money market or time to CDs, we’re going to start hearing from them soon enough here and we’re looking at in the market of how are we going to fund loans and make sure that we do it efficiently. And I think the costs are going to go up and I think it’s probably going to happen in the next quarter or two. I don’t know if it will happen this quarter. I think it’s going to be pretty close to where we are, but I think we’ll start seeing it tick up by the second half of the year for sure.
And then, we’re just going to have to – I expect our loan growth – our loan yield to go faster than our cost of deposits for sure. So we – that’s why we expect our margin to hold or expand, but we are going to show – no question we’re going to have to share some of the cost with our clients and it’s going to go up, the cost of deposits.
Lynn Hopkins
Yes, I mean, I would just add, ending the quarter with our overnight borrowings at $300 million plus, we would look to be shifting those into deposits in our deposit growth. So, I think just purely swapping those two out, you sort of have an increase associated with market rates there. But with the growth in earning assets, I think the loan yields would outpace the increase in the deposit funding costs.
Matthew Clark
Okay. And then just on the buyback, good to see you guys started it. Do you feel like you might be able to step that activity up or does the kind of global macro uncertainty that’s growing, can I – give you some pause?
Jared Wolff
No, I certainly – look I – we think that our company is undervalued and certainly think there is opportunistic ways to buy our stock in the market. It’s under a program. We do only way we’re able to buy during a blackout is when you’re under a 10b5 program. So we’re under that now. And then we’ll evaluate it when it opens back up. But we – I think, we have a lot of belief in our company and future value. And I think these temporary geopolitical issues, notwithstanding, I think, our company is going to continue to grow and I think our stocks can continue to perform. So we think we’re a buyer of our stock at these levels.
Matthew Clark
Okay. And then last one from me, just on the new loan yield. It sounds like there’s a little bit of a lift there in a few categories. What would you attribute that to? Is it more mix? Was there some relief in terms of competition? Just any color there would be helpful.
Jared Wolff
In terms of rising loan yields?
Matthew Clark
In terms of new business. It sounds like the new loan – part of the uplift or uptick in loan yields was due to new business.
Jared Wolff
Yes, I think – so, loan pricing overall has gone up in all categories. So we’re – as we grow the loan book, it’s just benefiting from higher rates and the amount that loan yields have gone up, have not caused activity to pause. Rates are still low enough for – on a historical basis. That is not affecting business activity. So, clients aren’t pausing when their rates go up 25 basis points or 50 basis points, in terms of getting a new loan. They’re just factoring it into the rising cost of doing business and it hasn’t slowed their business initiatives yet, if that makes sense.
Matthew Clark
Yes. Thank you.
Jared Wolff
Did I answer your question? Okay.
Operator
The next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner
Thanks, good morning. I appreciate all the color in the commentary on the deposit side and I agree remarkable job there, last couple of years. Just one last question I had was, just as you’re thinking about the ACL, when I think you flagged kind of the adjusted ACL, still up near 170. Obviously, a nice recovery this quarter that went directly into capital. How are you thinking about the ACL from here as you think about kind of the CECL model, any changes to the inputs there and all our sequel result expect a pretty de minimis if not negative provision for the year, excluding this quarter?
Lynn Hopkins
Sure, Gary. Thank you. So, for the provision and where we ended the first quarter, there was a lot going on, given that we have a nice recovery of $31.3 million related to the legal settlements. So that came through that particular account. So setting that aside, we took a look at our portfolio at the end of the quarter, the credit quality that’s in it, the growth that occurred during the quarter, and then, as we will talk about on the macroeconomic variables, our outlook on the economy.
So, as we look at that, we do have certain specific reserves that sit inside our reserve levels. Even setting those aside, we feel like we’re very well reserves. I think, now that we’re two years into the pandemic and we’re coming out of that particular crisis, I appreciate that there is other uncertainty. But, when we look at the reserve, we’re getting close to what may have been viewed as pre-pandemic levels in our reserve.
So, to the extent that we have net loan growth, we think that we would expect potentially some modest reserves. It may be offset by continued improved asset quality. So, I don’t know that I would automatically go to the negative reserves. I think there’s still a lot of uncertainty in the markets and we do work through a process there. But we do think we’re well reserved and extremely well capitalized as well.
Operator
The next question will come from David Feaster with Raymond James. Please go ahead.
David Feaster
I wanted to touch on C&I. Obviously, there were some moving parts in the quarter with the transfer, but even excluding that, we saw some C&I growth, which is great to see. And I know some that you guys have worked really hard on. I just wanted to get a sense of what use – what drove that growth? Is it new relationships, increased utilizations, expansion into some of the new segments that you’ve gone into, and just, how do you think about your ability to continue to drive C&I growth going forward?
Jared Wolff
Well, I’m looking at our pipeline daily and weekly and it’s a, as I mentioned earlier, our pipeline is very balanced. And so we expect C&I to continue to grow. Real estate is going to grow too, but we expect C&I to continue to grow. And it’s across all of our assets right now, all of our different types of C&I that we’re doing.
It’s – line utilization is up slightly. It’s in the high 40s. It – the high point was in kind of high – mid to high 50s before the pandemic. And right now it’s in the high 40s, up a little bit from the mid-40s. So there’s a little bit of contribution there but not tremendously. It’s more just new business from existing and new clients.
David Feaster
Okay. Well, that’s great. And then, we’ve had – you touched on your prepared remarks, you’ve had a ton of success on the new hiring, from talent magnet as you said. Just curious how the hiring pipeline looks? Where are you most focused on hiring new producers? Is it more, some of these specialty lines and then are there any additional lines that you might be interested in, or just are you seeing more opportunity on the core commercial, general commercial bankers?
Jared Wolff
So the hiring is taking place generally on the production side and we’re – obviously need for have the right gearing ratio. So for every production person that you add or every few you need to add the support people that are critical to how we do our business on the loan operation side and our analysts and our credit support and our underwriters who do a tremendous job as well. So we have to balance those as well. And look at how that might impact operations.
So, there is kind of a loop that takes place as you hire in certain areas and you get leverage. You get operating leverage, but you need to make sure that you’re supported across the company. So you don’t put too much stress on any one area and that’s something we try to get right.
In terms of the specific people that we’re hiring, we’ve made some inroads on the ABL side. We hired a Head of ABL that we announced and I know that he has been hiring people to fill in on his team. We previously talked about hires that we’ve made in the entertainment and media space and obviously, we have to make sure that we’re supporting those teams. And then we continue to hire in healthcare and grow just in general commercial and real estate.
I mean, I would say it’s pretty broad based and everything that we’ve announced, we’re just continuing to grow. It’s a good time right now in Southern California and in all the markets we serve. Our teams are doing a terrific job in the Bay area and in the Central Valley where we have folks as well.
And just, there’s a lot of new relationships coming to the bank from people’s previous engagements and then also just, I think, our name is out there. And I ran to a client on the street the other day who said he heard our names three times in the last week and he wants to get together again. And so it’s – the momentum is certainly there for us right now, which is nice.
David Feaster
That’s great. And then, just touching maybe on one of the exciting things that you guys are working on and I don’t believe I heard much commentary in the prepared remarks on it, but, the partnership with the Finexio, just curious where that stands and any updates you have on that, but also your appetite for additional fintech type partnerships or investments and what you would mostly be interested in? And is that something that we should expect to see more announcements coming forward in?
Jared Wolff
So, I think, Lynn and I both hope that by the end of next quarter, we will be either – with our results are before, we’ll be able to announce more initiatives in the technology space, and specifically in payments. I don’t want to go into too much right now because we’re not ready to announce it, but we are working behind the scenes very actively in that area and are planning some flags in the ground and hope to be able to lay out clearly what our strategy is, and I think it will be obvious why we picked that is an approach. We’ve been working on it for over 18 months. And so we’re excited to share when we’re ready.
As it relates to Finexio, I appreciate you asking. We said that would be kind of a back half of the year, kind of contributor and we’re just finalizing agreements and white labeling and putting things in place, and it’s been a great partnership. They’re doing very, very well. They have crossed the $1 billion in payments threshold and we expect that to start showing contribution later in the year.
Operator
The next question will come from Kelly Motta with KBW. Please go ahead.
Kelly Motta
I wanted to circle back on loan growth and specifically on the mortgage warehouse lines, just with the moving rates. I believe Jared, in your prepared remarks you said you expect to grow in spite of mortgage warehouse or actually even grow it. I just – I was wondering if you could just add a bit more color on what we should be expecting there?
Jared Wolff
Sure. I think mortgage warehouse will temper. So I think that the balances that were out right now, we’re not expecting them to grow and they may in fact shrink slightly. But we expect overall to grow as a company, notwithstanding, the fact that, that line may come down a little bit. Our team – I mean, I think we’ve proven this out pretty consistently, I’m kind of tired of talking about it, but I know it’s a question, but I think we’ve proven out consistently that we know we’re doing in that area and that our business is very different than the way it’s conducted elsewhere.
Our teams are fantastic. And we tend to be the primary and secondary lines for most of the borrowers that we lend to. And our team has done a great job bringing in new relationships in the warehouse business as well to support our – the business that we have there.
That said, overall financings and refinancings of – in the single-family market, which is what that business is about, are slowing. And therefore, there’s not as much business and it’s not as robust. The securitization market has slowed a little bit as well as people expect rates to rise, and therefore, they want to wait to securitize things that might be a – they don’t want to put on things that are – rates that are lower than they are going to be in the future.
So, knowing that, things have slowed a little bit but our team has done a great job managing it. We think it will – it’s not going to drop off a cliff, it’s going to move down gently, and our other businesses are growing fast enough to more than offset any slowdown in that area. And I think it’s just going to kind of move in tandem, and we’ll continue to show growth, and that’s the way we see it for the foreseeable future.
It could stay flat. It could shrink a little bit. That’s kind of what we’re planning right now is, that it might shrink a little bit, but we don’t see it dropping massively.
Kelly Motta
That’s really helpful. Thanks a lot.
Jared Wolff
Of course.
Kelly Motta
And then I guess, keeping that in mind and also understanding that repayments are likely to flow as refinances slow. Do you have any expectation as to the net growth number for 2022 now? Any changes on the commentary you gave last quarter with that?
Jared Wolff
So, I would say that the first quarter performed better than I would have expected, because typically the first quarter slower and we guided to overall for the year, kind of high single-digit loan growth.
And when I think about that, I’m not really thinking about, I’m thinking about kind of our core growth and that’s kind of what we hit in the quarter. We hit on ex – PPP and warehouse, I think we’re at 8% on an annualized basis. And so, that seems about right, although, our pipeline is really strong. I just don’t know what payoffs are going to be. So I probably would say, okay, now we’re high-single digit, low-double digit in that – obviously, you feel comfortable expanding the range, knowing that our pipeline is strong.
But again, I don’t actually know what we’re going to do. I just – I mean, I don’t and nobody does. We just see what’s on the horizon and we think we make estimates that we think are appropriate at the time. And so right now it’s feeling better than it did in the first quarter. So I would be comfortable, people felt like we were going to do a little bit better because I feel like we’re going to do a little bit better. But it’s hard to actually know what we look at its production and you can control payoffs as much as you’d like to.
Our production volume last quarter, including purchases, was at an all-time high and even without purchases it was at an all-time high. I’m looking at a five quarter running total here. And I know that this quarter it’s going to be even higher. And we’re probably not even going to do that much in purchases. We have a little bit in the pipeline, but it’s going to slow as we get through the year.
So, yes, Kelly, I mean I think that’s the best I can do. I wish I had a precise – more precise number. But, I certainly feel more comfortable that we could hit double-digit loan growth this year, given what we did in the first quarter. Yes.
Kelly Motta
That’s really helpful. Thank you so much for the color, Jared.
Jared Wolff
Yes. No problem. Okay. Thanks, Kelly.
Operator
The next question will come from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell
Jared, I just wanted to ask on the buyback. I hear you when you’re talking about being attractive kind of at these levels, but given you kind of just announced, so I was hoping you could just talk about the framework you think about when considering the attractiveness of the buyback. I don’t know if you have any kind of internal rate of return threshold, or tangible book value you earned back that you look at when considering the buyback. But just, hoping you could share some color there.
Jared Wolff
I think the best way I can answer that question, Andrew, without disclosing what’s in our 10b5 parameters, because I don’t really want to give that color to the market. So people know at what prices we’ve agreed to buy it. I think, I would just say that the price looks low to me right now. I mean, we’re trading at less than 1.5 times tangible book. And I’m looking at our company as a growth company with an expanding margin with 40% noninterest-bearing deposits and one of the best markets in the country with 12 plus consecutive quarters of doing what we said we would do, probably better than people thought we would do it including ourselves. We’ve kind of – our team always impresses me in terms of outperforming high standards and they do an incredible job.
And so, I just keep looking at like what’s the prove it to me story here that is weighing down our price to tangible book. I mean, we keep growing our operating leverage. Lynn did a remarkable job with her team in the quarter of protecting our tangible book value by putting some securities in the held to maturity down in a safe and balanced way.
We recovered on the charge-off. As we said, we would – I mean, we’re trading too low. I mean, we’re going to keep growing. I mean, I just don’t see anything that’s getting in the way of it. And so, that’s how I feel about it. I am obviously biased. But it just seems like we’re trading well too low, when we have almost pure like metrics.
I mean, we’ll get our return on tangible common up higher our ROAA, which we haven’t talked about was 1.11% in the quarter. People thought we were – we said we were going to be above 1.10% for the year, we hit it out of the park at beginning in the first quarter. I mean we’re getting – all of this operating leverage builds on itself, and it makes it easier quarter-after-quarter.
And so, as long as our loan growth continues to hold up and we can solve on the deposit side, I think we’re going to continue to grow earnings and we have a couple of levers to pull. So, that’s my soap box. I apologize for going off that. I just feel like we’re trading too low on tangible book value basis.
Andrew Terrell
Yes, no, that’s great color and I appreciate it. Maybe just one more question from me. Do you happen to have the yield or the weighted average yield for the – I think, it was $360 million or so of residential mortgage purchases made this quarter.
Jared Wolff
Lynn, do we have that? I see on our sheet, the overall production yield for SFR.
Lynn Hopkins
Right. So I think the – I think, we haven’t necessarily disclosed that. But I mean it’s part of our overall yields. They’ve been holding up. I want to say they are in the mid-3s to upper-3s, based on the rates and the trade yields during the quarter. It shows up in our net interest margin table that’s in the back of that release. So, our single family, the yield went from 3.32% last quarter to 3.45% this quarter. That includes some of the purchases that came through.
Andrew Terrell
Yes.
Lynn Hopkins
Obviously, there is a bit of an inflection point happening with rates moving in the market. So, we saw pricing start to moderate up – sorry, the yields moderate up towards the end of the quarter.
Andrew Terrell
Yes. Okay.
Jared Wolff
I mean, one of the, Andrew, one of the reasons we – like, we’re so bullish on that portfolio is because it doesn’t require very many people to manage it. It’s outsourced to DMI as the servicer and it’s – these are low loan to value, high FICO, primary residence is the people in California for the most part, that performed like clockwork.
And it was hard to find – in a very low interest rate environment, it’s hard to find equivalent yields that didn’t require tons of people monitoring, that would actually put your actual yield much lower. And so, on a risk adjusted basis, we felt it was a smart place to put money for our shareholders. But, as that – we don’t intend to be a pure single family company at all. And so, as loan growth picks up in other areas and we can get better yields for the return for the risk, we see the SFR portfolio staying flat and us growing.
I’m sorry, that’s not stayed, we wouldn’t make other purchases that they made sense in the yields were right, but, we just see growth in other areas. It’s really outweighing that.
Operator
[Operator Instructions] This concludes today’s conference call along with our question and answer session. You may disconnect your lines at this time and thank you for your participation.
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