Banc of California, Inc. (BANC) 2026 Q3 法說會逐字稿

Good day and welcome to the Banc of California third quarter 2026 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Meghan O'Leary, Investor Relations. Please go ahead.

Good morning and thank you for joining Banc of California's third quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website.

Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information are available in the earnings press release and earnings presentation, which are available on our investor relations website.

Before we begin, we would like to remind everyone that today's call will include forward-looking statements, including statements about our targets, goals, strategies, and outlook for 2026 and beyond, which are subject to risks, uncertainties, and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our Safe Harbor statement on forward-looking statements included in both the earnings release and the earnings presentation, as well as the risk factors section of our most recent 10-K.

Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer; and Joseph Kauder, Chief Financial Officer. After our prepared remarks, we'll be taking questions from the analyst community.

I would like to now turn the call over to Jared.

Thanks, Meghan. Good morning, everyone. We delivered a strong third quarter with meaningful growth in earnings and profitability while continuing to strengthen our balance sheet and grow the franchise.

In the second quarter, we took several deliberate actions to improve the earnings capacity of our balance sheet reduced selected credit exposures and created additional opportunities for profitable growth. We're now seeing the benefit of those actions, and our teams continue to grow the business while executing on them.

Earnings per share were $0.46 and pre-tax-provision income was $118.4 million. Compared with the first quarter before the strategic repositioning, those measures increased 18% and 12% respectively. Year-over-year, earnings per share increased 21% and pre-tax-provision income increased 16%. We also generated positive operating leverage. Revenue increased 6% from a year ago, while non-interest expense was essentially unchanged.

Return on average tangible common equity reached 11.93%, up over 200 basis points from Q1. Net interest income increased 9% from the second quarter. And our net interest margin expanded 21 basis points to 3.34%. These results demonstrate the progress we've made in unlocking the earnings power of the company, and we see a clear path to further earnings growth ahead.

The repositioning also advanced a broader objective, building a balance sheet that can produce sustainable earnings across a range of economic and interest rate conditions.

We completed our securities reinvestment during the quarter, deploying the proceeds into higher-yielding assets. We also redeemed $385 million of subordinated debt ahead of a significantly higher contractual reset rate. Together, these actions increased asset yields and avoided a substantial increase in future borrowing costs.

The third quarter reflected the full benefit of the debt redemption. The securities reinvestment was completed in the third quarter, so we expect an additional benefit from a full quarter of those earnings in Q4. We completed both targeted loan sale transactions, with the performing CRE sale closing in Q3 and the remaining LIHTC construction sale closing October 21. Results were consistent with the marks established in June.

These sales reduced selected credit exposures and borrower concentrations and created additional capacity for profitable growth. Exiting these lower yielding or nonperforming exposures is also expected to support further NIM expansion in the fourth quarter.

While we executed these actions, client activity remained strong. Our bankers delivered another strong quarter of production with $2.6 billion in loan production and disbursements, contributing to 6% annualized growth in loans held for investment.

Production was broad-based across all of our lending categories, demonstrating the strength and diversity of our platform. We continue to direct capital toward businesses where we understand the risks and see attractive risk-adjusted returns.

New loan production was priced above our existing portfolio yield. That production is improving the yield mix of our portfolio as existing loans repay while we maintain our underwriting and return requirements.

We're also continuing to expand the capabilities of our franchise. Our launch of private banking is part of that effort. Giving us more ways to serve existing clients, develop new relationships and support long-term growth.

On deposits, we grew core balances while reducing our reliance on brokered funding. Period-end core deposits increased approximately $515 million during the quarter, and total broker deposits declined approximately $375 million.

Average total deposits grew 8% on an annualized basis, supported by interest-bearing relationship deposits. Over the past two years, we've opened more than 6,000 new non-interest-bearing business deposit accounts, representing approximately $1.3 billion in deposits. This activity reflects the continued success of our relationship-driven approach and our ability to attract high-quality clients to the bank.

Our focus is not just on bringing in new clients but on building broader, deeper relationships over time, earning more of each client's operating deposits and serving more of their banking needs.

Turning to credit, non-performing, classified, and delinquent HFI loans declined during the quarter, reflecting portfolio actions and resolutions. Classified loans and delinquencies reached five-quarter lows. Special mention loans increased during the quarter, although they remained below year-ago levels. We continue to take a proactive approach to managing credit.

As we've said before, we're quick to downgrade and slow to upgrade, and when we identify potential issues early, we act decisively to address them. That discipline remains an important part of how we manage the balance sheet and maintain disciplined underwriting as we grow.

We're also building capital. Our CET1 ratio increased 45 basis points to an estimated 9.7%, exceeding the anticipated range we communicated last quarter. The increase reflects strong earnings generation and a lower regulatory deduction for NOL-related deferred tax assets.

Continued capital generation strengthens our capacity to support relationship growth and maintain flexibility. We will remain disciplined in evaluating capital deployment against its contribution to long-term shareholder returns.

We are building resilience through the choices we make on both sides of the balance sheet, reducing selected credit concentrations, growing relationship funding, managing interest rate exposure, and retaining capital for optionality and strength.

We're focused on building a balance sheet that can perform well across a variety of economic and interest rate environments. Our objective is to sustain attractive returns through changing conditions while maintaining disciplined underwriting and liquidity.

As we look ahead, we're confident in our ability to continue growing earnings because we see several meaningful drivers of further improvement already in place.

In the fourth quarter, we expect additional benefits from the full quarter contribution of our securities reinvestment and the completion of the targeted loan sales. Beyond that, scheduled repricing within our multifamily portfolio and new loan production at yields above the existing portfolio provide opportunities to improve asset returns.

And as we have mentioned previously, we anticipate retiring our preferred stock when it is redeemable in September of 2027. Continued growth in relationship deposits and disciplined expense management will support that progress. Together, these drivers give us confidence in our earnings trajectory as we enter 2027.

With that, I'll turn it over to Joe to walk through the financial results in a bit more detail, and then I'll come back with some closing comments. Joe?

Thank you, Jared. For the third quarter, we reported net earnings available to common and equivalent shareholders of $73.1 million or $0.46 per diluted share. Pre-tax pre-provision income was $118.4 million, up 12% from Q1 and up 16% year-over-year.

When adjusted for non-recurring items, core PTPP was $120.6 million. We continue to expect fourth quarter pre-tax pre-provision income of $125 million to $130 million, reflecting additional repositioning benefits and continued business execution.

Moving to net interest income, we recorded $272.4 million for the quarter, an increase of $21.9 million or 9% from the second quarter. Securities interest income increased $17.7 million that increase included the benefit of reinvestment into higher yielding securities and a non-recurring $2.8 million special dividend on FHLB stock.

The available for sale securities yield for the quarter was up 23 basis points to 4.58% and the total securities yield increased 142 basis points to 4.86%. Higher interest income from loans and cash also contributed to the increase in net interest income, partially offset by higher deposit interest expense.

Our net interest margin increased 21 basis points to 3.34%, primarily reflecting the benefit of higher security and loan yields. Our 3Q exit net interest margin was 3.35%. And we expect fourth quarter net interest margin of 3.35% to 3.40%, narrowing our range guidance.

Average loan yield increased 6 basis points to 5.69%. Loan interest income and yield benefited from fewer non-accrual interest reversals and one additional day in the quarter. And new production was priced at 6.58% for the third quarter, supporting continued portfolio repricing and our third quarter exit loan yield was 5.78%.

Total core loans increased 8% with strong production across multiple loan categories, while loans held for sale decreased 45%, reflecting the impact of our targeted loan sales. The average cost of deposits increased 3 basis points to 1.83%, while total cost of funds increased 2 basis points to 2.16%.

Average core deposits grew 15% annualized versus the second quarter, reducing the need for brokered deposits, which decreased $375 million in the quarter. The improvement in our funding mix helped offset the impact of higher market rates in the quarter and our third quarter exit cost of deposits was 1.87%.

In terms of interest rate sensitivity, our modeling indicates that net interest income remains relatively neutral to changes in interest rates when adjusted for our deposit repricing beta assumptions. Those assumptions matter and actual results will depend on deposit pricing and balance sheet mix.

We manage interest rate exposure to support earnings across a range of conditions. And separately, changes in market rates can affect the value of our available for sale securities and tangible book value, which I will address shortly.

Turning to non-interest income and expenses, non-interest income was $31.4 million. This included approximately $5 million of non-recurring losses on loans held for sale and equity investments. Non-interest expense was $185.4 million, down $4.5 million or 2% from the second quarter.

The decrease primarily reflected lower FDIC assessments in the absence of the second quarter software charge, partially offset by higher compensation leads and customer-related expenses.

Our efficiency ratio improved to 59.1% compared with 67.2% in the second quarter. Our effective tax rate was 23.1%, including $1.9 million of tax favorability related to finalizing our 2025 taxes. That benefit should be distinguished from our ongoing operating performance, as should the special FHLB dividend and the losses, which I described above. We expect our tax rate to normalize to around 26% in the fourth quarter.

Turning to provision and credit, provision expense was $10.4 million compared to $9.8 million in the first quarter. We used the first quarter as a comparison because the second quarter provision was elevated by the strategic repositioning.

Net charge-offs were $17.3 million, more than half of this amount had been specifically reserved at June 30. Our allowance or credit losses was 1.10% of loans compared with 1.14% at June 30. The decline in the allowance ratio primarily reflected charge-offs of loans for which we had previously established specific reserves. We believe our overall reserve levels remain appropriate.

On capital, our CET1 ratio increased to an estimated 9.70% at September 30 compared with 9.25% at June 30. Earnings contributed 28 basis points and a lower regulatory deduction for NOL-related deferred tax assets added 26 basis points, partly offset by changes in risk-weighted assets and other items.

Tangible book value per share was $16.09 compared with $16.44 at June 30, reflecting a $116.1 million increase in after-tax unrealized losses on available-for-sale securities as intermediate-term interest rates increased. As noted, we have entered into contracts intended to hedge against the impact of extreme moves in interest rates.

Looking ahead, we expect additional benefits in the fourth quarter from both our securities repositioning and our loan sales, along with continued opportunities from loan repricing, relationship deposit growth and disciplined expense management.

To summarize our fourth quarter outlook, we continue to expect pre-tax-provision income of $125 million to $130 million and a year-end CET ratio of between $9.80 million and $9.90 million. And we have revised our net interest margin outlook to 3.35% to 3.40%.

And with that, I'll turn the call back to Jared.

Thanks, Joe. This was a strong quarter for Banc of California, and I'm very pleased with the progress we've made. The actions we took last quarter are delivering the benefits we expected, and we're seeing meaningful improvement in the earnings power of the company.

At the same time, our teams continue to grow the business, bring new relationships to the bank, and maintain the discipline that's always been central to our strategy.

As we look ahead, we see numerous levers that will continue to drive EPS growth. We're benefiting from the repositioning of our balance sheet, continued loan production and attractive yields, and the opportunity to grow our franchise while maintaining strong capital and liquidity.

Importantly, we're focused on building a high-quality, consistent, and sustainable earnings path. We believe the combination of our stronger balance sheet, talented banking teams, and opportunities across our markets position us well for continued earnings growth and even higher returns ahead.

I want to thank our nearly 2,000 Banc of California colleagues. They executed a significant set of strategic actions while continuing to serve our clients and grow the business. That takes focus and hard work, and I appreciate what our tremendous team continues to accomplish day in and day out. I'm proud of our progress and very confident in the opportunities ahead.

With that, operator, let's open the line for questions.

(Operator Instructions)

David Chiaverini, Jeffries.

So I wanted to start on the net interest margin. You're guiding $335 to $340 up from the 3Q level. Can you talk about the tailwinds or potential tailwinds to net interest margin looking out over multiple quarters? It sounds like fixed asset repricing should provide a nice multiple quarter tailwind.

That's right. I mean, we try to lay out in our investor deck the volume of multifamily assets that are expected to reprice and kind of the schedule over which they'll do that. And that's going to create some NII tailwinds as well as obviously margin tailwinds.

Our production yield is meaningfully higher than our portfolio yield. And our lowest portfolio yield really sits in the multifamily portfolio. And so for those reasons, we expect margin to expand. I would also say that I was pretty pleased with our disciplined pricing on deposits.

Deposit pressure is real. I think all banks have been talking about it. And for the quarter, our average deposit costs only increased about 3 basis points. At the average for the end of the quarter was a little bit higher, but I think they're very well managed. Also running off higher-cost broker deposits because of our deposit growth in the quarter was a nice benefit that we didn't see coming. We just had really strong deposit growth, and that so far has continued into the beginning of this quarter. We'll see where the average is and where we end up, but I think those are the important tailwinds.

That's helpful. And then sticking with one of the components to NIM on loan pricing, looking on. slide 9 looks like the rate on new production, now you mentioned it's up sequentially, but year-over-year, it's down 50 basis points. What drove that and to what extent is it simply mix shift to resi mortgage versus spread compression from competition?

Yeah, it's actually, it's exactly that. It's mix shift because as I look, different loan categories price differently, but when I look at where things are quarter-over-quarter in terms of production yield.

I'm just going across my list here that I have at my desk. We did kind of peak, I would say second quarter pricing was a little bit higher in some categories than third quarter, but not all. Multifamily was a little bit higher in the second quarter than the third quarter, but construction is higher now than it was in the second quarter.

C&I was a little bit higher, and that just could be just the nature of the loans we're putting on in any given quarter, just how competitive we want to be. So I wouldn't read into it too much production yield, excluding purchases of single-family loans, production yield was higher in the third quarter than the second quarter.

So I would chalk it mostly up to kind of single-family purchases, but it could be just kind of anomalies of what the mix is in any given quarter.

Yeah, I think we also had some rate cuts in 2025 and we have a decent portion of our portfolio, 30%, 40% of our loans are floating rates, C&I, so that was also a contributor just to why those came down as well, why you see that coming down. And then rates have obviously turned back up recently, but back in '25, you remember we had some cuts.

Thank you.

Chris McGratty, KBW.

Good morning. Joe, a question on expenses. The implied fourth quarter is a touch link quarter. You gave a good disclosure in the slides about the sensitivity of ECR costs to rates. And so the question, I guess, would be for beyond the fourth quarter, how do we think about the balance of ECR deposits as you're trying to grow other deposits and ultimately, I guess, level of expense growth either with or without the ECRs?

Chris, so I'll start with the fourth quarter. Obviously, we're going to have some improved continued improvement in our probably in our FDIC assessments as we move forward, but I think we could expect those improvements to be offset by higher customer-related expenses as we reflect the 25 basis point increase rate increase we just had.

As we look out beyond that, I think we're a big fan of the HOA business and we have a page in the deck where we show the total cost of those deposits. And they're not as cheap as some of our core non-interest-bearing and other opportunities, but when you compare them to brokered and other things where we other opportunities, it's a good, solid business. It's very stable and provides a good base. I think we want to continue to try to grow that business in a prudent, responsible way.

Jared, anything you'd add to that?

No, it's an outstanding business. I mean, we got $4 billion in deposits that are at cost that are really reasonable. The third-party cost that we pay is to the property management company. It's not to the HOAs themselves. So those deposits sit in NIB. They're very stable. They're distributed across a huge number of accounts. And we want to continue growing that business.

Our team does an outstanding job. And I think in the country, there's four or five leaders in this business, and we're one of them. So I feel great about it. And we've got an outstanding team.

Okay, great. And then, Jared, the second question is more directed to you. Just where you're at with the balance sheet optimization efforts, obviously made a ton of progress this quarter. Obviously, the preferred is coming due. I'm ultimately trying to gauge this. It seems like a smaller but more profitable balance sheet. I hear you on the NIM, but I guess the question is more the size of balance sheet and any tweaks from here?

Look, I think that all the modeling that we've been doing suggests that we should be growing organically with the production levels that we have. If we don't grow, Chris, and we just remix, we're still going to make more money. So if we're able to grow on top of that, it's going to continue to drive higher earnings ahead.

There are a couple of different ways we can grow. For once in the last feels like the last five or six years, we finally have the opportunity to look at multiple types of assets into which we can deploy capital. So we can deployment loans, we can deploy securities, and they're both good risk-adjusted returns. You can find a lot of opportunities. So our plan is to grow from here, and we think we can do it really well organically.

Great. Thank you.

Thank you.

David Feaster, Raymond James.

Hi, good morning everybody.

Morning.

I wanted to touch on commercial loan growth side, just the core commercial loan growth side. Obviously, there's some strategic declines in multifamily, exclusive of that in the single-family resi purchases, core commercial loans relatively flattish. How do you think about how are pipelines shaping up across your businesses? How do you think about growth exclusive of the SFR and warehouse portfolios and your ability to accelerate that?

I like the momentum of our teams. We had in the second quarter, we did $2.8 billion of production and disbursements. And in the third quarter, we had $2.6 billion of production and disbursements. We have payoff and paydowns of about $2 billion. That feels pretty good. I mean, these last two quarters we've had on it, you put aside the loan sales, we've had net portfolio growth.

And I think we can continue to do that. In terms of where it's going to come from, we've got a lot of different levers, and I like the distribution that we have. I like the fact that we have some things work when other things aren't, and that's good. It shows that we have balance in our portfolio. We're not producing solely from one place.

On the C&I side, we've got many different levers to pull. We obviously have our lender finance and our warehouse business, but our core C&I grew in the quarter. We had $355 million of production and disbursements, and we had $278 million of payoffs and paydowns.

Sometimes you can control it, sometimes you can't, but it grew over the quarter. It was flat the quarter before that. So I see growth ahead, David, and I think our teams are working really hard at it. But as I mentioned also, if we just remix our portfolio, we're going to make more money, and I feel good about that too.

That's great. And on the other side of the balance sheet, one of the most impressive things that you all did, your core deposit growth was terrific, especially when you considered the optimization that you've done. Where are you seeing the most opportunity? You touched on the HOA business.

Where are you seeing the most opportunity on the funding side for growth? And how do you think about maybe the competitive landscape and your ability to continue to drive that core deposit base and optimize things further?

Yeah, well, thanks for recognizing that. So, and we are being opportunistic. For example, in the quarter, we grew interest-bearing deposits more than non-interest-bearing deposits, but that was intentional. We said to our teams look for all opportunities. Let's evaluate cost. And as we mentioned, our average deposit cost only went up by 3 basis points.

So our teams are being very opportunistic and looking to make sure that we are taking as much wallet shares as we can from our existing clients. We think the private banking initiative that we launched, which by the way, is not expensive. We are deploying tools that we have and people that we have toward a sector that we think is underserved in our key markets. And this is a sector that we have been asked to serve.

These RIAs do not want to give their business to competitors that other banks that will compete with them with wealth management services. They're looking for a bank that will provide really high-touch solutions to their clients in a non-competitive way to them as wealth advisors.

And so we think that this is a place that we can lean in and do really well, and I expect to get some growth from there. But our venture business is doing really well. Our venture business continues to bring in a big amount of deposits, which is not only our fund finance, but our life sciences and our tech team. And those deposits continue to grow.

Now, they're different. On the venture and life sciences side, these are startups, they bring in deposits and then the deposits actually burn off. Unlike a traditional C&I business, a law firm, an accounting firm, a professional services company where the deposits are stable and growing, these burn off, which means we have to work harder to grow the deposits. But our team is doing an outstanding job.

That's terrific. And maybe last one, just a high level for you, Jared. You've done a lot of optimization, really, as I look back over the past two years, right? There's been a lot of noise. But we're seeing the benefits of that now. This quarter was pretty straightforward. That was nice. I guess when I talk to investors, we talk a lot of time about like consistency of earnings and the durability of earnings growth.

I just -- how do you touched on a little bit just given some of the repricing dynamics, but how do you think about your ability to drive much more clean and consistent earnings just kind of given some of the levers that you've pulled and the durability of your earnings growth outlook?

I would say that this was one of the most boring quarters we've had in a while, and I expect that to continue. And we believe that the glide path that we've set in place at this point is kind of on the right path.

We don't see any big moves that we need to make. We're obviously economy dependent like everybody else, but assuming the economy holds up and there's no major moves, we expect to see resilient, sustainable and growing earnings for the quarters ahead. I'm not sure what would get in the way of that.

So we think that the moves we made put us in place to do this, and we hope it's boring and kind of rinse repeat with the growing earnings from here. I'm really pleased with our growth in ROTCE, and we expect that to continue to grow as well.

Terrific. Thanks, everybody.

Jared Shaw, Barclays.

Thanks. Good morning. Thanks for the info in the slide deck. I guess as we look at the securities portfolio, Joe, maybe can you give us an expectation of what yields should be for the fourth quarter with the full impact of the restructuring? And then when we look at the roll-on, roll-off from there going forward, I guess that's just a little under $100 million a quarter, what's sort of that roll-off? Yield we should expect then going forward.

Yeah, so Jared, on the securities portfolio, during the third quarter, we reinvested a lot of the proceeds, but we didn't get a full quarter of the benefit. So if you look out into the fourth quarter, I think you could expect probably somewhere between 15 basis points or so expansion of yield, somewhere in that range, maybe like 12 basis points to 15 basis points expansion of yield on the AFS securities book.

And I think that's going to be very positive and continue to contribute to our net interest margin as well as the loans that we, the loan transactions we did, we're taking those loans, getting those loan sales closed and getting them off the book. Some of those were non-performing loans and as those come off, we replace those with performing assets. So that's also going to be sort of a kicker to our net interest margin in the fourth quarter.

Your question or was there part of it I didn't get?

I guess just now that it's now that the securities restructuring is done, what's sort of the go-forward roll-off rate as we look at that 7% that should pay down within the first year?

I think the way if you talk about the securities book, I think what you would like what you'll probably see is us reinvesting in the securities book and continuing to grow yield there as we reinvest lower rate securities rolling off and then newer, higher rate securities coming on. And in addition to that, we may look to grow the AFS securities portfolio as we look for the most optimal way to deploy our capital. And so there may be some additional benefits there.

And then I'm sorry if I missed this, but what's sort of the expectation now for the beta through the cycle with some of the changes and improvements you've made to the core deposit base?

I think we've historically said our cumulative beta is around 60%, and I think that's still kind of our operating assumptions, although we aspire to outperform that in all environments, but we'll see how it comes out.

Great, thanks.

Matthew Clark, Piper Sandler.

Good morning, everyone. Just around the margin, assuming we get a December rate hike here. And I don't think you have rate hikes in your guidance.

And I see your sensitivity slide on page 17, which is pretty modest, but at least in the near term, with 30% to 40% of your loans repricing pretty quickly, and the deposit cost increase being pretty manageable to date. Fair to assume that there might be a little bit of upside to that margin guide in the fourth quarter or even into 1Q?

I don't know if we want to go there yet. I mean, we are fairly neutral. I think we're -- I was pleased with the results of our margin in Q3. There's still a lot of moving parts. We will not see the -- a December rate hike isn't going to really show up too much in Q4, so we'll get the benefit of that in Q1 to your point.

So I think for now we feel comfortable with kind of our margin guidance for Q4, wouldn't you say, Joe?

Yeah, the one thing I would add to that is if you think about we're neutral from a total earnings perspective, Matt, and so if there was a rate increase, which you'll see is you'll see a slight expansion of NIM and then interest income, but then you'll see an increase in the customer-related expenses as well, which will offset in total earnings. So for any rate increase, you will see a small expansion in NIM. But as I said, being neutral, that would be largely offset with the expenses.

The one thing I would say to that though, and this is always the debate we have internally, is that all these models assume a static balance sheet. So when rates go up, we are going to make more money. It's not going to offset completely. It's going to be on a static balance sheet, it's going to offset.

And then as we put new loans on the books. And we're going to grow earnings. And that's my whole point about our balance sheet remixing is so powerful that we don't need to grow to make more money. It's just happening generally day in and day out, which is what's so exciting about where we sit right now, particularly because of the multi-family portfolio. So I would expect to make more money in an upgraded environment because our balance sheet is not static, it's dynamic. But in a flat balance sheet, it's kind of neutral.

Got it. Okay, great. And then just on the held for sale that's still left there, I think $65 million was taken out of the $300 million that was intended to be sold. It looked like it was still under construction and was converted to permanent financing, I guess.

Can you just provide us some thoughts on the final resolution of that? Did you just --

That's not in help for sale. That came on as a performing loan on our books. So we committed to finance the permanent piece so that it didn't get sold because it converted to permanent. We committed to take the permanent financing for any of those loans anyway because they're good performing loans. And so when those construction loans convert, they will come onto our books as performing mini-perm loans for these low-income housing tax credit projects where we get CRA credit and everything else.

So we wanted those performing loans to be on our books. We just took them off during the construction phase when they got backed up. So we do have a small portfolio of held-for-sale loans that we've put in over time as part of our strategy of moving loans in and out. We have them appropriately marked. And so those will get resolved over several quarters. But the $825 million or $827 million of targeted loan sales that we announced in Q2, those are done. Those are all gone at the marks we projected and off our books.

Understood. Okay, great. Thank you.

Yes. Thank you.

Anthony Elion, JP Morgan.

Hi, everyone. The loan-to-deposit ratio ticked up morning. The loan-to-deposit ratio on a period basis ticked up a little bit to 87%. It seems like you still have some capacity to increase that, but would like to hear your thoughts on maybe where you expect that over the near term?

Yeah, I mean, we could look, we're going to make more money if we keep -- the higher we go, right? We could go to 93% or 95% and we'll be making more money. But what I've tried to do and what our team is trying to do is run a very balanced, disciplined company that grows in a reasonable way and doesn't get too hot in any direction.

And so if you want to run a balance sheet for all seasons and all interest rate environments and all economic climates, you don't want to be too frothy in any one direction, so running the loan to deposit ratio, 85% to 92% is probably where we're going to be.

We had some loans come off, so it came down a little bit. I imagine it will probably float up to around 90%, and that'll keep us from buying expensive deposits just to fund loan growth when you get above that. But we've historically stayed around 88%, 90%, and I think that's probably where we'll end up.

Thank you. And then my follow-up on capital, you see on slide 7 that you anticipate achieving 10% CET1 in 1Q. Is that the point at which you think you'll resume buybacks, Jared? And is the TCE ratio coming more under the microscope given I think it's around 7.3%?

Yeah, no, TCE is that's going to float up and I'm not concerned that it's going to be floating down. So we're not concerned about that. We want to be disciplined and it's not going to be in the 6.5% or 7% range. We're going to keep that moving in the right direction.

In terms of buybacks, well, Anthony, we of course hope that we're going to have our stock is going to rerate here with our higher ROTCE and our higher earnings glide path, and of course, that will create a better multiple and tangible book.

But ahead of that, we're going to keep looking at it. And we want to make sure that we retain capital to buy back our preferred stock, but we're going to be opportunistic around capital. I don't know that it needs to be at 10. For us to buy back, so I'm not going to put that line in the sand. I'd like to know that we're going to achieve 10.

And so, if -- I don't think the final rules have come out on the regulatory relief for risk weightings. If for some reason the regulators said that that's going to be effective January 1, '27, and we all knew, and we're adding 60 basis points of CET1 come the new year, I mean, I think that kind of opens opportunities up for us in Q4.

Absent that, I think we're just going to be careful and make sure that we are putting good numbers under our belt. So I'm not going to draw a line in the sand, but we'll just have to see how things go. It's not a no, but it's a, we'll to see all the things available to us and make decisions accordingly.

Understood. Thank you.

Gary Tenner, DA Davidson.

Thanks. Good morning, Joe. Hey, Joe, the discount creation stepped down this quarter to 8.7 million from 11 million to, I think, in the second quarter. Not a, it is a somewhat meaningful change at least to NIM [bps]. I'm just wondering kind of is that kind of a run rate going forward or was it unusually low by your expectations in the third quarter?

Well, that's a great question. It was a little bit low. We got basically no accelerated discount accretion in the quarter, which -- when you look at our portfolio and some of the timing of the repricing, we should start to be seeing more of that.

It's hard to know, Gary. I don't want to commit to anything. When we do our forecasting and stuff, we try to be very prudent and not include a lot of that in there. But the number you saw this quarter was the base run rate without really any of the potential upside that could exist in that number.

So, effectively, then your fourth quarter NIM guide assumes just the base rate. Sorry, Jared, to talk over you.

Go ahead.

No, I was just going to say, so your guide for the NIM in the fourth quarter basically assumes the base run rate closer to this level versus where it had been running?

That's correct. That's correct.

I was just going to mention that in terms of tailwinds, we do have net discounts of about $33 million remaining. So that will come in over time, and it will benefit us. We're obviously putting on new loans at much higher rates. So whether it comes or not, it doesn't really matter. But when it does come, it will benefit capital, and we'll take it in.

Appreciate that. And then just any thoughts shared around the ads to non-accrual or the inflows to non-accrual this quarter? I know you talk about being aggressive and there's always inflows, outflows, but just any common thread or lumpiness within those inflows?

No, nothing significant, just normal stuff. And we don't have any material specific reserves at this point. So we feel good about where we sit and feel very good about our reserves.

And it was just normal ins and outs.

Got it. Thank you.

Thank you.

Ben Gerlinger, Citi.

Hi. Good morning. Good morning. Wondering if, on page 12, it's a bit more nuanced, but you guys, you look through the maturity schedule for the multi-family loans. I get variable rate, but so hybrid rate, you guys imply that it's early fixed rate period before resetting. Do these resets generally stay with you guys? The only reason I ask is you have roughly $1 billion. It's going to reprice about 300 basis points higher. I get that the material aspect of your margin list, but do these always kind of stick around? And if so do they pass DSCR amount in China? I think like resetting higher is also a credit implication too.

Yeah, no, it's a good question. So but this has been happening for -- we've been in a rising rate environment now for a little while. And so we've seen the impact for there was a whole schedule of loans that repriced before the ones that are coming up, right, and that are now in floating rate periods and our NPAs for multifamily loans are 0.1%.

Like we've got a $5 billion book and we've got a 0.1% multifamily, 0.1% non-performing ratio. So the book itself is very well underwritten with very good loan-to-values. And so just starting on the credit piece that they perform and we have every expectation based on everything, we've seen that they will continue to perform. That's not to say that any given loan could somebody has a problem, but fundamentally as a portfolio that's performing extremely well for its size and for the repricing risk.

So now I'll go to your second question, which is kind of what happens, what do these things do? And I would say it's mixed. Some of them surprisingly just stick around and they're paying the higher floating rate, oftentimes just trying to be opportunistic and thinking about, okay, where are things going to settle in for them to fix permanently.

Maybe they're trying to sell the property and they don't want to get into a permanent loan with where there's a diffusance where they'll to pay an exit fee. And so sometimes that's part of the strategy. Sometimes they're looking for extra capital to come in and be a partner to pay down the loan to get even better pricing on a permanent loan.

And sometimes they do fix it. Fannie and Freddie right now are lower than what we're offering. We've reached out to these borrowers. As I mentioned, we have Project Reset. We'll reach out to these borrowers and offer something that's shorter duration than Fannie and Freddie at a little bit higher rate with less prepayment cost. And oftentimes people will take it. About a third of the time they take it.

So that's just kind of the behavior. But our assumption isn't necessarily that we keep these loans. Our assumption is that we are going to redeploy the capital. In fact, I'd prefer not to keep a lot of these loans because they're broker-funded.

And I can go into other forms of loans that have a better risk-adjusted return. And we've got plenty of multifamily loans that I'd rather shrink it and have a little bit less concentration. And so our internal model is that we are going to exit a lot of these loans. We're going to let them run off, give them incentives to move away if we need to, and we will be able to deploy the money into better yielding assets.

Got it. That's helpful. And then I get basically a year away now, but on the preferred, if you were to redeem it, how would the balance sheet composition look? Would you kind of -- is there a funding avenue you would take or? Just what would it look like?

I'll start and I'll let Joe come in. I think the easiest way to think about it is if today we chose to redeem it all and fund it with FHLB, it would be cheaper. And then that would give us an opportunity to pay down the FHLB over time without a long-term commitment. We initially estimated that that would probably save us about half the cost of the preferred.

So it's $40 million after tax. So that's why we've been saying we think that on a conservative basis we would return $20 million of after-tax income to the common.

(inaudible) $11 or $0.12 or something like that. So that's how we get there. That's probably the easiest way to think about it. There are obviously other, we'll to see what the financing market is like when we get there. But as of now, we think that that's a good proxy for what we would do.

Joe, anything to add there?

Yeah, no, I think you nailed it, Jared. I mean, in a perfect world, we'd some excess deposits and we could partially fund it with that, but we'll just have to see where we are when we get out to September 30, which is the redemption date.

And as Jared said, if you assume you backfill the [775%] preferred with FHLB, the cost of the preferred today is an after-tax cost. It's like $40 million a year. If you backfill with FHLB, that's tax deductible, you should pick up at least 50% of the benefit based on today's rates.

Yeah, they're all different terms of FHLB we could use based on what our thoughts are at the time.

Terry McEvoy, Wells Fargo.

Thanks. Just one quick one for me. Jared, I was hoping to get some clarity on your private bank comment. You said not expensive. And was that from an operating expense perspective or from a cost of deposits perspective?

Operating expense, but both. I mean, I think our strategy, we've redeployed, we've deployed a team that we have here to target this market without hiring additional people for the time being. We think we can absorb the capacity initially and then as we build it out, we will grow the team in a very targeted way.

There's some marketing expense and there's some we added some APIs and some other things, but fundamentally, the operating cost was negligible for what we want to do. And that's from an operating expense standpoint.

From a cost of deposit standpoint, we're targeting high net worth individuals, family offices, and entrepreneurs that want high-touch tailored banking solutions for their family. This is not a rate-focused play. If they have excess funds that they want to put in an interest-bearing vehicle, that's probably the domain of the wealth manager. We want to help them make their lives simpler.

And I've used the example of my family. I've got, between my kids, my wife and I, our in-laws, my parents, we probably have 12 accounts at Banc of California. And when somebody wants to open a CD or they want to do something, we have a relationship manager here who texts with us and sends us stuff through DocuSign, and [she's] fantastic.

And that experience we can deliver to a lot of families in family offices that have multiple accounts to manage. They want to see to one screen. They want to have a tight relationship experience. And they want to make sure that things are done for them in a very responsive way. And our team is excellent at that. And we're not going to be deploying that to a group that we haven't targeted in the past.

That's great. Thanks for the additional color.

Thank you.

Timur Braziler, UBS.

Hi, good morning.

Good morning.

Hey, guys. Joe, maybe just provide a little bit of color on how you're thinking about average earning assets into the fourth quarter. And then maybe a little bit more broadly this quarter, you used some of that strong deposit generation to pay down brokers. I guess as we go forward, should we think that much of the core loan growth or I'm sorry, much of the core deposit growth goes to funding loans and growing the balance sheet, or is there still some ability to continue paying down. Your broker and some wholesale funding on the liability side.

So, I think on average earning assets, I think you could see it, increase, a continued increase, maybe in the tune of, I don't know, anywhere from, let's just say several hundred million if things go well. We would like to deploy excess deposits wherever we get the best in excess liquidity wherever we get the best adjusted rate of returns, whether that be loans or securities.

I mean, if you think about the securities rates and securities have gotten really attractive, and they have a very nice risk-adjusted return when you take the low capital care that's required for them. So we're going to look at them, we're going to look at loans, and we're going to see if we can't continue to grow not only our earnings and our net interest margin, but our ROTCE and NIM as well.

Okay, I want to make sure I -- were you asking if we were going to use excess deposits to pay down brokered?

Yeah, excess deposit growth to pay down brokered versus growing.

I -- just to compliment what Joe said, I mean, I think there's, I think we have multiple things that we're going to do. I think that we have the capacity with our loan and deposit ratio being what it is to do multiple things. So Joe's right that we're going to obviously use fund loan growth and asset purchase, but I do think that broker deposits could come down. I mean, I think we can do both. And so I would like it to come down over time.

Yeah. Absolutely. I'm sorry. I didn't mean to imply otherwise. That's absolutely we do.

Okay, great. And then I just want to make sure, so you think average earning assets can still grow with some of the LFS sales taking place and netting out in 4Q? And then maybe similarly on Jared's question in terms of 4Q securities deal, that up 15 basis points. I'm assuming that's excluding the FHLB special dividend in 3Q, or is that kind of an all-in cost quarter over quarter?

Before we get to the securities, just on the average earning assets, our expectation is that we're going to grow the balance sheet. We don't have any planned sales, we don't have anything that is large, and we expect our teams to continue to grow the balance sheet by putting on good loans.

But production is what it is, and we've got multifamily large swaths of it that could pay off. We've got these maturity schedules of multifamily that are pretty large for repricing and maturing loans, and so that's the one thing that would offset growth. You could also see warehouse, shrink because of just the rain environment.

So our aspiration is to grow the balance sheet. If we're not growing the balance sheet, I still expect our earnings to grow because our portfolio mix is improving and our earning asset yield is improving on the loan side. Let me let Joe address the investment side.

Yeah, Timur, if you look at it on page 15 of our deck, you'll see on the investment securities page, there's a row where I have total AFS, I kind of showed you the total AFS securities portfolio yield that when I said about 15 basis point expansion, that's the yield that I'm saying would expand by that amount.

Got it. Thanks, guys.

That's not the total. And the difference between that and the total investment yield is the yield you get on the FHLB and FRB stock, which is really hard to predict because you never know what the dividends are going to be until they tell you.

Got it. Thank you.

Tim Coffey, Brean Capital.

Joe, can you talk about the resiliency of your market vis-a-vis higher interest rates? I think back in September, you said that the 25 basis point hike that month would have nominal impact on your customers. But if you look out forward at two more rate hikes, does your view change?

Are you talking about like whether we're able to retain deposits or like the loan growth or what are you talking about?

Does the economic growth stall in your footprint?

With two more rate hikes? Probably I mean, I think so. Right now, everything seems good, although I would say that there's a huge amount of the economic engine in this country that is being driven by AI capital, right? When you think about how much capital is invested in AI, we don't have an unlimited amount of capital, and it's absorbing capital that could be invested in other industries.

I think there's been a lot of concern about, is the AI capital boom rate resilient enough to absorb a rising rate environment? And if that slows down which is propping up investment in a lot of places in this country in terms of infrastructure investment. If that slows down or even if it stays, it really has absorbed the capital that could be invested elsewhere.

So I don't know that I think those two things will work against the economy, rate hikes and the fact that AI has just taken up so much, AI infrastructure spending has taken up so much that it's basically taking capital away from all these other areas which could be growing. And so that's why I think rate hikes are probably going to stall the economy if we get a few more. Who knows?

But like I said, that's why I mentioned on the call multiple times that we're building this balance sheet to be resilient in all seasons. And I think one of the things that we did last quarter and we did it several times last year was we de-risked our balance sheet. We are looking proactively outward and saying what could be on the horizon.

It's one of the reasons why I'm a fan of securities right now. As I've said, I think that securities investment is some of the best risk-adjusted yields that we've had in a long time, and I mentioned that we have alternatives to ask, so we're being very selective on loan growth.

And I think that we will continue to grow, and we'll continue to make good loans. But we have alternatives, and our job is to deploy capital in the best interest of shareholders, and sometimes that's in alternatives other than loans or making decisions about certain types of loans to avoid. And I think we've been good stewards of that, and I believe that we're going to continue to grow even among rate hikes because of how we've positioned ourselves.

Great, thanks. And then on the construction portfolio, is there an opportunity to benefit on the construction loan growth with all the infrastructure projects that are happening in the footprint ahead of the Olympics?

We're not. All the venues for the Olympics have been built in Los Angeles, so we do not need to build any new investments, any new venues for the Olympics. I'm on the Sports Entertainment Commission, so I'm pretty close to it. And we're fortunate that way. We have plenty of hospitality. There's some convention center reinvestment investment that's going on.

There are some new hotels and new large projects that we are participants in that I think, that will be good, that are good loans. The policy is rebuilding. We don't build. We will participate in homebuilding, but not owner-occupied homebuilding. We're not a Honda lender. So some of it we will, some of it we won't, but nothing specific to the Olympics at this time, Tim.

Okay, great. Thanks. Those are our questions.

Thanks.

Eric Bedell, Bloomberg Intelligence.

Hi, thanks for taking my question. I was just wondering if you could give us an update on payments, how you're thinking about that impacting 2027?

Yeah, we're excited about our payments initiative. Our team is doing a great job of putting in place the plans. And we hope that it contributes to fee income growth in '27. I think '27 at the end of the year, we hope to see an uptick in fee income contributing from payments, which for us is merchant acquiring as well as issuing.

And we have got great leaders in both of those areas. And so currently we have about $10 to $12 million of fee income a month. So we're $30 to $36 million a quarter. If we could grow that in a meaningful way next year, that would be great. It's not going to obviously grow 10% out of the gate.

But if we could have it contribute 5% of fee income or even more next year, that'd be fantastic. So haven't been formally set a target yet, but we expect it to contribute to fee income in a way that shows up next year.

Thanks. And then is there any additional investment needed in order to grow this further?

There's not. We are actually about to enter into a partnership with another company to support our workforce and relationship building on that side, and we've chosen to partner as opposed to invest, and I think that that's going to pay dividends for us.

Great.

Thank you very much. Thank you, Eric.

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