Banc of California (BANC) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, Oct. 28, 2026

CALL PARTICIPANTS

• Chairman and Chief Executive Officer - Jared Wolff
• Chief Financial Officer - Joe Kauder
• Investor Relations - Meghan O'Leary

TAKEAWAYS

• Diluted EPS -- $0.46, representing a 21% increase from $0.38 year over year.
• Net Interest Margin -- 3.34%, expanding 21 basis points from the prior quarter following strategic balance sheet repositioning.
• Net Interest Income -- $272.4 million, increasing 9% from the second quarter due to higher yields on interest-earning assets.
• Pretax Preprovision Income -- $118.4 million, representing 16% growth year over year from $102.0 million.
• Total Revenue -- $303.8 million, up 6% year over year driven by increased investment security yields.
• Loan Production -- $2.6 billion for the quarter, with a weighted average interest rate on originations of 6.58%.
• Core Deposits -- increased by approximately $515 million during the quarter, reflecting the bank's relationship-driven growth strategy.
• Brokered Deposits -- decreased by approximately $375 million, as management reduced its reliance on wholesale funding.
• Common Equity Tier 1 Ratio -- 9.7%, an increase of 45 basis points from the previous quarter.
• Efficiency Ratio -- 59.1%, improved from 67.2% in the second quarter as revenue grew while expenses remained flat.
• Q4 Pretax Preprovision Income Guidance -- $125 million to $130 million, reflecting full-quarter benefits from securities reinvestment and completed loan sales.
• Q4 NIM Guidance -- 3.35% to 3.40%, narrowing the range from previous communications.
• Subordinated Debt Redemption -- $385 million, executed to avoid a significantly higher contractual interest rate reset.
• Return on Average Tangible Common Equity -- 11.9%, increasing over 200 basis points since the first quarter.
• Available-for-Sale Securities Yield -- 4.58%, up 23 basis points due to reinvestment into higher-yielding assets.
• Classified Loans -- reached five-quarter lows as nonperforming assets declined during the period.
• Net Charge-Offs -- $17.3 million, representing 0.27% of average loans and leases on an annualized basis.
• Tangible Book Value Per Share -- $16.09, down from $16.44 at June 30 due to unrealized losses on available-for-sale securities.
• HOA Deposits -- approximately $4 billion in balances, which management characterized as stable checking accounts with costs paid to property management firms.
• Targeted Loan Sales -- $525 million of commercial real estate and construction loans sold during the quarter.
• Average Cost of Deposits -- 1.83%, an increase of 3 basis points from the prior quarter.
• Total Available Liquidity -- $14.6 billion, including cash, borrowing capacity, and unpledged securities.
• Multifamily Portfolio Credit Quality -- $5 billion in total loans with a nonperforming ratio of 0.1%.
• Monthly Fee Income -- $10 million to $12 million, supported by commissions, service charges, and leased equipment.
• Single-Family Residential Credit Coverage -- $109.9 million from credit-linked notes on a $2.1 billion loan portfolio.

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RISKS

• Wolff stated, "Deposit pressure is real. I think all banks have been talking about it," noting the competitive environment for funding.
• Wolff warned that interest rate hikes are probably going to stall the economy if the Federal Reserve implements further increases.

SUMMARY

Banc of California, Inc. (NYSE:BANC) reported improved earnings and positive operating leverage following the completion of its strategic balance sheet repositioning. Management indicated that the company is transitioning toward organic growth and asset remixing to drive sustainable returns across various economic cycles. The bank completed significant subordinated debt redemptions and securities reinvestments while reducing its credit concentrations in commercial real estate and construction lending.

• Wolff stated that the new private banking initiative provides high-touch tailored banking solutions to high-net-worth individuals and family offices.
• CFO Kauder stated, "We continue to expect fourth quarter pre-tax pre-provision income of $125 million to $130 million."
• The company expects the multifamily portfolio to provide net interest income tailwinds as assets reprice to higher market rates during their scheduled maturity periods.
• Wolff indicated that the bank plans to retire its preferred stock in September 2027, which management expects will return approximately 20 million in after-tax income to common shareholders.
• Management expects the Common Equity Tier 1 ratio to reach 10% by the first quarter of 2027.
• Wolff noted that the company is partnering with a third-party firm to expand its payment processing workforce.

INDUSTRY GLOSSARY

• AOCI: Accumulated Other Comprehensive Income (Loss), which captures unrealized gains and losses on certain investments.
• CET1: Common Equity Tier 1, a key regulatory measure of a bank's core equity capital.
• Efficiency Ratio: A financial metric used to calculate a bank's overhead as a percentage of its revenue.
• FHLB: Federal Home Loan Bank, a provider of liquidity and funding to member financial institutions.
• HOA: Homeowners Association.
• LIHTC: Low-Income Housing Tax Credit.
• NIM: Net Interest Margin, the difference between the interest income generated and the interest paid to lenders.
• PTPP: Pre-tax, pre-provision income.
• ROTCE: Return on average tangible common equity, a measure of how much profit a bank makes on the equity held by common shareholders.

Full Conference Call Transcript

Operator: Good day, and welcome to the Banc of California third quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.

Meghan O'Leary: 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. Reconciliations for these measures and additional required information are available in the earnings press release and earnings presentation, which are also 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. 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 Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like now to turn the conference over to Jared.

Jared Wolff: 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, reduce selected credit exposures, and create additional opportunities for profitable growth. We are now seeing the benefit of those actions, and our teams continued to grow the business while executing on them. Earnings per share were $0.46 and pre-tax, pre-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, pre-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 21st. 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 non-performing 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 are 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 are 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. 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 will turn it over to Joe to walk through the financial results in a bit more detail, and then I will come back with some closing comments. Joe.

Joe Kauder: 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-$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 Q3 exit net interest margin was 3.35%, and we expect fourth quarter net interest margin of 3.35%-3.40%, narrowing our range guidance. Average loan yield increased six 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 broker 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 and the absence of the second quarter software charge, partially offset by higher compensation lease 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 for 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, pre-provision income of $125 million-$130 million and a year-end CET1 ratio of between 9.80% and 9.90%, and we have revised our net interest margin outlook to 3.35%-3.40%. With that, I'll turn the call back to Jared.

Jared Wolff: Thank you, 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: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from David Chiaverini with Jefferies. Please go ahead.

David Chiaverini: Hi, thanks for taking the questions. I wanted to start on the net interest margin. You are guiding 335 basis points to 340 basis points 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.

Joe Kauder: David, good morning. That is right. I mean, it is

Jared Wolff: We try to lay out in our investor deck the volume of multifamily assets that are expected to reprice and the schedule over which they will do that. That is 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. 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. For the quarter, our average deposit cost only increased about 3 basis points.

The average for the end of the quarter was a little bit higher, but I think they are very well managed. Also running off higher cost broker deposits because of our deposit growth in the quarter was a nice benefit that we did not see coming. We just had really strong deposit growth, and that so far has continued into the beginning of this quarter. We will see where the average is and where we end up, but I think those are the important tailwinds.

David Chiaverini: That's helpful. Sticking with one of the components to NIM on loan pricing, looking on slide 9, looks like the rate on new production. 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?

Jared Wolff: It's exactly that. It's mix shift because as I look different loan categories price differently. 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 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. Construction's 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.

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

David Chiaverini: Yeah.

Joe Kauder: 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 rate C&I. That was also a contributor to why those came down as well, why you see that coming down. Then rates have obviously turned back up recently. Back in 2025, you remember we had some cuts.

David Chiaverini: Thank you.

Operator: The next question is from Chris McGratty with KBW. Please go ahead.

Chris McGratty: 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. The question would be for beyond the fourth quarter, how do we think about the balance of ECR deposits as you are trying to grow other deposits? Ultimately, I guess, level of expense growth either with or without the ECRs. Thanks.

Joe Kauder: Yeah, Chris. I will start with the fourth quarter. Obviously, we are going to have some continued improvement probably in our FDIC assessments as we move forward. I think we could expect those improvements to be offset by higher customer-related expenses as we reflect the 25 basis point rate increase we just had. As we look out beyond that, I think we are a big fan of the HOA business, and we have a page in the deck where we show the total cost of those deposits. They are not as cheap as some of our core non-interest-bearing and other opportunities. When you compare them to brokered and other things where we other opportunities, it is a good solid business.

It is 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?

Jared Wolff: No, it's an outstanding business. I mean, we got $4 billion of 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. 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. I feel great about it, and we've got an outstanding team.

Chris McGratty: Okay, great. Then Jared, the second question's more directed to you. Just where you're at with the balance sheet optimization efforts. Obviously made a ton of progress this quarter. Obviously have the preferreds coming due. I'm ultimately trying to gauge if this. It seems like a smaller but more profitable balance sheet. I'm hearing you on the NIM, but I guess the question is more just size of balance sheet and any tweaks from here.

Jared Wolff: 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. If we're able to grow on top of that, it's going to continue to drive higher earnings ahead. There are a couple 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. We can deploy them into loans, we can deploy into securities, and they're both good risk-adjusted returns.

You can find a lot of opportunities. Our plan is to grow from here, and we think we can do it really, really well organically.

Chris McGratty: Great. Thank you.

Jared Wolff: Thank you.

Operator: The next question is from David Feaster with Raymond James. Please go ahead.

David Feaster: Hi. Good morning, everybody.

Jared Wolff: Morning.

David Feaster: 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 and the single-family resi purchases, core commercial loans, relatively flattish. 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?

Jared Wolff: I like the momentum of our teams. In the second quarter, we did $2.8 billion of production and disbursements. In the third quarter, we had $2.6 billion of production and disbursements. We have payoff and pay downs of about $2 billion. That feels pretty good. These last two quarters we've had on a you put aside the loan sales. We've had net portfolio growth. 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 pay downs. Sometimes you can control it, sometimes you can't, but it grew over the quarter. It was flat the quarter before that. I see growth ahead, David, and I think our teams are working really hard at it.

As I mentioned also, if we just remix our portfolio, we're going to make more money, and I feel good about that too.

David Feaster: That's great. 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 consider 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?

Jared Wolff: Well, thanks for recognizing that. 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." As we mentioned, our average deposit cost only went up by 3 basis points. Our teams are being very opportunistic and looking to make sure that we're taking as much wallet share 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.

This is a sector that we have been asked to serve. These RIAs do not want to give their business to competitors, 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. We think that this is a place that we can lean in and do really, really well, and I expect to get some growth from there. 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.

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. Our teams do an outstanding job.

David Feaster: That's terrific. Maybe last one, just 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. 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 consistency of earnings and the durability of earnings growth. You touched on it 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 given some of the levers that you've pulled and the durability of your earnings growth outlook?

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

We think that the moves we made put us in place to do this, and we hope it's boring and rinse and 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.

David Feaster: Terrific. Thanks, everybody.

Jared Wolff: Thank you.

Operator: The next question is from Jared Shaw with Barclays. Please go ahead.

Jared Shaw: Thanks. Good morning. Thanks for the info in the slide deck. I guess, as you look at the securities portfolio, Joe, maybe can you give us an expectation of what yields should be for fourth quarter with the full impact of the restructuring? 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 that roll-off yield we should expect then going forward?

Joe Kauder: 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. 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 to 15 basis point expansion of yield on the AFS securities book. I think that's going to be very positive and continue to contribute to our net interest margin as well as the loan transactions we did. We're taking those loans, getting those loan sales closed and getting them off the books.

Some of those were non-performing loans, and as those come off, we replace those with performing assets. That's also going to be a kicker to our net interest margin in the fourth quarter.

Jared Shaw: Okay.

Joe Kauder: Did I answer your question or was there part of it I didn't get?

Jared Shaw: Yeah, I guess just now that the securities restructuring is done, what is the go-forward roll-off rate as we look at that 7% that should pay down within the first year?

Joe Kauder: If you are talking about the securities book, I think what you will 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. 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. There may be some additional benefits there.

Jared Shaw: Okay. Thanks. I am sorry if I missed this, but what is the expectation now for the beta through the cycle with some of the changes and improvements you have made to the core deposit base?

Joe Kauder: I think we have historically said our cumulative beta is around 60%, and I think that is still our operating assumptions, although we aspire to outperform that in all environments. We will see how it comes out.

Jared Shaw: Great. Thanks.

Jared Wolff: Thanks, Jared.

Operator: The next question is from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone.

Jared Wolff: Morning.

Matthew Clark: Just around the margin. Assuming we get a December rate hike here, I do not 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%-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?

Jared Wolff: I do not know if we want to go there yet. We are fairly neutral. I was pleased with the results of our margin in Q3. There is still a lot of moving parts. A December rate hike is not going to really show up too much in Q4. We will get the benefit of that in Q1, to your point. I think for now, we feel comfortable with our margin guidance for Q4, wouldn't you say, Joe?

Joe Kauder: Yeah. The one thing I would add to that is, if you think about we are neutral from a total earnings perspective, Matt. If there was a rate increase, what you will see is you will see a slight expansion of NIM and net interest income, but then you will see an increase in the customer-related expenses as well, which will offset in total earnings. 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.

Jared Wolff: 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.

Joe Kauder: Yep.

Jared Wolff: When rates go up, we are going to make more money. It's not going to offset completely. On a static balance sheet, it's going to offset. Then as we put new loans on the books, we're going to grow earnings. 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 multifamily portfolio. I would expect to make more money in an uprate environment because our balance sheet is not static, it's dynamic. In a flat balance sheet, it's neutral.

Matthew Clark: Got it. Okay, great. 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. Can you just provide us some thoughts on the final resolution of that? Did you just?

Jared Wolff: Yeah. That's not in held for sale. That came on as a performing loan on our books.

Matthew Clark: Okay.

Jared Wolff: We've 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. 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. We wanted those performing loans to be on our books. We just took them off during the construction phase when they got backed up. 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 ones in and out.

We have them appropriately marked, and so those will get resolved over several quarters. 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.

Matthew Clark: Understood. Okay, great. Thank you.

Jared Wolff: Yep. Thank you.

Operator: The next question is from Anthony Elian with JPMorgan. Please go ahead.

Anthony Elian: Hi, everyone.

Jared Wolff: Morning, Anthony.

Anthony Elian: Morning. The loan-to-deposit ratio on a period end 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.

Jared Wolff: Look, we're going to make more money the higher we go, right? We could go to 93% or 95%, and we'll be making more money. 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. 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. Running the loan-to-deposit ratio 85%-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%. That'll keep us from buying expensive deposits just to fund loan growth when you get above that. We've historically stayed around 88%, 90%, and I think that's probably where we'll end up.

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

Jared Wolff: Yeah. No. TCE, that's going to float up, and I'm not concerned that it's going to be floating down. 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, Anthony, we of course hope that our stock is going to re-rate here with our higher ROTCE and our higher earnings glide path. Of course, that will create a better multiple on 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. I'm not going to put that line in the sand. I'd like to know that we're going to achieve 10. 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's going to be effective January 1, 2027, and we all knew, and we're adding 50 basis points of 60 basis points of CET1 come the new year, I think that opens opportunities up for us in Q4. Absent that, I think we're just going to be careful and make sure that we have put 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 have to see all the things available to us and make decisions accordingly.

Anthony Elian: Understood. Thank you.

Operator: The next question is from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner: Thanks. Good morning.

Jared Wolff: Morning, Gary.

Gary Tenner: Hey. Joe, the discount accretion stepped down this quarter to $8.7 million from $11.2 million, I think, in the second quarter. It is a somewhat meaningful change, at least to NIM basis points. I am just wondering, is that a run rate going forward or was it unusually low by your expectations in the third quarter?

Joe Kauder: Well, that is 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 is hard to know, Gary. I do not 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. The number you saw this quarter was the base run rate without really any of the potential upside that could exist in that number.

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

Jared Wolff: No, go ahead.

Gary Tenner: No, I was just going to say, 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?

Joe Kauder: That's correct.

Jared Wolff: I was just going to mention that in terms of tailwinds, we do have net discounts of about $33 million remaining. 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. When it does come, it will benefit capital, and we'll take it in.

Gary Tenner: Appreciate that. Then just any thoughts, Jared, around the adds 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?

Jared Wolff: No. Nothing significant, just normal stuff. We do not have any material-specific reserves at this point. We feel good about where we sit and feel very good about our reserves. It was just normal ins and outs.

Gary Tenner: Got it. Thank you.

Jared Wolff: Thank you.

Operator: The next question is from Ben Gerlinger with Citi. Please go ahead.

Ben Gerlinger: Hi. Good morning.

Jared Wolff: Morning.

Ben Gerlinger: Wondering if we could, on page 12, it's a bit more nuanced, but you guys, you look through the maturity schedule for the multifamily loans and get variable rate. These 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 that's going to reprice, call it 300 basis points higher. I get that's the material aspect of your margin lift, but do these always stick around, and if so, do they pass DSCR amount? I'm trying to think, like, resetting higher is also a credit implication too.

Jared Wolff: Yeah, no, it's a good question. This has been happening for, we've been in a rising rate environment now for a little while. We've seen the impact for, there was a whole schedule of loans that repriced before the ones that are coming up, right? That are now in floating rate periods. Our NPAs for multifamily loans are 0.1%. We've got a $5 billion book, and we've got a 0.1% multifamily, 0.1% in non-performing ratio. The book itself is very well underwritten with very good loan to values. 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 couldn't, somebody has a problem. Fundamentally, as a portfolio, it's performing extremely well for its size and for the repricing risk. Now I'll go to your second question, which is what happens, what do these things do? 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 where there's a defeasance where they'll have to pay an exit fee.

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. 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, where 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 prepayments cost. Oftentimes people will take it. About a third of the time they take it. That's just the behavior. 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. I can go into other forms of loans that have a better risk-adjusted return. We've got plenty of multifamily loans that I'd rather shrink it and have a little bit less concentration. 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.

Ben Gerlinger: Got it. That's helpful. I get we're basically a year away now, but on the preferred, if you were to redeem it, how would the balance sheet composition look? Is there a funding avenue you would take, or just what would it look like?

Jared Wolff: I think 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. That would give us an opportunity to pay down the FHLB over time without a long-term commitment. We initially estimated that would probably save us about half the cost of the preferred. It's $40 million after tax. 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. Which is $0.11 or $0.12 or something like that. That's how we get there. That's probably the easiest way to think about it.

There are obviously other, we'll have to see what the financing market is like when we get there. But as of now, we think that's a good proxy for what we would do. Joe, anything to add there?

Joe Kauder: Yeah, no, I think you nailed it, Jared. I mean, in a perfect world, we'd have some excess deposits, and we could partially fund it with that. We'll just have to see where we are when we get out to September 30th, which is the redemption date. As Jared said, if you assume you backfill the 7.75% 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.

Jared Wolff: Yeah, they're all different terms of FHLB we could use based on

Joe Kauder: Yeah.

Jared Wolff: What our thoughts are at the time.

Joe Kauder: Okay.

Ben Gerlinger: Got you. Okay. No, that's really helpful. I appreciate it. Thank you, guys.

Jared Wolff: Thanks.

Operator: The next question is from Terry McEvoy with Wells Fargo. Please go ahead.

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

Jared Wolff: Operating expense. Both. I mean, 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 we added some APIs and some other things. Fundamentally, the operating cost was negligible for what we want to do. 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. 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. 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. That experience we can deliver to a lot of families and family offices that have multiple accounts to manage. They want to see it in one screen.

They want to have a tight relationship experience. They want to make sure that things are done for them in a very responsive way, and our team is excellent at that. We're now going to be deploying that to a group that we haven't targeted in the past.

Terry McEvoy: That's great. Thanks for the additional color.

Jared Wolff: Thank you.

Operator: The next question is from Timur Braziler with UBS. Please go ahead.

Timur Braziler: Hi, good morning.

Jared Wolff: Hey, Timur. Good morning.

Timur Braziler: 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 brokered. I guess as we go forward, should we think that 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 brokered and some wholesale funding on the liability side?

Joe Kauder: I think on average earning assets, I think you could see it continue to 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 and 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, they have a very nice risk-adjusted return when you take the low capital carry that's required for them.

We're going to be looking 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 ROATCE and NIM as well.

Jared Wolff: Wait. I want to make sure I. Timur, were you asking if we were going to use excess deposits to pay down brokered?

Timur Braziler: Yeah. Excess deposit growth to pay down brokered versus growing the asset side.

Jared Wolff: Just to complement what Joe said, I think we have multiple things that we're going to do.

Timur Braziler: We have the capacity with our loan and deposit ratio being what it is to do multiple things. Joe's right that we're going to obviously use fund loan growth and asset purchases. But I do think that broker deposits could come down. I think we can do both. I would like it to come down over time. Yeah.

Joe Kauder: Yeah, absolutely. I'm sorry. I didn't mean to imply otherwise. Absolutely, we do.

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

Jared Wolff: 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. 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. That's the one thing that would offset growth. You could also see warehouse shrink because of just the rate environment. 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.

Joe Kauder: Timur, if you look at it on page 15 of our deck, you will see on the investment securities page, there is a row I have total AFS. I show you the total AFS securities portfolio yield. That when I said about 15 basis point expansion, that is the yield that I am saying would expand that by that amount.

Timur Braziler: Got it. Thanks, guys.

Joe Kauder: That is not the total. 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.

Jared Wolff: Got it. Thank you.

Operator: The next question is from Tim Coffey with Brean Capital. Please go ahead.

Tim Coffey: Morning, gentlemen.

Jared Wolff: Morning.

Tim Coffey: Jared, can you talk about the resiliency of your market, vis-à-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. If we look out forward at 2 more rate hikes, does your view change?

Jared Wolff: Are you talking about whether we're able to retain deposits or the loan growth, or what are you talking about?

Tim Coffey: The economy. Does the economic growth stall in your footprint with two more rate hikes?

Jared Wolff: Does economic growth stall with two more rate hikes? Probably.

Tim Coffey: Yeah.

Jared Wolff: 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?

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. 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. 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. 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. I mentioned that we have alternatives to assets.

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. We have alternatives, and our job is to deploy capital in the best interest of shareholders. Sometimes that's in alternatives other than loans. We're making decisions about certain types of loans to avoid. 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.

Tim Coffey: Great. Thanks. On the construction portfolio, is there an opportunity to benefit on the construction loan growth with all the infrastructure projects that are happening in your footprint ahead of the Olympics?

Jared Wolff: 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 Los Angeles 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 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 loans. The Palisades rebuilding. We will participate in home building, but not owner-occupied home building. We're not a homebuilder lender. Some of it we will, some of it we won't.

Nothing specific to the Olympics at this time, Tim.

Tim Coffey: Okay, great. Thanks. Those are my questions.

Jared Wolff: Thanks.

Operator: The next question is from Eric Bedell with Bloomberg Intelligence. Please go ahead.

Eric Bedell: 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.

Jared Wolff: No, we're excited about our payments initiative. Our team is doing a great job of putting in place the plans. We hope that it contributes to fee income growth in 2027. I think 2027, 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. We have got great leaders in both of those areas. Currently we have about $10 million-$12 million of fee income a month. We're $30 million-$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. Haven't formally set a target yet, but we expect it to contribute to fee income in a way that shows up next year.

Eric Bedell: Thanks. Is there any additional investment needed in order to grow this further?

Jared Wolff: 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. We've chosen to partner as opposed to invest, and I think that's going to pay dividends for us.

Eric Bedell: Great. Thank you very much.

Jared Wolff: Thank you, Eric.

Operator: This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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