Banc of California, Inc. 2026 Q3 Earnings Call

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. 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.

Thanks, Megan. 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. 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.