Banc of California, Inc. Barclays 24th Annual Global Financial Services Conference

Thanks everybody. Good afternoon. We are happy to continue the mid-cap bank schedule with Banc of California. We are joined by Jared Wolff, the Chairman and CEO. Thanks a lot for coming. Karen Hon is in the audience as well as Deputy CFO. Thanks very much for coming, and look forward to having a conversation.

Thank you, Jared. Thank you to Barclays. Really happy to be here.

Great. Maybe kicking it off, you took several significant balance sheet actions in the second quarter, including the securities repositioning and CRE loan sales. What were you trying to accomplish, and I guess what evidence are you seeing that those actions are producing the intended results?

The second quarter actions that we took were among the most significant we have taken since we merged Banc of California and PacWest in November of 2023. We had over $2 billion of securities that were locked at a suboptimally priced at around 2%, with a fairly long duration of six years plus. We were able to sell those securities and reinvest them at a 285 basis point pickup. It was a big lift for earnings. We have been fully reinvested since the beginning of this quarter, and it has been really. I think it will show up well this quarter. One of the ways that is going to show up is we gave guidance that our margin by the fourth quarter would be 330 to 340. We are ahead of schedule, and so I think that is one reflection that it is working.

Why was this the right time to do that?

We've been looking for the right time to break HTM and move these securities. I think since then we've seen some others follow. We had to thread the needle. We had to find the right time. First of all, you had to have the right amount of capital. We did this without raising any capital. I would mention that the earn back, because of the reinvestment rate and the relatively low AOCI, is only 1.4 years. We feel good about that. We had to have the right level of capital, and then you had to have the right environment where you want to be reinvesting in a higher rate environment, but that's going to work against you in terms of the AOCI. We were able to do so at a loss that was lower than we projected and reinvest higher than we projected.

Our team did a great job of threading the needle. I would also mention that until about 12 or 18 months ago, no bank had really done this for quite some time. Then a couple banks did it in 2025. They had to raise capital when they did it. We found the right time was 2026 when we had the right amount of capital and the conditions were right.

Sticking with the capital moved lower following the actions. What's the path from here, and how are you balancing capital build with opportunities to grow the balance sheet?

We had plenty of capital. We ended the second quarter in the low nines. We are picking up capital pretty quickly, and we will be returning close to 10 by the end of the year. If the risk-weighted adjustments take hold, if the Fed rules take hold, we will expect to pick up 50 to 60 basis points of additional CET1 when those rules take effect. We are building up capital pretty quickly. I think we should be at 10 or have 10 clearly in sight to start buying back stock. We have a repurchase authorization that is out there. If we are in the fourth quarter, everything is moving along, our capital levels are on target, and we have confirmation that the new risk weightings will take effect. I do not think we would hesitate to buy back stock if the conditions were right.

If we have not heard about those regulatory capital rules, and we do not know with certainty, then I think we will wait until we get above 10 to start buying back stock.

As part of the actions, you took some steps to address select credits and reduce CRE concentration. How would you characterize the underlying credit portfolio and the provision outlook from here?

The actions that we took in the second quarter were designed to de-risk the balance sheet and improve the earnings profile on a consistent and reliable basis. We obviously did that through the securities repositioning. It was about a $200 million loss on the securities, and we said if we are going to do this, maybe the $200 million loss should be larger if we find some opportunities for things that could pose risk to earnings in the future. We looked at select groups of credits. We identified 825 million of credits. 300 million were in a construction relationship that had gotten into a business divorce. We thought it was money good, but it was going to create noise for a while. Then we found 525 million of performing CRE loans that had repricing characteristics that we did not like.

We found buyers for these two pools of loans, discounted roughly. We sold them for roughly 90%, so not a very significant discount. The first pool of $525 million is under contract at the price that we marked it to. That should close this quarter. The second pool for $300 million is now being documented at the price we marked it to. It should close very early next quarter, certainly well before earnings.

With that now addressed, how should investors think about loan growth going forward, and what matters most about the evolution of the portfolio from here?