Q3 2024 Banc of California Inc Earnings Call

Good day and welcome to the Banc of California's third quarter 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.

Operator: Welcome to the Banc of California's Q3 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would like now to turn the conference over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.

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 like now to turn the conference over to Anne de Vries head of Investor Relations at Banc of California. 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 is available in the earnings press.

Ann DeVries: Good morning, and thank you for joining Banc of California's Q3 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 is 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 may include forward-looking statements, 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.

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 may include forward looking statements, 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 joined.

Ann DeVries: Joining me on today's call are Jared Wolff, President and Chief Executive Officer, and Joseph Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I would like to now turn the conference call over to Jared.

Joining me on today's call are Jerry Guo, President and Chief Executive Officer, and Joe Kennedy, Our Chief Financial Officer.

After our prepared remarks, we will be taking questions from the analyst community for the Q&A portion of the call. We ask that each participant ask just one question and one follow up before returning to the queue.

Speaker Change: I would like to now turn the conference call over to Jared.

Thank you Anne.

Jared Wolff: Thank you, Ann. Good morning, everyone, welcome to Banc of California's Q3 earnings call. I'd like to start off by highlighting our team's strong execution during the quarter to actively transform and reposition our balance sheet. We delivered on numerous strategic actions as we continued to make progress on our transformation efforts. I am very proud of the intense focus and efforts put forth by our team to create a strong, well-positioned balance sheet that generates high quality and sustainable earnings. Let me start off just by listing the accomplishments of the quarter to put into context the volume of actions that our team pulled across the finish line. We sold $1.95 billion of Civic loans at 98% of par.

Jared: Good morning, everyone and welcome to Banc of California's third quarter earnings call.

Jared: I'd like to start off by highlighting our team's strong execution during the quarter to actively transform and reposition our balance sheet.

Jared: We delivered on numerous strategic actions as we continued to make progress on our transformation efforts.

Jared: I am very proud of the intense focus and efforts put forth by our team to create a strong well positioned balance sheet that generates high quality and sustainable earnings.

Jared: Let me start off just by listing the accomplishments of the quarter to put into context, the volume of actions that our team pulled the crosses the finish line.

Jared: We sold 1.95 billion of civic loans at 98% of par.

Jared Wolff: We deployed the $1.9 billion of liquidity to pay down $545 million of bank term funding and also paid down approximately $1.85 billion of broker deposits and expensive borrowings. We used approximately $60 million of the $100 million of capital we created from the Civic sale to reposition about $740 million of securities and pick up over 270 basis points of incremental yield. We bought back approximately $320 million of lender finance loans at par and hired a team to grow that business. We completed our core system conversion in late July, converting over 20,000 customers and over 50,000 accounts onto a single core platform. We continue to run our bank business as usual, serving clients, bringing in new relationships, and growing loans and deposits in key areas. That's just the start of the list.

Jared: We deployed the 1.9 billion of liquidity to pay down $545 million of bank term funding and also paid down approximately 1.85 billion of broker deposits and expensive borrowings.

We used approximately $60 million and 100 million of capital we created from the civic sale to reposition about 740 million of securities.

And pick up over 270 basis points of incremental yield.

Jared: We bought back approximately 320 million of lender finance loans at par.

And hired a team to grow that business.

We completed our core system conversion in late July converting over 20000 customers in over 50000 accounts onto a single core platform.

And we continue to run our bank business as usual serving clients, bringing in new relationships and growing loans and deposits in key areas.

And that's just the start up the list, we'd like to keep our head down and do our work and pushed through but this was a quarter, where I thought our team really shine and I'm extremely proud of all of our colleagues here at Banc of California.

Jared Wolff: We like to keep our head down and do our work and push through, but this was a quarter where I thought our team really shined, and I'm extremely proud of all of our colleagues here at Banc of California. We are really hitting on all cylinders right now, and our quarterly results demonstrate the power of the franchise we are building. These balance sheet repositioning actions, along with a few other items we executed on during the quarter, resulted in strong net interest margin expansion and higher tangible book value and capital. I really feel good about how much we have accomplished and strengthened our balance sheet. I also feel good about the growth in our core earnings power and our positioning for future growth. Slide seven in the investor presentation lays out a lot of these recent actions in more detail.

Jared: We are really hitting on all cylinders right now and our quarterly results demonstrated the power of the franchise we are building.

Jared: These balance sheet repositioning actions along with a few other items, we executed on during the quarter resulted in strong net interest margin expansion and higher tangible book value and capital.

Jared: I really feel good about how much we have accomplished and strengthened our balance sheet.

Jared: And strengthened.

Jared: I also feel good about the growth in our core earnings power.

Jared: And our positioning for future growth.

Slide seven in the Investor presentation.

Jared: Lays out a lot of these recent actions in more detail.

Jared: Furthermore.

Jared Wolff: Furthermore, I'm very pleased with the progress we made in Q3 reducing non-interest expenses. We achieved our previously communicated target range for non-interest expenses of $195 million to 200 million a quarter earlier than expected. Importantly, we received the benefit of normalized FDIC assessment expenses in Q3, which significantly reduced our non-interest expense, and we should benefit from that new lower baseline going forward. While reducing our operating expenses, we're also continuing to make investments in both talent and technology that will further elevate the client experience, enhance efficiencies, and contribute to the further growth of our client roster. It's also important to note that a portion of our operating expenses are customer-related expenses, which are mainly driven by our HOA business. These expenses are tied to Fed funds and have 100% beta and will decline as interest rates go lower.

I'm very pleased with the progress we made in the third quarter, reducing noninterest expenses.

Jared: We achieved our previously communicated target range for non interest expenses of $195 million to $200 million a quarter earlier than expected.

Jared: Importantly, we received the benefit of normalized FDIC assessment expenses in the third quarter.

Jared: Which significantly reduced our non interest expense and we should benefit from that new lower baseline going forward.

Jared: While reducing our operating expenses were also continuing to make investments in both talent and technology that will further elevate the client experience enhance efficiencies and contribute to the further growth of our client roster.

Jared: It's also important to note that a portion of our operating expenses are customer related expenses, which are mainly driven by our HOA business.

These expenses are tied to fed funds and have 100% beta and will decline as interest rates go lower.

Jared Wolff: We have included some new disclosures on customer-related expenses, which you can find on slide 16 of the investor presentation. While economic conditions remain somewhat challenging, we continue to see good results from our bankers' efforts to expand client relationships and add new relationships. Over the past 3 quarters, we have added over 1,700 new relationships to the bank. Our end-of-period non-interest-bearing deposits for the quarter were essentially flat from Q2 as we saw some volatility late in the quarter. Our deposit mix has become more favorable, however, as our quarter end non-interest-bearing deposits as a percentage of total deposits grew to 29%, given our efforts to reduce higher cost broker deposits. Moving on to loans. While industry activity levels remain relatively tepid in the current environment, we added $1.6 billion in loans during the quarter, which includes production, unfunded new commitments, and purchase loans.

Jared: We have included some new disclosures on customer related expenses, which you can find on find on slide 16 of the investor presentation.

Jared: Well economic conditions remain somewhat challenging we continue to see good results from our bankers efforts to expand client relationships and add new relationships.

Jared: Over the past three quarters, we've added over 1700, new relationships to the bank.

Our end of period non interest bearing deposits for the quarter were essentially flat from the second quarter as.

Jared: As we saw some volatility late in the quarter.

Jared: Our deposit mix has become more favorable however, as our quarter end non interest bearing deposits as a percentage of total Basel grew to 29% given our efforts to reduce higher cost brokered deposits.

Jared: Moving on to loans.

Jared: While industry activity levels remain relatively tepid in the current environment.

Jared: We added $1 6 billion in loans during the quarter, which includes production unfunded new commitments and purchase loans.

Jared Wolff: Importantly, we are continuing to be conservative in new loan production and have maintained our disciplined underwriting and pricing criteria. We continue to see growth in warehouse balances, where we are adding new clients and seeing increased line utilization among existing clients, as well as growth and increasing line utilization in construction and commercial loans. The growth in these areas, along with the reacquired lender finance portfolio, offset the continued runoff of lower-yielding multifamily and CRE loans and resulted in a modest amount of growth in our total loan balances in Q3. New loans continue to come on the books at higher rates than those that are paying off, which is accretive to our average loan yields and to our margin. Our loan portfolio continues to perform well on a broad basis. However, we remain cautious in the current economic environment.

Importantly, we are continuing to be conservative in new loan production.

Jared: We have maintained our disciplined underwriting and pricing criteria.

Jared: We continue to see growth in warehouse balances, where we're adding new clients.

Jared: Seen increased line utilization among existing clients as well as growth and increasing line utilization and construction and commercial loans.

Jared: The growth in these areas along with the required lender finance portfolio offset the continued run off of lower yielding multifamily and CRE loans and resulted in a modest amount of growth in our total loan balances in the third quarter.

New loans continue to come on the books at higher rates than those that are paying off which is accretive to our average loan yields and to our margin.

Jared Shaw: Our loan portfolio continues to perform well on a broad basis; however, we remain cautious in the current economic environment, and when we see signs of weakness in any credit, we have been quick to downgrade and slow to upgrade. We downgraded several credits to non-performing status in the quarter, including two commercial loans in a remaining civic loan. We believe that the credit migration of the two commercial loans was specific to those loans, and we are not seeing any indications of broader weakness across the portfolios. During the quarter, we also had an increase in class five loans, which was primarily reflective of our continued conservative approach to managing credit.

Jared: Our loan portfolio continues to perform well on a broad basis. However, we remain cautious in the current economic environment.

Jared Wolff: When we see signs of weakness in any credit, we have been quick to downgrade and slow to upgrade. We downgraded several credits to non-performing status in the quarter, including two commercial loans and a remaining Civic loan. We believe that the credit migration of the two commercial loans were specific to those loans. We are not seeing any indications of broader weakness across the portfolios. During the quarter, we also had an increase in classified loans, which was primarily reflective of our continued conservative approach to managing credit, the policies that we have put in place to get frequent updates on borrowers' financial performance and collateral valuations, and proactively downgrading certain rate-sensitive loans in light of the current environment. We expect these loans to return to non-classified status as we work through the credits.

Jared: And when we see signs of weakness in any credits we've been quick to downgrade and slow to upgrade.

We downgraded several credits to nonperforming status in the quarter, including two commercial loans and our remaining civic one we.

Jared: We believe that the credit migration of two commercial loans were specific to those loans and we are not seeing any indications of broader weakness across the portfolios.

Jared: During the quarter. We also had an increase in classified loans, which was primarily reflective of our continued conservative approach to managing credit.

Jared Shaw: The policies that we have put in place to get frequent updates on borrowers for national performance and collateral evaluations, and proactively downgrading certain rate-sensitive loans in light of the current environment. We expect these loans to return to non-class spite status as we work through the credits. Importantly, our overall loan portfolio continues to benefit from our strong underwriting standards and borrowers' strength. While our net show drops for the quarter were relatively low at 2.4 million or 0.04% of loans, the commercial real estate market remains uncertain, and accordingly we remain cautious and conservative in our portfolio management.

The policies that we have put in place to get frequent updates on borrower's financial performance and collateral evaluations.

Jared: Proactively downgrading certain rate sensitive loans in light of the current environment.

Jared: We expect these loans to return to non classified status as we work through the credits.

Jared Wolff: Importantly, our overall loan portfolio continues to benefit from our strong underwriting standards and borrower strength. While our net charge-offs for the quarter were relatively low at $2.4 million or 0.04% of loans, the commercial real estate market remains uncertain. Accordingly, we remain cautious and conservative in our portfolio management. We continue to be prepared for a variety of economic environments and will balance our drive to increase returns and grow with protecting our balance sheet and capital. We remain prudent by maintaining robust reserves at 1.2% of total loans. I think it's also important to note that our economic coverage ratio, which incorporates the loss coverage from our credit-linked notes, as well as the unearned credit mark from our purchase accounting, is substantially higher above 1.8% of total loans.

Jared: Importantly, our overall loan portfolio continues to benefit from our strong underwriting standards and borrowers strength.

While our net charge offs for the quarter were relatively low at $2 4 million or 0.04% of loans. The commercial real estate market remains uncertain and accordingly, we remain cautious and conservative in our portfolio management.

Jared Shaw: We continue to be prepared for a variety of economic environments, and will balance our drive to increase returns and grow with protecting our balance sheet and capital. We remain prudent by maintaining robust reserves at 1.2% of total loans. I think it's also important to note that our economic coverage ratio, which incorporates the loss coverage from our credit link notes, as well as the under credit mark from our purchase accounting, is substantially higher above 1.8% of total loans.

Jared: We continue to be prepared for a variety of economic environments, and we'll balance our drive to increase returns and grow with protecting our balance sheet and capital.

Jared: We remain prudent by maintaining robust reserves at one 2% of total loans.

Jared: I think it's also important to note that our economic coverage ratio, which incorporates the loss coverage from our credit linked notes as well as the unearned credit Mark from a purchase accounting is substantially higher above one 8% of total loans.

Jared Shaw: Let me make a few comments on the interest rate environment before I turned over to Joe. We believe our balance sheet is well positioned for a declining rate environment, with our balance sheet being more liability sensitive, and set to replace our mature over the next year. With the Fed starting the cutting cycle in September, we have started to reduce deposit pricing, and we're closely monitoring market conditions in customer behavior. On the acid side, about half of our fixed rate in hybrid loans will reset our mature within the next three years, and are expected to replace at higher rates, even at a declining rate environment.

Jared Wolff: Let me make a few comments on the interest rate environment before I turn it over to Joe. We believe our balance sheet is well-positioned for a declining rate environment, with our balance sheet being more liability sensitive and set to reprice or mature over the next year. With the Fed starting the cutting cycle in September, we have started to reduce deposit pricing, and we're closely monitoring market conditions and customer behavior. On the asset side, about half of our fixed rate and hybrid loans will reset or mature within the next three years and are expected to reprice at higher rates, even in a declining rate environment. We'll be making competitive adjustments, of course, as appropriate. Now I'll hand it over to Joe, who will provide some additional financial information, and then I'll have some closing remarks before opening up the line for questions.

Jared: Let me make a few comments on the interest rate environment before I turn it over to Joe.

Jared: We believe our balance sheet is well positioned for declining rate environment with our balance sheet being more liability sensitive and set to reprice or mature over the next year.

Jared: With the fed starting the cutting cycle in September.

Jared: We have started to reduce deposit pricing and we're closely monitoring market conditions and customer behavior.

Jared: On the asset side about half of our fixed rate and hybrid loans will reset or mature within the next three years and are expected to reprice at higher rates, even in a declining rate environment.

Jared David Wesley Shaw: We will be making competitive adjustments, of course, as appropriate.

Jared: We will be making competitive adjustments of course as appropriate.

Speaker Change: Now I'll hand, it over to Joe who will provide some additional financial information and then I'll have some closing remarks before opening the line for questions.

Jared Shaw: Now I'll hand it over to Joe, who provides some additional financial information, and he'll have some closing remarks before opening up the line for questions.

Jared: Yeah.

Joseph Kauder: Thank you, Jared. On a gap basis, we reported a net loss of one cent per share for the third quarter, which includes a 60 million dollar loss for the securities repositioning that we completed during the quarter. Excluding the loss incurred on the securities repositioning on an adjusted basis, our earnings per share was 25 cents for that third quarter. A significant increase from the prior quarter results, reflecting the execution of our core strategy to grow net interest margin, the positive impact of our successful balance sheet transformation, and the reduction in our operating cost, including the normalization of FDIC assessment expense.

Thank you Jared.

Joseph Kauder: Thank you, Jared. On a GAAP basis, we reported a net loss of $0.01 per share for Q3, which includes a $60 million loss for the securities repositioning that we completed during the quarter. Excluding the loss incurred on the securities repositioning on an adjusted basis, our earnings per share was $0.25 for Q3, a significant increase from the prior quarter results, reflecting the execution of our core strategy to grow net interest margin, the positive impact of our successful balance sheet transformation, and the reduction in our operating cost, including the normalization of FDIC assessment expense. There were a few noteworthy items, largely in non-interest income, that had a positive impact on our Q3 results, which we have laid out on slide six in our investor presentation. The collective impact of these items was a benefit of approximately $0.05 to EPS.

Joe: On a GAAP basis, we reported a net loss of one cents per share for the third quarter, which includes a $60 million loss for the securities repositioning that we completed during the quarter.

The loss incurred on the securities repositioning on an adjusted basis, our earnings per share was 25 for the third quarter, a significant increase from the prior quarter results, reflecting the execution of our core strategy to grow net interest margin.

Joe: The positive impact of our successful balance sheet transformation.

Joe: The reduction in our operating cost, including the normalization of FDIC assessment expense.

Joe: There were a few noteworthy items largely in noninterest income that had a positive impact on our third quarter results, which we have laid out on slide six and our best her presentation.

Joseph Kauder: There were a few note where the items largely and non-interesting come that have positive impact in our third quarter results, which we have laid out on slide six in our best of presentation. The collective impact of these items was a benefit of approximately five cents to EPS. We generated 232 million in that interesting come, which was slightly up from the prior quarter. While I averaged interesting assets were lower in the third quarter by 1.4 billion due to the sale of the civic loans, this impact was offset by an improvement in our net interest margin. Our net interest margin in the quarter increased 13 basis points to 2.93 percent due to a 13 basis point decline in cost of funds, partially offset by a 2 basis point decrease in the yield on average earning assets.

Joe: The collective impact of these items was a benefit of approximately <unk> <unk> to EPS.

Joe: We generated $232 million and net interest income, which was slightly up from the prior quarter.

Joseph Kauder: We generated $232 million in net interest income, which was slightly up from the prior quarter. While average interest earning assets were lower in Q3 by $1.4 billion due to the sale of the Civic loans, this impact was offset by an improvement in our net interest margin. Our net interest margin in the quarter increased 13 basis points to 2.93% due to a 13 basis point decline in cost of funds, partially offset by a 2 basis point decrease in the yield on average earning assets. Our cost of funds declined from 2.95% to 2.82%, and the yield on average earning assets decreased from 5.65% to 5.63% in the quarter.

Joe: While average interest, earning assets were lower in the third quarter by $1 4 billion due to the sale of the civic loans. This impact was offset by an improvement in our net interest margin.

Joe: Our net interest margin in the quarter increased 13 basis points to 293% due to a 13 basis point decline in cost of funds par.

Joe: Partially offset by a two basis point decrease in the yield on average earning assets.

Joseph Kauder: Our cost of funds declined from 2.95 percent to 2.82 percent, and the yield on average earning assets decreased from 5.65 percent to 5.63 percent in the quarter. The decrease in the cost of funds was driven by a 6 basis point reduction in the cost of interest bearing deposits from 3.58 to 3.52 percent, and a 13 basis point reduction in the cost of interest bearing liabilities from 3.93 to 3.80 percent. The reduction in the cost of interest bearing deposits was driven largely by a 1.85 billion reduction in broker deposits, and growth in the average non interest bearing deposit ratio from 27 to 28 percent.

Joe: Our cost of funds declined from 295% to $2 eight 2%.

Joe: And the yield on average, earning assets decreased from $5 six 5% to 563% in the quarter.

Joseph Kauder: The decrease in the cost of funds was driven by a 6 basis point reduction in the cost of interest-bearing deposits from 3.58 to 3.52%, and a 13 basis point reduction in the cost of interest-bearing liabilities from 3.93 to 3.80%. The reduction in the cost of interest-bearing deposits was driven largely by a $1.85 billion reduction in broker deposits and growth in the average non-interest-bearing deposit ratio from 27% to 28%. The reduction in cost of interest-bearing liabilities was largely driven by the payoff of $545 million of high-cost BTFP borrowings. Note the overall cost of deposits was down 6 basis points to 2.54%.

Joe: The decrease in the cost of funds was driven by a six basis point reduction in the cost of interest bearing deposits from $3 five 8% to 352%.

Joe: And a 13 basis point reduction in the cost of interest bearing liabilities from $3, 93% to 380%.

Joe: The reduction in the cost of interest bearing deposits was driven largely by a 1.85 billion reduction in broker deposits and.

Joe: And growth in the average noninterest bearing deposit ratio from 27% to 28%.

Joseph Kauder: The reduction in cost of interest bearing liabilities was largely driven by the pay off of 545 million of high cost BTFP borrowings. Note the overall cost of deposits was down 6 basis points to 2.54 percent. The decreasing yield on net earning assets in the quarter was driven by the impact of the sale of the 1.95 billion civic portfolio, which had a combined yield of over 6 percent, which offset the benefits from higher rate net loan originations and the security repositioning. During the quarter, our loan balance grew as our loan production and line utilization of 1.8 billion outpaced paid albums of 1.5 billion.

Joe: The reduction in cost of interest bearing liabilities, which largely driven by the pay off of $545 million of high cost Bts P borrowings.

Note. The overall cost of deposits was down six basis points to 2.54%.

Joe: The decrease in yield on net earning assets in the quarter was driven by the impact of the sale of the $1 95 billion civic portfolio, which had a combined yield of over 6%.

Joseph Kauder: The decrease in yield on net earning assets in the quarter was driven by the impact of the sale of the $1.95 billion Civic portfolio, which had a combined yield of over 6%, which offset the benefits from higher rate net loan originations and the security repositioning. During the quarter, our loan balances grew as our loan production and line utilization of $1.8 billion outpaced pay downs of $1.5 billion. Yields on new loan production increased to 8.29% from 7.80% last quarter. Our yield on gross loans was stable at 6.18%. As Jared mentioned, we used a portion of the capital raised through the Civic sale to do some repositioning in our securities portfolio. We sold $742 million of securities with an average yield of 2.94% and purchased $724 million of securities with an average yield of 5.65%.

Joe: Which offset the benefits from higher rate net loan originations and the security repositioning.

Joe: During the quarter, our loan balances grew as our loan production and line utilization of $1 8 billion outpaced pay downs of $1 5 billion.

Joseph Kauder: EOS a new loan production increased to 8.29 percent from 7.80 percent last quarter. Our yield on growth loans was stable at 6.18 percent.

Joe: Yields on new loan production increased 282, 9% from 780% last quarter.

Joe: Our yield on gross loans was stable at $6 one 8%.

Speaker Change: As Jared mentioned, we used a portion of the capital raised through the civic sale to do some repositioning in our securities portfolio, We sold 742 million of securities.

Joseph Kauder: As Jared mentioned, we used a portion of the capital raised through the civic sale to do some repositioning in our securities portfolio. We sold 742 million of securities with an average yield of 2.94 percent and purchased 724 million of securities, which with an average yield of 5.65 percent. This action has positively impacted our average yield and earning assets and is expected to generate 4.8 million of interesting income per quarter. Our net interest margin is expected to trend higher as the third quarter only included partial benefit of our balance sheet repositioning actions due to timing. We expect further improvement at our net interest margin in the fourth quarter, with a full quarter benefit of the securities repositioning and reduction in higher cost funding sources, as well as new loans continue to come on the balance sheet that higher rates than what is paying off.

Speaker Change: With an average yield of 294% and.

Speaker Change: And purchased $724 million of securities, which with an average yield of 565%.

Joseph Kauder: This action has positively impacted our average yield on earning assets and is expected to generate $4.8 million of interest income per quarter. Our net interest margin is expected to trend higher as the Q3 only included partial benefit of our balance sheet repositioning actions due to timing. We expect further improvement in our net interest margin in the Q4 with the full quarter benefit of the securities repositioning and reduction in higher cost funding sources, as well as new loans continue to come on the balance sheet at higher rates than what is paying off. We provided our Q4 outlook for our net interest margin to be in the range of 3% to 3.10%, as detailed on slide ten of the investor presentation. This assumes that our balance sheet will be relatively consistent and one additional Fed rate cut in November.

Speaker Change: This action has positively impacted our average yield on earning assets and is expected to generate $4 8 million of interest income per quarter.

Our net interest margin is expected to trend higher as the third quarter only included partial benefit of our balance sheet repositioning actions due to timing.

Speaker Change: We expect further improvement in our net interest margin in the fourth quarter with a full quarter benefit of the securities repositioning and reduction in higher cost funding sources as.

Speaker Change: As well as new loans continue to come on the balance sheet at higher rates than what is paying off.

Joseph Kauder: We provided our fourth quarter outlook for our net interest margin to be in the range of 3% to 3.10%, as detailed on flight 10 of the investor presentation. This assumes that our balance sheet will be relatively consistent and our additional and one additional Fed rate cut in November.

Speaker Change: We provided our fourth quarter outlook for net interest margin to be in the range of 3% to $3, 100% as detailed on slide 10 of the Investor presentation.

Speaker Change: This assumes that our balance sheet will be relatively consistent and our additional and one additional fed rate cut in November.

Joseph Kauder: Our total non interest income was negative in the third quarter due to the impact of the $60 million loss recognized on the securities repositioning. Excluding the loss on the securities, our adjusted non-interest income increased significantly from the prior quarter due to several noteworthy items, including a 6.4 million gain on sale of a lease residual, positive fair value adjustments on our credit linked notes, and dividends and gains on equity investments. Our total non interest expense was $196.2 million, a decrease of $7.4 million from the prior quarter, which was primarily due to a decrease in our FDIC assessment expense, which came one quarter earlier than we originally projected.

Speaker Change: Our total non interest income was negative in the third quarter due to the impact of the $60 million loss recognized on the securities repositioning.

Joseph Kauder: Our total non-interest income was negative in Q3 due to the impact of the $60 million loss recognized on the securities repositioning. Excluding the loss on the securities, our adjusted non-interest income increased significantly from the prior quarter due to several noteworthy items, including a $6.4 million gain on sale of a lease residual, positive fair value adjustments on our credit-linked notes, and dividends and gains on equity investments. Our total non-interest expense was $196.2 million, a decrease of $7.4 million from the prior quarter, which was primarily due to a decrease in our FDIC assessment expense, which came one quarter earlier than we originally projected.

Speaker Change: Excluding the loss on the securities our adjusted noninterest income increased significantly from the prior quarter.

Due to several noteworthy items, including a $6 4 million gain on sale of a lease residual.

Speaker Change: Positive fair value adjustments on our credit linked notes.

Speaker Change: And dividends and gains on equity investments.

Speaker Change: Our total noninterest expense was $196 2 million a decrease of $7 4 million from the prior quarter, which was primarily due to a decrease in our FDIC assessment expense, which came one quarter earlier than we originally projected.

Joseph Kauder: With the cost savings we have now realized, was still more expected to come as we get the full quarter benefit of the systems conversion and reduction in headcount. We reached our target level of non-interest expense of $195 to $200 million, one quarter ahead of our prior outlook. Turning to the balance sheet, our total loans held for investment increased by approximately 300 million, primarily due to increases in our mortgage warehouse, construction, and lender finance loans, which offset lower balances and discontinued portfolio loans and runoff we are seeing and lower yielding seary and multi-family loans. Our total deposit declined in the quarter, primarily due to the reduction in broker deposits, as we continue to use our liquidity to let high-cost deposits runoff.

Joseph Kauder: With the cost savings we have now realized, with still more expected to come as we get the full quarter benefit of the systems conversion and reduction in headcount, we reached our target level of non-interest expense of $195 to $200 million one quarter ahead of our prior outlook. Turning to the balance sheet, our total loans held for investment increased by approximately $300 million, primarily due to increases in our mortgage warehouse, construction, and lender finance loans, which offset lower balances in discontinued portfolio loans and runoff we are seeing in lower yielding CRE and multifamily loans. Our total deposits declined in the quarter, primarily due to the reduction in broker deposits as we continue to use our liquidity to let high-cost deposits run off.

Speaker Change: With the cost savings, we have now realized.

Speaker Change: With still more expected to come as we get the full quarter benefit of the systems conversion and reduction in head count.

Speaker Change: We reached our target level of noninterest expense of $1 95 to 200 million one quarter ahead of our prior outlook.

Speaker Change: Turning to the balance sheet.

Speaker Change: Our total loans held for investment increased by approximately 300 million.

Speaker Change: Primarily due to increases in our mortgage warehouse construction and lender finance loans, which offset lower balances and discontinued portfolio loans and run off we are seeing in lower yielding CRE and multifamily loans.

Speaker Change: Our total deposits declined in the quarter, primarily due to the reduction in broker deposits as we continue to use our liquidity to let high cost deposits run off.

Joseph Kauder: During the quarter, we opportunistically added 500 million of putable FHLB advances with a funding cost of just about 3%. Which we view as an attractive source of funding for borrowings that have a 10-year duration and can't be put back by the FHLB for at least two years. We continue to be well positioned for rate cuts as we have intentionally kept the duration of our liabilities relatively short, with 7.3 billion more liabilities repricing or maturing than assets over the next year. Over 90% of our interest-faring deposits have no term or mature less than one year. As rates decline, we should continue to see a lower cost of funds, particularly as we continue to add new clients that bring non-interest-faring deposits to the bank.

Speaker Change: During the quarter, we opportunistically added $500 million of political <unk> advances with a funding cost of just about 3%.

Joseph Kauder: During the quarter, we opportunistically added $500 million of puttable FHLB advances with a funding cost of just about 3%, which we view as an attractive source of funding for borrowings that have a 10-year duration and can't be put back by the FHLB for at least 2 years. We continue to be well-positioned for rate cuts. As we have intentionally kept the duration of our liabilities relatively short, with $7.3 billion more in liabilities repricing or maturing than assets over the next 1 year. Over 90% of our interest-bearing deposits have no term or mature in less than 1 year. As rates decline, we should continue to see a lower cost of funds, particularly as we continue to add new clients that bring non-interest-bearing deposits to the bank. As Jared mentioned earlier, with the September rate cut, we have started to reprice our deposits down.

Speaker Change: Which we view as an attractive source of funding for borrowings that have a 10 year duration I can't be put back by the FHA Obi for at least two years.

We continue to be well positioned for rate cuts as we have intentionally kept the duration of our liabilities liabilities are relatively short with $7 3 billion more in liabilities repricing or maturing that assets over the next year.

Speaker Change: Over 90% of our interest bearing deposits have no term or mature in less than one year.

Speaker Change: As rates decline, we should continue to see a lower cost of funds, particularly as we continue to add new clients that bring noninterest bearing deposits to the bank.

Joseph Kauder: As Jared mentioned earlier, with the September rate cut, we have started to reprise our deposits down. To date, we estimate our deposit beta at just over 50% based on rate changes that we have passed through to our customers. Furthermore, we have 2.7 billion in loans with a weighted average coupon of 4.67% set to reprise and mature over the next year. With yields of new loan production at over 8%, we believe there's ample opportunity to reprise these loans higher, even in a declining rate environment.

Speaker Change: As Jerry mentioned earlier with the September rate cut we have started to reprice our deposits down to date, we estimate our deposit beta at just over 50% based on rate chain changes that we are passed through to our customers.

Joseph Kauder: To date, we estimate our deposit beta at just over 50% based on rate changes that we have passed through to our customers. We have $2.7 billion in loans with a weighted average coupon of 4.67% set to reprice and mature over the next year. With yields on new loan production at over 8%, we believe there's ample opportunity to reprice these loans higher, even in a declining rate environment. At this time, I will turn the call back over to Jared.

Speaker Change: Furthermore, we have $2 7 billion in loans with a weighted average coupon of 467% set to reprice mature over the next year.

Speaker Change: With with yields on new loan production at over 8%, we believe there's ample opportunity to reprice these loans higher even in a declining rate environment.

Speaker Change: At this time I will turn the call back over to Jared.

Speaker Change: Okay.

Jared Wolff: Thanks, Joe. As I've indicated in the past, we take a lot of pride in doing what we say we're going to do. We have kept our head down, focused on executing on all the key merger integration milestones to date, and are now starting to realize the positive benefits of our financial performance. With the balance sheet repositioning and major integration milestones we have completed in Q3 behind us, including the core systems conversion and consolidation of 12 branches, we are now at an inflection point. We are shifting our focus from transforming our internal infrastructure to external growth and capitalizing on the strength of the franchise and the balance sheet we have built and the exceptional customer experience we can offer to add new attractive client relationships.

Jared: Thanks, Joe.

Jared: As I've indicated in the past.

Jared: A lot of pride in doing what we say we're going to do.

Jared: We have kept our head down.

Jared: Focused on executing on all the key merger integration milestones to date.

Jared: And are now starting to realize the positive benefits of our financial performance.

Jared: With the balance sheet repositioning and major integration milestones, we have completed in the third quarter behind us, including the core systems conversion and consolidation of 12 branches. We are now at an inflection point.

Jared: We are shifting our focus from transforming our internal infrastructure to external growth.

Jared: And capitalizing on the strength of the franchise and the balance sheet. We have built an exceptional customer experience, we can offer to add new attractive client relationships.

Jared: We are benefiting from our ability to attract high quality banking talent.

Jared Wolff: We are benefiting from our ability to attract high-quality banking talent, and now we are being more active in our marketing efforts, including launching a new branding campaign in our markets to promote the superior banking experience that we can offer. As we fully realize the benefits of the strategic balance sheet repositioning and merger integration efforts completed so far, we expect to see further growth in our financial performance. While we expect to benefit from a reduction in rates, we are not solely reliant on lower interest rates to improve our performance. With the capital and liquidity we have, we can still consider additional balance sheet repositioning actions should we see opportunities that would positively impact our earnings power down the road. While near-term economic conditions remain uncertain, we believe we are well positioned to increase our market share and expand our client roster as economic conditions improve.

And now we are being more active in our marketing efforts, including launching a brand new a new branding campaign in our markets to promote the superior banking experience that we can offer.

Jared: As we fully realize the benefits of the strategic balance sheet repositioning and merger integration efforts completed so far we.

Jared: We expect to see further growth in our financial performance.

Jared: While we expect to benefit from a reduction in rates we're.

Jared: We're not solely reliant on lower interest rates to improve our performance.

Jared: And with the capital and liquidity, we have we can still consider additional balance sheet repositioning actions shall we see opportunities that would positively impact our earnings power down the road.

While near term economic conditions remain uncertain.

Jared: We believe we are well positioned to increase our market share and expand our client roster as economic conditions improve.

Jared: With the balance sheet, we have built.

Jared Wolff: With the balance sheet we have built, the superior level of technology and expertise we can offer, and the talented banking teams that we have, we look forward to steadily adding attractive client relationships in the future, generating profitable growth, and consistently enhancing the value of our franchise. None of these accomplishments to date or in the future would be possible without the dedication of our incredibly talented colleagues at Banc of California. Every day, our teams come to work focused on helping our clients, improving our communities, and delivering for each other and for our shareholders. I'm very privileged to lead this team, and I want to thank them for their ongoing efforts. With that, operator, let's go ahead and open up the line for questions.

Jared: The superior level of technology and expertise we can offer.

Jared: And the talented banking teams that we have.

Jared: We look forward to steadily adding attractive client relationships in the future.

Jared: Generating profitable growth.

And consistently enhancing the value of our franchise.

None of these accomplishments to date.

Jared: Or in the future would be possible without the dedication of our incredibly talented colleagues at banc of California.

Jared: Every day, our teams come to work focused on helping our clients.

Jared: Moving our communities and delivering for each other and for our shareholders.

Jared: I'm very privileged to lead this team and I want to thank them for their ongoing efforts.

Jared: With that operator, let's go ahead and open up the line for questions.

Operator: We will now begin the question-and-answer session. Management has asked that we limit ourselves to one question and one follow-up only. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matthew Clark of Piper Sandler. Please go ahead.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys and if at any time. Your question has been addressed and you would like to withdraw. It. Please press Star then two management has asked that we limit ourselves to one <unk>.

Speaker Change: And one follow up only at this time, we will pause momentarily to assemble our roster.

Speaker Change: Our first question comes from Matthew Clark of Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone.

Matthew Clark: Hey, good morning, everyone.

Jared Wolff: Good morning.

Matthew Clark: Good morning.

Matthew Clark: First one for me just around the ECR deposits. It looks like there were $3 7 billion on average.

Matthew Clark: First one for me, just around the ECR deposits. It looks like they were $3.7 billion on average. Do you have that figure in the prior quarter, and what's your outlook for those balances going forward? Do you expect any growth, or should we just assume they're flat?

Matthew Clark: Do you have that figure in the prior quarter and what's your outlook for those balances going forward or do you expect any growth or should we just assume they're flat.

Speaker Change: No. We we we fully intend to I'll, let I'll, let Joe or Ann look up what the prior quarter was or it might be something that we have to publish later, Matt if we can't find it quickly.

Jared Wolff: No. I'll let Joe or Anne look up what the prior quarter was, or it might be something that we have to publish later, Matt, if we can't find it quickly. We fully expect to grow our HOA balances. We have a great leadership in place and a great team, and we're working hard to bring over new HOA relationships to the bank. Not all of our relationships have an ECR component to them, but many do. As mentioned, they're tied to Fed funds. If you were to put an interest rate on that ECR component, the all-in cost across our entire HOA deposit base is a little over 3%. We have opportunity to bring down those costs as rates come down.

Speaker Change: We fully expect to grow our HOA balances, we have a great leadership in place.

Speaker Change: And a great team and we're working hard to bring over new HOA relationships to the bank.

Speaker Change: Not all of our relationships have an ECR component to them, but many do.

Speaker Change: And as mentioned they are tied to fed funds.

Speaker Change: Our all in cost of deposits include if you were to kind of.

Speaker Change: Put in interest rate on that ECR component.

Speaker Change: The all in cost across our entire HOA deposit basis, a little over 3%.

Speaker Change: And so we have opportunity to bring down those costs as rates come down.

Speaker Change: Okay.

Speaker Change: Great and then just on the borrowings do you happen to have the spot rate at the end of September.

Matthew Clark: Great. Then just on the borrowings, do you happen to have the spot rate at the end of September on the $1.6 billion of borrowings? Then any update on the cost of fund improvement that you had been expecting last quarter by the end of the year, down 20 to 25 basis points. Do you still feel good about that range, or do you think you could do better than that?

Speaker Change: On the $1 6 billion of borrowings.

Speaker Change: And then any update on kind of the cost of funds improvement that you had been expecting last quarter by the end of the year down 20 to 25 basis points do you still feel good about that range or you think you could do better than that.

Okay.

Speaker Change: Yeah.

Jared Wolff: We'll let Joe address that.

Speaker Change: Well I'll, let Joe address that.

Joseph Kauder: Yeah. Well, the spot rate on the cost of borrowings is not something that we've disclosed, but we can get that for you, Matt. I'm sorry, what was the second part of your question?

Speaker Change: The spot rate on the cost of borrowings is not something that we've that we disclose but we can get that for you Matt the.

Speaker Change: I'm sorry, what was the second part of your question.

Matthew Clark: Just on the cost of funds improvement.

Matthew Clark: Just on the cost of fund improvement that you had targeted last quarter of down 20 to 25 basis points by the end of the year. Any update on that range?

Matthew Clark: You had targeted last quarter, it's down 20 to 25 basis points by the end of the year any update on that range.

Speaker Change: The range that we've put out you know in our in our NIM guidance of three point out at $3. One really incorporates us continuing to bring down our cost of funds and we see a mean through all of our restructuring actions that we took in the third quarter we built.

Joseph Kauder: The range that we've put out in our NIM guidance of 3.0 to 3.10 really incorporates us continuing to bring down our cost of funds. We see, through all of our restructuring actions that we took in Q3, we believe that a lot of those will continue to pull through in Q4, and we'll see the full quarter benefit. If we take that in conjunction with the rest of the core strategy of growing our non-interest-bearing deposits and continuing to have our higher-yielding loans rolling on, lower yielding loans rolling off, we'll continue to see benefits in our NIM. I think the way to think about the answer to your question is we expect NIM to continue to expand in Q4.

Speaker Change: Leave that a lot of those will continue to pull through in the fourth quarter and we will see the full quarter benefit and we take that in conjunction with all the rest of the core strategy of growing our noninterest bearing deposits and continuing to.

Speaker Change: Our loans higher yielding loans rolling on lower yielding loans rolling off will continue to see benefits in our NIM and so I think the way to think about the the.

Speaker Change: The answer to your question is we expect NIM to continue to expand in the fourth quarter.

Speaker Change: NIM being 283, we gave a range of 293.

Jared Wolff: NIM being 283, we gave a range of 290 to 3. The top end of that range would be 17 basis points, which would be a pretty big expansion, right? To go from the Q3 of 283 to 3 for the Q3. Excuse me, for the Q4. There are some things that could work against that as well. It's pretty early in terms of looking at. Joe mentioned in his comments that we're currently seeing about a 50% deposit beta in terms of the rate benefit that we're getting following the rate cut. It's still pretty early. Not all customers have received their statements yet. We're watching how that flows through, although early signs are positive. That could back up on us a little bit and affect our margin. Right now it looks pretty good.

On the top end of that range would be 17 basis points, which would be a pretty big expansion.

Speaker Change: To go from the third quarter of 283 to three for the third quarter.

Speaker Change: Excuse me for the fourth quarter.

Speaker Change: There are some things that could work against that as well it's pretty early in terms of looking at Joe mentioned in his comments that we're currently seeing about a 50% deposit beta.

Speaker Change: In terms of the rate benefit that we're getting following the rate cut.

Speaker Change: It's still pretty early not all customers have received their statements yet.

Speaker Change: And we're watching how that flows through all the you know early signs are positive, but that could cut back up on us a little bit and affect our margin, but right now it looks pretty good.

Speaker Change: Yeah.

Thank you.

Matthew Clark: Thank you.

Speaker Change: Thanks, Matt.

Jared Wolff: Thanks, Matt.

Operator: Our next question comes from David Feaster of Raymond James.

Speaker Change: Our next question comes from David Feaster of Raymond James.

David Feaster: Everybody. Maybe just starting, Jared, just following up on your comments about shifting from internally focused and right-sizing operations to more of the growth side. I wanted to get your thoughts on the loan growth outlook. Obviously, there is a lot of underlying positives. You talked about $1.6 billion in originations. A lot of the growth this quarter was warehouse and loan purchase. I am just curious, how do you think about the loan growth outlook going forward? You have made a lot of new hires. You are expanding business lines. I am just curious where you are seeing opportunities, how much of the moves this quarter was strategic or optimization, and just how you think about organic loan growth going forward.

Speaker Change: Everybody.

Speaker Change:

David Feaster: Maybe just starting just following up on your comments about shifting kind of from internally focused in right sizing kind of operations to more of the growth side I wanted to get your thoughts on the loan growth outlook. Obviously, there's a lot of underlying positive he talks about $1 $6 billion in originations, but you know a lot of the growth is.

David Feaster: Quarter was warehouse in the the loan purchases.

Speaker Change: I'm just kind of curious like how do you think about the loan growth outlook going forward, you've made a lot of new hires you're expanding business lines I'm, just curious where you're seeing opportunities how much of that like the moves this quarter was strategic or optimization and just how you think about organic loan growth going forward.

Jared Wolff: Sure. I think loan growth across the board, other than specific pockets, is going to remain muted until rates come down about another 50 basis points. A huge part of our market is real estate, and while we're seeing a little bit of an uptick in construction and we're seeing good warehouse lending, some activity in fund finance. It really is not at the levels that we would expect due to rates being higher that is keeping borrowers from entering into new transactions. Multifamily transactions are way down relative to where they should be or where we've seen them in the past. In my estimate, speaking to our clients, is that it's going to take another 50 basis points for things to unlock. What we're trying to do is position ourselves as well as possible to take advantage of that stuff when things do unlock.

Speaker Change: Sure so.

Speaker Change: I think loan growth across the board.

Speaker Change: Other than specific pockets is going to remain muted until rates come down about another 50 basis points of <unk>.

Speaker Change: Huge part of our market is real estate.

Speaker Change: And while we're seeing a little bit of an uptick in construction.

Speaker Change: And we're seeing you know.

Speaker Change: Good warehouse lending.

Speaker Change: Some activity and fund finance.

Speaker Change: It really is not at the levels that we would expect.

Speaker Change: Due to rates being higher that is keeping borrowers from <unk>.

Speaker Change: Entering into new transactions, you know multifamily transactions are way down relative to where they should be or where we've seen them in the past.

Speaker Change: In my estimate speaking to our clients is that it's going to take another 50 basis points for things to unlock what we're trying to do is position ourselves as well as possible to take advantage of that stuff when it when things do unlock and I think that we are well positioned I think we're our teams are in the right places.

Jared Wolff: I think that we are well-positioned. I think our teams are in the right places. We're connected to the right people. Our branding campaign, as I mentioned, is out there, so we're top of mind. We have the balance sheet to obviously start lending. Obviously, payoffs are going to pick up as well when lending starts. You'll see a lot of refinancings. Payoffs have been slower than we expected. We've had some good loan originations, but mostly, David, I think it is going to take a little bit, and I think we're just trying to position ourselves as well as possible to take advantage of that. We're excited to grow. Again, we don't want to push on things too hard when the economy's a little bit slower. We'll be ready for it when the economy picks up.

Speaker Change: We're connected to the right people our branding campaign as I mentioned is out there. So we're top of mind and we have the balance sheet to obviously start lending and obviously payoffs are going to pick up as well when lending starts you'll see a lot of refinancings and so payoffs have been slower than we expected.

Speaker Change: We've had some some good loan originations.

Speaker Change: But mostly David I think it's going to take a little bit and I think we're just trying to position ourselves as well as possible to take advantage of that where we're excited to grow but again, we don't want to push on things too hard when the economy is a little bit slower so we'll be ready for when the economy picks up.

David Feaster: Got it. Where do you see opportunity for growth, I guess, in the relatively short run?

David Feaster: Where do you see opportunity for growth I guess in the relatively short run.

David Feaster: Well, we're warehouses continuing to thrive there is refinancing activity. There is new I think with what's happening there is a couple of things.

Jared Wolff: Well, warehouse is continuing to thrive. There is refinancing activity. I think what's happening there is a couple things. One is people are still buying homes and refinancing their homes. Even with rates being somewhat higher, overall rates have come down to levels where it's not historically that high for home buyers and for people refinancing. There is plenty of activity there. In fact, we saw an uptick in people looking to do things around the hurricane for refinancing. We bold some of our lines because there was an uptick of activity. We expect lender finance to be something which does grow over the next several quarters. It's hard to say it's going to grow any specific quarter, but in the next several quarters, we would expect that to grow.

David Feaster: One is people are still buying homes and refinancing their homes and even with rates being somewhat higher overall rates have come down to levels, where it's not historically that high for for for homebuyers and for people refinancing and so there is plenty of activity. There in fact, we saw an uptick and people looking to do things around the house.

David Feaster: Hurricane for for refinancing and so are we.

David Feaster: Bold some of our lines to because there was an uptick of activity.

David Feaster: We expect lender finance to be something which does grow over the next several quarters. It's hard to say, it's going to grow any specific quarter, but the next several quarters. We would expect that to grow we think that there is a dearth in the market of <unk>.

Jared Wolff: We think that there is a dearth in the market of other banks providing that service, and so we're glad to fill that void. Fund finance has continued to do well as we've picked up market share, although line utilization has been a little bit down as people have not been deploying funds. Although we're ready for it. We've been adding new client logos and good new clients, and we expect those lines to actually be tapped as people see opportunities. More generally, we would expect just general C&I activity to pick up as the economy picks up. Right now, though, that's relatively slow.

David Feaster: Other banks, providing that service and so we're glad to fill that void.

David Feaster: Sun Finance has continued to do well as we've picked up market share. Although line utilization has been a little bit down as people have not been deploying funds, although we're ready for it we've been adding new client logos and a good new clients and we expect those lines to actually be tapped as people see opportunities.

David Feaster: And then more generally we would expect just general C&I activity to pick up as the economy picks up right now, though that is relatively slow.

David Feaster: Okay. That's helpful. Maybe just on the other side of the coin, core deposit growth is obviously a huge focus for you all. You've made a lot of progress. I'm curious, how do you think about deposit growth? Do you think you can keep deposit growth kind of in line with loan growth just given that you're kind of towards the midpoint of your loan-to-deposit ratio? Is there some appetite to potentially use some of the excess cash to fund growth as it comes?

Speaker Change: Okay. That's helpful.

Speaker Change: And maybe just on the other side of the coin core deposit growth is obviously a huge focus for you all you've made a lot of progress I'm curious how do you think about deposit growth.

Speaker Change: Do you think you can keep deposit growth kind of in line with loan growth.

Speaker Change: Just given that you've kind of towards the mid point of your loan to deposit ratio or is there some appetite to potentially use some of the excess cash to fund growth as it comes.

Jared Wolff: I don't think so. I think loans are typically going to grow much faster than deposits. That's why right now when there is slow loan growth, it's important to build up all of your deposit relationships as best you can and see if you can bring in new relationships and start in living with a comfortable loan-to-deposit ratio. I would expect our loan-to-deposit ratio to climb when business activity starts picking up again. Now, we might see some benefit with growth in deposit balances too, but that's why we're trying to build so many new relationships now, so that we have the liquidity to fund loans and don't have to go outside too far. We're going to live within our means. We're not going to get into the high nineties loan-to-deposit ratio. We're going to try to avoid that.

Speaker Change: I don't think so I mean, it would be hard I think loans are typically a girl grow much faster than deposits and we're going to do and that's why right now.

Speaker Change: When there is slow loan growth, it's important to build up all of your deposit relationships as best you can.

Speaker Change: And see if you can.

Speaker Change: Bringing new relationships and start.

Speaker Change: In living with a comfortable loan to deposit ratio I would expect our loan to deposit ratio to climb when business activity starts picking up again now we might see some benefit with growth in deposit balances too, but that's why we're trying to build so many new relationships now so that we have the liquidity to fund loans and don't have to go outside to far we're going to live within our means.

Speaker Change: We're not going to get you know, which are the high ninety's slowed to deposit ratio, we're going to try to avoid that but.

Jared Wolff: I think we have the ability to expand because we've stayed in the mid-eighties. We have room to expand and comfortably do so without having to go to the brokered market to grow deposits. If we needed to, we would, if we thought it would be profitable. I'm really proud of the efforts that our teams have made in growing these new relationships. It doesn't always show up because you have other deposit balances that are coming down as people use their balances for whatever they need. The new relationships sometimes offset balances that are just coming and going in existing relationships. The new relationships is what we track, and that's what's going to benefit the growth of the bank overall over the long term.

Speaker Change: But I think we have some we have the ability to expand because we've stayed in the mid eighties.

Speaker Change: So we have room to expand in and comfortably do so without having to go to the brokered market too.

Two.

To grow deposits, if if if we needed to we would if we thought it would be profitable, but I'm really proud of the efforts that our teams have made in growing these new relationships. It doesn't always show up because you have other deposit balances that are coming down as people use their you know to use there.

Speaker Change: Use their balances for whatever they need so the new relationships, sometimes offset.

Speaker Change: Balances that are just coming and going and existing relationships, but the new relationships is what we track and that's what's going to benefit the growth of the bank overall over the long term.

Speaker Change: Our next question comes from Jared Shaw of Barclays. Please go ahead.

Operator: Our next question comes from Jared Shaw of Barclays. Please go ahead.

Jared Shaw: Hey, everybody. Thanks.

Speaker Change: Hey, everybody. Thanks.

Jared Wolff: Good morning.

Speaker Change: Good morning, maybe just a.

Jared Shaw: Morning. Maybe just starting again with the margin. What were the dates, I guess, of the restructuring in terms of how much more of that's just going to flow through into the quarter? If we saw two rate cuts instead of one as your assumptions are, how should we expect sort of the year-end margin and the jumping off point for Q1 based on sort of some of those assumptions?

Speaker Change: Starting again with the margin.

Jared Shaw: What was the what were the the dates I guess of the restructuring in terms of like how much more of that is just going to flow through.

Jared Shaw: For the quarter and if we saw two rate cuts instead of one is your assumptions are.

Jared Shaw: How would that how should we expect sort of the year and margin and the jumping off point for first quarter based on sort of some of those assumptions.

Jared Shaw: Yeah.

Jared Wolff: Yeah. I think the way to think about the restructuring actions is they happened throughout the quarter. The Civic portfolio sale was right at the beginning of the quarter. You had securities repositions which happened throughout the quarter, and then you had the FHLB putables that happened at the end, right? You had a kind of steady set of activity through the quarter. We have that laid out in the financial impacts on slide seven in the investor deck with some relevant information there. The way to think about that is that we will see a full quarter of benefit from those actions in Q4, and it should be pretty meaningful.

Speaker Change: I think the way to think about the restructuring actions as they happened throughout the quarter. The civic portfolio sale was right at the beginning of the quarter, you had securities Repositions, which happening happened throughout the quarter and then you had the FHA portables that happened at the end right. So you had you had has gone up.

Speaker Change: Steady state of activity this quarter, we have that laid out.

Speaker Change: The financial impact on slide seven in the investor deck with some relative relevant information there.

Speaker Change: And two.

Speaker Change: Way to think about that is that we will continue we will see ya.

Speaker Change: Full quarter of benefit from those actions in the fourth quarter and it should be pretty meaningful.

Speaker Change: Okay, and then if we if we see two cuts.

Jared Shaw: Okay. If we see two cuts, does that accelerate?

Speaker Change: Does that accelerate the.

Speaker Change: Yeah, Yeah, the expansion I guess.

Jared Wolff: Yeah

Jared Shaw: the expansion, I guess?

Jared Wolff: An additional cut would be beneficial to us. We're still assuming a very conservative beta on that based upon it's still early. We're still having some conversations with our customers. You would think that that could add $0.01 or so. It's a rough estimate of earnings impact.

Speaker Change: An additional cut.

Speaker Change: It would be beneficial to us.

Speaker Change: We're still.

Speaker Change: We're still assuming a very conservative beta on that based upon the early you know we were still having some conversations about customers, but you would think that that could add a penny or so as a rough rough estimate of earnings impact.

Speaker Change: Okay sure Joe to your point I mean, our second cuts going to happen probably pretty late so the benefit is really going to be in in Q1 and not Q4.

Jared Shaw: Okay.

Jared Wolff: Jared, to your point, a second cut's going to happen probably pretty late. The benefit's really going to be in Q1 and not Q4.

Jared Shaw: Yeah. Okay. It's great to see the progress on expenses and getting there a quarter early. Is this a good run rate on FDIC? What are some of the other opportunities maybe to see expenses even trickle down from here? Is this sort of the good stable rate to look at?

Yep.

Speaker Change: And then you know.

Speaker Change: It was great to see the progress on expenses and getting there a quarter early.

Speaker Change: Is this a good run rate on FDIC and is there any other.

Speaker Change: You know what are some of the other opportunities maybe to see expenses, even trickle down from here or is this the sort of the good stable rate to look at.

Jared Wolff: As you can see on our notable items slide, there was a one-time benefit that came in the quarter on FDIC, which is not repeatable. That being said, I think that there should also be a slightly improved FDIC core number for Q4. I think the number you're seeing this quarter is probably about a pretty good run rate going forward, taking those two things into consideration.

Speaker Change: As as you can see on our notable items slide there was a one.

Speaker Change: One time benefit that came in the quarter on FDIC, which is not repeatable.

Speaker Change: That being said I think that they should also be slight.

Speaker Change: Slightly improved.

Speaker Change: FDIC a core number for the fourth quarter. So I think the number you're seeing this quarter is probably about a pretty good.

Speaker Change: Run rate going forward.

Speaker Change: Taking those two things into consideration.

Jared Shaw: Great. Thanks.

Speaker Change: Great. Thanks.

Operator: Our next question comes from Andrew Terrell of Stephens. Please go ahead.

Our next question comes from Andrew <unk> of Stephens. Please go ahead.

Speaker Change: Yeah.

Andrew Terrell: Hey, good morning.

Speaker Change: Hey, good morning.

Jared Wolff: Morning.

Speaker Change: <unk>.

Andrew Terrell: Hey, I just want to follow up on some of the deposit cost commentary. I'm curious on, do you have just maybe the spot interest-bearing balance or interest-bearing costs at the end of the period? It's, I think, a lot to wade through with the broker reduction and the rate move that happened later in the quarter.

Speaker Change: Hey, I just want to follow up on some of the.

Speaker Change: Deposit cost commentary.

Speaker Change: Curious on you know do you have just maybe the spot interest bearing balances our interest bearing costs at the end of the period. It's I think a lot's of way through with the the broker to reduction in the rate move that happened later in the quarter.

Jared Wolff: Yeah. I think the way to think about it is that in our quarters, because we've been doing so much restructuring action, there has been some noise in our monthly numbers. I'm not sure whether if we gave you that number, whether that would really be helpful for you for your modeling purposes. I think it's a little bit higher, obviously, than the 2.93, which we have for the year. Maybe I don't want to give you an exact number, but a couple basis points higher than that would probably be a good modeling estimate.

Speaker Change: Yes.

I think the way to think about it is that.

Speaker Change: Quarters, because we've done been doing so much restructuring action there has been some noise in our monthly numbers I'm not sure whether we if we gave you Oh you know what.

Speaker Change: That number whether that would really be helpful. For you for your modeling purposes I think.

Speaker Change: It's a little bit higher obviously than the $2 93, which we have for the year. So maybe it's maybe like a you.

Speaker Change: You know.

Speaker Change: Oh.

Speaker Change: I don't want to give you an exact number but it <unk>.

Speaker Change: Couple of basis points higher than that would probably be a good modeling estimate.

Speaker Change: Okay understood I appreciate it and then just you know.

Andrew Terrell: Okay. Understood. I appreciate it. Just, Jared, as you've gone out to clients and you guys have lowered deposit costs following the Fed move, just curious any kind of pushback you've received specifically knowing that earlier in the year, you kind of proactively or preemptively ahead of rate cuts had already moved some down on the cost side. Just curious if you're getting any kind of pushback or if you feel like at a 50% beta already, as you mentioned in the prepared remarks, if you have any more room to go beyond that.

Speaker Change: Jared as you've gone out to clients and you guys have lowered.

Speaker Change: Lower deposit costs following the fed move just curious any any kind of pushback you've received specifically knowing that you know earlier in the year, you kind of proactively or preemptively ahead of rate cuts that have already moved some doubt on the on the cost side, just curious if youre getting any kind of pushback or if you feel like you know at a 50% beta already as you mentioned in the prepared remarks.

Speaker Change: If if you have any more room to go beyond that.

Speaker Change: We certainly got pushed back which is why it wasn't a 100% beta.

Jared Wolff: We certainly got pushback, which is why it wasn't 100% beta. I wanted to achieve as much as we could. We kind of divided up our relationships in a couple different ways. You look at who is rate sensitive and who is not. Who's focused on rates and who isn't. You then have to have your relationship managers go out to your clients and carefully message the relationship and the changes that we want to make. Yeah, we definitely got some pushback, we also try to work with them and explain the valuable services that we're providing. I think we came to a good spot across the board for our company. It's still playing out in real time, Andrew. It's pretty early because this just happened, we have to let this play out. There's more to come, right?

Speaker Change: I wanted to achieve as much as we could and so you know we kind of divide it up are our relationships and in a couple of different ways and you you look at.

Speaker Change: Who is rate sensitive and who is not.

Speaker Change: You know who's focused on rates and who isn't and you then have to have your relationship managers go out to your clients and carefully message the relationship in the end and that the changes that we want to make.

Speaker Change: Yeah, we definitely got some pushback, but we also tried to work with them and explain the valuable services that we're providing and I think we came to a good spot across the board for our company.

Speaker Change: It's still playing out in real time, Andrew it's pretty early because this just happened and we have to let this play out there's more to come right and so part of what we're doing right now is sensitizing our clients to where this is headed.

Jared Wolff: Part of what we're doing right now is sensitizing our clients to where this is headed. Our clients really value the relationships that we provide them and the services that we provide to them, value the relationship they have with us because of the services that our treasury management and lending teams provide and relationship management overall. I'm confident that we're not losing clients as a result of rate cuts because we're managing and messaging it well. It's really a fairly iterative process. If we are losing anybody due to rate cuts, it's not a true relationship. There were absolutely clients here that were here for higher rates that the company needed to pay based on the circumstances they were in, the company was in at the time.

Speaker Change: Our clients really valuable value the relationships that we provide them and the services that we provide them value the relationship they have with us because of the services that our treasury management and lending teams provide.

And relationship management overall.

Speaker Change: So I'm confident that we're not losing clients as a result of <unk>.

Speaker Change: <unk> cuts.

Speaker Change: Because we're managing and messaging as well.

Speaker Change: And so it's really a fairly iterative process.

Speaker Change: If we are losing anybody due to rate cuts.

Speaker Change: It's not a true relationship. It says you know what there there were absolutely clients here that we're here for for higher rates that the company needed to pay based on the circumstances. They were in the company was in at the time and so some of that gets flushed out and you realize that you don't need those deposits anymore, they're masquerading as relationships when theyre not really.

Jared Wolff: Some of that gets fleshed out and you realize that you don't need those deposits anymore. They're masquerading as relationships when they're not really relationships if all they have is a money market at 4.5% or 5%. That's not a relationship that is likely to stay at the bank as rates come down unless we've been able to expand it to provide other services.

Speaker Change: Relationships if all they have is the money market at four and a half of 5% that's not a relationship that is likely to stay at the bank as rates come down unless we are able to expand it to provide other services.

Speaker Change: Our next question comes from Gary Tenner of D. A Davidson. Please go ahead.

Operator: Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead. Mr. Tenner, could your line be muted?

Mr Tenner, because your line be muted.

Gary Tenner: Yes, I apologize good morning.

Gary Tenner: Yes, I apologize. Good morning.

Jared Wolff: Morning.

Gary Tenner: Good morning.

Gary Tenner: Hey, I wanted to ask about loan yields. I know, Joe, you'd mentioned the 6.18 kind of flat quarter-over-quarter all-in loan yield. Just to get a sense of kind of where new production was kind of impacting loan yields. Do you have a sense of kind of what that impact would've been quarter-over-quarter adjusted for the Civic loan sale? In other words, just kind of what the more apples to apples Q2 to Q3 would've looked like from a yield perspective.

Gary Tenner: Hey, I wanted to ask about loan yields I know Joe you had mentioned the 618 kind of flat quarter over quarter. All in loan yield just to get a sense of kind of where new production was was kind of impacting.

Yields do you have a sense of.

Kind of what that impact would have been quarter over quarter adjusted for the civic loan sale in other words, just kind of what the more apples to apples <unk> would've looked like from a yield perspective.

Gary Tenner: I think I think the.

Joseph Kauder: I think the 6.18 would've been higher absent the Civic loan sale. I don't have an exact number for you, Gary. Another way to look at the new production is we had a lot of new originations coming in up right around the 8% level. We also acquired the Lender Finance portfolio, which was at 8.8%. That's one way to think about the new production.

Speaker Change: The total of the $6 one eight would have been higher.

Speaker Change: Absent the civic loan sale.

Speaker Change: I don't have an exact number for you Gary but.

Speaker Change: Another way to look at the.

Speaker Change: The new production rises we had.

Speaker Change: A lot of new originations coming in up right around the 8% level and then we also acquired the lender finance portfolio, which was at eight 8%.

Speaker Change: That's one way to think about the new production, yeah, I mean to layer on there Gary.

Jared Wolff: Yeah. To layer on there, Gary, in Q2, our new production yield was 7.8%. It didn't include lender finance, which as Joe says, is the upper rates. In Q3, our new production was around 8.3%. You can't take that number and apply it across the portfolio because it's not going to repeat, and there's some rates that are coming down. Construction is actually much higher because its rates are higher because of the originations versus what was going on before, which was just fundings of existing loans that were at lower rates. SFR is up, but C&I is going to be coming down. Multifamily is going to be coming down. Equipment finance is probably going to be coming down. Almost everything that's floating rate is going to be coming down. It's still much higher than what is refinancing and paying off.

In the in the third quarter in the second quarter.

Speaker Change: Our new production yield was seven 8%.

Gary Tenner: But it didn't include lender finance, which is as Joe says as the up rates.

And so in the third quarter, our new production was around eight 3%.

Gary Tenner: You can't you can't take that number and apply it across the portfolio because there is.

Gary Tenner: It's not going to repeat and Theres some rates that are coming down I mean, you know construction is actually.

Gary Tenner: Much higher because it's rates are higher because of the originations versus what was going on before which was just <unk>.

Fundings of existing loans that were at lower rates, but you know as.

Gary Tenner: So far is up but C&I is going to be coming down multifamily is going to be coming down.

Gary Tenner: Equipment finance is probably going to be coming down.

Gary Tenner: Almost everything that's floating rate is going to be coming down right.

Gary Tenner: So.

Gary Tenner: But it's still much higher than.

What is refinancing and paying off and.

Jared Wolff: Even as rates come down, we expect our margin to expand and expect our loan yield to incrementally grow a little bit over the next several quarters.

Gary Tenner: And so even as rates come down we expect our margin to expand.

Gary Tenner: I would expect our loan yield to incrementally grow a little bit over the next several quarters.

Speaker Change: Okay that is helpful. I appreciate it.

Gary Tenner: Okay. That is helpful. I appreciate it. In past quarters, Jared, you had kind of talked about kind of some ranges or targets for expense to average assets. Unless I missed that, I don't think that was included as you talked to the ROA and ROTCE. Obviously, the expense to average assets was down quite a bit this quarter. Any change to how you're kind of targeting that number with or without customer-related deposit costs?

Gary Tenner: Then in <unk>.

First quarters.

Gary Tenner: Where do you kind of talk.

Gary Tenner: What about kind of.

Some ranges or targets for expense to average assets and also I missed that I don't think.

Gary Tenner: That was included as you talked about you talked to the ROA and <unk>.

Gary Tenner: Obviously the expense to average assets was down quite a bit this quarter.

Any change to how you're kind of targeting that number with or without customer related deposit costs. I think you have to pull out the customer related deposit costs. When you do that number because it really is an interest.

Jared Wolff: Yeah. I think you have to pull out the customer-related deposit costs when you do that number because it really is an interest expense that's somehow because of the way it's calculated, it comes through the operating expenses. The 2% is still kind of our target range. I think we have a little bit of room to go on expenses. It's not as clear as it might seem. It looks like we hit kind of the middle of the range. As Joe points out, there were some unusual items in the quarter that really pushed us to the top of our range. One thing I'll say is that we have a lot of work to do.

Expense, that's somehow you know.

Gary Tenner: Because of the way, it's calculated it's tied to it as it comes through.

Gary Tenner: The operating expenses, but.

Gary Tenner: The 2% is still.

Gary Tenner: One of our target range I think we have a little bit of room to go on expenses.

Gary Tenner: And it's not as clear as it might seem.

Gary Tenner: It looks like we hit.

Speaker Change: You know kind of the middle of the range, but as Joe pointed out you know there were some unusual items in the quarter that really pushed us to the top of our range.

Gary Tenner: And one thing I'll say is that we have a lot of work to do I mean, there is as great as our company has done.

Jared Wolff: I mean, as great as our company has done and as optimistic as I am, there's still a ton of work that we have to do and to get where we need to be. It's not necessarily easy work. I think we've gotten a lot of the heavy lifting behind us so that we're able to focus more on the growth phase when the economy recovers versus kind of just the internal phase. We're looking up now. Our head isn't so down, it's more up and looking out and expanding and looking for opportunities to expand. I just don't see the economy moving that fast right now. As I mentioned earlier, we're going to be ready when it happens.

Gary Tenner: And as optimistic as I am there is still a ton of work that we have to do.

Gary Tenner: And to get where we need to be and it's it's not necessarily easy work, but I think we've gotten a lot of the heavy lifting behind us so that we're able to focus.

Gary Tenner: More on that growth phase when the economy recovers versus kind of just the internal phase you know and.

Gary Tenner: And so were looking up and now our head isn't so down it's more up and looking out and expanding and looking for opportunities to expand I just don't see the economy moving that fast right now, but as I mentioned earlier, we're going to be ready when it happens.

Joseph Kauder: Yeah. Gary Tenner, if you didn't already see it on page 15, we have the NII to average asset ratio at the bottom of the page on both a base and a reported and adjusted basis.

Yeah.

Speaker Change: And Gary if you had if you ignore you see on page 15, we have an eye to average asset ratio at the bottom of the page on both.

Gary Tenner: A basin.

Gary Tenner: Our reported and adjusted.

Gary Tenner: <unk>.

Gary Tenner: Yes, okay.

Jared Wolff: Yeah, you're right. Okay. Thanks very much, guys.

Speaker Change: Thanks, very much guys.

Joseph Kauder: No problem.

Speaker Change: No problem.

Operator: The next question comes from Ben Gerlinger of Citi. Please go ahead.

Speaker Change: The next question comes from Ben Garlinger a city.

Speaker Change: Go ahead.

Ben Gerlinger: Hey, good morning.

Good morning.

Jared Wolff: Morning.

Speaker Change: Yeah.

Speaker Change: So you guys have done a tremendous amount of them.

Ben Gerlinger: You guys have done a tremendous amount of, let's call it tweaking everything, it seems like year to date. In Q3 specifically, you've done quite a bit. Jared, on the most recent comment you just said, you still have a tremendous amount to do. When you look through the positives here, it seems like you're going to have better margin. You're going to have operating leverage improvement. You have hires that seem to have portfolio space going into 2025. It seems like you're well set up for growth. With that growth, you have leverage. What else can you kind of paint a picture or point to some things that there's more left to do? It seems like the engine's about to really start going here, but just trying to focus on improvement is good, but what else is there really?

Speaker Change: Let's call it tweaking everything it seems like year to date in the third quarter, specifically, you've done quite a bit.

Speaker Change: Jerry I don't unless reason comment you just said you still have a tremendous amount to do.

When you look through the positives here it seems like you're going to have a better margin or operating leverage improvement of hires that seemed to have portfolio space going into 2025, so it seems like you're well for growth.

Speaker Change: And with that growth.

Speaker Change: Average.

Speaker Change: Can you kind of paint a picture of a point to some.

Speaker Change: Things like there is more left to do it seems like the engines about to really start going here, but just trying to focus on.

Speaker Change: Improvement is good but what else is that really.

Jared Wolff: Well, thank you for that. We're always tough on ourselves, but I also think that I'm hesitant to declare victory of anything. We have a lot of work to do, and we've set some targets that we are not yet close to achieving, but we fully intend to achieve. We expect to make progress as we've outlined through next year, and hopefully get to those targets. I'm not going to be really very happy until I've seen better operating performance and better efficiency. Our teams are doing great. We've got tremendous people. I would say that some of the stuff that you can't see is we have some whole bunch of technology initiatives beyond the core conversion that we have.

Speaker Change: Yeah, well I, thank you for that.

Speaker Change: You know, we're always tough on ourselves, but I also think that it's.

Speaker Change: You know I'm I'm hesitant to declare victory or anything we have we have a lot of work to do and we've set some targets that we are not yet close to achieving but we fully intend to achieve.

Speaker Change: And we expect to make progress as we've outlined through through next year.

Speaker Change: And hopefully get you know get.

Speaker Change: Get to those targets.

Speaker Change: And so I'm not going to be really very happy until I've seen better operating performance and better efficiency. Our teams are.

Speaker Change: Are doing great. We've got tremendous people I would say that some of the stuff that you can't see is we have some a whole bunch of technology initiatives.

Speaker Change: Beyond the course conversion that we have we have some system initiatives that are that are in place that we're working very hard on to put together some technology that that needs to.

Jared Wolff: We have some system initiatives that are in place that we're working very hard on to put together some technology that needs to work better. I would say that we have a program on data internally that we're working very hard on to ensure that we get data in a more efficient way, and that it's delivered to our teams in a way that they can self-service with that data. That also flows through to how we serve our customers. All of these things will cost money and are enhancements that are important. Our payments initiative is still going to make some progress. We have a lot going on there. That's not going to really show signs of benefit until next year.

Speaker Change: Hmm.

Speaker Change: Work better.

Speaker Change: I would say that we have a program on data internally that we're working very hard on to ensure that we get data in a more efficient way and that it is delivered to our teams in a way that they can self service with that data and then also flows through to how we serve our customers.

Speaker Change: All of these things are will cost money and our enhancements that are important our payments initiative is still going to make some progress we have a lot going on there, but that's not going to really show signs of benefit until next year as I mentioned this year.

Jared Wolff: As I mentioned this year, even if it is showing benefit, it's de minimis given the size of this company relative to what it would have shown on a standalone Banc of California. We're not going to talk about that until it's meaningful enough to talk about as of this combined company. Those are some of the things that we're working on that will cost money. I also think stuff's going to show up. I mean, I'm glad that we keep provisioning around the $9 to $10 million level. We want to keep our total reserves at the highest possible level to make sure that we get rid of any headwinds to keep us from performing at a high level next year. We're going to remain highly conservative on downgrading credits, and we'll be pretty slow to upgrade them.

Speaker Change: Even if it is showing benefit it's not it's de minimis given the size of this company relative to what it would've shown on a Standalone bank of California. So we're not going to talk about that until it's meaningful enough to talk about as of this combined company.

Those are some of the things that we're working on that will cost money.

Speaker Change: I also think stuffs going to show up I mean, I'm glad that we keep provisioning around the $9 million to $10 million level, we want to keep our.

Speaker Change: Our total reserves.

Speaker Change: At the highest possible level to make sure that we get rid of any headwinds to keep us from performing at a high level next year and we're going to remain highly conservative on downgrading credits.

And we will be pretty slow to upgrade I mean, I think that it's important that we maintain that posture now we can afford it.

Jared Wolff: I think that it's important that we maintain that posture now. We can afford it. It's the right thing to do in this environment. It doesn't mean that things that we migrate to classified, they're still on accrual. It doesn't mean they're not coming back. It's the amount of prudence that you take in an environment like this to make sure that you are properly looking at things and not kidding yourself about that things may take longer than it appears while interest rates stay higher for longer.

Speaker Change: And it's the right thing to do in this environment. It doesn't mean that things that we migrate to classified there they're still on accrual it doesn't mean, they're not coming back.

Speaker Change: It's the it's the amount of prudence that you've taken in an environment like this to make sure that you are properly looking at things and not.

Speaker Change: Not kidding yourself about that things may take longer than it appears while interest rates a higher for longer.

Okay. That's helpful and then just.

Ben Gerlinger: Got you. That's helpful. Just kind of one point of clarification on the HOA-related deposits. I know a few other banks have that and then the ECR. Like, I get it. When you think about just the contract or the longer-term nature of it, how often are those kind of renewed or negotiated? I'm just kind of thinking from a behavioral perspective. If I was an HOA, I'm staring down the barrel of quite a few rate cuts here in the next 12 months. I'd probably want a little bit better rate in the next negotiation. Just kind of how that works going forward.

Speaker Change: One quick clarification on the HOA related deposits.

Speaker Change: Other banks have the ECR like get it when.

Speaker Change: When you think about the contract or the longer term nature of it are they how often are those kind of renewed or negotiated.

Just kind of thinking from a behavioral perspective.

Speaker Change: That was an HOA I'm staring down the barrel of quite a few rate cuts here in the next 12 months I would probably want a little bit better rate in the next negotiation, but just kind of how that works going forward.

Jared Wolff: Yeah. Our relationships are negotiated annually. We're in that process right now. It's not uncommon that you agree to some sort of formula tied to Fed funds. It could be plus or minus or a percentage of Fed funds. As Fed fund comes down, that formula gets applied to whatever Fed funds is.

Speaker Change: Our our relationships are negotiated annually.

Speaker Change: And we're.

Speaker Change: We're in that process right now.

Speaker Change: And as you know it's it's.

Speaker Change: It's.

Speaker Change: Not uncommon that you agree to some sort of formula tied to fed funds.

Speaker Change: It could be plus or minus or a percentage of fed funds and then I started feeling comes down that formula gets applied to whatever fed funds is.

Ben Gerlinger: Gotcha. Okay. That's helpful.

Speaker Change: Got it okay. That's helpful. But it is but its annual in our cases, Daniel Youre not you know youre stuck with what you negotiate.

Jared Wolff: It's annual. In our case, it's annual. You're stuck with what you negotiate, but at least you have certainty over what it is.

Speaker Change: But you know at least you have certainty over what it is.

Ben Gerlinger: Sure. No, that makes sense. It's formulaic, but the formula can change, I guess.

Speaker Change: Sure sure no that makes sense, it's formulaic, but the formula.

Ben Gerlinger: Yep.

Ben Gerlinger: Okay. I got you.

Speaker Change: Okay, I Gotcha, all right I appreciate it yeah.

Ben Gerlinger: Yep.

Ben Gerlinger: All right. Appreciate it.

Jared Wolff: Yeah. Thanks, Ben.

Ben Garlinger: Thanks Ben.

Operator: Our next question comes from Timur Braziler of Wells Fargo. Please go ahead.

Speaker Change: Our next question comes from Tim Here <unk> of Wells Fargo. Please go ahead.

Timur Braziler: Hi. Good morning.

Speaker Change: Hi, good morning.

Jared Wolff: Morning.

Speaker Change: Good morning circling.

Timur Braziler: Morning. Maybe just circling back on the margin discussion. Q4 benefits from some of the activities. In Q3, they get the full quarter impact. I am just wondering, as we look past that, you are liability sensitive kind of over the next 12 months. Should we just assume kind of a step up higher in margin, subsequent to some of these actions from Q3 playing out in Q4? Is there a lagging period where maybe margin expansion slows before the liability sensitive balance sheet actually plays out?

Speaker Change: Maybe just circling back on the margin discussion so <unk> benefits from some of the activities and <unk>. They get the full quarter impact I'm. Just wondering as we look past that your liability sensitive kind of over the next 12 months and should we just assume kind of a step up higher in margin.

Speaker Change: Subsequent to some of these actions from <unk> playing out in the parking or is there a lagging period, where maybe margin expansion slowed before the liability sensitive balance sheet actually played out.

You know.

Joseph Kauder: I think the way to think about it is we will have benefit in the Q4 from the restructuring actions that we've taken, that should be pretty meaningful. We remain very conservative with respect to how we're thinking about the rate cut environment, our betas, et cetera. As we mentioned, we only have one cut in our forecast for the rest of this year, and we're assuming a pretty moderate beta. I think that's reasonable given the uncertainty and all the variables that are in the economy, including the impact election and everything.

Speaker Change: I think the way to think about is we will have benefit in the fourth quarter from the restructuring actions that we've taken and that should be pretty meaningful.

We all have been very we remain very conservative with respect to how we're thinking about the rate cut environment, our betas et cetera.

As we only.

Speaker Change: As we mentioned, we only have one cut in our in our forecast for the rest of this year and we're assuming a pretty moderate rate up.

Speaker Change: And I think that's reasonable given the uncertainty in all of the variables that are in the economy, including the election impact collection and everything so as you look forward tumor.

Joseph Kauder: As you look forward, Timur, our strategy and our overall approach is to continue to grow the margin through continuing to bring down the cost of funds, continuing to see lower cost loans roll off, higher cost loans roll on, and positioning the balance sheet for growth in those areas like warehouse and lender finance, where we can see good margins and good returns.

Speaker Change: Our strategy and are.

Speaker Change: Overall approach is to continue to grow the margin through continuing to bring down the cost of funds continuing to see.

Speaker Change: Lower cost loans roll off higher cost loans roll on and positioning the balance sheet for growth in those areas like warehouse and lender finance, where we can see good margins and good returns.

Timur Braziler: Okay. Speaking of lender finance, I guess maybe a two-part question. A, just some of the rationale in making that acquisition this quarter, some of those purchases. If I'm not mistaken, I believe warehouse and lender finance were kind of the largest C&I categories of legacy Bank of Cal. I'm just wondering what your expectation is for lender finance kind of as that business gets rolled out. Is that going to be one of the larger areas within commercial? What's the overall role you expect lender finance to play for the bank?

Speaker Change: Okay, and then speaking of lender finance.

Speaker Change: Maybe a two part question age as some of the rationale and making that acquisition.

Speaker Change: This quarter some of those purchases and then if I'm not mistaken I believe warehouse and lender finance or kind of the largest C&I categories of legacy Bank a cow I'm just wondering what your expectation is for lender finance kind of as that business gets rolled out is that going to be one of the larger areas within.

Speaker Change: Commercial what's the overall would you expect lender finance for the bank so.

Jared Wolff: You are correct that warehouse was one of the larger areas for Banc of California, but we didn't have lender finance. That was a legacy PacWest area. PacWest had sold a big portion of that portfolio to a private equity firm. PacWest continued to service that portfolio. We were very familiar with those loans. When the private equity firm told us they were looking to exit it, we were able to buy them back at par with full awareness of what was in that portfolio. I had stayed in touch with the team, and we already had several hundred million of those loans on the books that hadn't run off. Adding 320 got us above $700 million.

Speaker Change: You are correct that warehouse was one of the larger areas for banc of California, but we didn't have lender finance that was a legacy Pac west area.

Speaker Change: Pac West had sold a big portion of that of that portfolio to another to a private equity firm.

Speaker Change: But Pac west continue to service that portfolio.

So we were very familiar with those loans. So when the private equity firms told us they were looking to exit it we were able to buy them back at par with full awareness of what was in that portfolio and I had stayed in touch with the team and we already had.

Speaker Change: Several hundred million dollars of those loans on the books that hadn't run off adding 320 got us above $700 million and so it made sense to me to to kind of if we're going to do it let's do it let's bring back this super talented team to go into this area, especially when we see a dearth of other lenders participating.

Jared Wolff: It made sense to me to kind of, if we're going to do it, let's do it, and let's bring back this super talented team to go into this area, especially when we see a dearth of other lenders participating. We like the area quite a bit. We think that it has historically had very low losses, if any. The CECL mark, the coverage ratio you have on CECL for that as well as warehouse are fairly low. They're relatively short-term loans. Given the historical benefits, you don't have a big carrying cost for the loans. It doesn't generate a lot of deposits, but you can afford it when you have other areas that do generate deposits. We like the benefit of that business very much. I think our team is going to do a great job expanding that business.

We like the area quite a bit we think that it has historically had.

Speaker Change: Very low losses, if any and so the Cecil Mark.

Speaker Change: The coverage ratio you have on Cecil for that as well as warehouse are fairly low they are relatively short term loans.

Speaker Change: And given the historical benefits you you don't have a big carrying cost for the loans and so it doesn't generate a lot of deposits, but you can afford it when you have other areas that do generate deposits.

Speaker Change: And so we like to be.

We like the we like the benefit of that business very very much and I think our team is going to do a great job expanding that business.

Jared Wolff: I'm hesitant to give a size. Our warehouse business today is about $1.2 billion. When we were at Banc of California, we tried to keep it a little bit lower given the size of our balance sheet. I could see warehouse going to $2 billion. I wouldn't have any problem with that. Lender finance, I think we have to leave a couple of quarters to see how it grows and see what opportunities they can find that makes sense. I don't want to put out any numbers that might make them feel like they have targets they have to hit. They're working at it now, and I know that they're focused on credit quality. We'll let that just kind of expand as it does. I would say that fund finance is similar to those areas. They're expandable.

Speaker Change: I'm hesitant to give a size like our warehouse business today is about $1 2 billion. When we were at Banc of California, We tried to keep it a little bit lower given the size of our balance sheet, but I could see warehouse.

Speaker Change: Going to 2 billion I wouldn't have any problem with that lender finance I think we have to leave a couple of quarters to see how it see how it grows in fee.

Speaker Change: What opportunities they can find that makes sense. So I don't want to put out any numbers that might make them feel like they have targets. They have to hit there. They are working at it now and I know that they're focused on credit quality. So, we'll let that just to kind of expand as it does.

Speaker Change:

Speaker Change: I would say that fund finance similar to those areas they're expandable.

Jared Wolff: They're kind of lines of credit that go up and down. That business has been up in the mid 7s and kind of now it's in the upper 5s. That business has room to expand as well. We like all three of those businesses.

Speaker Change: Kind of lines of credit that go up and down.

Speaker Change: That business has been up in the mid Sevens and kind of now it's in a day.

Speaker Change: The upper fives, and so that that business has room to expand as well we like all three of those businesses.

Timur Braziler: Great. Thanks for the color.

Speaker Change: Great. Thanks for the color.

Jared Wolff: Yeah. Thank you.

Speaker Change: Yeah. Thank you.

Operator: The next question comes from Timothy Coffey of Janney. Please go ahead.

Speaker Change: The next question comes from Tim Coffey of Janney. Please go ahead.

Timothy Coffey: Great. Thank you, and thanks for the opportunity to ask a question.

Tim Coffey: Alright, Thank you and thanks for the opportunity to ask a question Hey, Tim.

Jared Wolff: Hey, Tim.

Timothy Coffey: Hey, Gabe. In the investor deck, there's a couple of bullet points about opportunities to optimize the balance sheet. I'm wondering if you can kind of share what some of those might be, and would any of them result in lower assets by year-end?

Tim Coffey: And the investment that Theres discuss a couple of bullet points about opportunities to optimize the balance sheet. I'm wondering if you can kind of share what some of those might be and whether any of them resulted in lower assets by year end.

Tim: As of right now, we're not looking at opportunities to shed assets, if anything I think we want to keep the right <unk>.

Jared Wolff: As of right now, we're not looking at opportunities to shed assets. If anything, I think we want to keep the right asset base to grow from. Selling assets is not something we're looking at right now. When I think about improving the balance sheet, I think about a couple things. I think about how do we optimize our capital stack? What's coming due in terms of preferreds or sub-debt or anything like that, and can we build up liquidity and capital to take that out? Do we actually need it? Those are the opportunities I'd like to take down the road when we have what we would consider to be excess capital. We've also been living in a state where our financial results are predictable and stable, that we feel that it's prudent to take capital actions, whatever those might be.

Tim Coffey: Asset base to grow from.

Tim Coffey: And so selling assets is not something we're looking at right now.

Tim Coffey: When I think about improving the balance sheet I think about a couple of things I think about.

Tim Coffey: How do we optimize our capital stack.

Tim Coffey: And whats coming due in terms of preferreds or sub debt or anything like that and can we build up liquidity and capital to take that out do we actually need it.

Tim Coffey: And those are the opportunities I'd like to take down the road when we have what we would consider to be excess capital and we've also been living in a state where.

Tim Coffey: Our financial results are predictable and stable that we feel that it's prudent to take capital actions whatever those might be we're not there yet and as we've said we want to get we want to have excess capital, which looks closer to see if you're one of 11, but I think.

Jared Wolff: We're not there yet, and as we've said, we want to have excess capital, which looks closer to CET1 of 11. I think whether it's 11 or somewhere around there, I don't want to peg it the number specifically, but I think there is opportunities to prune the balance sheet on that side as opposed to on the asset side.

Tim Coffey: Whether it's 11 or somewhere around there I don't want to peg it the numbers, specifically, but I think there is opportunities to prune the balance sheet on that side as opposed to on the asset side.

Timothy Coffey: Okay, great. That's helpful. Just looking out more long-term, if I look at the mix of earning assets, say about 70% is loans, 15% is just some securities. Is that the right mix of earning assets longer term?

Speaker Change: Okay, Great. That's helpful. And then just looking at more long term if I look at the mix of earning assets and about 70% as loans, 15% is just the securities is that the right mix of earning assets longer term.

Jared Wolff: I think 12% to 15% securities is probably right. Joe, what do you think?

Speaker Change: I think 12% to 15% Securities is probably right would you what do you think.

Joseph Kauder: Yeah. We manage our liquidity pretty strongly. What you could see over time, depending upon how things evolve is, maybe we have a little less cash for a few more securities, but the combined cash and security levels that we have today, we feel pretty comfortable with.

Speaker Change: Yeah, you know we manage our liquidity.

Pretty strongly what you could see over time, depending upon how things evolve as maybe.

Maybe we can have a little less cash a few mortgage securities, but is going to like the combined cash and security level that we have today, we feel pretty comfortable with.

Timothy Coffey: Great. Okay. Thank you very much.

Speaker Change: Right. Okay. Thank you very much.

Jared Wolff: Thank you.

Speaker Change: Thank you.

Operator: The next question comes from Chris McGratty of KBW. Please go ahead.

Speaker Change: The next question comes from Chris Mcgratty of K BW. Please go ahead.

Chris McGratty: Hey, good afternoon.

Speaker Change: Hey, good afternoon.

Jared Wolff: Hey, Chris.

Chris McGratty: Jared Shaw, I want to push a little bit on the capital question. You're going to be pretty close to 11% in early 2025. You did mention share buybacks with your stock at tangible and maybe re-rank the priorities for us. Thanks.

Chris Mcgratty: I Wonder Chris I'll go to push it a little bit on the on the capital question, I mean, youre going to be pretty close to 11% in early 'twenty five you Didnt mentioned share buybacks with your stock at tangible and maybe re rank the priorities.

Jared Wolff: Yeah. No, you're right. We'd have to look at all of those things at the time. The things that come up are buying back the preferred. Obviously, we're constantly investing in our company, and these things aren't necessarily mutually exclusive. It could be a buyback, it could be dividend, it could be buying back the preferred. The preferred has a ceiling on it in terms of the price, right? A buyback, you need to do that analysis at the time you intend to do it because you need to know where you're trading at. If our stock continues to trade at levels where it is now, and I hope it doesn't, and frankly, I don't think it will. As we continue to show progress on earnings, I would be surprised if our stock continued to trade here.

Yeah, Yeah, no you're right I mean, we'd have to look at all of those things at the time, so the things that come up or buying back the preferred.

Chris Mcgratty: Obviously, we're constantly investing in our company and these things aren't necessarily mutually exclusive.

Chris Mcgratty: Could be a buyback it can be dividend it could be buying back the preferred the preferred as a ceiling on it in terms of the price.

Chris Mcgratty: Right.

Chris Mcgratty: And a buyback you need to do that analysis at the time, you intend to do it because you need to know where you're trading at if our stock continues to trade.

Chris Mcgratty: At levels, where it is now and I hope it doesn't and.

Chris Mcgratty: Frankly, I don't think it will as we continue to show progress on earnings I would be surprised if our stock continues to trade here.

Jared Wolff: We would absolutely buy it back at these low price to tangible book. If it's still there because of whatever conditions exist, that would be a very high priority, Chris.

Chris Mcgratty: We would absolutely buy it back at these low price to tangible book.

Chris Mcgratty: And if it's still there because of whatever conditions exist, we would that would be a very high priority Chris.

Chris Mcgratty: Great and then Joe maybe just a question given the movements in noninterest income in the quarter, just any guidance or range of where like a reasonable jumping off point.

Chris McGratty: Great. Joe, maybe just a question, given the movements in non-interest income in the quarter, just any guidance or ranges where a reasonable jumping off point into the next couple of quarters would be great.

Speaker Change: You know then into the next couple of quarters Me Craig Yeah, I think we've said.

Joseph Kauder: Yeah. I think we've said historically that the run rate about $11 million a quarter of non-interest income. On a core basis, I think that still holds true. We've had some noise the last two quarters, and I can't promise you we won't have noise again because when we have to run fair value marks through non-interest income, it's kind of hard to predict. On a core basis, I think that $11 million a month number is a really solid number.

Speaker Change: Historically that the run rate of about $11 million a quarter of noninterest income and on a core basis I think that still holds true we've had some noise. The last two quarters and I can't promise you we won't have noise again, because you know.

Speaker Change: When would you have to run fair value marks through.

Speaker Change: Noninterest income is kind of hard to predict but on a core basis.

Speaker Change: I think that $11 million a month number is a really solid number.

Chris McGratty: All right. Perfect. Thank you.

Speaker Change: Alright, perfect. Thank you.

Speaker Change: Okay.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Speaker Change: [music].

Speaker Change: Yeah.

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Speaker Change: Yes.

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Speaker Change: Okay.

Speaker Change: Yes.

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