Operator: Good day, and welcome to the Banc of California Q3 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Meghan O'Leary, Investor Relations. Please go ahead.
Meghan O'Leary: Good morning and thank you for joining Banc of California's 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. Reconciliations for these measures and additional required information are available in the earnings press release and earnings presentation, which are also available on our investor relations website. Before we begin, we would like to remind everyone that today's call will include forward-looking statements, including statements about our targets, goals, strategies, and outlook for 2026 and beyond, which are subject to risks, uncertainties, and other factors outside of our control. Actual results may differ materially.
Meghan O'Leary: For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation, as well as the risk factors section of our most recent 10-K. Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer, and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like now to turn the conference over to Jared.
Jared Wolff: Thanks, Meghan. Good morning, everyone. We delivered a strong Q3 with meaningful growth in earnings and profitability while continuing to strengthen our balance sheet and grow the franchise. In the Q2, we took several deliberate actions to improve the earnings capacity of our balance sheet, reduce selected credit exposures, and create additional opportunities for profitable growth. We are now seeing the benefit of those actions, and our teams continue to grow the business while executing on them. Earnings per share were $0.46 and pre-tax, pre-provision income was $118.4 million. Compared with the Q1, before the strategic repositioning, those measures increased 18% and 12%, respectively. Year over year, earnings per share increased 21%, and pre-tax, pre-provision income increased 16%. We also generated positive operating leverage. Revenue increased 6% from a year ago while non-interest expense was essentially unchanged.
Jared Wolff: Return on average tangible common equity reached 11.93%, up over 200 basis points from Q1. Net interest income increased 9% from the Q2, and our net interest margin expanded 21 basis points to 3.34%. These results demonstrate the progress we have made in unlocking the earnings power of the company, and we see a clear path to further earnings growth ahead. The repositioning also advanced a broader objective, building a balance sheet that can produce sustainable earnings across a range of economic and interest rate conditions. We completed our securities reinvestment during the quarter, deploying the proceeds into higher-yielding assets. We also redeemed $385 million of subordinated debt ahead of a significantly higher contractual reset rate. Together, these actions increased asset yields and avoided a substantial increase in future borrowing costs. The Q3 reflected the full benefit of the debt redemption.
Jared Wolff: The securities reinvestment was completed in Q3, so we expect an additional benefit from a full quarter of those earnings in Q4. We completed both targeted loan sale transactions with the performing CRE sale closing in Q3 and the remaining LIHTC construction sale closing 21 October. Results were consistent with the marks established in June. These sales reduced selected credit exposures and borrower concentrations and created additional capacity for profitable growth. Exiting these lower yielding or non-performing exposures is also expected to support further NIM expansion in Q4. While we executed these actions, client activity remained strong. Our bankers delivered another strong quarter of production with $2.6 billion in loan production and disbursements, contributing to 6% annualized growth in loans held for investment. Production was broad based across all of our lending categories, demonstrating the strength and diversity of our platform.
Jared Wolff: We continued to direct capital toward businesses where we understand the risks and see attractive risk-adjusted returns. New loan production was priced above our existing portfolio yield. That production is improving the yield mix of our portfolio as existing loans repay while we maintain our underwriting and return requirements. We are also continuing to expand the capabilities of our franchise. Our launch of private banking is part of that effort, giving us more ways to serve existing clients, develop new relationships, and support long-term growth. On deposits, we grew core balances while reducing our reliance on brokered funding. Period end core deposits increased approximately $515 million during the quarter, and total broker deposits declined approximately $375 million. Average total deposits grew 8% on an annualized basis, supported by interest-bearing relationship deposits.
Jared Wolff: Over the past two years, we have opened more than 6,000 new non-interest-bearing business deposit accounts, representing approximately $1.3 billion in deposits. This activity reflects the continued success of our relationship-driven approach and our ability to attract high-quality clients to the bank. Our focus is not just on bringing in new clients, but on building broader, deeper relationships over time, earning more of each client's operating deposits, and serving more of their banking needs. Turning to credit. Non-performing, classified, and delinquent HFI loans declined during the quarter, reflecting portfolio actions and resolutions. Classified loans and delinquencies reached five-quarter lows. Special mention loans increased during the quarter, although they remain below year-ago levels. We continue to take a proactive approach to managing credit. As we have said before, we are quick to downgrade and slow to upgrade, and when we identify potential issues early, we act decisively to address them.
Jared Wolff: That discipline remains an important part of how we manage the balance sheet and maintain disciplined underwriting as we grow. We are also building capital. Our CET1 ratio increased 45 basis points to an estimated 9.7%, exceeding the anticipated range we communicated last quarter. The increase reflects strong earnings generation and a lower regulatory deduction for NOL-related deferred tax assets. Continued capital generation strengthens our capacity to support relationship growth and maintain flexibility. We will remain disciplined in evaluating capital deployment against its contribution to long-term shareholder returns. We are building resilience through the choices we make on both sides of the balance sheet. Reducing selected credit concentrations, growing relationship funding, managing interest rate exposure, and retaining capital for optionality and strength. We are focused on building a balance sheet that can perform well across a variety of economic and interest rate environments.
Jared Wolff: Our objective is to sustain attractive returns through changing conditions while maintaining disciplined underwriting and liquidity. As we look ahead, we are confident in our ability to continue growing earnings because we see several meaningful drivers of further improvement already in place. in Q4, we expect additional benefits from the full quarter contribution of our securities reinvestment and the completion of the targeted loan sales. Beyond that, scheduled repricing within our multifamily portfolio and new loan production at yields above the existing portfolio provide opportunities to improve asset returns. As we have mentioned previously, we anticipate retiring our preferred stock when it is redeemable in September of 2027. Continued growth in relationship deposits and disciplined expense management will support that progress. Together, these drivers give us confidence in our earnings trajectory as we enter 2027.
Jared Wolff: With that, I will turn it over to Joe to walk through the financial results in a bit more detail, and then I will come back with some closing comments. Joe.
Joe Kauder: Thank you, Jared. For Q3, we reported net earnings available to common and equivalent shareholders of $73.1 million or $0.46 per diluted share. Pre-tax, pre-provision income was $118.4 million, up 12% from Q1 and up 16% year-over-year. When adjusted for non-recurring items, core PTPP was $120.6 million. We continue to expect Q4 pre-tax, pre-provision income of $125 million to $130 million, reflecting additional repositioning benefits and continued business execution. Moving to net interest income, we recorded $272.4 million for the quarter, an increase of $21.9 million or 9% from Q2. Securities interest income increased $17.7 million. That increase included the benefit of reinvestment into higher-yielding securities and a non-recurring $2.8 million special dividend on FHLB stock. The available-for-sale securities yield for the quarter was up 23 basis points to 4.58%, and the total securities yield increased 142 basis points to 4.86%.
Joe Kauder: Higher interest income from loans and cash also contributed to the increase in net interest income, partially offset by higher deposit interest expense. Our net interest margin increased 21 basis points to 3.34%, primarily reflecting the benefit of higher security and loan yields. Our Q3 exit net interest margin was 3.35%, and we expect Q4 net interest margin of 3.35% to 3.40%, narrowing our range guidance. Average loan yield increased 6 basis points to 5.69%. Loan interest income and yield benefited from fewer non-accrual interest reversals and one additional day in the quarter, and new production was priced at 6.58% for Q3, supporting continued portfolio repricing and our Q3 exit loan yield was 5.78%. Total core loans increased 8% with strong production across multiple loan categories, while loans held for sale decreased 45%, reflecting the impact of our targeted loan sales.
Joe Kauder: The average cost of deposits increased 3 basis points to 1.83%, while total cost of funds increased 2 basis points to 2.16%. Average core deposits grew 15% annualized versus the Q2, reducing the need for broker deposits, which decreased $375 million in the quarter. The improvement in our funding mix helped offset the impact of higher market rates in the quarter, and our Q3 exit cost of deposits was 1.87%. In terms of interest rate sensitivity, our modeling indicates that net interest income remains relatively neutral to changes in interest rates when adjusted for our deposit repricing beta assumptions. Those assumptions matter, and actual results will depend on deposit pricing and balance sheet mix.
Joe Kauder: We manage interest rate exposure to support earnings across a range of conditions, and separately, changes in market rates can affect the value of our available for sale securities and tangible book value, which I will address shortly. Turning to non-interest income and expenses. Non-interest income was $31.4 million. This included approximately $5 million of non-recurring losses on loans held for sale and equity investments. Non-interest expense was $185.4 million, down $4.5 million or 2% from the Q2. The decrease primarily reflected lower FDIC assessments and the absence of the Q2 software charge, partially offset by higher compensation leaves and customer-related expenses. Our efficiency ratio improved to 59.1%, compared with 67.2% in the Q2. Our effective tax rate was 23.1%, including $1.9 million of tax favorability related to finalizing our 2025 taxes.
Joe Kauder: That benefit should be distinguished from our ongoing operating performance, as should the special FHLB dividend and the losses which I described above. We expect our tax rate to normalize to around 26% in the Q4. Turning to provision and credit. Provision expense was $10.4 million, compared to $9.8 million in the Q1. We use the Q1 as a comparison because the Q2 provision was elevated by the strategic repositioning. Net charge-offs were $17.3 million. More than half of this amount had been specifically reserved at 30 June. Our allowance for credit losses was 1.10% of loans, compared with 1.14% at 30 June. The decline in the allowance ratio primarily reflected charge-offs of loans for which we had previously established specific reserves. We believe our overall reserve levels remain appropriate.
Joe Kauder: On capital, our CET1 ratio increased to an estimated 9.70% at 30 September, compared with 9.25% at 30 June. Earnings contributed 28 basis points and a lower regulatory deduction for NOL related deferred taxed assets added 26 basis points, partly offset by changes in risk-weighted assets and other items. Tangible book value per share was $16.09 compared with $16.44 at 30 June, reflecting a $116.1 million increase in after-tax unrealized losses on available for sale securities as intermediate term interest rates increased. As noted, we have entered into contracts intended to hedge against the impact of extreme moves in interest rates. Looking ahead, we expect additional benefits in the Q4 from both our securities repositioning and our loan sales, along with continued opportunities from loan repricing, relationship deposit growth, and disciplined expense management.
Joe Kauder: To summarize our Q4 outlook, we continue to expect pre-tax, pre-provision income of $125 million to $130 million and a year-end CET1 ratio of between 9.80% and 9.90%, and we have revised our net interest margin outlook to 3.35% to 3.40%. With that, I will turn the call back to Jared.
Jared Wolff: Thank you, Joe. This was a strong quarter for Banc of California, and I am very pleased with the progress we have made. The actions we took last quarter are delivering the benefits we expected, and we are seeing meaningful improvement in the earnings power of the company. At the same time, our teams continue to grow the business, bring new relationships to the bank and maintain the discipline that has always been central to our strategy. As we look ahead, we see numerous levers that will continue to drive EPS growth. We are benefiting from the repositioning of our balance sheet, continued loan production at attractive yields, and the opportunity to grow our franchise while maintaining strong capital and liquidity. Importantly, we are focused on building a high-quality, consistent and sustainable earnings path.
Jared Wolff: We believe the combination of our stronger balance sheet, talented banking teams, and opportunities across our markets position us well for continued earnings growth and even higher returns ahead. I want to thank our nearly 2,000 Banc of California colleagues. They executed a significant set of strategic actions while continuing to serve our clients and grow the business. That takes focus and hard work, and I appreciate what our tremendous team continues to accomplish day in and day out. I am proud of our progress and very confident in the opportunities ahead. With that, operator, let us open the line for questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from David Chiaverini with Jefferies. Please go ahead.
David Chiaverini: Hi. Thanks for taking the questions. Wanted to start on the net interest margin. You are guiding 335 to 340, up from the Q3 level. Can you talk about the tailwinds or potential tailwinds to net interest margin looking out over multiple quarters? It sounds like fixed asset repricing should provide a nice multiple quarter tailwind.
Jared Wolff: David, good morning. That is right. We try to lay out in our investor deck the volume of multifamily assets that are expected to reprice and kind of the schedule over which they will do that. That is going to create some NII tailwinds as well as obviously margin tailwinds. Our production yield is meaningfully higher than our portfolio yield. Our lowest portfolio yield really sits in the multifamily portfolio. For those reasons, we expect margin to expand. I would also say that I was pretty pleased with our disciplined pricing on deposits. Deposit pressure is real. I think all banks have been talking about it. For the quarter, our average deposit costs only increased about 3 basis points. The average for the end of the quarter was a little bit higher, but I think they are very well managed.
Jared Wolff: Also running off higher cost broker deposits because of our deposit growth in the quarter was a nice benefit that we did not see coming. We just had really strong deposit growth, and that so far has continued into the beginning of this quarter. We will see where the average is and where we end up, but I think those are the important tailwinds.
David Chiaverini: That is helpful. Sticking with one of the components to NIM on loan pricing, looking on slide 9, looks like the rate on new production. You mentioned it is up sequentially, but year-over-year it is down 50 basis points. What drove that and to what extent is it simply mix shift to resi mortgage versus spread compression from competition?
Jared Wolff: Yeah. It is exactly that. It is mix shift because as I look, different loan categories price differently. But when I look at where things are quarter-over-quarter in terms of production yield, I am just going across my list here that I have at my desk. We did kind of peak, I would say Q2 pricing was a little bit higher in some categories than Q3, but not all. Multifamily was a little bit higher in Q2 than Q3. But construction is higher now than it was in Q2. C&I was a little bit higher, and that just could be just the nature of the loans we are putting on in any given quarter. Just how competitive we want to be. I would not read into it too much.
Jared Wolff: Production yield, excluding purchases of single family loans, production yield was higher in Q3 than Q2. I would chalk it mostly up to kind of single family purchases. But it could be just kind of anomalies of what the mix is in any given quarter.
David Chiaverini: Very helpful. Thank you.
Joe Kauder: I think we also had some rate cuts in 2025, and we have a decent portion of our portfolio, 30% to 40% of our loans are floating rate C&I. That was also a contributor to why those came down as well. Why you see that coming down. Then rates have obviously turned back up recently. But back in 2025, you remember we had some cuts.
David Chiaverini: Thank you.
Operator: The next question is from Chris McGratty with KBW. Please go ahead.
Chris McGratty: Morning. Joe, question on expenses. The implied Q4 is a touch link quarter. You gave a good disclosure in the slides about the sensitivity of ECR costs to rates. The question, I guess, would be for beyond Q4, how do we think about the balance of ECR deposits as you are trying to grow other deposits? Ultimately, I guess, level of expense growth either with or without the ECRs. Thanks.
Joe Kauder: Yeah, Chris. I will start with Q4. Obviously, we are going to have some continued improvement probably in our FDIC assessments as we move forward. I think we could expect those improvements to be offset by higher customer-related expenses as we reflect the 25 basis point rate increase we just had. As we look out beyond that, I think we are a big fan of the HOA business, and we have a page in the deck where we show the total cost of those deposits. They are not as cheap as some of our core non-interest-bearing and other opportunities, but when you compare them to brokered and other things where we, other opportunities, it is a good, solid business. It is very stable and provides a good base. I think we will want to continue to try to grow that business in a prudent, responsible way.
Joe Kauder: Jared, anything you would add to that?
Jared Wolff: No, it is an outstanding business. I mean, we got $4 billion of deposits that are at costs that are really reasonable. The third-party cost that we pay is to the property management company, it is not to the HOAs themselves. So those deposits sit in NIB. They are very stable. They are distributed across a huge number of accounts. We want to continue growing that business. Our team does an outstanding job. I think in the country, there are four or five leaders in this business, and we are one of them. So I feel great about it, and we have got an outstanding team.
Chris McGratty: Okay, great. Jared, the second question is more directed to you. Just where you are at with the balance sheet optimization efforts. Obviously, made a ton of progress this quarter. Obviously, have the preferreds coming due. I am ultimately trying to gauge if this, it seems like a smaller but more profitable balance sheet. I am hearing you on the NIM, but I guess the question is more just size of balance sheet and any tweaks from here.
Jared Wolff: Look, I think that all the modeling that we have been doing suggests that we should be growing organically with the production levels that we have. If we do not grow, Chris, and we just remix, we are still going to make more money. So if we are able to grow on top of that, it is going to continue to drive higher earnings ahead. There are a couple different ways we can grow.
Jared Wolff: For once in the last, it feels like for the last five or six years, we finally have the opportunity to look at multiple types of assets into which we can deploy capital. So we can deploy them into loans, we can deploy into securities, and they are both good risk-adjusted returns. You can find a lot of opportunities. So our plan is to grow from here, and we think we can do it really well organically.
Chris McGratty: Great. Thank you.
Jared Wolff: Thank you.
Operator: The next question is from David Feaster with Raymond James. Please go ahead.
David Feaster: Hi. Good morning, everybody.
Jared Wolff: Morning.
David Feaster: I wanted to touch on commercial loan growth side. Just the core commercial loan growth side. Obviously, there is some strategic declines in multifamily. Exclusive of that and the single-family resi purchases, core commercial loans relatively flattish. How are pipelines shaping up across your businesses? How do you think about growth exclusive of the SFR and warehouse portfolios and your ability to accelerate that?
Jared Wolff: Well, I like the momentum of our teams. In Q2, we did $2.8 billion of production and disbursements. In Q3, we had $2.6 billion of production and disbursements. We have payoff and pay downs of about $2 billion. That feels pretty good. These last two quarters we have had on a, you put aside the loan sales, we have had net portfolio growth. I think we can continue to do that. In terms of where it is going to come from, we have got a lot of different levers, and I like the distribution that we have. I like the fact that we have some things work when other things are not, and that is good. It shows that we have balance in our portfolio. We are not producing solely from one place. On the C&I side, we have got many different levers to pull.
Jared Wolff: We obviously have our lender finance and our warehouse business, but our core C&I grew in the quarter. We had $355 million of production and disbursements, and we had $278 million of payoffs and pay downs. Sometimes you can control it, sometimes you cannot, but it grew over the quarter. It was flat the quarter before that. I see growth ahead, David, and I think our teams are working really hard at it. As I mentioned also, if we just remix our portfolio, we are going to make more money, and I feel good about that too.
David Feaster: That is great. On the other side of the balance sheet, one of the most impressive things that you all did, your core deposit growth was terrific, especially when you considered the optimization that you have done. Where are you seeing the most opportunity? You touched on the HOA business. Where are you seeing the most opportunity on the funding side for growth, and how do you think about maybe the competitive landscape and your ability to continue to drive that core deposit base and optimize things further?
Jared Wolff: Well, thanks for recognizing that. We are being opportunistic. For example, in the quarter, we grew interest-bearing deposits more than non-interest-bearing deposits, but that was intentional. We said to our teams, "Look for all opportunities. Let's evaluate cost." As we mentioned, our average deposit cost only went up by 3 basis points. Our teams are being very opportunistic and looking to make sure that we are taking as much wallet share as we can from our existing clients. We think the private banking initiative that we launched, which by the way, is not expensive. We are deploying tools that we have and people that we have toward a sector that we think is underserved in our key markets. This is a sector that we have been asked to serve.
Jared Wolff: These RIAs do not want to give their business to competitors that other banks that will compete with them with wealth management services. They are looking for a bank that will provide really high-touch solutions to their clients in a non-competitive way to them as wealth advisors. We think that this is a place that we can lean in and do really, really well, and I expect to get some growth from there. Our venture business is doing really well. Our venture business continues to bring in a big amount of deposits, which is not only our fund finance, but our life sciences and our tech team, and those deposits continue to grow. Now they are different. On the venture and life sciences side, these are startups. They bring in deposits, and then the deposits actually burn off.
Jared Wolff: Unlike a traditional C&I business, a law firm, an accounting firm, a professional services company where the deposits are stable and growing. These burn off, which means we have to work harder to grow the deposits. Our team is doing an outstanding job.
David Feaster: That is terrific. Maybe last one, just high level for you, Jared. You have done a lot of optimization, really, as I look back over the past two years, right? There has been a lot of noise. We are seeing the benefits of that now. This quarter was pretty straightforward. That was nice. I guess, when I talk to investors, we talk a lot of time about consistency of earnings and the durability of the earnings growth. You touched on a little bit, just given some of the repricing dynamics, but how do you think about your ability to drive much more clean and consistent earnings, just kind of given some of the levers that you have pulled and the durability of your earnings growth outlook?
Jared Wolff: I would say that this was one of the most boring quarters we've had in a while, and I expect that to continue. We believe that the glide path that we've set in place at this point is kind of on the right path. We don't see any big moves that we need to make. We're obviously economy-dependent like everybody else, but assuming the economy holds up and there's no major moves, we expect to see resilient, sustainable, and growing earnings for the quarters ahead. I'm not sure what would get in the way of that. So we think that the moves we made put us in place to do this, and we hope it's boring and kind of rinse and repeat with the growing earnings from here. I'm really pleased with our growth in ROTCE, and we expect that to continue to grow as well.
David Feaster: Terrific. Thanks, everybody.
Jared Wolff: Thank you.
Operator: The next question is from Jared Shaw with Barclays. Please go ahead.
Jared Shaw: Thanks. Good morning. Thanks for the info in the slide deck. I guess, as we look at the securities portfolio, Joe, maybe can you give us an expectation of what yields should be for Q4 with the full impact of the restructuring? Then when we look at the roll on/roll off from there going forward, I guess that's what, just a little under $100 million a quarter. What's sort of that roll-off yield we should expect then going forward?
Joe Kauder: Yeah. Jared, on the securities portfolio, during Q3, we reinvested a lot of the proceeds, but we didn't get a full quarter of the benefit. If you look out into Q4, I think you could expect probably somewhere between 15 basis points or so expansion of yield, somewhere in that range, maybe like 12 to 15 basis point expansion of yield on the AFS securities book. I think that's going to be very positive and continue to contribute to our net interest margin as well as the loan transactions we did. We've taken those loans, getting those loan sales closed and getting them off the books. Some of those were nonperforming loans. As those come off, we replace those with performing assets. So that's also going to be sort of a kicker to our net interest margin in Q4.
Jared Shaw: Okay.
Joe Kauder: Did I answer your question or was there part of it I didn't get?
Jared Shaw: Yeah, I guess just now that the securities restructuring is done, what's sort of the go-forward roll-off rate as we look at that 7% that should pay down within the first year?
Joe Kauder: If you are talking about the securities book, I think what you will probably see is us reinvesting in the securities book, and continuing to grow yield there as we reinvest lower rate securities rolling off, and then newer, higher rate securities coming on. In addition to that, we may look to grow the AFS securities portfolio as we look for the most optimal way to deploy our capital. There may be some additional benefits there.
Jared Shaw: Okay. Thanks. I am sorry if I missed this, but what is sort of the expectation now for the beta through the cycle with some of the changes and improvements you have made to the core deposit base?
Joe Kauder: I think we have historically said our cumulative beta is around 60%, and I think that is still kind of our operating assumptions, although we aspire to outperform that in all environments. We will see how it comes out.
Jared Shaw: Great. Thanks.
Jared Wolff: Thanks, Jared.
Operator: The next question is from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Hey, good morning, everyone.
Jared Wolff: Morning.
Matthew Clark: Just around the margin. Assuming we get a December rate hike here, and I don't think you have rate hikes in your guidance. I see your sensitivity slide on page 17, which is pretty modest, but at least in the near term, with 30% to 40% of your loans repricing pretty quickly, and the deposit cost increase being pretty manageable to date. Is it fair to assume that there might be a little bit of upside to that margin guide in Q4 or even into Q1?
Jared Wolff: I do not know if we want to go there yet. We are fairly neutral. I think I was pleased with the results of our margin in Q3. There is still a lot of moving parts. A December rate hike is not going to really show up too much in Q4. We will get the benefit of that in Q1, to your point. I think for now, we feel comfortable with our margin guidance for Q4, would not you say, Joe?
Joe Kauder: Yeah. The one thing I would add to that is, if you think about we are neutral from a total earnings perspective, Matt. If there was a rate increase, what you will see is you will see a slight expansion of NIM and net interest income, but then you will see an increase in the customer-related expenses as well, which will offset in total earnings. For any rate increase, you will see a small expansion in NIM. As I said, being neutral, that will be largely offset with the expenses.
Jared Wolff: The one thing I would say to that, though, and this is always the debate we have internally, is that all these models assume a static balance sheet.
Joe Kauder: Yeah.
Jared Wolff: When rates go up, we are going to make more money. It is not going to offset completely. On a static balance sheet, it is going to offset. As we put new loans on the books, we are going to grow earnings. That is my whole point about our balance sheet remixing is so powerful that we do not need to grow to make more money. It is just happening generally day in and day out, which is what is so exciting about where we sit right now, particularly because of the multifamily portfolio. I would expect to make more money in an up-rate environment because our balance sheet is not static, it is dynamic. But in a flat balance sheet, it is kind of neutral.
Matthew Clark: Got it. Okay, great. On the held for sale that is still left there, I think $65 million was taken out of the $300 million that was intended to be sold. It looked like it was still under construction and was converted to permanent financing. Can you just provide us some thoughts on the final resolution of that?
Jared Wolff: Yeah, that is not in held for sale. That came on as a performing loan on our books.
Matthew Clark: Okay.
Jared Wolff: We had committed to finance the permanent piece so that it did not get sold because it converted to permanent. We committed to take the permanent financing for any of those loans anyway, because they are good performing loans. When those construction loans convert, they will come onto our books as performing mini-perm loans for these Low-Income Housing Tax Credit projects where we get CRA credit and everything else. We wanted those performing loans to be on our books. We just took them off during the construction phase when they got backed up. We do have a small portfolio of held-for-sale loans that we have put in over time as part of our strategy of moving loans in and out. We have them appropriately marked, and so those will get resolved over several quarters.
Jared Wolff: The $825 million or $827 million of targeted loan sales that we announced in Q2, those are done. Those are all gone at the marks we projected and off our books.
Matthew Clark: Understood. Okay, great. Thank you.
Jared Wolff: Yep. Thank you.
Operator: The next question is from Anthony Elian with JPMorgan. Please go ahead.
Anthony Elian: Hi, everyone.
Jared Wolff: Morning, Anthony.
Anthony Elian: Morning. The loan-to-deposit ratio on a period end basis ticked up a little bit to 87%. It seems like you still have some capacity to increase that, but would like to hear your thoughts on maybe where you expect that over the near term.
Jared Wolff: Yeah, look, we're going to make more money the higher we go, right? We could go to 93% or 95%, and we'll be making more money. But what I've tried to do, and what our team is trying to do, is run a very balanced, disciplined company that grows in a reasonable way and doesn't get too hot in any direction. So if you want to run a balance sheet for all seasons and all interest rate environments and all economic climates, you don't want to be too frothy in any one direction. So running the loan-to-deposit ratio, 85% to 92% is probably where we're going to be. We had some loans come off, so it came down a little bit. I imagine it will probably float up to around 90%. And that'll keep us from buying expensive deposits just to fund loan growth when you get above that.
Jared Wolff: We've historically stayed around 88%, 90%, and I think that's probably where we'll end up.
Anthony Elian: Thank you. My follow-up on capital. You say on slide 7 that you anticipate achieving 10% CET1 in Q1. Is that the point at which you think you will resume buybacks, Jared? Is the TCE ratio coming more under the microscope, given I think it is around 7.3%? Thank you.
Jared Wolff: Yeah. TCE, that is going to float up, and I am not concerned that it is going to be floating down. We are not concerned about that. We want to be disciplined, and it is not going to be in the 6.5% or 7% range. We are going to keep that moving in the right direction. In terms of buybacks, Anthony, we of course hope that our stock is going to re-rate here with our higher ROTCE and our higher earnings glide path. Of course, that will create a better multiple on tangible book. But ahead of that, we are going to keep looking at it, and we want to make sure that we retain capital to buy back our preferred stock. But we are going to be opportunistic around capital. I do not know that it needs to be at 10 for us to buy back.
Jared Wolff: I am not going to put that line in the sand. I would like to know that we are going to achieve 10. If I do not think the final rules have come out on the regulatory relief for risk weightings. If for some reason the regulators said that that is going to be effective 1 January 2027, and we all knew, and we are adding 50 basis points or 60 basis points of CET1 come the new year, I think that kind of opens opportunities up for us in Q4. Absent that, I think we are just going to be careful and make sure that we have put good numbers under our belt. I am not going to draw a line in the sand, but we will just have to see how things go.
Jared Wolff: It is not a no, but it is a we will have to see all the things available to us and make decisions accordingly.
Anthony Elian: Understood. Thank you.
Operator: The next question is from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner: Thanks. Good morning.
Jared Wolff: Morning, Gary.
Gary Tenner: Joe. Hey, Joe, the discount accretion stepped down this quarter to $8.7 million from $11.2 million, I think, in Q2. It is a somewhat meaningful change, at least to NIM bits. I am just wondering, is that kind of a run rate going forward, or was it unusually low by your expectations in Q3?
Joe Kauder: Well, that is a great question. It was a little bit low. We got basically no accelerated discount accretion in the quarter. When you look at our portfolio and some of the timing of the repricing, we should start to be seeing more of that. It is hard to know, Gary. I do not want to commit to anything. When we do our forecasting and stuff, we try to be very prudent and not include a lot of that in there. But the number you saw this quarter was the base run rate without really any of the potential upside that could exist in that number.
Gary Tenner: Okay, so effectively then your Q4 NIM guide assumes just the base rate. Sorry, Jared, to talk over you.
Jared Wolff: No, go ahead.
Gary Tenner: No, I was just going to say, your guide for the NIM in Q4 basically assumes the base run rate closer to this level versus where it had been running.
Joe Kauder: That's correct.
Jared Wolff: I was just going to mention that in terms of tailwinds, we do have net discounts of about $33 million remaining. So that will come in over time, and it will benefit us. We're obviously putting on new loans at much higher rates. So, whether it comes or not, it doesn't really matter. But when it does come, it will benefit capital, and we'll take it in.
Gary Tenner: Appreciate that. Then just any thoughts, Jared, around the adds to nonaccrual or the inflows to nonaccrual this quarter? I know you talk about being aggressive and there's always inflows, outflows, but just any common thread or lumpiness within those inflows?
Jared Wolff: No. Nothing significant, just normal stuff. We do not have any material specific reserves at this point. So we feel good about where we sit and feel very good about our reserves. It was just normal ins and outs.
Gary Tenner: Got it. Thank you.
Jared Wolff: Thank you.
Operator: The next question is from Ben Gerlinger with Citi. Please go ahead.
Ben Gerlinger: Hi. Good morning.
Jared Wolff: Morning.
Ben Gerlinger: Wondering if we could, on page 12, it is a bit more nuanced, but you look through the maturity schedule for the multifamily loans. I get variable rate, but so hybrid rate, you guys imply that it is early fixed rate period before resetting. Do these resets generally stay with you guys? The only reason I ask is you have roughly $1 billion that is going to reprice about 300 basis points higher. I get that that is the material aspect of your margin lift, but do these always kind of stick around, and if so, do they pass DSCR math? I am trying to think, like resetting higher is also a credit implication too.
Jared Wolff: Yeah, no, it is a good question. This has been happening for, we have been in a rising rate environment now for a little while. So we have seen the impact for it. There was a whole schedule of loans that repriced before the ones that are coming up, right? That are now in floating rate periods. Our NPAs for multifamily loans are 0.1%. We have got a $5 billion book, and we have got a 0.1% multifamily, 0.1% in non-performing ratio. So the book itself is very well underwritten with very good loan to values. Just starting on the credit piece that they perform, and we have every expectation based on everything we have seen that they will continue to perform.
Jared Wolff: That is not to say that any given loan could not, somebody has a problem, but fundamentally, as a portfolio, it is performing extremely well for its size and for the repricing risk. Now I will go to your second question, which is kind of what happens, what do these things do? I would say it is mixed. Some of them surprisingly just stick around, and they are paying the higher floating rate, oftentimes just trying to be opportunistic and thinking about, okay, where are things going to settle in for them to fix permanently? Maybe they are trying to sell the property, and they do not want to get into a permanent loan where there is a defeasance where they will have to pay an exit fee. Sometimes that is part of the strategy.
Jared Wolff: Sometimes they are looking for extra capital to come in and be a partner to pay down the loan to get even better pricing on a permanent loan. Sometimes they do fix it. Fannie and Freddie right now are lower than what we are offering. We have reached out to these borrowers. As I mentioned, we have Project Reset where we will reach out to these borrowers and offer something that is shorter duration than Fannie and Freddie at a little bit higher rate with less prepayment cost. Oftentimes people will take it. About a third of the time they take it. That is just kind of the behavior. Our assumption is not necessarily that we keep these loans. Our assumption is that we are going to redeploy the capital. In fact, I would prefer not to keep a lot of these loans because they are broker-funded.
Jared Wolff: I can go into other forms of loans that have a better risk-adjusted return. We have got plenty of multifamily loans that I would rather shrink in and have a little bit less concentration. Our internal model is that we are going to exit a lot of these loans. They are willing to let them run off, give them incentives to move away if we need to, and we will be able to deploy the money into better yielding assets.
Ben Gerlinger: Got it. That is helpful. I get we are basically a year away now, but on the preferred, if you were to redeem it, how would the balance sheet composition look? Is there a funding avenue you would take, or just what would it look like?
Jared Wolff: Yeah. I will start and I will let Joe come in. I think the easiest way to think about it is if today we chose to redeem it all and fund it with FHLB, it would be cheaper. That would give us an opportunity to pay down the FHLB over time without a long-term commitment. We initially estimated that that would probably save us about half the cost of the preferred. It is $40 million after tax. That is why we have been saying we think that on a conservative basis, we would return $20 million of after-tax income to the common, which is $0.11 or $0.12 or something like that. That is how we get there. That is probably the easiest way to think about it. There are obviously other. We will have to see what the financing market is like when we get there.
Jared Wolff: But as of now, we think that that's a good proxy for what we would do. Joe, anything to add there?
Joe Kauder: Yeah. No, I think you nailed it, Jared. In a perfect world, we'd have some excess deposits, and we could partially fund it with that. But we'll just have to see where we are when we get out to 30 September, which is the redemption date. As Jared said, if you assume you backfill the 7.75% preferred with FHLB, the cost of the preferred today is an after-tax cost. It's like $40 million a year. If you backfill with FHLB, that's tax-deductible. You should pick up at least 50% of the benefit based on today's rates.
Jared Wolff: Yeah. There are all different terms of FHLB we could use based on
Joe Kauder: Yeah
Jared Wolff: what our thoughts are at the time.
Joe Kauder: Yeah.
Ben Gerlinger: Got you. Okay. No, that is really helpful. I appreciate it. Thank you, guys.
Jared Wolff: Thanks.
Operator: The next question is from Terry McEvoy with Wells Fargo. Please go ahead.
Terry McEvoy: Thanks. Just one quick one for me. Jared, I was hoping to get some clarity on your private bank comment. You said not expensive. Was that from an operating expense perspective or from a cost of deposits perspective?
Jared Wolff: Operating expense. But both. We have deployed a team that we have here to target this market without hiring additional people for the time being. We think we can absorb the capacity initially, and then as we build it out, we will grow the team in a very targeted way. There is some marketing expense and we added some APIs and some other things. But fundamentally, the operating cost was negligible for what we want to do.
Jared Wolff: That is from an operating expense standpoint. From a cost of deposit standpoint, we are targeting high-net-worth individuals, family offices, and entrepreneurs that want high-touch, tailored banking solutions for their family. This is not a rate-focused play. If they have excess funds that they want to put in an interest-bearing vehicle, that is probably the domain of the wealth manager. We want to help them make their lives simpler. I have used the example of my family.
Jared Wolff: I've got, between my kids, my wife and I, our in-laws, my parents, we probably have 12 accounts at Banc of California. When somebody wants to open a CD or they want to do something, we have a relationship manager here who texts with us and sends us stuff through DocuSign, and she's fantastic. That experience we can deliver to a lot of families and family offices that have multiple accounts to manage. They want to see it in one screen. They want to have a tight relationship experience. They want to make sure that things are done for them and in a very responsive way, and our team is excellent at that. We're now going to be deploying that to a group that we haven't targeted in the past.
Terry McEvoy: That's great. Thanks for the additional color.
Jared Wolff: Thank you.
Operator: The next question is from Timur Bravoleg with UBS. Please go ahead.
Timur Braziler: Hi, good morning.
Jared Wolff: Hey, Timur. Good morning.
Timur Braziler: Hey, guys. Joe, maybe just provide a little bit of color on how you are thinking about average earning assets into Q4. Then maybe a little bit more broadly, this quarter, you used some of that strong deposit generation to pay down brokered. I guess as we go forward, should we think that much of the core deposit growth goes to funding loans and growing the balance sheet, or is there still some ability to continue paying down your brokered and some wholesale funding on the liability side?
Joe Kauder: I think on average earning assets, I think you could see it continue to increase, maybe in the tune of, I do not know, anywhere from, let us just say several hundred million, if things go well. We would like to deploy excess deposits and excess liquidity wherever we get the best adjusted rate of returns, whether that be loans or securities. If you think about the securities, rates and securities have gotten really attractive, and they have a very nice risk-adjusted return when you take the low capital carry that is required for them. So we are going to be looking at them, we are going to look at loans, and we are going to see if we cannot continue to grow not only our earnings and our net interest margin, but our ROATCE and NIM as well.
Jared Wolff: Wait.
Timur Braziler: Okay. Then
Jared Wolff: I want to make sure I. Timur, were you asking if we were going to use excess deposits to pay down brokered?
Timur Braziler: Yeah. Excess deposit growth to pay down brokered versus growing the asset side.
Jared Wolff: Just to complement what Joe said, I think we have multiple things that we are going to do.
Joe Kauder: Yeah.
Jared Wolff: I think that we have the capacity with our loan and deposit ratio being what it is, to do multiple things. Joe's right that we are going to obviously use fund loan growth and asset purchases. But I do think that broker deposits could come down. I think we can do both.
Joe Kauder: Absolutely.
Jared Wolff: I would like it to come down over time. Yeah.
Joe Kauder: Yeah, absolutely. I am sorry. I did not mean to imply otherwise. Absolutely, we do.
Timur Braziler: Okay, great. I just want to make sure, so you think average earning assets can still grow with some of the HFS sales taking place and netting out in Q4? Then maybe similarly on Jared's question in terms of Q4 securities yield at up 15 basis points. I am assuming that is excluding the FHLB special dividend in Q3, or is that kind of an all-in cost quarter-over-quarter of 15 basis points?
Jared Wolff: Before we get to the securities, just on the average earning assets, our expectation is that we're going to grow the balance sheet. We don't have any planned sales. We don't have anything that is large, and we expect our teams to continue to grow the balance sheet by putting on good loans. But production is what it is, and we've got multifamily, large swaths of it that could pay off. We've got these maturity schedules of multifamily that are pretty large for repricing and maturing loans. That's the one thing that would offset growth. You could also see warehouse shrink because of just the rate environment. Our aspiration is to grow the balance sheet. If we're not growing the balance sheet, I still expect our earnings to grow because our portfolio mix is improving and our earning asset yield is improving on the loan side.
Jared Wolff: Let me let Joe address the investment side.
Joe Kauder: Yeah. Timur, if you look at it on page 15 of our deck, you'll see on the investment securities page, there's a row I have total AFS. I kind of showed you the total AFS securities portfolio yield. When I said about 15 basis point expansion, that's the yield that I'm saying would expand by that amount.
Timur Braziler: Got it. Thanks, guys.
Joe Kauder: That is not the total. The difference between that and the total investment yield is the yield you get on the FHLB and FRB stock, which is really hard to predict because you never know what the dividends are going to be until they tell you.
Timur Braziler: Got it. Thank you.
Operator: The next question is from Tim Coffey with Brean Capital. Please go ahead.
Tim Coffey: Morning, gentlemen.
Jared Wolff: Morning.
Tim Coffey: Joe, can you talk about the resiliency of your market vis-a-vis higher interest rates? I think back in September, you said that the 25 basis point hike that month would have nominal impact on your customers. But if we look out forward at 2 more rate hikes, does your view change?
Jared Wolff: Are you talking about whether we are able to retain deposits or the loan growth? Or what are you talking about?
Tim Coffey: The economy. Does the economic growth stall in your footprint with 2 more rate hikes?
Jared Wolff: Oh, does economic growth stall with 2 more rate hikes? Probably.
Tim Coffey: Yeah.
Jared Wolff: I think so. Right now, everything seems good. Although I would say that there is a huge amount of the economic engine in this country that is being driven by AI capital, right? When you think about how much capital is invested in AI, we do not have an unlimited amount of capital, and it is absorbing capital that could be invested in other industries. I think there has been a lot of concern about is the AI capital boom rate resilient enough to absorb a rising rate environment? If that slows down, which is propping up investment in a lot of places in this country in terms of infrastructure investment. If that slows down or even if it stays, it really has absorbed the capital that could be invested elsewhere. I do not know that I think those two things will work against the economy.
Jared Wolff: Rate hikes and the fact that AI has just taken up so much. AI infrastructure spending has taken up so much that it is basically taking capital away from all these other areas which could be growing. That is why I think rate hikes are probably going to stall the economy if we get a few more. Who knows? Like I said, that is why I mentioned on the call multiple times that we are building this balance sheet to be resilient in all seasons. I think one of the things that we did last quarter, and we did it several times last year, was we de-risked our balance sheet. We are looking proactively outward and saying, "What could be on the horizon?" It is one of the reasons why I am a fan of securities right now.
Jared Wolff: As I have said, I think that securities investment is some of the best risk-adjusted yields that we have had in a long time, and I mentioned that we have alternatives to assets. So we are being very selective on loan growth, and I think that we will continue to grow and we will continue to make good loans. But we have alternatives, and our job is to deploy capital in the best interest of shareholders. Sometimes that is in alternatives other than loans. We are making decisions about certain types of loans to avoid. I think we have been good stewards of that, and I believe that we are going to continue to grow even among rate hikes because of how we have positioned ourselves.
Tim Coffey: Great. Thanks. On the construction portfolio, is there an opportunity to benefit on the construction loan growth with all the infrastructure projects that are happening in your footprint ahead of the Olympics?
Jared Wolff: All the venues for the Olympics have been built in Los Angeles, so we do not need to build any new investments, any new venues for the Olympics. I am on the Los Angeles Sports & Entertainment Commission, so I am pretty close to it. We are fortunate that way. We have plenty of hospitality. There is some convention center investment that is going on. There are some new hotels and new large projects that we are participants in that I think that are good loans. The Palisades rebuilding. We will participate in home building, but not owner-occupied home building. We are not a Hunda lender. Some of it we will, some of it we won't, but nothing specific to the Olympics at this time, Tim.
Tim Coffey: Okay, great. Thanks. Those are all questions.
Jared Wolff: Thanks.
Operator: The next question is from Eric Bedell with Bloomberg Intelligence. Please go ahead.
Eric Bedell: Hi. Thanks for taking my question. I was just wondering.
Jared Wolff: Sure
Eric Bedell: If you could give us an update on payments. How are you thinking about that impacting 2027?
Jared Wolff: Yeah. No, we are excited about our payments initiative. Our team is doing a great job of putting in place the plans. We hope that it contributes to fee income growth in 2027. I think 2027, at the end of the year, we hope to see an uptick in fee income contributing from payments, which for us is merchant acquiring as well as issuing. We have got great leaders in both of those areas. Currently we have about $10 million to $12 million of fee income a month. So we are $30 million to $36 million a quarter. If we could grow that in a meaningful way next year, that would be great. It is not going to obviously grow 10% out of the gate, but if we could have it contribute 5% of fee income or even more next year, that would be fantastic.
Jared Wolff: We have not formally set a target yet, but we expect it to contribute to fee income in a way that shows up next year.
Eric Bedell: Thanks. Is there any additional investment needed in order to grow this further?
Jared Wolff: There is not. We are actually about to enter into a partnership with another company to support our workforce and relationship building on that side. We have chosen to partner as opposed to invest. I think that that is going to pay dividends for us.
Eric Bedell: Great. Thank you very much.
Jared Wolff: Thank you, Eric.
Operator: This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
