BANC OF CALIFORNIA, INC. Q3 FY2024 earnings call

• Balance sheet repositioning: Sold $1.95 billion of CIVIC loans, paid down expensive borrowings, repositioned securities, and bought back lender finance loans.
• Net interest margin: Increased 13 basis points to 2.93% due to lower cost of funds and security repositioning.
• Non-interest expense: Achieved target range of $195 million to $200 million one quarter early, benefiting from normalized FDIC assessment expenses.
• Loan growth: Added $1.6 billion in loans, with loan production and line utilization outpacing paydowns.
• Credit portfolio: Loan portfolio performed well, but cautious on economic environment, with some credits downgraded to non-performing status.
• Interest rate environment: Well-positioned for declining rates, with liabilities more sensitive to rate changes than assets.

Loans: Total loans held for investment increased by approximately $300 million, driven by growth in mortgage warehouse, construction, and lender finance loans, offsetting runoff in lower-yielding CRE and multi-family loans. New loan production yield increased to 8.29% from 7.80% prior quarter, with yield on gross loans stable at 6.18%. Securities: 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%, positively impacting average yield on earning assets.

• Net interest margin expected to be in the range of 3% to 3.10% for the fourth quarter, benefiting from full quarter impact of balance sheet repositioning actions and new loans at higher rates.
• Expect further improvement in net interest margin as balance sheet repositioning actions fully take effect.

• Economic conditions remain uncertain, potentially impacting loan growth and credit quality.
• Deposit beta may not continue to expand as expected, affecting cost of funds.
• Credit migration risks, with potential broader weakness in portfolios if economic conditions deteriorate.
• Uncertainty around the pace and impact of interest rate cuts on the balance sheet and margin.

Q: About ECR deposits, what's the prior quarter average and outlook for growth?

A: Prior quarter average not quickly available, but fully intend to grow HOA balances with strong leadership and team working to bring in new relationships.

Q: On borrowings, spot rate at end of September and cost of fund improvement outlook?

A: Spot rate not disclosed, but NIM guidance of 3.0% to 3.10% incorporates continuing to bring down cost of funds with balance sheet actions.

Q: Loan growth outlook and where opportunities lie?

A: Loan growth muted until rates drop further, but warehouse, refinancing, lender finance, and fund finance offer opportunities; positioned to take advantage when economy picks up.

Q: Expense outlook and FDIC impact?

A: One-time FDIC benefit in quarter, but improved FDIC core number expected for fourth quarter, with expenses at a good run rate going forward.

Q: Deposit cost commentary and pushback?

A: Got pushback on deposit rate cuts, but worked with clients, and deposit beta at over 50% early signs positive, with more to play out.

Q: Loan yields and expense to average assets?

A: New loan production yield higher, but rates on some loans coming down; expense to average assets target still in range with ongoing work on technology and data initiatives.

Q: Balance sheet optimization and asset mix?

A: Not looking to shed assets, focusing on optimizing capital stack and liquidity; securities mix around 12%-15% seems right.

Q: Capital and non-interest income guidance?

A: Prioritize buying back stock at low tangible book, with non-interest income on core basis running at about $11 million a month.