Banc of California, Inc. Q2 FY2025 earnings call

• The bank delivered a strong second quarter with pretax pre-provision income growing 6% quarter-over-quarter. - Achieved third consecutive quarter of robust broad-based commercial loan production, driving 9% annualized total loan growth. - Opportunistically sold $507 million of commercial real estate loans, transferred to held for sale with expected proceeds net of reserve release of 95%. - Credit quality metrics improved, with nonperforming loans, classified loans, and special mention loans declining from Q1. - Tangible book value per share grew to $16.46 for the fifth consecutive quarter. - Repurchased $150 million of common stock early in the second quarter, with $150 million remaining in the buyback program.

For the second quarter, Banc of California reported net income of $18.4 million or $0.12 per share and adjusted net income of $48.4 million or $0.31 per share. Net interest income was $240 million, up 3.4% from the prior quarter, with net interest margin expanding to 3.10% due to growth in loan balances and higher loan yields. Total loan portfolio grew 9% annualized. Noninterest income was $32.6 million, down 3% from the prior quarter. Noninterest expense was $185.9 million, up $2.2 million from Q1 but remaining below the target range of $190 million to $195 million per quarter. Core deposits were up 5% annualized.

• Expect mid-single-digit growth in average earning assets for the back half of 2025. - Anticipate mid-single-digit increases in quarterly net interest income in the back half of 2025. - Aim to achieve the margin target range in Q4. - Effective tax rate expected to be approximately 25%.

• Broader macroeconomic uncertainties pose potential impacts. - Competitive deposit landscape could lead to higher deposit costs. - Despite proactive credit management, potential credit issues may arise.

Q: On the loan sales, what's the plan on the other side of the balance sheet regarding unwinding wholesale funding?

A: There's not a one-to-one relationship; the bank is providing leverage on the loans sold.

Q: Timing of the remaining $233 million of loans to be sold over the next several quarters?

A: Bids exist on all loans, some have contracted with drafted contracts, others will be sold with the $95 mark considered conservative.

Q: What's driving the growth optimism? Is it market share or customer optimism?

A: Growth is split 50% from existing customers and 50% from new relationships, with teams working on both.

Q: What's the trend for deposit costs in the back half of the year?

A: It's very competitive, with interest-bearing checking and money market rates up, but CD and savings down; heat may slow when rates drop.

Q: What's driving margin expansion?

A: Primarily on the loan side, including loan roll on/roll off and conservative assumptions on deposit costs.

Q: What's the outlook for asset quality trends post loan transfer?

A: Provisioning is expected to be $10-12 million quarterly, depending on loan type, with lower risk loan categories influencing reserves.

Q: Thoughts on M&A considerations?

A: Focus on organic growth now, expect opportunity to buy when stock at normalized multiple, with a valuable franchise in California.

Q: What's the outlook for ROE?

A: Growing core earnings, tangible book value, and efficient capital use will help achieve higher ROE.

Q: Where's the most opportunity for core deposit growth?

A: Focus on bringing in business relationships, including using a new digital platform for deposit onboarding.

Q: Any cautiousness on credit side post loan transfer?

A: Proactive management has addressed major concerns, with charge-off rate low and reserves well aligned, though some credit issues may still pop up.