Banc of California, Inc. Q3 FY2025 earnings call

• Earnings per share grew 23% quarter-over-quarter to $0.38, reflecting positive operating leverage and net interest margin expansion. - Return on tangible common equity grew 231 basis points to 9.87% since the start of the year. - Repurchased 2.2 million shares in Q3, with total repurchases at $185 million, more than half of the $300 million authorization. - Core deposit trends were positive with noninterest-bearing deposits up 9%, and broker deposits declined 16%. - Loan production remained healthy at $2.1 billion, with broad-based production from business units, and CRE loan sales proceeding well. - Credit quality remained stable with criticized loans down and special mention loans down, though classified loan balances increased due to timing issues and risk rating framework revision.

For the third quarter, net interest income rose 5% from Q2 to $253 million, with the net interest margin expanding to 3.22% driven by higher loan yields and lower deposit cost. Core deposits showed positive trends with noninterest-bearing deposits up 9% to represent 28% of total deposits, and broker deposits declined 16%. Loan production and disbursements were healthy at $2.1 billion, though total loans declined slightly from the prior quarter mostly due to paydowns and proactive payoffs of criticized loans. Excluding the deliberate payoff activity, the core loan portfolio was essentially flat.

• Expect loan growth for the full year to be in the mid-single-digit range. - Net interest margin to remain within the 3.20% to 3.30% target range for the fourth quarter. - Maintain strong capital and liquidity position while delivering steady high-quality earnings growth.

• Credit risks related to specific loans, such as the $50 million CRE loan timing issue and risk rating framework changes in the Venture Banking portfolio. - Interest rate risks, including potential impact of rate cuts on the balance sheet and deposit costs. - Operational risks related to managing deposit mix and loan production dynamics to optimize earnings.

Q: Credit trends this quarter were good, and about NDFI lending structure. Can you give color on how you structured that exposure and why you feel there's not loss there?

A: Jared Wolff explained that the loan in question was a pure real estate loan, not an NDFI loan, well collateralized with a first priority interest in the mortgage deed. NDFI lending at Banc of California is mostly in mortgage warehouse and fund finance with negligible historical losses.

Q: On the margin discussion, with rate cuts, are you still liability sensitive from a margin standpoint?

A: Jared Wolff and Joseph Kauder stated that the balance sheet is mostly neutral if excluding HOA deposits with ECR benefit, but directionally, they believe margin can expand due to loan production and deposit cost management.

Q: On the third quarter deposit growth, particularly in DDA, how much tied to warehouse?

A: Jared Wolff clarified it wasn't HOA related, and ECR deposits weren't the main driver of growth, with HOA inflows and outflows being seasonal.

Q: On the Venture business, what changed in risk rating loans causing creep in classified?

A: Jared Wolff explained they tightened the risk rating framework for Venture credits, looking at factors like sponsor support, remaining months of cash, and cash to debt levels, which led to different rating of some credits while they remained performing.

Q: On loan growth and production drivers, what are key drivers of increase in production?

A: Jared Wolff mentioned strong pipeline in C&I, Lender Finance, construction (low-income housing tax credit), Warehouse, and expected Fund Finance activity in the fourth quarter.

Q: On buyback timing and CET1 levels, why not be more aggressive?

A: Jared Wolff stated they are opportunistic, considering capital levels and undervaluation of shares, while being cautious about maintaining strong capital positions.

Q: On margin and rate cuts impact, how would rate cut next week affect NIM guide?

A: Joseph Kauder and Jared Wolff discussed complexity, with ECR related to HOA having a lag and margin expansion depending on loan production and deposit beta management.