BANC

• Core Franchise Performance

  • The quarter delivered strong underlying core growth: 9% annualized loan growth, 12% annualized deposit growth, and $2.8 billion in total new loan production, which was broad-based and focused on higher-return loan categories.
  • Cumulative new non-interest-bearing business deposits from relationships opened in the last two years reached $1.2 billion by quarter-end, demonstrating traction for the firm's relationship-based banking model. New loan production carried an average yield of 6.39%, supporting ongoing portfolio remixing.

• Strategic Balance Sheet Actions

  • Management executed three complementary actions to remove underperforming assets from the balance sheet, improve long-term returns, and increase recurring earnings power: 1) repositioning of $2.3 billion in low-yielding long-duration held-to-maturity securities; 2) targeted sale of $825 million in selected loans; 3) early retirement of $385 million in subordinated debt ahead of a much higher contractual reset rate.
  • The securities repositioning generated a 276 basis point average yield pickup on reinvested proceeds, reduced overall portfolio duration from 5 years to 4 years, cut portfolio risk weighting from 19.5% to 9.5%, and is expected to have a tangible book value earn-back period of just 1.4 years. As of the call, ~$100 million of proceeds remain to be reinvested.
  • The $825 million loan portfolio for sale consists of $300 million in weak single-borrower construction loans and $525 million in lower-yielding performing commercial real estate (CRE) loans, with a blended average yield of 4.6%. The entire portfolio is under contract, with closings expected by the end of Q3 2026, and the sale will reduce concentration risk and future credit volatility.
  • Early debt retirement lowers long-term funding costs and supports immediate NIM expansion, with no equity raised to fund any of the strategic actions. Capital ratios remain well above regulatory well-capitalized thresholds.

• Capital Position

  • Common Equity Tier 1 (CET1) was 9.25% at quarter-end, and is expected to rise organically to 9.5-9.6% by end-Q3 2026, 9.8-9.9% by end-2026, and above 10% in early 2027, assuming no new regulatory capital reform. If regulatory reform requiring an additional 60 basis points of capital is implemented, management expects to meet the requirement via organic capital generation.
  • Accelerated organic capital generation creates flexibility for future capital actions, including potential redemption of the firm's preferred stock in 2027, which would add ~$20 million after-tax annually to common shareholder earnings.

• New Strategic Growth Initiatives

  • Management is advancing longer-term complementary growth initiatives, including a payments/card acquiring business and a new private banking offering for high-net-worth individuals in the firm's existing markets. Technology investments including new client APIs have improved client embedding and retention.

• NIM is expected to reach ~3.30% after full reinvestment of securities proceeds and closing of the targeted loan sale, with a full-year 2026 target range of 3.30% to 3.40%, representing an upward revision to prior guidance.
• Fourth quarter 2026 pre-tax pre-provision income (PTPP) is guided to $125 million to $130 million, with targets for full-year ROA and ROTCs revised upward to higher ranges. Guidance is intentionally conservative, with upside expected if deployment of proceeds proceeds faster than projected.
• Full-year 2026 loan growth is projected to hit mid-single-digits, with management noting the firm is currently on track to outpace this target.
• Non-interest expenses are expected to be flat to down sequentially from Q2 2026 levels in H2 2026, with full-year 2026 expense growth expected to come in well below the initial 3% year-over-year guidance.
• Normalized quarterly provision expense going forward is expected to run in the $9 million to $12 million range, consistent with pre-Q2 2026 run rates. The effective tax rate is expected to decline by 1-2 percentage points over the remaining quarters of 2026.
• Elevated FDIC assessment expenses from the strategic actions are expected to begin declining in Q3 2026 and fully normalize by early 2027 as capital levels rebuild.

Bank of California is a single-segment commercial banking firm. For Q2 2026: Net interest income (NII) was $250.5 million, down 11 basis points quarter-over-quarter (QoQ) to a 3.13% net interest margin (NIM), with the decline driven by $5 million in non-accrual loan interest reversals, temporary wholesale funding use, and higher short-term replacement borrowing for retired subordinated debt. Excluding non-accrual impacts, NII increased by $3.9 million QoQ. Non-interest income was a loss of $234.1 million, driven by a $256.7 million pre-tax loss on securities sales and a $12.5 million mark-down on loans held for sale; adjusted for these items, non-interest income was $35.2 million, in line with prior quarter run rates. Non-interest expense was $189.9 million, up from $181.4 million in Q1, driven by temporarily elevated FDIC assessments and a non-recurring software obsolescence charge, partially offset by lower seasonal compensation. Provision expense was $161.8 million, almost entirely from marking the $825 million loan sale portfolio to lower of cost or market. The firm reported a net loss to common shareholders of $251.3 million ($1.61 per diluted share), entirely driven by one-time accounting impacts from strategic balance sheet actions. Core credit metrics improved significantly QoQ: special mention loans down 56%, classified loans down 31%, and delinquent loans down 50%. The allowance for credit losses ratio increased 2 basis points to 1.14%, which management considers appropriate for the current portfolio composition.

• Ongoing economic uncertainty: Management noted underlying economic signals are mixed, with unexpectedly strong current loan demand but potential headwinds from future interest rate changes, persistent inflation, and geopolitical conflict that could impact credit performance and loan growth.
• Regulatory capital reform: New Basel III capital requirements are being considered that would require the firm to hold an additional 60 basis points of CET1 capital, though management expects to meet this requirement via organic capital generation.
• Loan sale execution risk: While the full $825 million targeted loan portfolio is under contract, buyers retain limited due diligence rights that could result in renegotiated pricing or rejected loans. Management noted there is robust secondary market demand and backup bidders, and current reserves already account for potential downside.
• Interest rate risk: While the balance sheet is currently positioned to be relatively net interest income neutral across a range of rate environments, unexpected rate changes could impact funding costs and reinvestment yields.
• Concentration risk: The firm inherited large single-borrower and low-duration multifamily loan concentrations from its predecessor PacWest; management has reduced concentrations via two years of targeted loan sales, but remaining lower-yielding longer-duration multifamily loans ($6 billion at an average 4% yield) still represent an overhang on portfolio yields, though they are repricing gradually over time.

Q: Ben Gerlinger (Citi) asked how much of the 20% markdown on the $825 million loan sale came from credit issues versus rate impacts, and why non-performing assets (NPAs) still increased despite the sale. He also asked for assumptions behind the Q4 PTPP guidance for provisioning and the tax rate. / A: Jared Wolff explained the NPA uptick was a one-time timing lag: one problematic loan from the sale group was delayed and sold after quarter-end, so NPAs will drop by $34 million in Q3, and that loan sold at par. He noted 525 million of the portfolio is performing lower-yielding CRE, with 300 million being the previously flagged weak single-borrower construction relationship, and the firm marked the portfolio more conservatively than received bids to account for execution risk. Joe Kauder confirmed normalized future provision will run $9 million to $12 million per quarter, and the tax rate will fall by 1-2 percentage points through the end of 2026.

Q: Gary Tanner (DA Davidson) asked how investors can be confident this $825 million loan sale will be the last large problem loan sale, after $475 million sold last year, for a total of $1.3 billion in two years. He also asked when elevated FDIC assessments will normalize. / A: Jared Wolff clarified the sales are part of a multi-quarter plan to reduce the large loan concentrations inherited from PacWest, and the firm is now largely done addressing known problem concentrations. He said management will retain the option to sell future loans if it benefits shareholders, but does not expect additional large problem loan sales in the near term. Joe Kauder added FDIC assessments will begin declining in Q3, with full normalization by early 2027 as capital rebuilds.

Q: David Giovarini (Jefferies) asked to confirm the NIM timeline: whether 3.30% NIM is expected in Q3, and what drivers will push NIM expansion in H2 2026, including what Fed rate path is assumed. / A: Management confirmed Q3 NIM is expected to hit ~3.30% after the loan sale closes and remaining securities proceeds are reinvested. The NIM expansion in H2 will come from full-quarter benefits of the strategic actions: lower-yielding assets are replaced with higher-yielding new loans and securities, and new production continues to come in at current elevated market rates. Management did not assume any future Fed rate hikes, and expects deposit costs to continue declining gradually due to strong recent deposit inflows, adding additional margin upside.

Q: David Beaster (Raymond James) asked what management will refocus on after completing most of the balance sheet optimization work, and how the firm plans to continue optimizing core deposit growth and funding costs going forward. / A: Jared Wolff said core execution on existing relationship-based lending and deposit gathering will remain the primary focus, with new growth initiatives (payments/acquiring, private banking) ramping up over time, and potential preferred stock redemption in 2027 that will add ~$20 million after-tax to common earnings. For deposit optimization, the firm runs Project Stay to retain rate-sensitive depositors at lower costs than acquiring new deposits, actively manages deposit rates with existing clients to lower average costs, and sources lower-cost institutional deposits instead of more expensive brokered deposits. Technology investments including new client APIs also improve retention by deepening client relationships.

Q: Anthony Elion (JPMorgan) asked for a rough quantification of the run-rate earnings benefit from the full set of strategic balance sheet actions, and if there are any remaining balance sheet or expense overhangs left to address. / A: Jared Wolff declined to give a specific full-year 2027 earnings number, but noted the actions diluted tangible book value by ~7%, and management expects earnings to grow by a mid-double-digit to mid-teens percentage offsetting that dilution, leading to fast earn-back of tangible book value. He addressed investor questions about the $6 billion 4% average yield multifamily portfolio: it is gradually repricing as loans mature, and management publishes the burn rate timeline quarterly for transparency; while there is an active secondary market if the firm chose to sell, no sale is currently teed up.