Banc of California, Inc.

Good day and welcome to the Bank of California's third quarter 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 like now to turn the conference over to Anne DeVries, head of investor relations at Bank of California. Please go ahead.

Anne DeVries Good morning and thank you for joining Bank of California's third quarter 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-GAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation which are available on our investor relations website. Before we begin, we would like to remind everyone that today's call may include forward-looking statements, which are subject to risks, unfairness, and other factors outside of our control, and actual results may differ materially. For 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 factor section of our most recent 10-K. Joining me on today's call are Jared Wolf, President and Chief Executive Officer, and Joe Calder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I would like to now turn the conference call over to Jared.

Thank you, Anne. Good morning, everyone. and welcome to Bank of California's third quarter earnings call. I'd like to start off by highlighting our team's strong execution during the quarter to actively transform and reposition our balance sheet. We delivered on numerous strategic actions as we continued to make progress on our transformation efforts. I am very proud of the intense focus and efforts put forth by our team to create a strong, well-positioned balance sheet that generates high quality and sustainable earnings. Let me start off just by listing the accomplishments of the quarter to put into context the volume of actions that our team pulled across the finish line. We sold 1.95 billion of civic loans at 98% of par. We deployed the 1.9 billion of liquidity to pay down 545 million of bank term funding and also paid down approximately 1.85 billion of broker deposits and expensive borrowings. We used approximately 60 million of the 100 million of capital we created from the civic sale to reposition about 740 million of securities and pick up over 270 basis points of incremental yield. We bought back approximately 320 million of lender finance loans at par and hired a team to grow that business. We completed our core system conversion in late July, converting over 20,000 customers and over 50,000 accounts onto a single core platform. And we continue to run our bank business as usual, serving clients, bringing in new relationships, and growing loans and deposits in key areas. And that's just the start of the list. We like to keep our head down and do our work and push through, but this was a quarter where I thought our team really shined and I'm extremely proud of all of our colleagues here at Bank of California. We are really hitting on all cylinders right now, and our quarterly results demonstrate the power of the franchise we are building. These balance sheet repositioning actions, along with a few other items we executed on during the quarter, resulted in strong net interest margin expansion and higher tangible book value in capital. I really feel good about how much we have accomplished and strengthened our balance sheet. I also feel good about the growth in our core earnings power and our positioning for future growth. Slide seven in the investor presentation lays out a lot of these recent actions in more detail. I'm very pleased with the progress we made in the third quarter reducing non-interest expenses. We achieved our previously communicated target range for non-interest expenses of 195 to 200 million a quarter earlier than expected. Importantly, we received the benefit of normalized FDIC assessment expenses in the third quarter, which significantly reduced our non-interest expense, and we should benefit from that new lower baseline going forward. While reducing our operating expenses, We're also continuing to make investments in both talent and technology that will further elevate the client experience, enhance efficiencies, and contribute to the further growth of our client roster. It's also important to note that a portion of our operating expenses are customer-related expenses, which are mainly driven by our HOA business. These expenses are tied to Fed funds and have 100% beta and will decline as interest rates go lower. We have included some new disclosures on customer-related expenses which you can find on slide 16 of the investor presentation. While economic conditions remain somewhat challenging, we continue to see good results from our bankers' efforts to expand client relationships and add new relationships. Over the past three quarters, we have added over 1,700 new relationships to the bank. Our end-of-period non-expiry deposits for the quarter were essentially flat from the second quarter, as we saw some volatility late in the quarter. Our deposit mix has become more favorable, however, as our quarter-end non-expiry deposits as a percentage of total deposits grew to 29%, given our efforts to reduce higher-cost broker deposits. Moving on to loans, while industry activity levels remain relatively tepid in the current environment, we added $1.6 billion in loans during the quarter, which includes production, unfunded new commitments, and purchase loans. Importantly, we are continuing to be conservative in new loan production and have maintained our disciplined underwriting and pricing criteria. We continue to see growth in warehouse balances where we are adding new clients and seeing increased line utilization among existing clients, as well as growth and increasing line utilization in construction and commercial loans. The growth in these areas, along with the reacquired lender finance portfolio, offset the continued runoff of lower yielding multifamily and CRE loans and resulted in a modest amount of growth in our total loan balances in the third quarter. New loans continue to come on the books at higher rates than those that are paying off, which is accretive to our average loan yields and to our margin. Our loan portfolio continues to perform well on a broad basis. However, we remain cautious in the current economic environment, and when we see signs of weakness in any credits, we have been quick to downgrade and slow to upgrade. We downgraded several credits to non-performing status in the quarter, including two commercial loans and a remaining civic loan. we believe that the credit migration of the two commercial loans were specific to those loans, and we are not seeing any indications of broader weakness across the portfolios. During the quarter, we also had an increase in classified loans, which was primarily reflective of our continued conservative approach to managing credit, the policies that we have put in place to get frequent updates on borrowers' financial performance and collateral valuations, and proactively downgrading certain rate-sensitive loans in light of the current environment. We expect these loans to return to non-classified status as we work through the credits. Importantly, our overall loan portfolio continues to benefit from our strong underwriting standards and borrower strength. While our net charge-offs for the quarter were relatively low at $2.4 million or 0.04% of loans, the commercial real estate market remains uncertain, and accordingly we remain cautious and conservative in our portfolio management. We continue to be prepared for a variety of economic environments, and will balance our drive to increase returns and grow with protecting our balance sheet and capital. We remain prudent by maintaining robust reserves at 1.2% of total loans. I think it's also important to note that our economic coverage ratio, which incorporates the loss coverage from our credit link notes, as well as the unearned credit mark from our purchase accounting, is substantially higher, above 1.8% of total loans. Let me make a few comments on the interest rate environment before I turn it over to Joe. We believe our balance sheet is well positioned for declining rate environment with our balance sheet being more liability sensitive and set to reprice or mature over the next year. With the Fed starting the cutting cycle in September, we have started to reduce deposit pricing and we're closely monitoring market conditions and customer behavior. On the asset side, about half of our fixed rate and hybrid loans will reset or mature within the next three years and are expected to reprice at higher rates even in a declining rate environment. we'll be making competitive adjustments, of course, as appropriate. Now I'll hand it over to Joe, who will provide some additional financial information, and then I'll have some closing remarks before opening up the line for questions.

Thank you, Jared. On a GAAP basis, we reported a net loss of one cent per share for the third quarter, which includes a $60 million loss for the securities repositioning that we completed during the quarter. Excluding the loss incurred on the securities repositioning, On an adjusted basis, our earnings per share was 25 cents for the third quarter, a significant increase from the prior quarter results, reflecting the execution of our core strategy to grow net interest margin, the positive impact of our successful balance sheet transformation, and the reduction in our operating costs, including the normalization of FDIC assessment expense. There were a few noteworthy items, largely in non-interest income, that had a positive impact on our third quarter results, which we have laid out on slide six in our investor presentation. The collective impact of these items was a benefit of approximately five cents to EPS. We generated 232 million in net interest income, which was slightly up from the prior quarter. While average interest earning assets were lower in the third quarter by 1.4 billion due to the sale of the civic loans, this impact was offset by an improvement in our net interest margin. Our net interest margin in the quarter increased 13 basis points to 2.93% due to a 13 basis point decline in cost of funds partially offset by a two basis point decrease in the yield on average earning assets. Our cost of funds declined from 2.95% to 2.82% and the yield on average earning assets decreased from 5.65% to 5.63% in the quarter. The decrease in the cost of funds was driven by a six basis point reduction in the cost of interest bearing deposits from 3.58 to 3.52% and a 13 basis point reduction in the cost of interest bearing liabilities from 3.93 to 3.80%. The reduction in the cost of interest bearing deposits was driven largely by a 1.85 billion reduction in broker deposits and growth in the average non-interest-bearing deposit ratio from 27% to 28%. The reduction in cost of interest-bearing liabilities was largely driven by the payoff of $545 million of high-cost PTFP borrowings. Note the overall cost of deposits was down six basis points to 2.54%. The decrease in yield on net earning assets in the quarter was driven by the impact of the sale of the $1.95 billion Civic portfolio, which had a combined yield of over 6%, which offset the benefits from higher rate net loan originations and the security repositioning. During the quarter, our loan balances grew as our loan production and line utilization of $1.8 billion outpaced paydowns of $1.5 billion. Yields on new loan production increased to 8.29% from 7.80% last quarter. Our yield on gross loans was stable at 6.18%. As Jared mentioned, we used a portion of the capital raised through the civic sale to do some repositioning in our securities portfolio. We 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%. This action has positively impacted our average yield in earning assets and is expected to generate $4.8 million of interest income per quarter. Our net interest margin is expected to trend higher as the third quarter only included partial benefit of our balance sheet repositioning actions due to timing. We expect further improvement in our net interest margin in the fourth quarter with the full quarter benefit of the securities repositioning and reduction in higher cost funding sources, as well as new loans continue to come on the balance sheet at higher rates than what is paying off. We provided our fourth quarter outlook for our net interest margin to be in the range of 3% to 3.10% as detailed on slide 10 of the investor presentation. This assumes that our balance sheet will be relatively consistent and our and one additional Fed rate cut in November. Our total non-interest income was negative in the third quarter due to the impact of the $60 million loss recognized on the securities repositioning. Excluding the loss on the securities, our adjusted non-interest income increased significantly from the prior quarter due to several noteworthy items, including a $6.4 million gain on sale of a lease residual, positive fair value adjustments on our credit link notes, and dividends and gains on equity investments. Our total non-interest expense was $196.2 million, a decrease of $7.4 million from the prior quarter, which was primarily due to a decrease in our FDIC assessment expense, which came one quarter earlier than we originally projected. With the cost savings we have now realized, we're still more expected to come as we get the full quarter benefit of the systems conversion and reduction in headcount. We reached our target level of non-interest expense of 195 to 200 million, one quarter ahead of our prior outlook. Turning to the balance sheet, our total loans held for investment increased by approximately 300 million, primarily due to increases in our mortgage warehouse, construction, and lender-financed loans, which offset lower balances and discontinued portfolio loans and runoff we are seeing and lower yielding CRE and multifamily loans. Our total deposits declined in the quarter primarily due to the reduction in broker deposits as we continue to use our liquidity to let high-cost deposits run off. During the quarter, we opportunistically added $500 million of puttable FHLB advances with a funding cost of just about 3%, which we view as an attractive source of funding for borrowings that have a 10-year duration and can't be put back by the FHLB for at least two years. We continue to be well-positioned for rate cuts, as we have intentionally kept the duration of our liabilities relatively short, with $7.3 billion more in liabilities repricing or maturing than assets over the next year. Over 90% of our interest-bearing deposits have no term or mature in less than one year. As rates decline, we should continue to see a lower cost of funds, particularly as we continue to add new clients that bring non-interest-bearing deposits to the bank. As Jared mentioned earlier, with the September rate cut, we have started to reprice our deposits down. To date, we estimate our deposit beta at just over 50% based on rate changes that we have passed through to our customers. Furthermore, we have $2.7 billion in loans with a weighted average coupon of 4.67% set to reprice and mature over the next year. With yields on new loan production at over 8%, we believe there's ample opportunity to reprice these loans higher, even in a declining rate environment. At this time, I will turn the call back over to Jared.

Thanks, Joe. As I've indicated in the past, We take a lot of pride in doing what we say we're going to do. We have kept our head down, focused on executing on all the key merger integration milestones to date, and are now starting to realize the positive benefits of our financial performance. With the balance sheet repositioning and major integration milestones we have completed in the third quarter behind us, including the core systems conversion and consolidation of 12 branches, we are now at an inflection point. We are shifting our focus from transforming our internal infrastructure to external growth and capitalizing on the strength of the franchise and the balance sheet we have built and the exceptional customer experience we can offer to add new, attractive client relationships. We are benefiting from our ability to attract high-quality banking talent, and now we are being more active in our marketing efforts, including launching a new branding campaign in our markets to promote the superior banking experience that we can offer. As we fully realize the benefits of the strategic balance sheet repositioning and merger integration efforts completed so far, we expect to see further growth in our financial performance. While we expect to benefit from a reduction in rates, we are not solely reliant on lower interest rates to improve our performance. And with the capital and liquidity we have, we can still consider additional balance sheet repositioning actions should we see opportunities that would positively impact our earnings power down the road. While near-term economic conditions remain uncertain, we believe we are well-positioned to increase our market share and expand our client roster as economic conditions improve. With the balance sheet we have built, the superior level of technology and expertise we can offer, and the talented banking teams that we have, we look forward to steadily adding attractive client relationships in the future, generating profitable growth, and consistently enhancing the value of our franchise. None of these accomplishments to date or in the future would be possible without the dedication of our incredibly talented colleagues at Bank of California. Every day, our teams come to work focused on helping our clients, improving our communities, and delivering for each other and for our shareholders. I'm very privileged to lead this team, and I want to thank them for their ongoing efforts. With that, operator, let's go ahead and open up the line for questions.

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 it, please press star, then 2. Management has asked that we limit ourselves to one question and one follow-up only. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matthew Clark of Piper Sandler. Please go ahead.

Good morning, everyone.

Good morning.

First one for me, just around the ECR deposits, it looks like they were $3.7 billion on average. Do you have that figure in the prior quarter, and what's your outlook for those balances going forward? Do you expect any growth, or should we just assume they're flat?

No, we fully intend to, I'll let Joe or Ann look up what the prior quarter was, or it might be something that we have to publish later, Matt, if we can't find it quickly. But we fully expect to grow our HOA balances. We have a great leadership in place and a great team, and we're working hard to bring over new HOA relationships to the bank. Not all of our relationships have an ECR component to them, but many do. And as mentioned, they're tied to Fed funds. Our all-in cost of deposits include, if you were to kind of put an interest rate on that ECR component, the all-in cost across our entire HOA deposit base is a little over 3%. And so we have opportunity to bring down those costs as rates come down.

Great. And then just on the borrowings, do you happen to have the spot rate at the end of September on the $1.6 billion of borrowings and the And then any update on kind of the cost of fund improvement that you had been expecting last quarter by the end of the year, down 20 to 25 basis points? Do you still feel good about that range, or do you think you could do better than that?

We'll let Joe address that.

Well, the spot rate on the cost of borrowings is not something that we've disclosed, but we can get that for you, Matt. I'm sorry, what was the second part of your question?

Just on the cost of fund improvement that you had targeted last quarter of down 20 to 25 basis points by the end of the year, any update on that range?

The range that we've put out in our NIM guidance of 3.0 to 3.10 really incorporates us continuing to bring down our cost of funds And we see a mean through all of our restructuring actions that we took in the third quarter, we believe that a lot of those will continue to pull through in the fourth quarter and we'll see the full quarter benefit. And if we take that in conjunction with all the rest of the core strategy of growing on non-interest bearing deposits and continuing to have our loans, higher yielding loans rolling on, lower yielding loans rolling off, we'll continue to see benefits in our NIM And so I think the way to think about the answer to your question is we expect NIM to continue to expand in the fourth quarter.

You know, NIM being, you know, 283, we gave a range of, you know, 290 to 3. The top end of that range would be 17 basis points, which would be a pretty big expansion, right, to go from the third quarter of 283 to 3 for the third quarter. Excuse me, for the fourth quarter. There are some things that could work against that as well. It's pretty early in terms of looking at – Joe mentioned in his comments that we're currently seeing about a 50% deposit beta in terms of the rate benefit that we're getting following the rate cut. It's still pretty early. Not all customers have received their statements yet. And, you know, we're watching how that flows through, although, you know, early signs are positive. But that could back up on us a little bit and affect our margin. But right now it looks pretty good.

Thank you.

Thanks, Matt.

Our next question comes from David Feaster of Raymond James.

Hey, everybody. Maybe just starting, Jared, just following up on your comments about shifting kind of from, you know, internally focused and, you know, right-sizing kind of operations to more of the growth side. I wanted to get your thoughts on the loan growth outlook. Obviously, there's a lot of underlying positives. You talked about $1.6 billion in originations. But a lot of the growth this quarter was warehouse in the loan purchase. I'm just kind of curious, how do you think about the loan growth outlook going forward? You've made a lot of new hires. You're expanding business lines. I'm just curious where you're seeing opportunities, how much of the moves this quarter was strategic or optimization, and just how you think about organic loan growth going forward.

Sure. So I think loan growth across the board – other than specific pockets, is going to remain muted until rates come down about another 50 basis points. A huge part of our market is real estate. And while we're seeing a little bit of an uptick in construction, and we're seeing good warehouse lending, some activity in fund finance, it really is not at the levels that we would expect due to rates being higher. That is keeping borrowers from entering into new transactions. Multifamily transactions are way down relative to where they should be or where we've seen them in the past. And in my estimate, speaking to our clients, is that it's gonna take another 50 basis points for things to unlock. What we're trying to do is position ourselves as well as possible to take advantage of that stuff when things do unlock. And I think that we are well positioned. I think our teams are in the right places. We're connected to the right people. Our branding campaign, as I mentioned, is out there. So we're top of mind. And we have the balance sheet to obviously start lending. And obviously, payoffs are going to pick up as well when lending starts. You'll see a lot of refinancings. And so payoffs have been slower than we expected. We've had some good loan originations. But mostly, David, I think it's going to take a little bit. And I think we're just trying to position ourselves as well as possible to take advantage of that. We're We're excited to grow, but again, we don't want to push on things too hard when the economy is a little bit slower. So we'll be ready for it when the economy picks up.

Okay. Where do you see opportunity for growth, I guess, in the relatively short run?

Well, warehouse is continuing to thrive. There is refinancing activity. I think what's happening there is a couple things. One is people are still buying homes and refinancing their homes and And even with rates being somewhat higher, overall rates have come down to levels where it's not historically that high for home buyers and for people refinancing. And so there is plenty of activity there. In fact, we saw an uptick in people looking to do things around the hurricane for refinancing. And so we bolded some of our lines because there was an uptick of activity. We expect lender finance to be something which does grow over the next several quarters. It's hard to say it's going to grow any specific quarter, but in the next several quarters, we would expect that to grow. We think that there is a dearth in the market of other banks providing that service, and so we're glad to fill that void. Fund finance has continued to do well as we've picked up market share, although line utilization has been a little bit down as people have not been deploying funds, although we're ready for it. We've been adding new client logos and good new clients, and we expect those lines to actually be tapped as people see opportunities. And then more generally, we would expect just general CNI activity to pick up as the economy picks up. Right now, though, that's relatively slow.

Okay, that's helpful. And maybe just on the other side of the coin, core deposit growth is obviously a huge focus for you all. You've made a lot of progress. I'm curious, how do you think about deposit growth? Um, do you think you can keep deposit growth kind of in line with loan growth? Uh, just given that you're kind of towards the midpoint of your, your loan to deposit ratio, or is there some appetite to potentially use some of the excess cash to fund growth as, as it comes?

I, I, I don't think so. I mean, it would be hard. I think loans are typically grow, grow much faster than deposits and we're going to do every, that's why right now when there is low loan growth, it's important to build up all of your deposit relationships as best you can and see if you can bring in new relationships and start living with a comfortable loan to deposit ratio. I would expect our loan to deposit ratio to climb when business activity starts picking up again. Now, we might see some benefit with growth in deposit balances too, but that's why we're trying to build so many new relationships now so that we have the liquidity to fund loans and don't have to go outside too far. We're going to live within our means. We're not going to get you know, into the high 90s loaded deposit ratio. We're going to try to avoid that. But I think we have some, we have the ability to expand because we've stayed in the mid 80s. So we have room to expand and comfortably do so without having to go to the broker market to grow deposits. If we needed to, we would, if we thought it would be profitable. But I'm really proud of the efforts that our teams have made in growing these new relationships. It doesn't always show up because you have other deposit balances that are coming down as people use their, you know, use their balances for whatever they need. So the new relationships sometimes offset, you know, balances that are just coming and going in existing relationships. But the new relationships is what we track, and that's what's going to benefit the growth of the bank overall over the long term.

Our next question comes from Jared Shaw of Barclays. Please go ahead.

Hey, everybody. Thanks. Morning. Morning. Maybe just starting again with the margin. What were the dates, I guess, of the restructuring in terms of how much more of that's just going to flow through into the quarter? And if we saw two rate cuts instead of one, as your assumptions are, how should we expect sort of the year-end margin and the jumping off point for first quarter based on some of those assumptions.

I think the way to think about the restructuring actions is they happened throughout the quarter. The civic portfolio sale was right at the beginning of the quarter. You had securities repositions, which happened throughout the quarter, and then you had the FHOE putables that happened at the end. you had a steady set of activity in the quarter. We have that laid out in the financial impacts on slide seven in the investor deck with some relevant information there. And so the way to think about that is that we will see a full quarter of benefit from those actions in the fourth quarter, and it should be pretty meaningful.

Okay, and then if we see two cuts, Does that accelerate the expansion, I guess?

An additional cut would be beneficial to us. We're still assuming a very conservative beta on that based upon it's still early. We're still having some conversations with our customers, but you would think that that could add a penny or so. It's a rough estimate of earnings impact. Okay.

Jared, to your point, I mean, a second cut is going to happen probably pretty late, so the benefit is really going to be in Q1 and not Q4. Exactly.

Yeah, yeah. Okay. And then, you know, it's great to see the progress on expenses and getting there a quarter early. Is this a good run rate on FDIC, and is there any other – What are some of the other opportunities maybe to see expenses even trickle down from here, or is this sort of the good stable rate to look at?

As you can see on our notable item slide, there was a one-time benefit that came in the quarter on FDIC, which is not repeatable. That being said, I think that there should also be a slightly improved FDIC core number for the fourth quarter. So I think the number you're seeing this quarter is probably about a pretty good run rate going forward, taking those two things into consideration.

Great, thanks.

Our next question comes from Andrew Terrell of Stevens. Please go ahead.

Hey, good morning.

Morning.

Hey, I just want to follow up on some of the deposit cost commentary. I'm curious on, you know, do you have just maybe the spot interest bearing balance or interest bearing costs at the end of the period? I think a lot to wade through with the broker reduction and the rate move that happened later in the quarter.

Yeah, you know, I think the way to think about it is that in our quarters, because we've been doing so much restructuring action, there has been some noise in our monthly numbers, so I'm not sure whether if we gave you that number, whether that would really be helpful for you for your modeling purposes. I think it's a little bit higher, obviously, than the 2.93 which we have for the year, so maybe like a, I don't want to give you an exact number, but a couple basis points higher than that would probably be a good modeling estimate.

Okay. Understood. I appreciate it. And then just, you know, Jared, as you've gone out to clients and you guys have lowered deposit costs following the Fed move, just curious, any kind of pushback you've received specifically knowing that, you know, earlier in the year, you kind of proactively or preemptively ahead of rate cuts had already moved some down on the cost side. Just curious if you're getting any kind of pushback or if you feel like, you know, at a 50% beta already, as you mentioned in the prepared remarks, if you have any more room to go beyond that?

We certainly got pushback, which is why it wasn't 100% beta. I mean, I wanted to achieve as much as we could. And so, you know, we kind of divided up our relationships in a couple different ways. And you look at who is rate sensitive and who is not, you know, who's focused on rates and who isn't, and you then have to have your relationship managers go out to your clients and carefully message the relationship and the changes that we want to make. Yeah, we definitely got some pushback, but we also tried to work with them and explain the valuable services that we're providing, and I think we came to a good spot across the board for our company. It's still playing out in real time, Andrew. It's pretty early because this just happened, and we have to let this play out. There's more to come, right? And so part of what we're doing right now is sensitizing our clients to where this is headed. Our clients really value the relationships that we provide them and the services that we provide them, value the relationship they have with us because of the services that our treasury management and lending teams provide and relationship management overall. And so I'm confident that we're not losing clients as a result of rate cuts because we're managing and messaging it well. And so it's really a fairly iterative process. If we are losing anybody due to rate cuts, it's not a true relationship. There were absolutely clients here that were here for higher rates that the company needed to pay based on the circumstances they were in, the company was in at the time. And so some of that gets fleshed out and you realize that you don't need those deposits anymore. They're masquerading as relationships when they're not really relationships if all they have is a money market at 4.5% or 5%. That's not a relationship that is likely to stay at the bank as rates come down unless we've been able to expand it to provide other services.

Our next question comes from Gary Tenner of DA Davidson. Please go ahead. Mr. Tenner, could your line be muted?

Yes, I apologize. Good morning. Morning. Hey, I wanted to ask about loan yields. I know, Joe, you had mentioned the 618 kind of flat quarter-over-quarter all-in loan yield. Just to get a sense of kind of where new production was kind of impacting loan yields, do you have a sense of kind of what that impact would have been quarter-over-quarter adjusted for the civic loan sale? In other words, just kind of what the more apples-to-apples 2Q to 3Q would have looked like from a

I think the total, the 6.18 would have been higher, you know, absent the civic loan sale. I don't have an exact number for you, Gary, but, you know, another way to look at the, you know, the new production, right, is we had a lot of new originations coming in up you know, right around, you know, the 8% level. And then we also acquired the Lender Finance portfolio, which was at 8.8%. That's one way to think about the new production.

Yeah, I mean, to layer on there, Gary, in the second quarter, our new production yield was 7.8%. But it didn't include Lender Finance, which is, you know, as Joe says, is the upper eighths. And so in the third quarter, our new production was around 8.3%. You can't take that number and apply it across the portfolio because it's not going to repeat. And there's some rates that are coming down. I mean, construction is actually much higher because rates are higher because of the originations versus what was going on before, which was just fundings of existing loans that were at lower rates. But You know, SFR is up, but CNI is going to be coming down. Multifamily is going to be coming down. You know, equipment finance is probably going to be coming down. Almost everything, you know, that's floating rate is going to be coming down, right? So, but it's still much higher than what is refinancing and paying off. And so even as rates come down, we expect our margin to expand and expect our loan yield to incrementally grow a little bit over the next several quarters.

Okay, that is helpful. I appreciate it. And then in past quarters, Jared, you kind of talked about kind of some ranges or targets for expense to average assets. And also I missed that. I don't think that was included as you talked about, you know, talk to the ROA and RRTCE. Obviously, the expense to average assets was down quite a bit this quarter. Any change to how you're kind of targeting that number with or without customer-related deposit costs?

Yeah, I think you have to pull out the customer-related deposit costs when you do that number because it really is an interest expense that's somehow, you know, because of the way it's calculated, it's tied to, it comes through the operating expenses. But the 2% is still kind of our target range. I think we have a little bit of room to go on expenses, but And it's not as clear as it might seem. You know, it looks like we hit, you know, kind of the middle of the range. But as Joe points out, you know, there were some unusual items in the quarter that really pushed us to the top of our range. And, you know, one thing I'll say is that we have a lot of work to do. I mean, as great as our company has done and as optimistic as I am, there's still a ton of work that we have to do to get where we need to be. And it's not necessarily easy work. But I think we've gotten a lot of the heavy lifting behind us so that we're able to focus more on the growth phase when the economy recovers versus kind of just the internal phase. And so we're looking up now. Our head isn't so down. It's more up and looking out and expanding and looking for opportunities to expand. I just don't see the economy moving that fast right now. But as I mentioned earlier, we're going to be ready when it happens.

Yeah. And, Gary, if you didn't already see it on page 15, we have the NIE to average asset ratio at the bottom of the page on both a base and, you know, a reported and adjusted basis.

Yep, you're right. Okay. Thanks very much, guys. No problem.

The next question comes from Ben Gerlinger of Citi. Please go ahead. Hey.

Good morning. Morning.

Good morning.

Um, so you guys have done a tremendous amount of, let's call it tweaking everything. It seems like year to date and the third quarter specifically done quite a bit. Jared, on the most recent comment you just said, you still have a tremendous amount to do. When you look through the positives here, it seems like you're going to have a better margin. You're going to have operating leverage improvement. You have hires that seem to have portfolio space going into 2025. So it seems like you're well set for growth. And with that growth, you have leverage. What else? Can you kind of paint a picture and point to some things that, like, there's more left to do? It seems like the engine's about to really start going here, but just trying to focus on improvement is good, but what else is there, really?

Yeah, well, thank you for that. You know, we're always tough on ourselves, but I also think that it's You know, I'm hesitant to declare victory of anything. We have a lot of work to do, and we've set some targets that we are not yet close to achieving, but we fully intend to achieve, and we expect to make progress as we've outlined through next year and hopefully get to those targets. And so I'm not going to be really very happy until I've seen better operating performance and better efficiency. Our teams are doing great. We've got tremendous people. I would say that some of the stuff that you can't see is we have a whole bunch of technology initiatives beyond the core conversion that we have. We have some system initiatives that are in place that we're working very hard on to put together some technology that needs to work better. I would say that we have a program on data internally that we're working very hard on to ensure that we get data in a more efficient way and that it's delivered to our teams in a way that they can self-service with that data. And that also flows through to how we serve our customers. All of these things will cost money and are enhancements that are important. Our payments initiative is still going to make some progress. We have a lot going on there, but that's not going to really show signs of benefit until next year. As I mentioned this year, even if it is showing benefit, it's de minimis given the size of this company relative to what it would have shown on a standalone bank in California. So we're not going to talk about that until it's meaningful enough to talk about as to this combined company. Those are some of the things that we're working on that will cost money. I also think stuff's going to show up. I mean, I'm glad that we keep provisioning around the $9 million to $10 million level. We want to keep our total reserves at the highest possible level to make sure that we get rid of any headwinds to keep us from performing at a high level next year. And we're going to remain highly conservative on downgrading credits. And we'll be pretty slow to upgrade them. And I think that it's important that we maintain that posture now. We can afford it. And it's the right thing to do in this environment. It doesn't mean that things that we migrate to classified, they're still on accrual. It doesn't mean they're not coming back. But it's the amount of prudence that you take in an environment like this to make sure that you are properly looking at things and not kidding yourself about, you know, that things may take longer than it appears while interest rates stay higher for longer.

Yes, that's helpful. And then just kind of one point of clarification on the HOA related deposits. I know a few other banks have that and then the ECR, like I get it. When you think about this, the contract or the longer term nature, are they, how often those kind of renewed or negotiated? Just kind of thinking from a behavioral perspective. If I was an HOA, I'm staring down the barrel of quite a few rate cuts here in the next 12 months. I'd probably want a little bit better rate in the next negotiation, but it's kind of how that works going forward.

Yeah, our relationships are negotiated annually, and we're in that process right now. And it's not uncommon that you agree to some sort of formula tied to Fed Funds. It could be, you know, plus or minus or a percentage of Fed funds, and then as Fed fund comes down, that formula gets applied to whatever Fed funds is.

Got you. Okay, that's helpful.

But it's annual. In our case, it's annual. So you're not, you know, you're stuck with what you negotiate, but, you know, at least you have certainty over what it is.

Sure, sure, sure. No, that makes sense. It's formulaic, but the formula can change, I guess. Okay, I got you. All right, appreciate it.

Yeah, thanks, Ben.

Our next question comes from Tamir Brazzler of Wells Fargo. Please go ahead.

Hi, good morning. Morning. Circling, morning. Maybe just circling back on the margin discussion. So 4Q benefits from some of the activities and 3Q, they get the full quarter impact. I'm just wondering as we look past that, you're liability sensitive kind of over the next 12 months. Should we just assume kind of a step up higher in margin subsequent to some of these actions from 3Q playing out in 4Q, or is there a lagging period where maybe margin expansion slows before the liability-sensitive balance sheet actually plays out?

You know, I think the way to think about it is we will have benefit in the fourth quarter from the restructuring actions that we've taken, and that should be pretty meaningful. the, you know, we have been very, you know, we remain very conservative with respect to how we're thinking about the rate cut environment, our betas, et cetera. You know, as we mentioned, we only have one cut in our forecast for the rest of this year, and, you know, we're assuming a pretty moderate beta. And I think that's reasonable given the uncertainty and all the variables that are in the economy, including the election, the impact election and everything. As you look forward, Timur, our strategy and our overall approach is to continue to grow the margin through continuing to bring down the cost of funds, continuing to see lower-cost loans roll off, higher-cost loans roll on, and positioning the balance sheet for growth in those areas like warehouse and lender finance where we can see good margins and good returns.

Okay, and then speaking of lender finance, I guess maybe a two-part question. A, just some of the rationale in making that acquisition this quarter, some of those purchases. And then if I'm not mistaken, I believe Warehouse and London Finance were kind of the largest C&I categories of legacy bank of Cal. I'm just wondering what your expectation is for London Finance kind of as that business gets rolled out. Is that going to be one of the Larger areas within commercial, what's the overall role you expect lender finance to play for the bank?

So you are correct that warehouse was one of the larger areas for Bank of California, but we didn't have lender finance. That was a legacy PacWest area. PacWest had sold a big portion of that portfolio to a private equity firm, but PacWest continued to service that portfolio. So we were very familiar with those loans. So when the private equity firm told us they were looking to exit it, we were able to buy them back at par with full awareness of what was in that portfolio. And I had stayed in touch with the team and we already had, you know, several hundred million of those loans on the books that hadn't run off. Adding 320 got us, you know, above 700 million. And so it made sense to me to kind of, if we're going to do it, let's do it. And let's bring back this super talented team to go into this area, especially when we see a dearth of other lenders participating. We like the area quite a bit. We think that it has historically had very, very low losses, if any. And so the CECL mark, the coverage ratio you have on CECL for that as well as warehouse are fairly low. They're relatively short-term loans. And given the historical benefits, you don't have a big carrying cost for the loans. And so it doesn't generate a lot of deposits, but you can afford it when you have other areas that do generate deposits. And so we like the benefit of that business very, very much. And I think our team is going to do a great job expanding that business. I'm hesitant to give a size. Like our warehouse business today is about $1.2 billion. When we were at Bank of California, we tried to keep it a little bit lower given the size of our balance sheet. But I could see warehouse going to $2 billion. I wouldn't have any problem with that. Lender finance, I think we have to leave a couple quarters to see how it grows and see you know, what opportunities they can find that makes sense. So I don't want to put out any numbers that might make them feel like they have targets they have to hit. They're working at it now, and I know that they're focused on credit quality. So we'll let that just kind of expand as it does. I would say that fund finances, you know, similar to those areas, they're expandable. You know, they're kind of lines of credit that go up and down. That business has been up in the mid-sevens, and kind of now it's in the the upper fives, and so that business has room to expand as well. We like all three of those businesses.

Great. Thanks for the call.

Yeah, thank you. The next question comes from Tim Coffey of Janney. Please go ahead.

Great. Thank you, Aaron. Thanks for the opportunity to ask a question.

Hey, Tim.

Hey, Jared. In your investment deck, there's a couple of bullet points about opportunities to optimize the balance sheet. I'm wondering if you can kind of share what some of those might be and would any of them result in lower assets by year end?

As of right now, we're not looking at opportunities to shed assets. If anything, I think we want to keep the right asset base to grow from. And so selling assets is not something we're looking at right now. When I think about improving the balance sheet, I think about a couple things. I think about, you know, how do we optimize our capital stack? And, you know, what's coming due in terms of preferreds or sub-debt or anything like that? And can we build up liquidity and capital to take that out? Do we actually need it? And those are the opportunities I'd like to take down the road when we have what we would consider to be excess capital. And we've also been living in a state where our financial results are predictable and stable. that we feel that it's prudent to take capital actions, whatever those might be. We're not there yet, and as we've said, we want to get, you know, we want to have excess capital, which looks closer to CET 1 of 11, but I think whether it's 11 or somewhere around there, I don't want to peg in the number specifically, but I think there is opportunities to prune the balance sheet on that side as opposed to on the asset side.

Okay, great. That's helpful. And then just looking at more long-term, if I look at the mix of earnings and assets, say about 70% is loans, 15% is just securities. Is that the right mix of earning assets longer term?

I think 12% to 15% securities is probably right. Joe, what do you think?

Yeah, you know, we manage our liquidity pretty strongly. What you could see over time, depending upon how things evolve, is, you know, maybe we have a little less cash, a few more securities, but it's going to, like the combined cash and security levels that we have today, we feel pretty comfortable with.

Okay, thank you very much.

Thank you.

The next question comes from Chris McGrady of KBW. Please go ahead.

Hey, good afternoon. Gerald, I want to push a little bit on the capital question. I mean, you're going to be pretty close to 11% in early 25. You did mention share buybacks with your stock at Tangible, and maybe re-rank the priorities for us. Thanks.

Yeah. Yeah, no, you're right. I mean, we'd have to look at all of those things at the time. So the things that come up are buying back the preferred. Obviously, you know, we're constantly investing in our company. These things aren't necessarily mutually exclusive. It could be a buyback. It could be dividend. It could be buying back the preferred. The preferred has a ceiling on it in terms of the price, right? And a buyback, you need to do that analysis at the time you intend to do it because you need to know where you're trading at. If our stock continues to trade at levels where it is now, and I hope it doesn't. And, frankly, I don't think it will. As we continue to show progress on earnings, I would be surprised if our stock continued to trade here. We would absolutely buy it back at these low-priced tangible books. And if it's still there because of whatever conditions exist, we would-that would be a very high priority, Chris.

Great. And then, Joe, maybe just a question. given the movements in non-interest income in the quarter, just any guidance or ranges where like a reasonable jumping off point into the next couple quarters would be great.

Yeah, I think we've said, you know, historically that the run rate of about $11 million a quarter of non-interest income, and on a core basis, I think that still holds true. We've had some noise the last two quarters, and, you know, I can't promise you we won't have, you know, noise again because, you know, when you have to run fair value marks through non-interest income, it's kind of hard to predict. But on a core basis, I think that $11 million a month number is a really solid number.

All right. Perfect. Thank you.

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