Banc of California, Inc.

Hello, and welcome to Bank of California's Third Quarter Earnings Conference Call. If you need operator assistance, please press star then zero. I'll now turn it over to Anne DeVries, Head of Investor Relations at Bank of California. Please go ahead.

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-GAAP 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 also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goals, strategies, and outlook for 2025 and beyond, which are subject to risks, uncertainties, 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, Chairman and Chief Executive Officer, and Joe Cowder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared.

Thanks, Anne, and good morning, everyone. We're pleased to report another strong quarter for Bank of California with double-digit earnings per share growth and continued momentum across all of our key performance drivers. These results once again demonstrate the strength of our franchise, the consistent growth trajectory of our core earnings, and the disciplined execution of our teams. Strong Q3 earnings per share growth of 23% quarter-over-quarter of 38 cents reflects our success in generating positive operating leverage and continuing to expand our net interest margin. Since the start of the year, our return on tangible common equity has grown 231 basis points to 9.87%, while EPS has increased nearly 50% since Q1. During the quarter, we also continued returning capital to shareholders in a meaningful way. We repurchased 2.2 million shares of our common stock in Q3. And overall, under our program, we've bought back 13.6 million shares, more than 8% of our outstanding shares, at an average price of $13.59, well below our tangible book value per share. Repurchases have totaled 185 million, more than half of our 300 million repurchase authorization. And even with this activity, our continued earnings growth has built CET1 to 10.14% at quarter end, and tangible book value per share has also increased 3% quarter over quarter to $16.99. We will continue to be prudent with the remainder of our share buyback program and use it opportunistically while remaining focused on maintaining strong capital levels. Core deposit trends were positive with non-interest-bearing deposits of 9% and now represent 28% of total deposits. It was driven by both higher average balances and steady inflows of new business relationships. This strong core funding enabled us to further reduce broker deposits, which declined 16% from the prior quarter and lowered our total cost of deposits by five basis points to 2.08%. As noted in our investor deck, core interest-bearing deposits also increased when runoff of interest-bearing broker deposits is excluded. Our deposit strategy is both dynamic and flexible. While we continue to grow our core deposits, we will choose to shrink or expand other sources of deposits as needed, depending on pricing, our loan production, and other liquidity needs. Loan production and disbursements remained healthy at 2.1 billion, with broad-based production from our business units. We purchased fewer SFR loans this quarter, down about 346 million from Q2, as yields contracted due to strong secondary market demand. Total loans declined about 1.6% from last quarter, mostly due to elevated pay downs and approximately 170 million of proactive payoffs of criticized loans, consistent with our strategy to maintain high quality credit and exit credits that we believe are not meriting of long-term strength and support from us. Excluding that deliberate activity, our core loan portfolio was essentially flat. Pipelines remained strong, and we expect loan production activity to remain high. This strong loan production is one of the keys to the ongoing incremental growth in our earnings per share. The rate on new loan production remained healthy at 7.08%, well above the rate of loans that have been maturing. As a result, with strong loan production, even with elevated payoffs in the quarter, our balance sheet remixing accelerates our margin expansion. The loan sales we announced last quarter continue to proceed well. In Q3, we liquidated $263 million of held-for-sales CRE loans, largely through the execution of strategic sales within our targets and some proactive paydowns. We currently have $181 million of CRE loans remaining in HFS, and we expect to sell those over the next several quarters. Credit quality remains stable, with criticized loans down 4% quarter-over-quarter and special mention loans down 24%. Classified loan balances increased this quarter due to a timing issue related to a $50 million CRE loan for which the borrower executed a contract for sale after quarter end, as well as a revision to our risk rating framework for certain loans in the venture banking portfolio. It's important to mention that all of those loans are performing and on accrual status with no delinquencies greater than 30 days. The updated framework was procedural and not indicative of any incremental underlying credit weakness. Our allowance for credit losses increased to 1.12% of total loans or 1.65% on an economic coverage basis, reflecting our continued discipline to reserving and the strength of our credit profile. This was another great quarter for the company, a quarter that reinforces the positive trajectory we've established and the consistency of our performance. With a strong capital position, a valuable core deposit base, and a proven team that executes with discipline, we believe Bank of California is well-positioned to deliver sustainable, high-quality earnings growth for many quarters to come. Now let me turn it over to Joe for some additional financial details, and I'll certainly be back to answer questions. Thanks.

Thank you, Jared. For the third quarter, we reported net income of $59.7 million, or $0.38 per diluted share, which was up 23% from the adjusted EPS of $0.31 in the prior quarter. Net interest income rose 5% from Q2 to $253 million, The net interest margin expanded to 3.22%, driven by higher loan yields and lower deposit costs. Our exit net interest margin at quarter end was 3.18%, which is normalized for excess accretion income in the quarter. We expect our margin to continue to expand from this level in the fourth quarter. Average yield on loans increased 12 basis points. to 6.05%, reflecting the benefit of portfolio mix shift towards higher yielding C&I loan categories, including warehouse, lender, venture. Our loan yields also benefited from higher accretion income, which was up approximately $3 million from Q2, due to loan payoff activity. The spot loan yield at the end of the quarter was 5.90%, reflecting the impact of the September rate cut on the variable rate loans, and normalization for accretion income during the quarter. Total loans ended the quarter at $24.3 billion, down slightly from last quarter, largely due to the intentional payoff activity and elevated paydowns that Jared mentioned. Excluding that, underlying core loan balances were stable. Deposit trends were strong as we saw a favorable mixed shift towards more non-interest-bearing deposits and a reduction in broker deposits. As a result, cost of deposits declined five basis points to 2.08%. Our spot cost of deposits at 930 was 1.98%. And our cumulative beta in this down rate cycle for interest-bearing deposits is approximately 66%. The interest rate sensitivity on our balance sheet for net interest income remains largely neutral as the current repricing gap is balanced when adjusted for repricing betas. From a total earnings perspective, we remain liability sensitive due to the impact of rate-sensitive ECR costs on HOA deposits, which are reflected in non-interest expense. We expect fixed-rate asset repricing to continue to benefit net interest margin as we remix the balance sheet with high-quality and higher-yielding loans. We have approximately $1 billion of total loans maturing or resetting by the end of 2025, with a weighted average coupon of approximately 5% offering good repricing upside. Our multifamily portfolio, which represents approximately 25% of our loan portfolio, has approximately 3.2 billion repricing or maturing over the next two and a half years at a weighted average rate that offers significant repricing upside. Non-interest income was 34.3 million, up 5% from last quarter, primarily due to higher fair value adjustments on market-sensitive instruments. Normal run rate for non-interest income remains at about $10 to $12 million per month. Non-interest expenses of $185.7 million were relatively flat across most expense categories as we continue to maintain disciplined expense controls while supporting our growth initiatives. The combination of stable expenses and higher revenues drove a more than 300 basis point decline in our adjusted efficiency ratio to 58%. We continue to make progress on expanding positive operating leverage while still investing thoughtfully in technology and talent to support future growth. We expect 4Q expenses to be consistent with prior quarters and be at or below the low end of our range as we continue to make progress on managing core expenses. As Jared mentioned, credit quality remains stable with net recoveries of 2.5 million and declines in our criticized loan balances. Provision expense of 9.7 million was largely related to portfolio growth and updates to risk ratings and the economic forecast. Our allowance for credit losses ended the quarter at 1.12% of total loans or 1.65% on an economic coverage basis consistent with our prudent approach to credit management. Looking ahead, we remain on track with our 2025 guidance. We continue to expect loan growth for the full year to be in the mid-single-digit range and that interest margin to remain within our 320 to 330 target range for the fourth quarter. We also expect to maintain our strong capital and liquidity position while delivering steady, high-quality earnings growth. With that, I'll turn it back to Jared.

Thank you, Joe. This was another excellent quarter for Bank of California, one that highlights our strong performance, positive operating leverage, and the consistency of our results. Since completing our systems conversion in the third quarter of 24 following our merger with PacWest, we have been building core earnings while improving the balance sheet, managing expenses, and efficiently deploying capital. With four quarters of high-quality earnings growth under our belt and foreseeable EPS growth in sight, The track record and the path ahead should be very clear. Our teams continue to execute with discipline and focus, driving growth, and continuing to build one of the best franchises in California and everywhere else we operate. We have a proven business model that is delivering high-quality earnings through a diversity of lending channels, a valuable and growing core deposit base of deep client relationships, and a culture of performance and accountability. We believe the opportunity in our markets remains significant as we capitalize on the dislocation in the California banking landscape and win new relationships. We continue to add high quality talent to support our growth as our teams continue to win new business and bring new relationships to the bank while serving our clients and keeping safety and soundness front and center. The consistency of our results, strength of our balance sheet, and momentum in our business demonstrate why Bank of California is well positioned to continue our success and why we're so confident in the long-term trajectory of our franchise. Thank you to our employees for their dedication and commitment to serving our clients and community each and every day. With that operator, let's open up the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're 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 your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jared Shaw with Barclays Capital. Please go ahead.

Hey, everybody. Good morning, good afternoon. Good morning. Thanks for the questions. Hey, just to start off, you know, the credit trends this quarter were really good. And, you know, Bank of Cal was pulled into sort of a story of the Cantor loans. And, you know, I think, you know, just sort of broader concern around NDFI lending and structure. And clearly from the numbers you put up, you must feel that there's not a lot of loss there. And it feels like you have good collateral protection. Can you just give a little color on how you structured that exposure and why you feel that there's not loss there. And is that sort of reflective of the broader view of how you're going after some of the non-mortgage NDFI lending?

So thank you for the question, Jared. When you say how we structured that, you're speaking specifically to what was mentioned in the articles?

Yeah, in terms of like being able to get additional commercial real estate collateral and being sure that you have the senior lien position?

Yes. So this is a really important distinction. The frauds that were mentioned with Zions, with Fifth Third, with Western Alliance, fundamentally had to do with NDFI lending. And they were generally lending with collateral pools. We were mentioned because we had a loan to a related borrower. But our loan to that borrower was not an NDFI loan. It was a pure real estate loan. So we weren't lending on any collateral pool. This is a loan that was made. We made a loan many, many years ago on a hotel on the beach in Laguna. That loan has been on non-accrual, has been classified, and we filed a lawsuit many quarters ago. It's been in our numbers. But that had nothing to do with our NDFI lending. That was just a simple real estate loan. And so I would just say it was a real estate loan that the partners got into a business dispute. Clearly, some of the drama that was going on there affected what was going on elsewhere. But it's real estate. We're collateralized. We have a guarantee from this guy, Stupin. but we're relying on the property to pay us back, which we think we're well secured. And we think there's plenty of collateral there. So it's important to distinguish that. When we look at our, and I think Zion's mentioned in their lawsuit that we were in first position. Again, they were looking at loans that were in a collateral pool that we had lent on purely as real estate loans. And in fact, they were two single family loans that are no longer in our portfolio. They were sold as part of a pool of single family loans that was sold in connection with the transaction. So we weren't lending to these groups that seems to be caught up in the fraud, and certainly not Tricolor or First Brands, but as it relates to Cantor and the related entities, we never lent to any of those on an NDFI basis. That wasn't what we were doing. So let me just put that to bed. We're a real estate lender fundamentally to those folks, and we think we're well secured by real estate. And you perfect a first priority interest in the mortgage deed when you make a real estate loan very easy. In terms of NDFI, we put a chart together in our investor deck. It's on page 14. A significant portion of our NDFI lending is in mortgage warehouse and fund finance, which I think people have a strong understanding of. Our mortgage warehouse loans, we have a great team. It's really well done. We've had it for years. But we think we do all of these credits well, including our lender finance loans that are business credit, consumer credit, and other mortgage credit. And when you strip out mortgage warehouse fund finance and other mortgage credit, which is 11.6, 13.7% of our 18%, you're left with less than 5% of our loans having NDFI exposure. But across the board, we've had a history of no losses over. And I asked people to put in the 10-year historical loss rate so that we could go back as far as we can because PacWest had been doing this for a long time and Mortgage Warehouse at Bank of California has been in place for a long time. It's negligible. That's not to say you'll never have a loss, but I think that the way that we do it is very specific. One thing that's important to mention that we put in our deck, and I had our team go through what happened at the other locations without being critical of our peers who are very good lenders, but things happen. I said, what do we do that's different to protect ourselves, and they highlighted one of the things that we do is we have an in-house audit team that conducts anti-fraud measures, frequent testing of underlying collateral, cash collections, payment history, mortgage title checks. When we take a collateral pool, we look at it ourselves. We sample it. We check the trustees. We check the perfection and make sure that we know what position we're in through a broad sample. So look, I don't want to be critical of my peers. They're all good lenders and I can only speak to our history, what we do and how we do it. And I feel very comfortable with what we do. Happy to, let me pause there, Jared, happy to answer more questions.

Yeah, thanks. No, that was, that was great color. I think, uh, you know, good insight into, into how you're structuring it. Um, maybe just as a, as a followup shifting over to, to the margin. Um, you know, when we, when we look at the, the, the guide for the margin of three 20 to three 30, you know, is that, is that a good normalized, uh, level or as we sort of end the year and start looking into 26, how should we think about margin, especially with the likelihood of some cuts? And I think your guidance does not assume cuts. Is that right?

Correct. It doesn't assume cuts. I'll start and I'll let Joe chime in. So we certainly are liability sensitive when you factor in the ECRs. And so we do expect our margin to expand significantly. The accelerated accretion we had last quarter was in the middle of the quarter, which is why it affected our overall margin. It took us to 322, but when you strip it out, we were at about 318, which was still a nice expansion from the prior quarter. So we see our margin continuing to expand. The question is, at what pace? I'm pleased that our teams have been able to realize, I think, a pretty high level of beta as we're really being disciplined in terms of managing our deposit costs. I expect whether we're going to achieve 66% or 50% is going to matter on a whole bunch of factors, but we certainly expect to achieve at least 50% if not higher going forward on our deposit beta. Our margin will continue to expand, and Joe and I were talking about this before the call. The biggest driver of our margin expansion seems to be our increased loan production whatever it is in the quarter and how that is really replacing loans that are at much lower rates. You know, one of the big shoulder bags we're carrying is this $6 billion multifamily portfolio that it will, half of it matures or repays in the next two and a half years. But that's, that portfolio is at, you know, 25% of our balance sheet and it's at, of our loan portfolio and it's at, it's at 4%. So even with rates coming down, our loans coming on are coming on at much higher rates than, And even a lot of those loans happen to be floating rate loans, but they're still coming on at much higher rates. And, you know, generally we'll have floors on those loans as well. Joe, anything to add there?

No, I think you captured it, Jared. You know, as we look out into the future, you know, your original question, I think, Jared, was, you know, is it a solid run rate looking at 320, 330? I think that's a starting point. And then, as Jared Wolf mentioned, I think we intend to grow it from there. And the loans, obviously the remixing of the loans is a powerful accelerant to that. But then we also, as we did this quarter, we're continuing to focus on growing non-interest bearing and getting our cost of deposits and cost of funding down. And then you'll occasionally see some lumpy upside related to the accretion, which we had this quarter. So I think we're feeling pretty good about it.

Jared, I think as we get to the fourth quarter, it's going to be easier to get through the fourth quarter. It'll be easier for us to give you a range guidance for the margin for next year because I imagine you're starting to look at that. I expect if we're 320 to 330 right now, you know, we're going to end up, obviously we're going to end up there, you know, given that we're at 318 in the fourth quarter and we don't even have a full quarter of rate cuts. And so, you know, we'll end up, low 320s in the fourth quarter most likely, and then I would expect the jumping off point for 26 is going to be, you know, 325 to 335 or wherever it is that gives us some flexibility. Look, we're earnings first and margin second, but I think the margin will certainly continue to expand, and we should have more guidance as we get closer to the end of the fourth quarter.

Thank you.

Thank you.

The next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Hi, good morning.

Morning. Maybe just back on that margin discussion, I guess just looking at margin, kind of not the combined effect with the ECR reduction, just are you still liability sensitive from a margin standpoint or relative to the comments you just made rate cuts are going to be punitive maybe up front and then you get that ECR benefit on the back end?

They're definitely not punitive to us. We are at worst case neutral with rate cuts when you take out ECR. And I'll let Joe correct me if I'm wrong there, but we believe that we really are fundamentally neutral that our deposits and loans are kind of repricing and balance and then ECR gives us that liability benefit. But our margin expansion is really being driven by this loan production that we're seeing. Joe, do you agree with that?

Yeah, that's correct. Right now, as we stand today, we're a neutral balance sheet if you were to exclude the HOA deposit with the ECR benefit.

And, Timur, we kind of debate this internally. You know, when you do these models, as you probably know, these IRR models, they rely on a static balance sheet. And nothing is ever static in a bank. So I always think that they're off in some way. And it's, you know, they're directionally accurate, but they're never truly accurate because the balance sheet is not static. And so the question is, which way is it off? I think we can drive more benefit because I guess that's the way my brain works. And that's where, you know, I'm going to drive results. But I tend to think that we can Even on a static balance sheet or a slightly dynamic balance sheet, without production, I think I can get more movement on deposit costs because that can drive costs down. We have to put in assumptions about what deposits are going to reprice and how they're going to reprice. And I tend to think that we can be pretty aggressive as long as we're doing well on our growth initiatives. But the technical answer is we are completely neutral.

Okay, that's good, Calvin. Thank you. And then just looking at the third quarter deposit growth, particularly in DDA, I guess how much of that is tied to warehouse? There wasn't really an increase in related ECR costs. Was that more back-end driven, and we might see the higher average balances impact for two numbers, or was a lot of that growth kind of ex-ECR driven?

It wasn't – you said warehouse. I think you meant HOA. It wasn't, if I understood your question correctly, about whether it was HOA-related, right? I mean just ECR-related deposits. Yeah, the ECR is primarily in our HOA business. No, it really wasn't. We tend to see inflows of HOA at the beginning of a quarter, and then they flow out through the quarter. And so you won't see kind of average balances grow – tied to ECR. Also, our highest ECR cost is really associated with some larger depositors in HOA, and we have not been growing balances from them because we don't want to increase our cost and concentration. And so even if we were to grow HOA, we wouldn't see the same level of ECR costs come up. So that's just some color on how we're growing our balances, is the level of ECR that we're paying is not the same at new balances we're bringing in from HOA. Our team has done a great job of making sure that our ECR costs are not what they were historically. And we have some larger relationships that have some more expensive deposits, and we just don't want to grow those, right? And so I would say that the deposit growth was pretty broad-based. As I've said, I expect deposits over time to grow. we're working really hard at relationships. If people have been tracking kind of the ample reserve conversations at the national level and with the Fed policy, I mean, liquidity is tightening nationwide, and it's expected that the Fed is probably going to have to engage in some TOMO activity to kind of put some liquidity back in the market. That's consistent with what I've been saying for many quarters, is that if we're flat when liquidity is coming out of the system, that we're winning because, in many cases, deposits are down and your customers don't have more to give you. I would say this quarter was a great quarter. It was pretty balanced. We brought in a lot of new relationships. We did see some good activities from some existing clients as well. We'll see what shows up in the Q3, so we'll see what shows up in Q4. But over time, I expect that we're going to continue to win and bring in new deposit relationships in.

Great.

Thanks, Jared.

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Hey, good morning, everyone. Morning. Just on the loan deposit growth for the year, you know, targeting mid-single-digit growth, it implies a decent step up here in 4Q. Maybe just speak to the pipeline on both sides of the balance sheet and maybe mid-single-digit, you know, is 4 to 6, so 4Q. would kind of be in that range on the loan side, but on the deposit side, it just implies a steeper step up.

Yeah, you're right. I mean, what we don't do is we don't pull away from goals. We'll measure ourselves and see how we did at the end of the year. But you're right. It would suggest that we'd have to have some outsized growth this quarter, and we'll see if we hit it. Our teams are working hard. We might not, but I'm comfortable being measured against what we do. I think our shareholders are being rewarded by our growth and earnings and I like to put out there all the initiatives that we have and how we're driving results for shareholders. And the market is what it is. The dynamics are what they are. I think on a core basis on the loan, when you strip out the loans that were sold, you know, when you look at kind of core loan growth, we'll probably hit the 4% to 6% range. I think that's fair. Deposits are going to be a lot harder. So we'll see where we end up. But I just didn't feel like pulling back our goals. Our teams know what they are. They're out there working hard to try to deliver. Production's been fantastic. I've been really pleased with the production of our teams. Payoffs happen. But like I said, earnings are continuing to grow, notwithstanding that. So I'm very pleased with what we're doing so far.

Jared, I would just add also that we calibrate our deposits to our loans, right? So we don't want to have too many deposits. If we end up with excess deposits, we'll occasionally – take measures that will optimize our balance sheet. But, you know, we can, you know, there's a spectrum of deposits, and if loan growth, you know, to the extent that loan growth is robust in the fourth quarter, we can scale up those deposits to fund that.

Yeah, no, Joe, I'm glad you mentioned that. It's one of the comments that I had in my prepared remarks, which is that we are pretty dynamic in managing the balance sheet to optimize earnings and not carrying cash at levels where we think we can get a better return somewhere else. And so, And we'll let, depending on what we see in terms of our flows, keeping our loan to deposit ratio and equity levels in balance. Our team does a great job. Our treasury team does a phenomenal job with our finance team of really optimizing in a very dynamic way. You know, when we bring on broker deposits, at what cost, for what duration, what do we need right now, depending on other deposit flows. And so I'm glad you brought that up, Joe.

Great. And then just the other one for me on the On the venture business, can you just provide a little more color on what changed in the way you're risk rating those loans that may have caused a little bit of creep in the classifieds?

Yes, sure. So I mentioned this many quarters ago that we were going to get stricter on how we were internally grading ourselves because I feel like it's the best way to have an early warning system So you can downgrade credits based on a new methodology, but it has nothing to do with the experience that you've seen the date of the credits, but it might mean that you're watching them more closely because we decide the environment or just our risk tolerance may have changed. And so the way that we're looking at venture credits fundamentally has to do with a matrix of a number of factors. It has to do with fundamentally, just to remind everybody what we do in venture generally, So fund finance is capital call lines of credit. I think people are familiar with that. In venture, where we have a disproportionate amount of deposits relative to our loans, we lend discreetly. And generally what we're doing in the venture space is lending to give somebody a line of credit that bridges a round of funding. When we bring in a relationship, they're giving us all of their, let's say it's a company that has some great software. And they just did a round of of $20 million at a $200 million valuation. That $20 million is going to come into our bank and let's say we bid on a line of credit and we won. That $20 million is going to sit in our bank. It's probably going to be two or three million in their operating account and the rest is going to be in a money market account where they're getting some earnings because they need it because they're not profitable. They might have asked for a $5 million line of credit. That line of credit is going to not be used It's a bridge facility that would only be used when they go out to raise capital if they need additional time. And what we monitor is the RMC, the remaining months of cash, as they burn, and make sure that we never have what's called crossover, which is when the debt is in excess of cash. As long as our debt remains greater than the cash level, and most of the time our debt is zero, we're fine. and we're benefiting from these deep relationships of treasury management and cards and all the other services we provide and the expertise that we provide that they certainly value. But they may say, hey, we're going to go to a round C. We've got lined up investor support. We need a little bit more time. We have nine months of cash, and we think it's going to take us down to about four months of cash. Okay, and they're asking us, you know, and they're talking with us about whether or not they're going to – borrow on that line of credit and then it's a conversation and we go in with our eyes open based on what we see there. And 99% of the time it works out fine. But there have been circumstances when it doesn't. So what we've done is to tighten the requirements that we have for what we're looking at. We're looking at the sponsor support, the support of the VCs. We're looking at how they're doing relative to their business plan. We're looking at the we're looking at the cash to debt levels. We just tightened up the matrix and that caused us to rate credits in a different way. And there's about eight or 10 things that we look at. And it's hard for me to go deeper than that, Matthew, but I just wanted to give you some color. And so the credits could be the exact same credits and performing the exact same way, but under this new matrix, we might be looking at it a little bit differently and it might trigger another conversation with the sponsor and the VC firm. And that's just what we decided to do to tighten up our standards.

That's great.

Appreciate it. Hope that's helpful. Yep.

The next question comes from David Feaster with Raymond James.

Please go ahead. Hi, good morning, everybody. Good morning.

I guess maybe touching on the loan growth side, you know, if we think about the growth dynamics, obviously payoffs and paydowns have been a headwind. If I was reading between the lines, it sounds like you're expecting production, improving production to drive growth rather than really a deceleration in payoffs and paydowns. I guess, first, is that a fair characterization? And then secondarily, what do you see as some of the key drivers of that increase in production and how's pricing today?

Yeah, let me start at the back end of your question. So we see a very strong pipeline this quarter. it's looking really good. You know, the fourth quarter tends to have good activity. It's obviously economy dependent, but right now people seem to be doing well enough and active. And I think rate cuts generally will stimulate activity as well. So I think, you know, that probably bodes well for a good quarter. Pricing is holding up 7.08% of new production. You know, yields is a little bit lower than prior quarters, but it's still really, I think, really, really good. And if I look at the yields that we got on production in our individual lending units, which I have right here, production yield really held up pretty well. I mean, construction was flat, was a little bit up. CNI was up. Venture was up. Warehouse was up. SBA was a little bit down. Equipment lending was slightly down. Fund finance was relatively flat. Lender finance was down. So lender finance was down about over 50 basis points. And that's because those are floating rate credits pretty closely tied to SOFR. And so we were very active in the quarter. And so that would have brought some of it down. But overall, I think Yields were pretty good in the quarter. We had $7.29 last quarter, and it was $7.08 this quarter. But in the first quarter, it was $7.20. So there was kind of a spike in the second quarter, and then third quarter came down a little bit. And also, rates tend to lag a little bit. So this quarter, we'll see where they are based on rate cuts last quarter. But overall, I think production levels are strong. It's hard to know where payoffs are going to be in any given quarter. Stuff just happens. You know, it's a very dynamic, active. Our clients are very active. You know, we had one client that won a lawsuit. They brought in tons of deposits. And then they paid off a big loan that they had with us. And so, you know, it happens. We didn't know that that was going to happen. And it did. It's fine. It's just normal. But we really try to save loans when we can see things that are going to pay off. If it's a multifamily payoff, we certainly want to bid on it. If it's a construction payoff, generally we're happy with it, and we'll find new construction because some of those longer-term mini-perms at low rates we're just not going to do, and sometimes they're too large. Even though we're going to do the construction, that doesn't mean we're going to do the mini-perm. It's just there's much higher debt on the mini-perm, and it's just not something that we're necessarily prepared to do even if we did the construction. Sometimes we are, but not always. It just depends on the project. And so, David, let me ask you to reframe I want to make sure I'm answering all of your questions. Can you restate?

Yeah, the other part was just, you know, again, yeah, the other part was just, you know, with the increasing production that you were talking about, what are some of the key drivers of that?

In terms of the areas where we're lending, I mean, I think CNI overall is doing really well. So in California, across our commercial and community bank, we're seeing broad-based good production projects. And generally in our middle market area, which is to companies that are a little bit more experienced, a little larger, we're seeing good production locally and even more broadly. Across California, we're getting referrals from our business units for businesses that are all over the country, which is great. Lender finance continues to shine. And one of the things that Anne mentioned in a note to me was that We provided back leverage for the loans sold last quarter that were in lender finance, and that might have brought down the loan yields a little bit too because we provided good rates on those loans for the back leverage for the loans that were sold, but it was still well above the rates of loans paying off. So that might have contributed to lender finance rates being down a little bit. Let's see. We're still seeing a lot of construction demand in terms of low-income housing tax credit. That stuff just takes a while to – to pay up, but, uh, it's, that's doing very, very well. And, um, I would say that warehouse, you know, you, there's always people that are refinancing and buying homes even, you know, up or down, we seem to have good demand in warehouse. So that's, that's growing as well. So I'd say those are the drivers right now. Okay. Fund finance has been always pretty, the other thing I would mention would be fund finance. It was not a big quarter for fund finance. It was one of their slowest quarters after, uh, really three really strong quarters. So we'll see what happens in the fourth quarter. I know they have some good funding expected this quarter and fund finance could have a good quarter this quarter as well. But it was not a big contributor last quarter.

Okay. And maybe shifting back, I mean, you guys have been very proactive managing credit. That's been a part of what the payoffs and paydowns that you're seeing, some of which you're pushing out. The industry is obviously hyper-focused on the credit outlook and um today you know just given some of the recent issues that we've seen in in the industry i think you kind of put the ndfi issue to bed uh but outside of that i mean is there anything where you're seeing any pressures or that you're watching more closely or that maybe you're pulling back from just that risk adjusted returns don't maybe make as much sense just given you know competitive dynamics or underlying issues just kind of curious if there's anything you're seeing yeah it's

You know, as strong as the market is, I would say the areas where we have been very cautious have been, certainly, you know, we have not backed off any of our office comments about, we still think that that is, you know, I was at an event with one of the investment banks held with Blackstone, and John Gray was there speaking to a room full of CEOs about what they were seeing, and they're like doubling down on San Francisco. right now, the San Francisco office market. Obviously, Midtown Manhattan has come back pretty strong. That said, we don't feel the need to be an office lender. We just don't. And I let others do it. And so we're backing off that, even though we just signed a big lease downtown in downtown Los Angeles, where we're moving in. And we have two offices that we consolidated in downtown Los Angeles that got the same square footage, a little bit more, got rooftop signage for less than we were paying for the other two buildings combined. So we're trying to be proactive and take advantage of it. Notwithstanding that, and maybe because of that, I feel like I don't want to be a lender on office right now. And so we're not doing that. And I would say that anything that has government in it, any type of property with government, we're staying away from. And some of the things that we moved out of, we forced exits of properties everywhere. where the government was a tenant. And I said, just get rid of it. Tell them we're not going to renew the loan and just move it out. And that was some of the credits that went out in the quarter. At least one of them had a government tenant. And I said, just get out of it. It was a large tenant in the property. And I said, let's just move out of that property, even though it was completely stable. So that's where we've been proactive as well.

Okay. That's helpful.

Thanks, everybody.

Thank you, David.

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

Oh, hey, Jared. Hey, Joe. Good morning. Jared, on the, and you touched upon it in your prepared remarks, the buybacks, the opportunistic buybacks, partly from private equity, how are you thinking about CET1 levels, given the earnings improvement ramp, the growth you talked about, and just in light of regulation?

Yeah, I mean, I think the right number is between 10 and 11. And I think more people are coming, as I said in prior quarters, I think more people are coming down to us than going up to, you know, above 11. I'd said before I thought 10 and a half was totally fine. And, you know, so we're between 10 and 10 and a half now. And I think we've got plenty of capacity and we're building up CT1 faster than we're growing earnings due to some benefits that we have on the tax side that Joe can walk through. And so, yeah, we're able to continue to grow CET1 while buying back stock. And we're completely undervalued, in my view, by a meaningful amount. And we've got to solve that by continuing to drive earnings growth. I think the market gets it. And we're going to continue to build on this track record. But I think we now have a track record. And I think the margin expansion is there. But I don't want to lose the opportunity to take advantage of buying back our stock. And I think we're going to be plenty opportunistic and be able to maintain capital levels in the right range.

Okay, continuing to buy back. Got it. And then on the ECR betas, maybe a question for Joe. I guess what do you mean for betas on the ECR deposits? I may have missed that.

So it is approximately, the way the contracts work is approximately 75% for every 100 basis, for every basis point move.

Okay. And then, Joe, I have you to tease the tax, the fund tax item. What should we be thinking about in terms of tax strategies, tax rates, anything unusual?

No, I think 25% is probably a good tax rate for us moving forward. We do have a big DTA, you know, generated from net operating losses that have occurred in the past, also have fair amount of tax credits which have been built up through our low-income housing activities, et cetera. As we use those up, as we make money and we use those up, the way the tax law works is you're kind of restricted in the benefit of that deferred tax asset in your CET-1. So as you use up the deferred tax asset, it comes back in, it gets recycled back through CET-1. our CET1s is probably growing a little faster, is growing a little faster than our earnings as the amount of pullback from the NOL dispays over time. It's pretty complicated and we can get into it more if you want to get into it.

Yeah, I'm just interested if I think about utilization of it over the next couple of years, like how much of a CET1 benefit are we talking? Because I think it plays right into the buyback narrative.

Yeah. Well, you know, I think as part, maybe as part of our earnings guidance at the end of the year, maybe we'll, we'll put something together on that.

Okay.

That'd be great.

Thank you.

Thank you, Chris.

The next question comes from Andrew Terrell with Stevens. Please go ahead.

Hey, good morning. Morning. I had a question just around the, the classified loans. Jared, I heard, you know, you mentioned the prepared remarks, the 50 million of the pickup sequentially was more of a timing issue. So I guess, you know, One, should we expect classifieds moving down in the fourth quarter? And then I appreciate all the color on the venture business and the loan portfolio there. Any other areas left across the loan portfolio that you feel like you need to review kind of the matrix on risk rating? Anything we should expect incrementally there?

I don't think so. So classified, the $50 million loan, they signed the contract to sell it. for well above our loan amount post quarter end. So that will come out this quarter. I think the conservative thing to say is that classifieds will remain flat, but of course I hope they go down and I would want them to go down, but you know, I have to, things always pop up and you know, it doesn't mean you're going to have a loss, but stuff just happens. So Andrew, I want to be careful to say there, you know, all things being equal, if we, you know, we didn't have a dynamic balance sheet, Yes, it would go down. Right. I don't know. Stuff happens. I don't know. It could go up. It could stay flat. But hopefully it doesn't. I think our team is doing a really good job. And to your second question about, you know, are there other areas where we're doing reviews that could kind of impact our credit metrics? I don't think so. I think our team has kind of gotten through it all. And we had been rolling out this venture thing over several quarters. And so this was just kind of, you know, the one that the quarter that had the most impact, um, as we got through it and we, we started applying it. So I don't think there's going to be anything else. There's nothing else I'm aware of right now. Is that what I would say?

Yeah. Yeah. I know it's been a focus for, for a while. Okay. Um, that was it for me. I appreciate it.

Yeah. Thank you. Appreciate it.

The next question comes from Gary Tenner with DA Davidson. Please go ahead.

Thanks. Good morning guys. Uh, morning. most of my questions were, were asked, but I wanted just to ask about the timing of the buyback through the quarter. It looks like just based on the, on the average purchase price, it was kind of weighted towards the, you know, the last bit of the quarter, uh, after the stock had run up a little bit, was that kind of delayed just more of a function of getting visibility over where kind of growth in capital was going to go over the course of the quarter before you became more active later in the quarter?

Or were there other, I don't know if I, I don't know if I can confirm that, uh, Gary, not because there's anything confidential there. It's just because I don't know that that's right. I'd have to go back and look at it. You know, these are average prices that we're giving you, and it affects, you know, how much was purchased when versus purchased elsewhere. And then also we had a block that we purchased from Warburg. So it's hard for me to confirm that. Joe, I don't know if you have any data.

Well, you know, in the DAC on page 24, we show how much we purchased. and the average price. I'm not sure I understood the question.

Well, the average price, I think, was $16.48, right?

Yes.

And if I look at just kind of, you know, and knowing where the stock generally was over the course of the third quarter, and you didn't get kind of over $16, call it, until late August, and then it was kind of, you know, the stock was there mostly through September. So that's what drove the question.

Okay. So we, um, your question was whether or not it was driven by making sure we had the right capital levels. I think that was the heart of your question though, right? That was timing. Yeah. So let me, let me try to address that. Um, we absolutely want to make sure that when we buy back our stock, our capital levels are going to be sufficient and we, we, so we, we definitely look at, at, you know, where do we think capital is going to be when we buy back stocks? So that is, that is part of our calculation. that is part of our analysis. So let me just say, without saying when we bought stock, I will tell you that we definitely look at that. And that's probably a fair conclusion to make, but we obviously ended, ended comfortably above. It's also pretty hard to calculate because of what Joe said about our, our dynamic range of, of our taxes and the NOLs that we have and how it impacts our CT one. And it's a little bit iterative how that calculation works. And sometimes you don't have all the, all the feedback, but I think, I think, what we experienced last quarter coming out of, you know, we were at 990 or 995 or wherever we were on CT1. Now that we're comfortably above 10, I mean, I'm not, I think that that one might've been a one quarter kind of, kind of item that isn't really a concern going forward.

Got it. Appreciate the thoughts.

Yeah. Okay. And also, let me just say, look, we, we're always going to be looking at a variety of uses of our capital. We have, $115 million left on our share repurchase authorization. It is unlikely that we will use all of it because we will retain some of it, but we do intend to be active when we believe that our shares are undervalued relative to other, but we'll always be looking at other opportunities of what we could be using our capital for at any given time. And so they're not mutually exclusive, but our shares are, in our view, meaningfully undervalued. We're growing tangible book value at I don't know, the past couple of quarters, it's been 25 cents plus per quarter. So, you know, it seems like knowing where we're likely going to end up, you know, we can figure out like, you know, if we're not trading at 125, 130 or more of tangible book, which we should be given, you know, kind of our clear earnings path, you know, and the solid balance sheet that we have and the quality of the franchise and, you know, how big a footprint we have in California and how unique this is. I just think, you know, our stock is undervalued, so we'll be opportunistic.

Did you have a follow-up, Mr. Tenor?

No, I'm fine. Thank you.

The next question comes from Anthony Ellion with J.P. Morgan. Please go ahead.

Hi, Jared. Just a direct follow-up to your comment you just made on the buyback. Why not be more aggressive here and given the stock is still trading near tangible book value, before you potentially get to that 125 or 130 of TBV? Is it just because you don't want to get below 10% CET1 and you want to retain some capital?

Well, we might do exactly what you just said. I don't think it's prudent for us to tell the market exactly what we're doing and when we're going to do it, because that generally tends to work against us. So... I'm sure you can understand that dynamic. I want to make it clear that we will be opportunistic without saying exactly when we're going to do it. And I think we've done a really good job to date. If you look at the average prices that we've bought at, I think people can say that we've been pretty effective at it overall with an average price of $13.59 for the total program. So you pick your spots and you pick your dynamics accordingly. But strategically, Tony, what you're saying is accurate. But I want to be careful about what I commit to one.

That's fair. And then my follow-up, Joe, on the NIM guide, the 4Q NIM guide, I know you don't assume rate cuts, but if we do get a cut next week in December, could you quantify the impact that would have to the 3.2 to 3.30 guide? And then if we assume the floor curve next year, how would that impact the jumping off point of 3.25 to 3.35 you mentioned earlier? Thank you.

Yeah. So, you know, as we mentioned earlier, our core net interest income is neutral, but we have liability sensitivity in our HOA ECR book. The way the ECR deposits for HOA ECR deposits work is that they kick in the first day of the next quarter after the rate cut. So if there was a rate cut upcoming here in the fourth quarter, we will not get benefit of that until January 1st. So I would not assume that we would get much benefit in the fourth quarter from that rate cut.

And then Tony was asking about how rate cuts affect our margin guidance.

Correct, specifically on the 320 and 330 NIM guide. Just if we do get the cut next week, I mean, that's going to be more impactful coupled with the September cut. So how would that change? Thank you.

I think we have to see because so much of our NIMs, Since we're kind of neutral, but for the ECR, which is HOA, I think a lot of our NIM depends upon our loan production, Tony, and there's a little bit of a lag, right? And so we just have to see how that flows through. Joe, what do you think?

No, that's exactly right. It gets complicated because we can, as the point, or the discussion that Jared had earlier about the technical answer, the technical answer is pretty straightforward, which is that a 25 basis point rate cut for our HOA ECR relates to about $6 million a year of pre-tax income. But there's other factors that factor in. If rates go down and the economy stays strong, that should boost lending. That should have a benefit to us. Some of our loans, a lot of our loans have floors in them. So when do we hit those floors and whatnot? So it's It's a little bit more complex than just saying that it's how fast can we bring down deposits? What kind of deposit pay can we get with our customers? It's a little bit hard, but I think the technical answer is what I said earlier.

Tony, the non-technical answer is I expect that our margin will expand as rates go down because of our production and loans are coming on at higher rates and deposits are going down, given stuff paying off. If we're at 320 to 330 now, and we think we're going to end the year at the low 320s, right? Have a, you know, I don't know what it's going to be for the, whether it's 320, 321, whatever it is for Q4. And then off that 318 that we ended the quarter at. And then, so that's your starting point for next year. We generally don't model rate cuts. We just, you know, we will a little bit, but we are slightly sensitive to them. So if the guy next year is, you know, 325 to 335 or whatever it is. I think we'll just kind of be updating it as we go from there.

Thank you. Yep.

The next question comes from Tim Coffey with Jannie. Please go ahead.

Thank you, everyone. Jared, if we were to look at your non-interest expenses and back out the earnings credit rate, they've been essentially flat the last year. And not to say that it hasn't been something that you've been paying attention to, but has something changed with your philosophy of cost control in the last year that has become more of an emphasis?

I'll start, but Joe can throw out the details. So first of all, I give a lot of credit to not only our finance team, but our entire company for being very thoughtful about how we manage expenses. I think there were a lot of expectations about the timing of hiring that changed. We've been adding bodies, adding great, great talent at all levels, but the timing has been more spread out as our teams have figured out ways to drive efficiencies. We're asking, as we're budgeting for next year, we've asked everybody to think about where they're going to realize their benefits on gearing ratios. We've spent a lot of money on technology, and we've said to people, unless you're seeing a benefit of this technology, I'm you know, why are we doing it? So you need to factor into your hires for 2026 what benefits you're getting from technology and how your gearing ratios, which we think about as the, you know, it's the number of portfolio managers you need for every lender. It's the number of relationship managers you need for every new client relationship you're bringing in. Whatever the ratios are, whatever the gearing ratio is, what benefits are we seeing from technology? It has to do with how we monitor and manage BSA, how we're using Copilot and ChatGPT. both of which are deployed company-wide. And, you know, our IT team has done a great job of training people on and making sure that we are using tools that can allow us to do things faster. I've told our teams, like, we're not looking to lay people off, but hiring might be slower because we don't need as many people as quickly. So I think some of it is timing, but our teams have really done a good job. Joe, I'm sorry for that long introduction. What's the actual answer?

No, I think you pretty much nailed it, Jared. You know, we we've been very disciplined about the head count and about projects. And those are really the two drivers that move the needle and cost for us. And the, um, you know, on, on, on head count, people have just been really thoughtful in the way they've gone about in areas where we needed to add people. Maybe, maybe we found efficiency somewhere else to offset that. And on the projects, you know, we, we, we, we, we start at the beginning of the year. We have a list of projects we want to do. And, um, is detail and everything. But then as we get into them, we spend a lot of time and focus going through and sharpening our pencils and saying, okay, what do we really need to do? How can we do this in the most efficient and effective way? What are things that might be nice to have but not have to have that we can drop off of this project? And how do we get this done in a way that is the most effective for shareholders and for the bank? And we've done that, and the team has done a really good job, as Jared pointed out, doing that. As we get into 2026, you'll see some step up in cost for the normal wage inflation and those types of things and that some of the project spend investments we've made this year will start amortizing. But we think we're going to continue to focus on this and keep a really tight rein to make sure that our expenses don't grow in a way that is out of line with our revenue and we continue to increase our operating leverage.

You know, Tim, just another thought there we have an initiative in the company called Better Bank and we ask our employees to submit recommendations for improvement of anything that they see that they think is suboptimal and we have a team that reviews those submissions evaluates them ranks them and then gives a response to the person that submitted it and this is online for everybody to see in the company So we're constantly improving the company. And I believe to my core that that has actually created a ton of efficiencies in our company. When we have people that don't have to fill out the same forms that, you know, a third form when they've already filled out two others that have the same information, or they can get two forms down to one, or we can do something faster for our clients, or we can eliminate steps or get rid of things that just aren't necessary anymore because of our thoughtful employees who are on the front lines are saying, I can see a better way to do this, and you actually listen to your team, you can create a lot of improvement. And I wouldn't look past that as also a reason why we've been able to keep costs in line.

Okay. That was a great call. Thank you both. And then my next question has to be on the expense guide. I don't think you're getting credit for your expense, the fact that they've been flat for the last four quarters. So I'm kind of curious – It seems to me the guide for expenses is conservative. Are you expecting big investments in the business this next quarter, next year?

Joe, go ahead. Well, I think we just changed our guidance in the fourth quarter to say that we expect to be either at the low end or below the low end of the range. And I think we also further said we're somewhat consistent with what we've seen. we're beginning to lean into that. And yeah, I think it is fair to say maybe we've been a little conservative today.

But the project spend is real, Tim. Like, you know, if you ask people for a wish list of projects, it's pretty long, but our team is pretty mature and they understand that, like, let's do a couple things really, really well and not try to do everything. And, like, we'll tackle the next thing when we're done doing the first five things really, really well. And you know, I've been at a couple different companies and seen this managed. And generally, if you add up the number of projects, there are not enough man hours or people hours in the company to get it done in the time you want to get it done. And so if you're honest about it, you really don't have the people to get more than about five projects done in parallel and do them really, really well and on time that are significant. There's always small stuff going on and fixes here and there, but Major projects, you know, it takes a smart, dedicated group of people to do that, and they generally have day jobs as well. And so that's how we're trying to manage ourselves right now. I can definitely understand that point.

And then on the multifamily book, I mean, we talked about it earlier in the call, right? $6 billion, average yield factor on 4%. What strategies have you implemented to maybe bring forward some of those repricing strategies? timelines?

Well, it's very hard to encourage somebody who's got a rate at 3.5% to reprice sooner, okay? Because market rates are much higher. Just taking one example, it could be 4%, whatever it is. But what we do look at is when loans, we know which loans are coming off of their fixed rate period or are about to mature. because oftentimes these are 10-year loans with five-year fixed rates or they're five-year fixed rate loans. We will approach those borrowers and ask them if they are interested in working with us on a refi. And the benefit to working with us is they can do it with much lower documentation and lower fees and certainty. Fannie and Freddie are between $575,000 and $6,000 for a maybe 550 and six depending on the loan for a five-year fixed rate loan. We're offering between 590 and 6.1% for a three-year fixed rate loan with, you know, a different prepay. Fannie Freddie will have a prepay 54321 or something like that. They'll have lower fees, lower costs. They won't need a new appraisal. So there's a benefit to doing it with us even on a shorter duration. We've been about as successful about a third of the time of the ones that we've gone to.

All right. Those are my questions. Thank you very much for your time. Thank you. Thank you.

And we have a follow-up from Chris McGrady with KBW. Please go ahead.

Hey, Jared. Hey, thanks for your patience. Of course, I want to ask this respectfully. There's not a lot of banks at book value today, and we're in an M&A environment where good assets have bids. So can you balance buying your own stock versus partnering and bridging that gap to the 13% are we a little quicker?

Thanks. Look, I understand why we're attractive and why people mention our name. We have a very valuable franchise that's scarce. We're growing like crazy in one of the most dense and attractive markets in the country. We've got a really talented team of people. So I get why people might say, but I've heard that forever, wherever I've been. I think the most important thing that we can do is put our head down and run this company well like we're going to run it forever and take care of our shareholders and put our heads down and keep growing earnings, and everything else seems to take care of itself. So that's what we're focused on. We're focused on growing this franchise and being really successful, and I don't think you're going to see any secret where we are, but our teams are doing a fantastic job, and we're really focused on delivering excellent results for our shareholders.

Thanks, Zach. Thank you.

This concludes our question and answer session and Bank of California's third quarter earnings conference call. Thank you for attending today's presentation. You may now disconnect.