Banc of California Incorporated Aktie

Thanks, everybody. Good afternoon. We're happy to continue the Mid-Cap Bank schedule with Banc of California. We're joined by Jared Wolff, the Chairman and CEO. Thanks a lot for coming. And Karen Hon is in the audience as well with us as Deputy CFO. Thanks very much for coming, and look forward to having the conversation.

Thank you, Jared. Thank you to Barclays. Really happy to be here.

Great. Maybe kicking it off, you took several significant balance sheet actions in the second quarter, including the securities repositioning and CRE loan sales. What were you trying to accomplish? And I guess, what evidence are you seeing that those actions are producing the intended results?

The second quarter actions that we took were among the most significant we've taken since we merged Banc of California and PacWest in November of '23. We had over $2 billion of securities that were locked at a -- suboptimally priced at around 2% with a fairly long duration of 6 years plus. We were able to sell those securities and reinvest them at a 285 basis point pickup. And so it was a big lift to earnings. We have been fully reinvested since the beginning of this quarter. And so it's been really -- I think it will show up well this quarter. One of the ways that's going to show up is we gave guidance that our margin by the fourth quarter would be 3.30% to 3.40%. We're ahead of schedule. And so I think that's one reflection that it's working.

Why was this the right time to do that?

We've been looking for the right time to break HTM and move these securities. And I think since then, we've seen some others follow. We had to thread the needle. We had to find the right time. First of all, you had to have the right amount of capital. We did this without raising any capital. And I would mention that the earn back because of the reinvestment rate and the relatively low AOCI is only 1.4 years. So we feel good about that. But we have to have the right level of capital. And then you have the right environment where you want to be reinvesting in a higher rate environment, but that's going to work against you in terms of the AOCI.

We're able to do so at a loss that was lower than we projected and reinvest higher than we projected. So our team did a great job of threading the needle. I would also mention that until about 12 or 18 months ago, no bank had really done this for quite some time. And then a couple of banks did it in 2025. They had to raise capital when they did it. And so we found the right time was 2026 when we had the right amount of capital and the conditions were right.

Sticking with the capital, capital moved lower following the actions. What's the path from here? And how are you balancing capital build with opportunities to grow the balance sheet?

Yes. So we have plenty of capital. We ended the second quarter in the low 9s. We are picking up capital pretty quickly. And so we will be returning close to 10% by the end of the year. And then if the risk-weighted adjustments take hold, if the Fed rules take hold, we will expect to pick up 50 to 60 basis points of additional CET1 when those rules take effect. So we're building up capital pretty quickly. I think we should be at 10% or have 10% clearly in sight to start buying back stock. We have a repurchase authorization that's out there.

If we're in the fourth quarter, everything is moving along, our capital levels are on target, and we have confirmation that the new risk weightings will take effect. I don't think we would hesitate to buy back stock if the conditions were right. If we haven't heard about those regulatory capital rules, and we don't know with certainty, then I think we'll wait until we get above 10% to start buying back stock.

As part of the actions, you took some steps to address select credits and reduce CRE concentration. How would you characterize the underlying credit portfolio and the provision outlook from here?

So the actions that we took in the second quarter were designed to derisk the balance sheet and improve the earnings profile on a consistent and reliable basis. We obviously did that through the securities repositioning. It was about a $200 million loss on the securities, and we said, if we're going to do this, maybe the $200 million loss should be larger if we find some opportunities for things that could pose risk to earnings in the future. So we looked at select groups of credits. We identified $825 million of credits. $300 million were in a construction relationship that had gotten into -- it was a business divorce. We thought it was money good, but it was going to create noise for a while.

And then we found $525 million of performing CRE loans that had repricing characteristics that we didn't like. We found buyers for these 2 pools of loans, discounted roughly. We sold them for roughly 90%, so not a very significant discount. The first pool of $525 million is under contract at the price that we marked it to that will close -- should close this quarter. The second pool for $300 million is now being documented at the price we marked it to. It should close very early next quarter, certainly well before earnings.

With that now addressed, how should investors think about loan growth going forward? And what matters most about the evolution of the portfolio from here?

Well, we feel really good about credit, and we think it's going to be relatively stable going forward. On the provision, which you asked about, we expect to provision at normal levels, $9 million to $11 million has been our historical run rate, and we expect that to return in Q3 and hopefully for Q4 as well. So far this quarter, loan growth has been very, very strong. It's been good. We've had continued strong production for several quarters, but we expect net loan growth this quarter.

Deposit growth has also been strong. And as I mentioned, both on noninterest-bearing deposits and on interest-bearing deposits, and we expect those to support the margin going forward. Loans have been steady, fairly broad-based this quarter. We'll see where we end the quarter, but the averages should be good on both fronts, loans and deposits.

On the deposit side, you've had some good trends in noninterest-bearing DDA. What's been driving that momentum? And I guess, with that backdrop, how are you thinking about the margin outlook?

We're a very focused business bank, and we focus on serving businesses and bring in relationships where we can serve the business. But primarily, we want to help them with their operating accounts. They are business accounts that need services from banks but aren't necessarily focused on yield. They're focused on the services that we can offer to make their lives better, their business lives better. And that's been our consistent focus for many, many years in driving higher NIB. When we merged with PacWest, on a collective basis, we were about 25% NIB. We're now close to 30%. Once we hit 30% on a reliable basis, we'll set a new target of 35%.

As many of you know, before the merger, Banc of California on a stand-alone basis improved its noninterest-bearing deposit percentage from below 15% to 40% in 4 years by focusing on the steady focus on business clients. That's something that I did when I was early in my career at PacWest and also at City National. So we have a track record of doing this, and we know how to do it well. Our margin, of course, will be protected by the higher percentage of noninterest-bearing balances that we're able to continue to drive through the bank.

As I think about the margin, we're seeing a good contribution from the asset side now on our margin. Previously, we were getting most contribution on the margin from the liability side when rates were relatively flat, but we were driving down deposit costs. Today, as rates have kind of moved up, we're seeing better contribution from the asset side of the balance sheet, particularly on the securities portfolio, but also on loan yields, which are holding up and less contribution from the liability side. The more we can drive noninterest-bearing deposits, and we've been successful at that, the more contribution that we'll have going forward.

I mentioned one other thing, Jared, in terms of contribution to the margin. We have 2 levers that we intend to pull or that will be self-effectuating going forward that will be significant drivers of earnings growth and also the margin. We have $5.4 billion of performing multifamily loans, mostly broker-funded. Half of that $5.4 billion matures or reprices over the next 2 years. Those loans today are priced at around 4%. So they're going to be -- you take $2.5 billion roughly of a pickup of at least 200 basis points over the next 2 years. And those loans reprice or mature on a fairly even schedule over the next 2 years with a little bit of lumpiness. That's a pretty big pickup. That's $50 million of pretax income that will come just through the portfolio repricing itself and maturing over time.

In addition to that, as you and I have talked about, we have our preferred stock that matures -- we have the right to redeem it in September of 2027. That's a $40 million dividend after tax that we pay to the preferred shareholders. We expect to redeem it all, but we might have to finance some of it with FHLB or -- but we'll use mostly our liquidity. So at a minimum, we expect $20 million of after-tax income to come back to the common stockholders. Between those 2 things, that's roughly $70 million of pretax income that will come back to the common just through normal pricing and maturity.

With all of that, I guess, how should investors think about the path from today's earnings profile towards the longer-term targets you've outlined for PPNR and ROTCE?

I think it will be very evident this quarter where our earnings are going and certainly through the end of the year through the fourth quarter as we show the power of having repositioned $2 billion of securities that went from 2% to nearly 5%. Similarly, the multifamily that's repricing will start to take hold. And then our new production yield is about 6.4%, similar to what it was last quarter. So I think the earnings profile is accelerating, and our returns are accelerating due to the strategic positioning -- repositioning that we've done on the balance sheet.

Our aspiration is to be a very reliable relationship lender with a very boring earnings profile. We want to have consistent, reliable, steady earnings that come from very transparent sources without a lot of noise. And I think we've done a really good job moving the balance sheet in that direction. If you look at what happened when we closed the merger in November of '23, we said '24, we'd spend restructuring. The fourth quarter of '24 was kind of business as usual. So we've been at this about 7 quarters. Earnings have gone up and to the right on an adjusted basis pretty much every quarter. And now it's going to be with less and less noise going forward.

The company generated about $2.8 billion of production in the second quarter and still delivered strong underlying growth despite the loan sale. What does the growth outlook look like from here? And how do you expect the mix of loans to evolve over the next few years?

We think that mid- to upper single-digit loan growth is a steady place to play when the economy is working normally. In any one quarter, any couple of quarters, you can outpace that, have low double-digit growth because you had a strong quarter. But banks are generally participants in the economy. And if you're growing too fast, at least at our bank, I wonder if we're stretching for yield. So we feel very comfortable. You also have to fund it and you have to bring in deposits to fund it. We want to be core-funded as much as we can. And if you're growing too fast, you're going to have to find the funding elsewhere. It might be fine in any given quarter, but on a sustainable basis, you're going to want to have to have core funding. So we think about living within our means and growing responsibly.

One of the great things today is that there are many alternatives for our capital. For the last 2, 3 years, you had to find yield in loans. Today, you can find yield in securities as well. So when we're making loans, we're looking at, is this the best risk-adjusted return for our shareholders' capital. One area of loan growth that we expect to see grow is our single-family portfolio. We have about $3.5 billion plus of single-family loans. Originally, we were replacing those loans to keep the balance sheet flat. But we have a mortgage warehouse portfolio. And so we're able to buy those loans off our mortgage warehouse portfolio from the borrowers that we lend to. We're already secured by those loans. And we have other sources. So we've been finding that today, we can get pretty good risk-adjusted yields in single-family.

We don't have any compliance infrastructure because we don't originate the mortgages. We also don't service them. So it's like a bond portfolio, and we're netting about 6.25% for 30-year fixed rate mortgages. And we put a hedge on the portfolio to make sure that it doesn't prepay. So we're locking in that against that risk of prepayment speed. So that's another avenue that we have. But we think that overall, we're going to be a fairly down-the-middle C&I and real estate lender, our real estate exposure has gone below 300%. We think averaged 250% to 285% capital for CRE exposure. We continue to grow our fund finance business, our lender finance business, middle market and regular C&I is doing very well, and we think construction will pick up.

From your conversations with clients, what are the C&I clients sort of saying about demand and business conditions and navigating through all this macro noise that's out there?

So business conditions today remain generally benign. The interest rate environment is comfortable enough for businesses to borrow. It's not getting in the way of lending. We'll see what happens this week, whether the Fed raises rates. And I don't think 25 basis points will impact the lending environment very much. I would say that the environment feels okay. It doesn't feel like anything is particularly great, but it doesn't feel bad either. So it's just benign.

And we hope to have a more positive overall economic environment. But as we all know, we're all living and feeling it, there's a lot of excess noise out there. The cost of diesel fuel is very high, and diesel fuel runs through the economy and power is increasing costs for all sorts of industries. There's still spillover effects from tariffs and other things. So hopefully, that noise calms down and the economy is able to run with the power that I think it should.

From the outside, we often hear the narrative around businesses and individuals leaving California for lower-tax states yet your loans and deposits continue to grow. What are you actually seeing on the ground? And why do you remain constructive on California as a strong banking market?

Sure. I think rumors of California's death have been premature for quite some time. It is still one of the most important economies in the world. Today, Los Angeles is one of the engines that's powering California, which is the fourth largest economy in the world by different measures. If California as an economy slows or even if it fails to grow on a net basis, Banc of California is well positioned to grow notwithstanding. We are the third largest bank headquartered in California. We are the largest independent bank headquartered in Los Angeles. But we are largely grabbing business and winning business from competitors who are much larger, trying to serve clients with everything.

We are a much better and much more tailored solution-oriented lender and deposit gatherer to small- and medium-sized businesses than some of our largest competitors. And so we believe there's plenty of room for us to continue to be that differentiated lender to those smaller businesses then -- and we'll continue to do that, whether or not the economy grows. And as the economy grows, we'll grow even faster.

You talked about some of your specialty verticals, including venture, lender finance, fund finance, continuing to grow. Which client segments are producing the best opportunities for you today in some of those verticals?

To that point, I should mention in response to your previous comments to bring these 2 together is we actually are in 10 states. So we have our branch network largely in California and a little bit in Colorado. But we're in 10 states overall, and we have -- we're set up around a commercial and community bank, which is in-market relationship lending throughout California, which is your traditional C&I and real estate business with market presence serving customers on the ground.

And then we have our specialty businesses, which are not geography-based, which are specialty verticals that are in large ways nationwide, but they're also specialty businesses and they're relationship businesses. Fund finance, warehouse and lender finance have all been strong. And that's because we are competing against -- in a very tailored way against a narrow set of competitors. We expect middle market C&I to continue to grow. We have a thriving media and entertainment business that is -- we lend to streamers. We don't finance any content where we need to get paid back by distribution. We finance content that's already been bought, and we help with finance the production. And so that business continues to grow and is doing very well.

And all these businesses have deposits attached to them, some to a greater extent than others. We also have a homeowners association business, as you know, which has about $4 billion, gathers deposits from property management companies, and that business continues to grow well.

Generally, how would you characterize competition today across your markets? We continue to hear from other banks that larger super regionals are influencing pricing in both loans and deposits. What are you seeing out there in terms of the competitive landscape?

Yes. On both loans and deposits, competition is tough. I think starting on the deposit side, I mean, there is competition for liquidity. We've been fortunate to continue to be able to grow our deposits and our noninterest-bearing deposit share and hold deposit costs down, although we expect them to rise as all banks do over time in this environment. On the lending side, it just matters which pocket we're talking about. There are fewer competitors on the lender finance side perhaps and in some cases, on the fund finance side because of the way we compete than the general C&I business. What we have found is by focusing on areas where we're good, where we have specialty, where we are maybe a little bit more tailored, we narrow the competition. And we go after the proper-sized loan for our business. We're not stretching to try to participate in deals that are too large and grab a piece just to show growth. We really would like to be the primary lender and do it in areas where we have expertise.

One of the more encouraging trends over the last several years has been the steady growth in relationship-based deposits. What initiatives are driving the greatest success there today? And where do you still see the best opportunity to improve that versus the broader funding mix?

I'd say 2 things. So we have grown, as I mentioned, NIB from 25% to nearly 30% of our of our deposits. It's not through any secrets, through a lot of hard work and having people. There's really 3 things that I think we do well to bring those deposits in. First is we have people that are trained and experts in deposits. I don't expect our lenders to be as good as focused people on deposits and people who focus on deposits. Second is we actually have invested in the technology necessary to deliver on the promise that we're selling to a prospect. We tell them, look, if you join us, this is what we're going to be able to do for you and here's how we're going to be able to help you. And then we invest in that technology and we deliver on that promise.

And third is we have really good incentive programs that align behavior toward those outcomes. And I think all 3 of those things are necessary. One thing that we're doing going forward, which I think will be really important and could be a big differentiator for us is for the first time, we're launching a private banking initiative. Now I've shared time telling you all that we're primarily a commercial bank, and we are. But I have heard from too many people too frequently, I can't get someone to a bank to return my phone call. I ended up there through First Republic. I got my mortgage. I don't want to leave my mortgage, but I can't deal with their online banking. I've got $200,000 in deposits with my family, and I can't get them to return a call. We hear from RIAs, independent wealth managers that they have clients who can't get a phone call returned and have significant deposits.

So we have launched a tailored private banking solution, not focused on mortgages, not focused on wealth management, to help family offices and individuals with their daily banking for their families. I mean I'm a case in point, my family between my wife and I, our kids, our in-laws, my parents, we probably have 12 accounts, maybe 15 at Banc of California. And I can text, my kids can text, my wife can text with somebody if they need to open a new account, if they lose a password, get responses immediately. We are setting up that system for family offices for high net worth individuals so they can have a great banking experience just for their daily needs. And we're going to -- we're in beta right now. We're going to roll it out more effectively later this year, and I think that will pay big dividends.

Great. Looking at some of the technology side of things, you've invested heavily in technology and payments, treasury management, commercial infrastructure. Where are you seeing the highest returns today? And where do you think the incremental dollars will be spent going forward?

Well, we have invested in technology. It's really important to run the bank as an owner and to make sure that you're investing for the future and that you were keeping up to make sure you're there ahead of your clients. And you don't want your clients asking you for things that they're seeing elsewhere. That being said, you don't want to build it and hope that they come. You want to invest in things that you know are valuable for your clients. So payments is a perfect example. We have invested in building a team to deliver merchant acquiring services and credit card services for our clients. We hired Chris Healy, who was heading payments at Comerica for 20 years to head payments for us to help deliver that. He brought over 2 people, one to head merchant acquiring, one to head cards.

What I love about this is I don't need to change anybody's behavior. I don't need to build the market. Our clients have credit cards issued by somebody on which they're using their travel and spend dollars for their business. We would like to replace that card in their wallet and have them spend those dollars with us upon which we're going to get 2.89% interchange plus 1% cash back. We're already taking credit risk with these clients. Why not I give them credit card that's got $50,000 or $100,000 of credit on it and get the interchange benefit.

Merchant acquiring. Our clients are accepting credit cards to receive money from their clients. I would rather be the partner that allows them to receive that money and get it faster through us at potentially a lower cost. It has to go through some third party, it goes through another bank, and finally gets to their bank account. Again, I don't have to change behavior. I have to provide a solution that is attractive to them for something they're already doing. We're investing in payments because we believe that we should be that intermediary for our clients, and they would rather work with us and make them more connected to us. We think this will show big dividends next year.

Great. Maybe looking on the AI side, that's a theme that we're speaking to everybody about this year. How are you evaluating the opportunities and risks around AI? And beyond operational efficiencies, how do you think AI could change the way the bank interacts with clients over time?

It's been really exciting to go down this journey of AI. We're trying to do it carefully. We're not really an early adopter or a really fast follower. We think we can catch up fast enough without making the mistakes of being a first adopter. We have deployed AI throughout the company through ChatGPT, through Copilot, through Claude for coding and API development. We're in the process of hiring a Head of AI, which is a new position for our company, which will help us with strategic decisioning and thinking about our AI journey. But we have deployed it broadly, and we're seeing benefits in 3 areas today.

One is call center. We are deploying AI software to replace and succeed our call center agents. And I think the jury is in, clients would prefer to speak to an AI agent that is -- can anticipate questions better, can provide multiple responses, got infinite patience. If you want to put a dialect on it, you can. You don't have to. You can make it from the south, you can make it from anywhere. It can speak to clients the way they want to be spoken to and they'll stay on the phone as long as they want, and there will never be a wait time. It's a very, very good solution with human override.

Second, we're using it for BSA for enhanced due diligence, and we're finding significant time savings in report writing where data is available and needs to be collected and reported out. And third, we're using it in credit areas, not necessarily for upfront credit decisioning, but for evaluating credits that have been done, evaluating our credit portfolio, helping us see large amounts of data and looking at common denominators and focus points that might help us make better credit decisions in the future and hopefully get ahead of problems early.

These 3 areas, I think, are going to have a significant impact on our company, and I imagine many others. We also are upskilling our employees. We expect AI will result in us hiring slower but not necessarily broad layoffs. We invest in our employees. We spend time with them. We train them. This will allow our employees to do more exciting things, more creative things, and they know our company really well, and this provides great career path and training for them.

Let me see if there's any questions in the audience. Happy to take those. I guess maybe just going back to the capital discussion. There's potential tailwinds from Basel III. Once you're through the noise of the restructuring, where do you see, sort of, an optimal capital level for the bank? And what should we think about in terms of optimized capital?

Well, let me talk about CET1 and TCE. On the CET1 level, I think between 10% and 10.5% is where we see most banks leveling out at a time when the government is increasing capital levels. Most banks have moved away from 11% and are moving down to 10.5% and some are getting to 10% and below. We temporarily went below 10% to accomplish what I thought was an important initiative on the securities repositioning. But we will level out, come back to 10% fairly quickly here and then settle in between 10% and 10.5%, which I think is a comfortable level. And let's all remember that the well-capitalized level is 6.5%. So there's a fairly large buffer that I think people are feeling comfortable with. On TCE, I think around 8% is probably the right level and maybe a little bit above it. You don't want to be too much of an outlier, but that seems to be where things are settling out.

Maybe sort of wrapping up a little bit here is if we're sitting here a year from now and investors view Banc of California differently than they do today and as a result of partially the balance sheet restructuring, what do you think will have been the biggest factors that change the perception?

I think over the next several quarters, we will have fairly boring announcements of earnings growth, margin expansion, hopefully, good deposit and loan trends and healthy credit. And I think we're going to be doing so by just being a really good relationship bank in our markets. We've -- our team is exceptional. And one of the common denominators of our team is that we hire people who have been where we're going. We like to hire people who have experience at larger institutions and can bring and can rightsize their experience to an institution our size and help us grow. And through their experience, we've been able to do some very, I would say, complicated things over many quarters that have not gotten in the way of earnings, but have, in fact, have accelerated it. So I would expect a year from now, we're going to be looking at having achieved ROA and ROTCE targets and saying, what's the next target that we're going to set.

Great. Well, thanks very much.

Thank you, Jared.

Appreciate the time.

Enjoy this, and thank you again for inviting us, and thank you to Barclays for hosting a great conference.

Thanks.

Thank you.

Good day, and welcome to the Banc of California Second Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ann DeVries. Please go ahead.

Good morning, and thank you for joining Banc of California's second 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 are 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 will include forward-looking statements, including statements about our targets, goals, strategies and outlook for 2026 and beyond, which are subject to risks, uncertainties and other factors outside of our control, and actual results may differ materially.

For a 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 Factors section of our most recent 10-K.

Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer; and Joe Kauder, Chief Financial Officer. After our prepared remarks, we'll be taking questions from the analyst community.

I would like to now turn the call over to Jared.

Thanks, Ann, and good morning, everyone. The second quarter was another strong quarter for Banc of California. Our loan and deposit growth shined with 9% annualized loan growth and 12% annualized deposit growth. Loan production of $2.8 billion was particularly strong.

I mentioned these items at the outset, so they are not overshadowed by the important strategic moves that we made in the quarter. In fact, the strength of the underlying franchise is one of the key reasons we decided to take the strategic actions we did. In order for the true earnings power of our team and this franchise to show up quarter after quarter, we felt it was time to remove some of the weights hanging over us, namely over $2 billion yielding long-duration securities in our held-to-maturity portfolio.

Accordingly, the second quarter was an important step for Banc of California as we made a strategic decision to allocate capital towards opportunities that we believe will enhance stronger long-term returns for our shareholders and allow the true earnings power of this franchise and team to come through.

We implemented that strategy through 3 complementary actions, which included: first, the repositioning of $2.3 billion of lower-yielding securities; two, a targeted loan sale of approximately $825 million of select loans; and three, the retirement of $385 million of subordinated debt ahead of a significantly higher contractual reset rate.

Together, we believe these actions will create a more efficient balance sheet, increase recurring earnings power and accelerate capital generation. The securities repositioning was the largest and most impactful component of this strategy. We sold $2.3 billion of lower-yielding securities, which we partially redeployed into higher-yielding, shorter duration securities with the remaining proceeds expected to be reinvested in this quarter.

The repositioning generated a 276 basis point yield pickup, which will drive net interest margin expansion and higher recurring earnings power. Importantly, we executed this sale without raising equity and maintained capital ratios well above well-capitalized regulatory thresholds. At a time when many banks are managing margin pressure, this strategic repositioning puts us in a favorable position with early benefits to net interest margin already visible.

We expect our NIM following the targeted loan sale close and full reinvestment of the securities repositioning proceeds to come in above 3.30% and to expand further in the second half of the year. We also used favorable market conditions to sell approximately $825 million of select commercial real estate and multifamily construction loans.

After a competitive sale process, we have executed purchase and sale agreements for the entire $825 million. We expect closings to be completed by the end of the third quarter. The loans chosen for sale fell into 2 buckets. The first group, about $300 million were construction loans to a single borrower that were personally guaranteed but showing signs of weakness.

The second group, about $525 million were all performing CRE loans, but on average, carry lower interest rates. The blended interest rate of all $825 million is around 4.6%. The sale allows us to redeploy funds into market rate loans, reduce concentration risk and lower the risk of future credit-related volatility.

Combined with other actions taken in the quarter, credit metrics improved meaningfully quarter-over-quarter with a reduction in special mention loans by 56%, classified loans by 31% and delinquent loans by 50%. These changes provide a positive glide path for the strong earnings trajectory we expect going into the second half of the year.

Finally, retiring $385 million of subordinated debt ahead of a much higher reset rate lowers our future funding costs and together with the securities repositioning and the impact of the anticipated loan sales supports immediate expansion of net interest margin, higher recurring earnings and accelerated organic capital generation.

Capital remains solid, and we expect CET1 to build as the loan sale closes and retained earnings increase with expected CET1 of approximately 9.5% to 9.6% in the third quarter, 9.8% to 9.9% by year-end and above 10% in early 2027. This assumes no regulatory capital reform, which, if implemented, is expected to increase capital by roughly 60 basis points.

Our expected capital generation, combined with a larger earnings base and stronger margin trajectory, gives us greater flexibility as we evaluate future capital allocation, including for the potential to redeem our preferred stock in 2027. As I noted at the outset, our franchise continues to perform very well.

In addition to our strong deposit and loan growth, new loan production was broad-based and continued to support our remix toward higher return categories. We continue to add new noninterest-bearing business deposit relationships, which is one of the clearest indicators that our franchise is gaining traction.

Our cumulative new noninterest-bearing deposits from relationships opened in the last 2 years reached approximately $1.2 billion at quarter end. That reflects the strength of our teams, the quality of our client relationships and the continued value of our relationship-based banking model.

Having taken these important balance sheet steps, we entered the second half of the year with a higher margin trajectory, strong franchise momentum and a clear focus on execution. Our updated outlook reflects the earnings power created by the actions we took this quarter. By year-end, we are now targeting our NIM, ROA and ROTCE to be in the higher range and fourth quarter pretax pre-provision income of $125 million to $130 million.

These targets are conservative and reflect stronger earnings profile driven by more productive securities portfolio, continued balance sheet remixing, disciplined expense management and higher recurring net interest income. We believe these actions position Banc of California to generate stronger returns, build capital organically and create meaningful long-term value for shareholders.

Now let me turn the call over to Joe for a financial update, and then I'll return back at the end. Joe?

Thank you, Jared. Second quarter reported results reflect the impact of the strategic balance sheet actions that Jared discussed. Let me note at the outset that we have provided in our earnings materials a page on noteworthy items affecting second quarter financial results.

This page is intended to provide a road map to normalizing our earnings with the prior quarter. For the quarter, we reported a net loss available to common and equivalent shareholders of $251.3 million or $1.61 per diluted share. The reported loss reflects the near-term accounting impact of the securities repositioning, the targeted loan sale process and the retirement of subordinated debt.

The largest item was the $2.3 billion securities repositioning transfer from held-to-maturity to available-for-sale and subsequent sale of most of these securities. The transaction resulted in a $256.7 million pretax loss on sale of the securities. The securities sold had an average yield of approximately 2.1%. As of June 30, we had reinvested $1.7 billion of proceeds at a weighted average yield of 4.87%, resulting in a 276 basis point yield pickup on redeployed balances.

As of today, we have reinvested most of the proceeds with about $100 million remaining to invest. Based on the proceeds that have been reinvested so far, we expect tangible book value earn-back to be relatively short at about 1.4 years. In addition to the yield pickup, the repositioning provides further balance sheet efficiency by taking duration of the overall securities portfolio down from 5 years to 4 years and also lowers the risk weighting profile of the portfolio from 19.5% to 9.5%.

Most importantly, it is expected to increase recurring net interest income as the benefits of the reinvestment are realized. Net interest income of $250.5 million was down from the first quarter, partially due to nonaccrual loan interest reversals, which negatively impacted interest income by $5 million. Excluding that item, net interest income would have increased by approximately $3.9 million quarter-over-quarter, reflecting average balance sheet growth, partially offset by higher funding costs.

Reported net interest margin was 3.13% for the second quarter, down 11 basis points quarter-over-quarter. Approximately 7 basis points of the decline was attributable to the nonaccrual interest impact. The remainder was driven primarily by loan growth outpacing core deposit growth early in the quarter, which required greater use of wholesale funding as well as the replacement of $385 million of subordinated debt with higher cost borrowings.

The replacement of funding increased borrowing costs in the quarter, but it was well below the subordinated debt contractual reset rate, creating a meaningful reduction in future interest expense. Core deposit growth strengthened late in the quarter, which helped our funding profile as we entered the third quarter. New production pricing remained attractive at 6.39%, which continues to support the portfolio remix over time. Average loan yield declined 11 basis points to 5.63%, largely reflecting the nonaccrual interest impact.

On the funding side, the total loss of -- the total cost of deposits increased 2 basis points to 1.80%, while total cost of funds increased 4 basis points to 2.14% due to the dynamics I mentioned earlier around late quarter deposit growth and subordinated debt replacement funding. Importantly, the quarter reflected only a partial benefit from the securities repositioning.

As the remaining securities proceeds are invested and the targeted loan sale closes, we expect the go-forward margin to come in around 3.30%. Margin expansion is expected to continue building through the second half of the year, supporting our year-end NIM target between 3.30% and 3.40%.

Our interest rate sensitivity -- on interest rate sensitivity, our balance sheet remains positioned to perform across a range of rate environments. The HTM repositioning was largely net interest income neutral as greater asset sensitivity from shorter duration securities was offset by a higher net interest income base and significantly higher reinvestment yields.

When adjusted for deposit repricing betas, our net interest income sensitivity remains relatively neutral, while ongoing balance sheet remixing should continue to support net interest income expansion over time. Noninterest income was a loss of $234.1 million for the quarter, driven by the $256.7 million securities loss and a $12.5 million lower of cost or market adjustment on loans held for sale.

Excluding those items, noninterest income was $35.2 million, which was stable with prior quarters and consistent with our normal monthly run rate of approximately $11 million to $12 million a month. Noninterest expense was $189.9 million compared with $181.4 million in the first quarter. The increase was primarily driven by temporarily elevated FDIC assessment expenses resulting from our strategic actions this quarter and a nonrecurring charge for software obsolescence.

These were partially offset by lower compensation expenses following elevated first quarter seasonality. Expense discipline remains a priority, and we expect operating leverage to strengthen as the revenue benefit of the repositionings come through. Turning to provision and credit. Provision expense was $161.8 million for the quarter, driven primarily by the transfer of $827 million of select loans to held for sale in connection with the pending loan sale process.

These loans were recorded at the lower cost to market value, which resulted in charge-offs and additional provision expense during the quarter. While the provision impact creates some noise in our reported results, the anticipated targeted loan sales enhanced capital efficiency and strengthen our portfolio composition. During the quarter, classified loans declined 31%, special mention loans declined 56% and delinquent loans declined 50% from first quarter. Our allowance position remained stable with the ACL ratio up 2 basis points to 1.14%.

We believe overall loan reserve levels are appropriate, particularly given the continued shift in growth towards historically lower loss categories, which now represent 37% of loans held for investment, up from 34% in the first quarter. Capital remained well above well-capitalized regulatory thresholds. CET1 was 9.25% at June 30 and is expected to increase to approximately 9.5% upon closing of the targeted loan sale.

We expect CET1 to continue building to approximately 9.5% to 9.6% by the end of third quarter and 9.8% to 9.9% by the end of the fourth quarter and 10% early in 2027. As we move through the second half of the year, we expect the benefit of the strategic actions taken this quarter to come through more clearly in recurring net interest income, expanding margins, accelerated profitability and organic capital generation.

With that, I'll turn the call back to Jared.

Thanks, Joe. As we enter the second half of the year, our priorities are straightforward: Execute against the higher earnings profile we created this quarter through our strategic actions, continue growing high-quality client relationships and maintain the credit and expense discipline that supports consistent returns.

The balance sheet is more productive today and our updated outlook reflects that. We expect the benefits of the securities repositioning, targeted loan sales and debt retirement to become increasingly visible through stronger recurring net interest income, a higher margin, greater operating leverage and faster organic capital generation.

We have clear financial targets, strong franchise momentum and the flexibility to allocate capital toward the businesses and relationships where we see the best risk-adjusted returns. That is the work ahead, and our team is focused on delivering on it. I want to thank our employees across Banc of California for their hard work and execution this quarter.

They completed a significant set of balance sheet actions while continuing to serve our clients, build relationships and support one another. I am very proud of the team and grateful for their continued commitment to our clients, communities and shareholders.

Operator, we're ready to open the line for questions.

[Operator Instructions] The first question comes from Ben Gerlinger with Citi.

If you could unpack the loan sale a bit here with a charge-off perspective, like roughly took, let's call it, 20%. How much of that was rate? And how much of that was actual kind of credit itself?

And then kind of dovetail off of that if you could into more of like nonperforming was still up despite all the changes. It's just quite a bit going on. I was wondering if you could just unpack a little bit.

Yes. Let me unpack the last piece first. In terms of NPAs, there was one loan that was part of the loan sale that got kicked out that we moved that came out of held for sale. That loan has since been sold. It will be off our books this quarter. So NPAs will drop by about $34 million, which is the reflection of that increase. So NPAs will be down, and that loan was sold at par.

So let me put that to [ bed ], NPAs will be down and could have been down, but there was one loan that lagged. And so that loan is off the books -- will be off the books this quarter. In terms of how the buyers valued credit versus interest rate, that's hard for me to say. What I feel good about is that we got very strong bids. We conservatively marked them.

I think we marked them more -- I know we mark them more conservatively than the bids received. So that could flow back to us. I'm going to be conservative there because you need to give room for the buyers to maybe retrade or look for something and still have the loan sales close as expected. So we were pretty conservative here, but it's hard for me to say how they value the loans in terms of what amount they applied to interest versus credit.

But what I tried to give was a description of what the loans were, $525 million, all performing, $300 million was one relationship in process construction. It was the same loans that we had highlighted in the first quarter that we said we were going south and that caused the uptick in problems. And so we just took the opportunity to get rid of it.

Got you. Okay. And then when you gave the guide of kind of the 4Q ROTCE, can you unpack like provisioning and/or tax rate just because there's -- I mean, it is what it is, but just kind of how you got there?

To the -- our guide for 11.5% to 12.5% ROTCE by the end of the year?

Yes.

I'm not sure how to answer that specifically. Can you rephrase your question in terms of exactly what you're asking for? Because obviously, that's a calculation of what our returns are going to be and what our capital is going to be.

Right. No, I understand that because we can kind of get the NII, but what would you assume for average provisioning or what would you assume for the tax rate because the 2Q?

Joe, do you want to touch on that, Joe?

Yes. Yes. So on provisioning, I go back to a normalized provision run rate, what you saw from us prior to this quarter, which was like somewhere in like, say, $9 million to $11 million, $12 million range depending on individual quarter. And then on the tax rate, you'll see it come down just -- I think you'll see it come down a little bit as we go by 1 or 2 basis -- 1% or 2% as we go through the year in each of the remaining quarters.

The next question comes from Gary Tenner with D.A. Davidson.

Jared, I wanted to go back to the loan sale. Last year, in the second quarter, you did a loan sale of, I think, or you transferred and eventually sold about $475 million of loans and the thought at the time was you wanted to kind of remove a credit overhang and there were some characteristics of those loans you didn't care for longer term. How do you kind of give investors in the market kind of confidence that this is it. Now it's $1.3 billion in total over those 2 transactions?

Well, one thing I'll point to, Gary, is our earnings keep going up and our tangible book value has grown pretty aggressively and our stock price has reflected that. So I'm never going to say that's it because that's a setup for -- and I know you didn't mean it that way, but I want to be clear, like we're going to maintain flexibility to do what's right for shareholders.

And I feel really good about the fact that we've been able to grow earnings through various restructurings and have grown earnings per shareholders in a meaningful way, and I think this is a continuation of that. I'd like to think that I've been trying to preview with shareholders that there are certain actions that we want to take.

PacWest was very comfortable having large relationships. And I have talked multiple times about how I've tried to reduce concentrations in those relationships and try to have more granular lending that reflects kind of the bank that we want to be versus the bank that PacWest was, and they did many, many things very, very well.

But they had some very large relationships, which I think is different than the way we're operating going forward. So I think we're pretty much through that. I don't ever want to take off the table that I wouldn't sell loans in the future if I thought it was the right thing for shareholders in any given quarter. So I don't want to say that that's not a tool that we have to use.

But I think to your question about -- from what we can identify today, is this kind of -- do we think we've gotten through the things we need to get through? I think the answer is yes. I understand the idea and appreciate completely that people don't want to see this multiple quarters in a row. They want to have some sort of steadiness to where we go.

And I think one thing that we've been able to point to is the fact that earnings do keep growing. And one of the things we're really excited about in this quarter is how much this is going to accelerate our pace of earnings. We gave up a little bit of tangible book value, but we're earning it back in 1.4 years.

I think -- and most of the banks that I'm familiar with that did a HTM restructuring raised capital around it. We didn't raise capital around it. We can see how quickly we're building up capital. The earn-back is incredibly low. And one of the reasons the earn-back is so low is because we -- the timing was good to sell. Most of the AOCI had already been captured in HTM.

So there wasn't a meaningful uptick in AOCI since the securities have been moved to HTM. That's one -- that's the first piece of it is that the loss was contained. And second is the timing for reinvestment was really good. And we were able to get a pickup that was pretty meaningful, and our team did a great job executing. So I know I'm expanding beyond your question, but we feel good about kind of the different things that we did this quarter. And hopefully, we don't see loan sales anytime in the near future.

I appreciate the thoughts there. And then...

Gary, just to clarify, when I say we don't see loans, we don't see any problem loan sales anytime in the near future. I just want to -- I think that's what you're asking about, and I just want to clarify that.

Yes. Got it. And then just a quick expense question. Elevated FDIC assessment just given, I guess, the process this quarter. What's the time line for that normalizing? How long does that take?

I'm going to let Joe. I think it starts in the third quarter and then by the end of the year, it normalizes. Joe, go ahead.

Yes. It's going to start to come down in both the third and fourth quarter, and it will probably fully normalize sometime in early 2027 when we get back when the capital fully rebuilds.

The next question comes from David Chiaverini with Jefferies.

So I wanted to ask about the net interest margin and the outlook. I hear you on the guide of 3.30% to 3.40%. It sounds like -- just to clarify, it sounds like 3.30% is what you're pointing to for the third quarter. Is that right?

We believe that when the loan sales are concluded and the securities are fully invested, then our margin should be around 3.30%. So the margin for Q3, at this point, we think we'll be in the 3.30% range. That is correct. Joe, is that accurate?

That is accurate. That is accurate.

Okay.

Got it. And in your prepared comments, you mentioned about expanding further in the back half of the year. Can you talk through some of the drivers there between fixed asset repricing, whether there's any kind of rate sensitivity? And what are you included in that? Can you tell us what you're assuming in terms of rate activity from the Fed?

So we're relatively neutral. We did not assume any rate hikes. And this is -- it's going to start expanding because we're going to have a full quarter benefit of all the securities repositioning, full quarter benefit of having lower-yielding loans off our books and higher-yielding loans on our books and continuing to make loans at the rates that we are currently making them.

We don't assume that loan yields are going to go down. We assume that they're going to stay flat, even though we are not expecting any rate hikes. Joe, anything else that you would add there?

Yes. I would also say that I think that our deposit cost trajectory should return towards our normal. We've been taking that deposit cost down every quarter. And aspirationally, we had a strong deposit inflows at the end of the second quarter. We've had continued strong inflows so far in the third quarter. So I'd like to think that our cost of funds will continue to come down a bit, contribute to that.

The next question comes from Matthew Clark with Piper Sandler.

This is Adam Kroll on for Matthew Clark. Maybe starting on loan growth. It looks like overall production was pretty strong in this quarter. So I guess I'd be curious to hear your overall expectations for loan growth in the back half of the year and where the pipelines stand today?

Loans have been holding up remarkably well. So we gave guidance of mid-single-digit loan growth for the year. I think, obviously, it looks like we're outpacing that. I don't know what the back half of the year is going to be. I don't know what the Fed is going to do today in terms of -- and how that's going to affect the economy.

Everything seems to be holding up remarkably well. And I'm a little bit surprised by it because it feels like there's -- the underlying signals of the economy seem mediocre to me. They don't seem outstanding to me, they seem just mediocre. But restaurants are still full. There's a lot of loan demand. We're competing really, really well.

Our teams are getting a lot of looks in the areas that we want to get it. And we're choosing which loans we want to do. One of the dynamics that I'm seeing right now, which is very positive, is that there's stuff we're turning down and that's not affecting kind of our loan volume. We're proactively saying, yes, that's probably not for us. Let's move past that. And our teams have a lot of opportunities.

We're not looking to do that, but we do believe that we can be selective and make the loans that we want to do, and our teams are working really hard. So I would just say that it looks good right now from a loan perspective. And I would think that mid-single digits is something that we should be able to achieve reasonably well this year and hopefully outpace that.

Got it. I appreciate the color there, Jared. And then maybe moving to expenses. They ticked up this quarter, even stripping out the $5 million or so of nonrecurring items. But I guess I was just curious, how should we think about the expense run rate in the back half?

Joe, you want to take that?

Yes. So I think we put out guidance at the beginning of the year, which was, I think, a 3% increase year-over-year. And I think you can expect us from a total perspective to come in well below that. And I think you could expect to see our expense levels be flat to down from the level what you see here in the second quarter as we move through the third and fourth quarter.

The next question comes from David Feaster with Raymond James.

Look, we've spent a lot of managerial bandwidth working on these balance sheet optimization initiatives. You've accomplished a lot, clearly. Obviously, there's still some left to do, but you've done most of the heavy lifting.

What's next for you as you like refocus management's attention towards -- like what are some of the key initiatives that you're working on to deliver some of those targets that you laid out over time that we've talked about?

Well, thank you for the question. The good news is, is that all the pieces are in place, and we're executing. I think what we've been doing quarter-over-quarter has been working exceptionally well. But when you've got $2 billion of assets on your balance sheet that are not earning any money, because they're at 2% funded by 4%, they're holding you back and you're not making as much money as you should.

And fortunately, we had plenty of excess capital, didn't need to raise any capital to do something like this and the timing was right. So the short story to your answer is that in order to achieve our goals, we need to keep doing what we've been doing and the earnings are going to show up because we've already been doing it.

And our teams have done an exceptional job on the loan and deposit front. That said, there are initiatives that we have in place that I expect to play an important role in the future, not this year, but we've talked about payments and really excited what the team is doing there on cards and acquiring.

We've got a Board presentation on it this quarter because it's -- the prospects are looking really good. We have a private banking initiative that we're rolling out, that is going to be serving high net worth individuals with really high-quality tailored banking solutions. We don't need to provide mortgages. We don't need to provide wealth management.

We need to provide really high-quality tailored solutions, and there's a huge demand for it in our markets, and that's being rolled out. These are some interesting things that we're doing that complement what we're already doing. And I think those things are going to bear fruit. But the short answer is we're doing all the things already, David, and our teams are executing really well.

Okay. That's helpful. And one of the things...

I should have mentioned, David, that the preferred stock is obviously going to be an accelerant. So when you think about what are other levers that we have to pull, when that is redeemable in the third quarter of next year, as of now, we would love to do that.

And we've said that it's $40 million of net income after tax that we have to pay. It's a tax on the common. We're going to have to fund it somehow. But our expectation is that we're going to get at least a 50% pickup. So at least $20 million is going to come back to the common from that transaction alone.

Okay. That's helpful. And then I wanted to follow up kind of on Joe's commentary about improving the funding side, right, and some deposit cost leverage potentially. I mean you guys have been very active managing this.

Obviously, core deposit -- could you touch on some of the initiatives you got in place, how you think about opportunities -- there are some core deposit growth as we look forward. Obviously, you've had success on the NIB side and the new accounts like you talked about. But how do you think about additional opportunities to optimize the funding base?

Well, we have a project called [ Project Stay ], which is intended to capture deposits that might leave for higher rate. One of the things that we found is we're able to retain depositors at a lower rate who might be looking for rate than going out and finding new ones.

And so that project has yielded a lot of fruit of -- these are generally rate-sensitive customers that don't have a huge relationship with us, but we made an active campaign to retain those customers and our teams through the branches and otherwise have done an outstanding job of executing on that, and that had an impact this quarter.

We saw that outflows were much lower. So you don't want to be bringing in deposits in the front door while they're leaving out of the back door. And so you want to make sure you have a clear understanding of all the movements on deposits. Second is we found that we are -- our teams are very good at speaking with clients about rate and figuring out where there's opportunity to maybe lower rate.

So we're not always assuming that rates need to stay where they are. We can go to clients and actively manage the relationship and say, "Hey, we'd like to lower the rate a little bit here and there, and our teams have done a really good job with that. It's not on all clients, but we've figured that out.

Third is, I would say that we have some institutional relationships that we tap that tend to be less expensive than brokered. And those are larger relationships that we've been able to bring in. And our treasury team and our deposit solutions team do a really good job of bringing those in.

Those are 3 things that we're doing to make it look that I think have helped our deposit narrative quite a bit. One of the things that we have done on the technology side that makes us more attractive is we've added APIs and solutions that will allow us to be more attractive to future clients, clients to prospects and also make sure that we're tied more closely to existing clients.

So they are more embedded with us. It makes it harder for them to leave, but it makes them more reliant on our services. And those APIs can be very valuable. And so we've been investing in doing that with more and more clients. And Joe, thank you for that comment. He was texting me that I should mention that. Anything else we should mention?

No, I think you hit them.

The next question comes from Jared Shaw with Barclays.

This is Jon Rau on for Jared. Just thinking about the loan sale a little bit more. What are the proceeds from that expected fees for? And also, are there any deposit or fee relationships with these borrowers or any impact we should watch there?

Yes. There is no expected impact on the deposit side. And in fact, some of the loans that we had that we sold were tied to larger relationships, and we told the borrowers that are good relationships that we were selling the loans and make sure that they knew that they weren't surprised.

And so we don't expect any change in our deposit relationships as a result of the loan sale. In terms of what we're going to do with the proceeds, it's a function of deposits and loan growth, and we'll just play it by [ here ]. We can -- obviously, as we're making loans, we'll reinvest at higher rates. If loan growth slows, we're going to pay off borrowings, pay off broker deposits. But we would expect to make loans at higher yields, and that's kind of what we've modeled.

Okay. That's helpful. And then just thinking about the CET1 guidance, what impact is there to RWA tends to be or just RWA dollars after the loan sale goes through?

Joe, you want to take that?

Yes. So there was $827 million on the loan sale, and those are, for the most part, 100% or 100%, even in some cases, even a little bit over 100% risk weighted. So those all come off our sheet. And that's an immediate benefit to our capital. And so we should see an uptick when those come off.

Now as we redeploy those proceeds into loans or maybe even Day 1, Day 1they will probably allocated into some cash securities or something like that until loan growth kind of absorbs them, you should see a significant improvement in the risk RWA and CET1s. And in fact, just the loan sales coming off our books, that immediately will add up to 30 basis points of CET1, and we have that in our -- we have that on Page 8 of our investor deck.

There's kind of a CET1 walk on Page 8 that shows how we get to and what the components of it are in terms of how it's going to end up for the year.

The next question comes from Chris McGratty with KBW.

Going to your comments, Jared, about you're optimistic about the PPNR exit. I guess the question would be, if you look at consensus numbers, they're kind of at the low end already. And so I was hoping you could unpack the conservatism that you described in your prepared remarks. And then again, where if you do get that, that would show up in the PPNR as you exit '26?

Yes. So I would say the first thing is, I think I went back and I looked at consensus, and we try to keep the range within reason, although we don't control what people write. And I think there was a pretty wide range. I think that there were some outliers in terms of the expectations.

So I need to kind of keep the consensus front and center, but there were a couple of ones that were really high outliers. So I think that's driving the consensus to be higher. There is a much tighter range among many, and then there's a couple that are way up. And I think that, that pushes the consensus a little bit higher.

So let me start off by saying that, that I don't know that maybe we need to do a better job of managing that range, but we can't always control it, and we obviously don't control what numbers the analysts put out. They're doing it based on their own models, which we try to help inform. Joe, do you want to speak to what some of the assumptions are for our pretax pre-provision going forward?

Yes. So Chris, I'd start by saying you asked with conservatism. We try to do our best to forecast income with a level of humility and moderation because we don't know what the back half of the year is going to hold in terms of the economic environment.

There is still a war going on. There could be higher rates, there could be inflation, et cetera. So I would start by saying that. But if you look out through the year, you see some continued loan growth in the mid-single digits that we've talked about. You see deposit growth keeping up a little bit -- lagging behind a little bit behind the loan growth, but still being fairly strong.

And then we hope to bring expenses down, keep our provision stable. Our tax rate goes down a little bit. And so as we look out into where we might have opportunities, if we can do a better job of -- if we outperform on loan growth or bringing in more deposits, obviously, that will fall to the bottom line. And expense is something that we have control over, and we always try to strive to optimize that.

And just to put a finer point on it, Chris, to answer more directly now that we've put in all the assumptions, we believe that our outlook is conservative. We've said the margin should be the third quarter at 3.30%. We obviously hope to beat that. We have said $125 million to $130 million by the end of the year. I think with our expected margin expansion and the conservatism that Joe laid out, we think these numbers are conservative.

Okay. And then, Jared, on the 60 basis points [indiscernible] with Basel. How do we think about like urgency to use like stack ranking, what have? Like how do you foresee that playing out?

In terms of what we would do with excess capital?

With the 60 basis points from Basel III, if you get the helper, I know it's not in your guide, but if you get the 60 basis points.

Yes. So I mean it matters where our stock is trading. Yes, it's the same capital allocation, Chris. So now we're in excess capital land, right? We're going to get back to 10. We're in excess capital land, everything is going well. We have a buyback program that's still active where we have a whole bunch of authorized but not yet utilized buyback.

And depending on where we're trading, I don't think we would hesitate to pull the trigger there. It's not mutually exclusive from doing other things. We obviously have the ability to buy back the preferred and we have liquidity sources that we've identified to do that. But I think buyback is not out of question.

The next question comes from Anthony Elian with JPMorgan.

Jared, just following up on Chris' question. You note that the balance sheet actions are going to support higher recurring earnings over time. There's a lot of moving pieces here. Can you help us quantify how much of a benefit to run rate earnings you expect all these actions to contribute, right? If I just look at consensus for next year earnings, it's about $2 per share.

That's the consensus number for the full year for 2027?

That's right. I see somewhere in the low 2s.

Yes. So I'm not going to put a number out there, Tony, but that's -- we should beat that. I mean we -- look, we gave up -- let me try to put this in context without putting a specific number on that because that would be a forward guidance number that we haven't given, but this context may help.

We diluted tangle book value by about 7%. We're not diluting tangible book value by 7% to grow earnings by 7%. We want to grow earnings double the percentage of dilution of tangible book. So you could say mid-double digits, right, on that, you could say mid-teens would be a reasonable expectation for how we're going to grow earnings relative to the dilution of tangible book.

That's why tangible book value is going to grow back so quickly. And people will be able to calculate that when they see how quickly we're building up CET1. And so -- and the ROA, ROTCE expectations also have embedded in there.

We didn't really shrink the bank. So we didn't -- we're not getting to a higher ROA and ROTCE because we shrunk the bank. We have to grow earnings. And so if all of a sudden our earnings -- if our return and profitability expectations are up, that means that we're growing earnings faster. And hopefully, that puts it into context.

Fair. Okay. And then in the prepared remarks, you mentioned that the balance sheet actions were done to remove some weights from the company. Any other weights you see across the franchise, including balance sheet actions, loan portfolios or anything on the expense side?

Yes. I don't know that there's anything clear on the expense side. I mean one thing that people have asked about is multifamily. I mean we've got $6 billion at 4%. That -- we put -- one of the reasons that we put in our deck every quarter is the burn rate on that, so people can see how quickly that's coming off.

That seems to be taking care of itself. There is some longer duration multifamily. I mean one of the things that we found out in this loan sales, there's a really active market for loan sales. I mean -- and when you look at multifamily, it's completely capital-neutral if we wanted to sell it.

But that's not something that I have teed up as of right now. And that's -- we think that we have some pretty high recurring earnings power right now, and we're building up tangible book value. And we want to show this out and make sure people see what we're doing here.

But people ask about it all the time, so it's not wrong of me to put it out there and people say, what are you going to do about that? That's one of the reasons we put that information in the deck so that people can see what the repricing time line is for that multifamily book and when the accretion will kind of come on.

The next question comes from Timothy Coffey with Brean Capital.

So a question on the loan yields, right? So if you were to back out the loans that you plan to offload this quarter, was there a material change to the overall average loan yield?

Were to back out the loans that yielded 4.6%. Well, our new production yield was 6.4%. So I mean, we are putting on loans at much higher rates than loans that are coming off. Our loan yield -- our weighted average yield for the quarter, see here I'm looking at -- our loan yield is 5.78%, 5.8% was the average for the quarter.

Last quarter, 5.74%. So it upticked a little bit. And so it's just -- it's a volume question from the production side and payoffs. But I would say that there's probably when you take away $800 million of loans at 4.6% when we're generating 6.5% or whatever it is, it's probably going to help the overall loan yields for the portfolio a little bit. We have $24 billion of loans. So whatever that is as a percentage.

Okay. Okay. And do you have a sense -- and I apologize if I missed this, of what the provision would have been excluding the marks on the loans moved to held for sale?

I think we're looking at our provisioning just being normalized going forward. So it's 9% to 11%, 10% to 12%, something like that is where we're estimating it's going to be going forward.

And I think it's hard to break out this one quarter because there's just a lot of pieces, and we're not actually allowed to -- that's why we had to have those noteworthy items in there is because we're not allowed from SEC purposes to kind of remove provision expense to try to come up with a core number, but we've tried to provide the groundwork for that.

Yes. It does. And you can probably see what I'm trying to get to with that question, just to give an idea of what the core earnings power was.

We think -- for the quarter, we were kind of -- if you work out the numbers, we were at $0.39 or $0.40. I mean, it was -- in my view, that's where we were, just that's why we provided those noteworthy items. But -- it's going to be different this quarter because our margin is going up. And so we -- it's $10 million core provision is generally what we think it's going to be kind of -- that's probably the average going forward.

Right. Okay. Okay. I appreciate that. And then on the buyback, I understand what you're saying about the expected capital generation over time. But given that you're starting from a lower capital spot, the near-term buyback -- does that -- I mean, is it reasonable to think that there might not be any near-term buybacks?

Yes. I mean the question that was asked about Basel was -- and Basel is not expected to go into effect until next year. And so I was -- and we're not at 10% yet. And we've said that 10% is kind of where we want to maintain capital for buybacks.

Now I want to remind people that there were a lot of shareholders who said, "Hey, why wouldn't you go below 10% to buy back shares? And I said, I don't know that it makes sense. The securities repositioning, it made a ton of sense. It's a 1.4-year earn-back. It's and wildly accretive.

And so that made a ton of sense. But buybacks have a much longer duration in terms of earn-back. They're not as accretive. That doesn't mean you shouldn't do it. So yes, we wouldn't be buying back our stock until we're back above 10% and then it just matters what other things are on the table.

I shouldn't say -- I shouldn't put a bright line on it because you never know. But I think that's the general guidance we've given, and I think that general guidance is still reasonable.

I think so too. I think so too. And could there be upside -- on the PPNR question one more time. Could there be upside to that estimate if you're able to deploy the proceeds from the loan sale quicker into new loans, given that -- really strong.

I think we believe that our PTPP guidance is reasonable and probably conservative.

[Operator Instructions] We have a follow-up question from Ben Gerlinger with Citi.

For the loan sale, you kind of gave the implication that the price is not fully determined. Maybe I'm just reading it too much. Are we in a cool-off period or is it like more just closing time line?

Closing time line. So we've signed executed purchase and sale agreements. The buyers have the ability to kick out loans if during now and there's a reasonable period for diligence that's more diligence than what they were able to do before signing a purchase sale agreement. They have the ability to due diligence.

But if they kick out loans or change pricing, we don't have to close with them. We have backup buyers. There's -- this was a very competitive process, and there were multiple bids. And so there is some competitive tension.

We think that the pricing is fairly strict. And even if there were some price changes, we've reserved at levels that we think are in our numbers already. So I don't see any impact to our numbers if that helps. Yes, it sounds like you're asking whether or not we could have a bigger charge if the pricing came in differently.

Kind of I'm a little more worried like if part of them don't actually sell.

Yes, I feel good about it. And if they didn't sell to these buyers, they'd sell to somebody else, and we had multiple bids. So we feel good about it. And as I mentioned, one loan that we didn't sell through the loan sale process sold after the quarter ended and will come out of our numbers of $34 million this quarter.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Hello, and welcome to Banc of California's First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I'll now turn it over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.

Good morning, and thank you for joining Banc of California's First 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 will include forward-looking statements, including statements about our targets, goals, strategies and outlook for 2026 and beyond, which are subject to risks, uncertainties and other factors outside of our control, and actual results may differ materially. For a 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 Factors section of our most recent 10-K.

Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer; and Joe Kauder, 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, Ann. Good morning, everybody. We're pleased to report another strong quarter for Banc of California, with year-over-year earnings growth, net interest margin expansion and continued positive operating leverage. First quarter earnings per share grew 50% from a year ago to $0.39, driven by continued net interest margin expansion and positive operating leverage. Pretax pre-provision income increased 28%, while our adjusted efficiency ratio improved by nearly 500 basis points year-over-year.

More importantly, the quarter reinforced our confidence in the earnings trajectory ahead. We continue to see durable momentum across the core drivers of the franchise, including margin expansion, deposit mix improvement, disciplined expense management and embedded balance sheet remixing that should support profitability and shareholder value for the coming quarters.

Efficient use of capital remains an important priority for us. In the first quarter, we repurchased 1.7 million shares and also extended our buyback program through March '27 and increased our dividend from $0.10 per share to $0.12 per share. We also announced our plans to redeem $385 million of subordinated debt in May. These actions reflect both our confidence in the long-term value we are building and our commitment to deploying capital thoughtfully and opportunistically for the benefit of shareholders.

Our core earnings engine continues to generate capital at a healthy pace, with CET1 ratio of 10.18% at quarter end, while our tangible book value per share increased 1.5% quarter-over-quarter to $17.77. Core deposit trends were constructive during the quarter with continued growth in average noninterest-bearing deposits, up 4% annualized quarter-over-quarter and improvement in deposit mix, with NIB representing about 29% of total average deposits.

We continue to steadily attract new business relationships and are also seeing noninterest-bearing deposit balances ramp up in previously opened accounts, with average balances per account of 2.5% from the prior quarter. That reflects the quality of the relationships our teams are bringing in and the strength of our relationship-based deposit strategy. Loan production and disbursements remained strong at $2.1 billion in the quarter, with healthy and broad-based activity across the portfolio.

Strong production levels continue to drive the remixing of the balance sheet toward higher rate loans from lower fixed rate legacy CRE loans. This remixing has helped protect our overall loan yield and net interest margin despite a declining rate environment. We expect the margin benefit from remixing to continue as new production comes in at meaningfully higher rates than maturing loans, providing embedded earnings upside in the portfolio.

New production in Q1 came in at a rate of 6.65%, while fixed rate and hybrid loan repricing were maturing by year-end have a weighted average coupon of 4.7%. We view that ongoing remixing as an important driver of future net interest income growth. This quarter, we continue to manage credit proactively, remaining quick to upgrade and slow to downgrade. This resulted in some credit migration during the quarter, which was concentrated in a few specific real estate credits and does not reflect a broad change in portfolio performance or underwriting standards. We believe this disciplined approach to managing credit is important because it allows us to address issues early, helps reduce the risk of larger surprises later and should keep credit from becoming a more meaningful headwind as we continue to grow earnings.

As in the past, we will migrate credit when appropriate to take proactive action. We expect the ratios to improve over several quarters. And importantly, such migration will not disrupt our earnings trajectory.

This quarter's delinquency and special mention inflows were primarily driven by a limited number of credits with defined resolution paths. Special mention inflows and delinquency inflows were driven primarily by LIHTC or Low-Income Housing Tax Credit loans tied to a long-standing customer, where we've had a relationship for more than 20 years with no historical losses. The loans have low loan to values and personal guarantees in place and strong collateral values, and we expect them to be made current before the end of the second quarter.

Classified inflows were tied mainly to 2 multifamily loans in a single relationship tied to a long-standing customer of the company. These loans were restructured with credit enhancements and are not expected to result in any losses. Overall, we do not expect losses to appear with migrated loans based on our strong collateral and defined resolution paths.

Net charge-offs were $13.8 million or 23 basis points annualized and were driven by 2 specific situations that had already been identified and actively managed. Net charge-offs also included a partial charge-off related to a hotel property that migrated to nonperforming status in the first quarter of '25 and an office loan where the balance was adjusted to reflect an updated appraisal, while the loan remains current and performing. We do not view these items as indicative of broader deterioration trend in any of our portfolios. Importantly, reserve levels remain solid. We increased reserves where appropriate in the areas that saw migration. Taken together, we do not expect this quarter's credit migration to disrupt our earnings trajectory.

Our balance sheet remains strong with healthy capital and liquidity positions. We are also encouraged by the constructive backdrop from proposed regulatory changes around capital requirements, which if finalized substantially as proposed, could provide $150 million to $160 million of additional CET1. That would create additional flexibility as we evaluate attractive capital deployment opportunities, including further optimizing our balance sheet to accelerate our earnings trajectory, supporting prudent balance sheet growth and returning capital to our shareholders. The $150 million to $160 million is a baseline projection and could be higher under various scenarios.

Overall, this was another strong quarter for Banc of California. We continue to build the company the right way with disciplined execution, a strong and resilient balance sheet and a clear focus on sustainable growth and long-term shareholder value.

Let me now turn it over to Joe for some additional financial details, and I'll return afterwards. Joe?

Thank you, Jared. For the quarter, we reported net income of $62 million or $0.39 per diluted share, which was up 50% from $0.26 per diluted share in the comparable period -- prior year period. Net interest income of $251.6 million increased 8% year-over-year and was relatively flat versus the prior quarter. The increase in net interest income from a year ago reflects materially improved funding costs, while the linked quarter variance was mainly due to 2 fewer days in Q1 versus Q4. Q1 interest income from securities also increased due to the purchase of high-yielding securities and a $1.3 million special dividend on FHLB stock.

Net interest margin expanded to 3.24%, up 4 basis points from Q4 and and 16 basis points from a year ago, driven primarily by lower funding costs. Our spot NIM at March 31 was 3.22% after normalizing for the FHLB special dividend. We expect NIM to continue expanding through the remainder of the year, supported by strong production, ongoing balance sheet remixing and disciplined deposit pricing and mix.

These tailwinds are evident in our portfolio today. As a result, we continue to expect average quarterly NIM expansion of 3 to 4 basis points, though the path may not be perfectly linear. As always, we do not assume any Fed rate cuts in our outlook.

Average loan yield declined 9 basis points to 5.74% versus the Q4 loan yield of 5.83% and was relatively flat to the December 31 spot yield of 5.75%. The Q1 loan yield reflects the full quarter impact of 2 Fed rate cuts on the rates for new production and on our floating rate loan portfolio, which represents 38% of total loans. Our spot loan yield at the end of Q1 remained stable at 5.75%. Total average loan balances increased 4% annualized.

While Q1 loan production was strong, end-of-period loans declined modestly from the prior quarter, mainly due to higher payoffs and paydowns, which were primarily in warehouse, fund finance and other CRE. We continue to expect full year loan growth in mid-single digits, depending on broader economic conditions.

Deposit trends remained solid, with average noninterest-bearing deposits continuing to grow in the quarter and average core deposits, excluding one-way ICS deposit sales, also increasing modestly. We use one-way ICS sales to move deposits off balance sheet and manage excess liquidity. In the first quarter, average balances swept off balance sheet through one-way ICS sales were $271 million. End-of-period deposits declined slightly from the fourth quarter due to lower broker deposits and retail CD deposits. We continue to expect deposits to grow mid-single digits for the course of this year.

Deposit costs declined 11 basis points to 1.78%, driven by the benefit of Q4 Fed rate cuts and the continued runoff of higher-cost deposits. We remain disciplined on pricing and achieved an interest-bearing deposit beta of 57% in the first quarter. Spot cost of deposits at March 31 was 1.78%.

Our balance sheet remains positioned to perform well across rate environments and is largely neutral to changes in rates from a net interest income perspective. Sitting at neutral, we have the flexibility to manage our balance sheet to optimize results in any interest rate environment. For example, in a rising rate environment, we would expect to manage deposit betas to be more measured than in a down rate cycle, and the interest impact will be outpaced by the impact of interest income of the contractual repricing of our variable rate loans.

At the same time, we expect ongoing balance sheet remixing to continue to support net interest income expansion across rate environments. Fixed rate and hybrid loan repricing were maturing by year-end, have a weighted average coupon of 4.7%, well below current production rates, and approximately $3.2 billion of multifamily loans are expected to mature or reprice over the next 2.5 years. That embedded repricing opportunity remains an important earnings tailwind.

Noninterest income was $35.3 million, which was relatively flat quarter-over-quarter when excluding the $6 million lease residual gain in the fourth quarter. Noninterest expense of $181.4 million was relatively flat from the prior quarter and down 1% from a year ago. Compensation expense increased linked quarter due to seasonality, which includes Q1 resets for payroll taxes and benefits.

Customer-related expenses declined $1.1 million quarter-over-quarter due to the impact from Q4 rate cuts on ECR cost. The broader expense base remains well controlled, and we continue to target positive operating leverage through revenue growth, margin expansion and disciplined expense management.

Turning to credit. Reserve levels remained solid, with the ACL ratio stable at 1.12% and the economic coverage ratio at 1.60%. Provision expense of $9.8 million reflects the Q1 migration and impact of other credit activity. While the Moody's updated economic forecast, which included a significant improvement in the CRE price index, would have supported a reserve release, we continue to maintain a more conservative outlook for purposes of our methodology and increase the weighting of adverse scenarios offsetting that benefit. We continue to believe overall loan reserve levels are appropriate, particularly given the continued shift in growth towards historically lower loss categories, which now represent 34% of loans held for investment.

We are pleased with the strong start to the year and the progress we are making in building the company's earnings power. As we look ahead to the rest of 2026, we are reaffirming our guidance for pretax pre-provision income growth of 20% to 25% and noninterest expense growth of 3% to 3.5%. Our net drivers of earnings growth remain firmly in place, including continued loan portfolio remixing, disciplined expense management, healthy client activity and further benefits from deposit repricing and mix. Taken together, those levers give us good visibility into continued earnings growth through the balance of the year.

And with that, I will turn the call back over to Jared.

Thank you, Joe. This was another strong quarter for Banc of California with continued progress in key areas. Positive operating leverage, growth in our core earnings drivers, strong balance sheet fundamentals, disciplined expense and credit management and, of course, thoughtful capital deployment. The consistency of our results reflects the quality of the franchise we have built and the discipline with which our teams continue to execute.

As we look ahead, we remain mindful of the uncertainty created by the conflict in the Middle East and the potential for second order effects on growth, inflation and client activity. That said, what we are seeing today across our business lines is very positive with strong pipelines, a resilient client base and a healthy balance sheet. Our teams continue to win relationships in all areas of our business, and we remain very optimistic with strong pipelines.

Importantly, our outlook is supported primarily by company-specific levers already in motion, rather than by the need for a more favorable macro environment. We remain confident in the path ahead as our drivers of earnings growth are tangible, diversified and already underway. We have a valuable deposit franchise, attractive business segments, strong pipelines and a healthy balance sheet. We also have meaningful embedded earnings opportunities over time, including, as Joe mentioned, the runoff of approximately $8 billion of lower-yielding assets, the redemption of expensive capital, including our preferred stock and the opportunity to further optimize the balance sheet as the regulatory backdrop improves. These levers provide additional flexibility to accelerate earnings growth and compound shareholder value.

We are also making strong progress in deploying AI tools broadly across the company with nearly universal employee access, robust Co-Pilot active user rate, broad developer adoption and more than 80% of our developers using AI in their daily workflows. We see AI as a practical enabler of productivity, operating leverage, risk management, scalable growth, and we are already seeing early signs of efficiency gains across co-development, reporting, compliance support and workflow automation. We also have a number of targeted use cases underway, including BSA review support and customer service applications. Over time, we expect these efforts to contribute to a more efficient operating model and improve client service.

Our focus remains the same, to continue growing high-quality, consistent and sustainable earnings by serving clients well, adding strong new relationships, maintaining disciplined underwriting and expense management and further optimizing the balance sheet to drive long-term shareholder value. We like the momentum in the business we see, multiple embedded levers for future earnings growth, and we believe Banc of California is well positioned for continued progress in '26 and beyond.

I want to thank our employees for everything they are doing to move the company forward. Their execution, commitment and focus continue to set us apart in all of our markets.

With that, operator, let's open up the line for questions.

[Operator Instructions]

The first question comes from David Chiaverini with Jefferies.

So wanted to start on credit quality. You touched on this a bit, but can you walk through what the plan is for working out the increases in special mention and nonperforming loans? You mentioned about the 2 credits that were restructured with credit enhancements. Can you talk about what those enhancements were? Did these borrowers contribute more equity into their projects?

Yes. They contributed more equity in both cases in those loans that were downgraded. They brought more equity. We want to see is more time, and we want to see them work according to plan. We have every expectation that we will. But when we talk about being quick to downgrade and slow to upgrade, we don't immediately make a change to the range just because they provided the credit enhancement. We want to see performance over time. And we expect that these projects will return to normalcy over time and be upgraded with improvement over several quarters.

We also have visibility to other projects in those classifications that we expect to be upgraded. And so that's why, over time, we expect to see benefits, not only from those projects, but other projects in those categories.

Got it. Very helpful. And then shifting over to the net interest margin. It sounds like you have some good tailwinds in place, especially with the 6.65% production versus the 4.7% rolling off. The 3 to 4 basis points of quarterly expansion, how linear should that be? And remind us of the sensitivity to rate cuts to the extent we do get some rate cuts later this year?

Yes. I'll start, and then I'll let Joe jump in. So we sit today relatively neutral. And we believe, as Joe mentioned, we have the ability to pivot depending on the rate environment. We've already seen that in a down rate environment, our net interest margin expands. In an up rate environment, we would expect to have deposit increases trail and go much more slowly, and we benefit from rising rates in our floating rate loan portfolio and new production. And so we would expect to benefit in a rising rate environment as well. And we think that those benefits would more than offset the -- any sort of contribution that ECR would take in an up rate environment in that case. Joe, do you want to comment specifically on how linear our NIM should move?

Yes. So in theory, it should be pretty linear through the year, picking up as the year goes on with -- as we grow our balance sheet and as we add more higher-yielding loans and continue to manage our credit cost, the NIM improvement and benefit will expand as the year goes on.

What we don't have in there is accelerated accretion. And so we have these $8 billion of loans, which we know we're going to pay off or pay down at some point. And when that happens, we will get the accelerated accretion from the portion that was marked during the merger.

The next question comes from Matthew Clark with Piper Sandler.

Just on the expense run rate. You're on pace to be flattish relative to last year, and you maintained the 3% to 3.5% growth guide. I guess, what are the things coming online and we should think about that would cause that run rate to grow from here this year?

The -- as we look into the next couple of quarters, you'll see a little bit of an increase -- continued increase in compensation expense. As the year-end inflation adjustments and those things kick in, they'll be somewhat mitigated by the payroll taxes and the other benefit adjustments coming in, but they should step up just a little bit.

And then also, we're probably making some more investments in our platform. So you'll see a little bit of an increase potentially in some of the professional fees and other things as we move forward in some of our really important projects to grow earnings and help the balance sheet.

I would just say on that, that we're going to continue to be disciplined. I think it's normal to expect those increases through the year. If we find ways to offset them, we will do that, just because we believe that we can keep finding efficiencies. I mean, this AI stuff is real, and it's -- we're seeing some early signs and some early wins. And so we won't lose the opportunity to manage expenses as we always have.

Absolutely.

Yes. Okay. And then just on the ECR deposit balances, understand the sensitivity to rate. But with no rate cuts this year, assuming there's no rate cuts, is there any effort to try to remix away from those deposits or try to incrementally push the cost down?

We were looking for ways to improve our deposit costs across the board. The biggest and most important way to do that is to bring in noninterest bearing deposits that have no expectation of yield that rely on our services. And we have a lot of efforts underway. We continue to make progress there. I'm really pleased with what our teams are doing.

I see stories every day of clients coming to the bank, bringing more. I mean, I have -- I get really jazzed by the stories that my team shares with me, even this morning, hearing about a client that got acquired. And then the company that acquired them decided that they were going to keep all of the deposits at our bank as we were getting better service than -- giving better service than they were. And they brought more deposits in. And then there was another story about a customer that had left after the merger to a large bank, wasn't getting the service that they expected, brought back $3 million in deposits.

I mean, these stories are meaningful. And so the first thing we can do is bring back operating accounts and grow operating accounts, and we're doing it in a really -- I think our teams are doing a great job. The second is to be very proactive on deposit costs, whether or not there are rate adjustments from Fed rate cuts or Fed rate increases and see how we can manage our deposit costs.

As it relates to ECR, those contracts that we have generally come up annually. And in those -- when we -- when they come up, depending upon our deposit flexibility, we will negotiate with them to improve our positioning. And that's been the case for the last 2 years is our deposit positioning has been better, we've been able to negotiate those accounts to our benefit.

The next question comes from David Feaster with Raymond James.

Jared, I wanted to follow up on some of your commentary that you talked about on the capital side, just with the regulatory capital relief. Could you talk about what your top priorities might be at this point? Obviously, buybacks are extremely attractive. But curious whether there's any other capital deployment or optimization opportunities that you'd be considering or that are on the table?

Look, I think there's -- we run a lot of different scenarios. And obviously, buybacks are a big part of it, using it to redeem preferred. Things that we have in plans, we wouldn't need other funding sources if we did that. We will obviously look at our balance sheet and look at low-hanging fruit and look at things that are sub-optimally priced and see what we could do with that and what the earn-back might be.

But the $150 million to $160 million is, I would say, a very conservative estimate of what we could achieve under these new rules. We're still doing the analysis, but the initial analysis, we had a third party look at it, and they think we're going to get more than that. So I feel very good about that opportunity for us specifically. And there are a number of things that we could do.

Okay. That's helpful. That's a nice windfall. And then maybe switching gears to the loan growth side. I mean, I appreciate that you guys reiterated the loan growth guide. I wanted to dig in, how do you get to your mid-single-digit pace of growth this year? Obviously, warehouse is seasonally weaker. But production was solid. It was diversified this quarter. I'm just kind of curious, how do you think about production over the course of the year, some of the key drivers behind that? And how do ongoing payoffs and paydowns play into some of those expectations? In the competitive...

Yes. So we put a new chart in the deck. I'm sure folks will focus on, which is on Page 14. Excuse me, it's on Page 15, that shows production and disbursements as well as paydowns and payoffs, so that people could break down and see how heavy the production was and how broad-based it actually was. And the average rate.

And one of the best things about that chart is it shows that our weighted average rate on loans, despite since the first quarter of last year, despite the declining rate environment has stayed flat. Which is exactly what we talked about, that remixing our portfolio as deposit costs have dropped has resulted in our margin expansion and making more money on a flat balance sheet. And we know that, that will continue to be true.

So whether or not we have net growth or just remixing from our high production, we will continue to make more money. If we grow the balance sheet as well, we're going to make the money faster. We're going to make -- our earnings will grow even faster than what we've projected. We have, in our budget, hitting our numbers with a balance sheet that doesn't need to grow as fast. And if we grow faster, we're going to make even more money. So we feel very confident about that.

We have line of sight into kind of what the payoffs were and where they are, and we think that they were elevated and historically -- by historical means they were in the first quarter. Whether they remain elevated, it's kind of hard to know. But right now, it looks like production is going to outpace payoffs and paydowns for the foreseeable future, and we hope that's the case.

There are certain loan pools that we can buy to improve the balance sheet if we think it's necessary. But overall, we still expect mid-single-digit loan growth. It's just one quarter. This happened last year as well, where we had lower production early on, and then -- or in certain quarters, but we still ended up pretty much at our targets. And so it's too early to say that we're not going to hit our targets based on everything we see.

But even if, for example, we had lower net growth, by our estimates, we still hit our earnings targets based on our ability to remix the balance sheet. And that's why we put it in there because we think the power of that is pretty important.

The next question comes from Jared Shaw with Barclays.

I guess just sticking with that, when we look at the production numbers staying relatively stable, down a little bit, but relatively stable. What would have to happen to really see that grow? Jared, you've spoken about the strength of the economies that you're working in and the competitive disruption that's happened. I guess, why not -- what's keeping that production from really growing more?

Well, I mean, the production is -- I think first quarter is generally a little bit lower it can be. So we were $2.1 billion versus $2.2 billion last year. In the fourth quarter, we were at $2.7 billion. Those are pretty good numbers on the loan portfolio that's $24 billion to grow, $8 billion of production on a $24 billion loan portfolio.

Are there things that we could move faster? We probably could. But -- and I think we could ask various of our business units to increase sizes and to take larger positions and make more capital available. But we really believe that it's necessary to grow and balance. And we look at deposit flows. We look at our balance sheet overall. We are obviously at a loan-to-deposit ratio which is very comfortable, we can move that up.

But I'm not looking to necessarily just grow as fast as we can. We're looking to do it in a very sustainable, reliable way and -- so the earnings are repeatable and that they are consistent, reliable, high-quality earnings. So I guess, Jared, I would say that we could move faster. It feels like we're at a pretty good pace right now, and we're moving a little bit faster than the economy around us and it feels like a good pace.

Okay. All right. And then on the $8 billion of sort of identified target runoff, what's the -- how long does that take to move through the system?

So we have $6 billion of multifamily loans that will reprice or mature -- half of those $6 billion mature or reprice in the next 2.5 years. That's the bulk of it. And so we have a chart on the Page 16 of our deck that kind of walks through the repricing of those loans.

But there are some pretty big groups of multifamily loans that mature or reprice less than 1 year is $1.7 billion, and then $1.1 billion is 1 to 2 years. And then there's a big chunk that's more than 3 years, that's $2.3 billion. So we see $2.8 billion in the next 1.5 to 2 years, and then there's about $1 billion that's in the next 2 to 3 years, that's how you get to the 3.2 over 2.5 years.

Yes. Okay. All right. Good. And then on the deposit side, do you have any -- how are flows been sort of early in the second quarter? I know there's obviously a lot of seasonality with some of the first quarter flows, but looking at end of period versus average, any color there?

Yes, we're up this quarter relative to last quarter at the same time. So inflows have been higher early in this quarter relative to last quarter. And last quarter, our averages were pretty up. End of the first quarter, oftentimes in the first quarter, things are -- come out for taxes and things like that. I didn't really think that much about it. It just -- our averages are what moved the balance sheet, and it felt like we had a really good quarter. But so far, we're up higher this quarter than last quarter at this point in time.

Okay. If I could just squeeze one more in. How -- the allowance ratio, you talked about utilizing more of the adverse scenario to prevent more reserve releases. With the loan book the way it is right now, is 96 basis points sort of a good level to -- assuming that there's no broader economic backdrop change, is that a good level to expect for the rest of the year?

Yes, I think so. Our ACL is 1.12%, and our economic coverage ratio is about 1.60%. And I think that, that feels very comfortable. That assumes we continue provisioning around this level that we did this quarter, $9 million, $9.5 million. And I guess depending on production could get up to $10 million or $11 million, but it feels like it's the right level.

The next question comes from Andrew Terrell with Stephens.

I wanted to ask a question on the brokered time deposits. It looks like over the past year, those are up $500 million or so. I'm just curious, I heard some of your comments about early kind of 2Q flows on the deposits. But just as we think about mid-single-digit deposit growth for this year, should we expect more broker deposit addition throughout the year to support that growth? Or do you think there is, on the other side, opportunity to kind of remix the broker position this year?

Well, I'll let Joe go into detail on it, but my initial answer is that we focus on overall deposit costs and keep brokered within a band. And we will opportunistically use it, especially when we see that we have paydowns coming in certain areas where we have big chunks of deposits that are running off, and we will selectively go into the brokered market when we find that it's got better pricing than some other things that we might be seeing relative to deposits that are coming off. So we continue to move our cost of deposits down, and -- so we don't mind selectively using brokered. Joe, do you have more detail on that?

Yes. So we were at -- our brokered was 9.3% of total fundings this quarter compared to 9.7% in the fourth quarter, pretty flat when I look at it year-over-year. The other thing I would say is brokered also expands a little bit on loan growth. So if we do see some of the pickup in loan growth and it accelerates, we're able to put really good high-quality loans on the books. I mean, we do need to keep it in balance with deposits, but sometimes we're not afraid to dip into brokered a little bit to help put those loans on our balance sheet, knowing that deposits are going to catch up.

We actually -- to that point, I mean, we saw that loans were coming in late. And we saw average balances moving down, and we said, okay, let's grab some -- let's keep our loan-to-deposit ratio in balance and let's grab some brokered, and that way, we can make sure that we keep things in balance. And if we have excess, we'll just invest it. And so just kind of -- I think our team is pretty good at balance sheet management. We can let our loan-to-deposit ratio float up as well if we want to.

Yes. Yes, makes sense. I know you've got some term on the borrowing side, but is there any term in the broker deposit portfolio? Is it all shorter floating rate?

We have -- go ahead, Joe.

I was just going to say we do a little bit of term. It's mostly -- it's largely -- let's put it this way. It's all less than a year, but it's largely within 3 to 6 months, and then there's a little bit of it that goes out a little bit further to 9 months or 12 months.

The next question comes from Chris McGratty with KBW.

Jared, on the credit, I mean, you guys went through a similar -- I'm interested to kind of the comparison when you made some portfolio downgrades last year where you ultimately worked things through. What's different or similar this year as you kind of go through this process?

Yes. So it's pretty similar in that at various times -- first of all, these are some larger legacy relationships where we are trying to migrate them down to more manageable levels. Similar to last year, we migrated this. It did not get in the way of earnings, and we just continue to earn through it, and gradually, our ratios improved.

Is this the last chunk of it? Probably, it's pretty close. I mean, you never say never because something else pops up the moment you say that, but I feel pretty good about where we are. And it was just time to kind of move stuff around. You have conversations and relationships and you say, look, we don't want these relationships to be this large anymore.

We'd like you to move these things faster. That was the case in a couple of the loans. In some of the other loans, they just -- I think they just didn't manage it well. And we were watching them, and we kind of held their feet to the fire and said, look, you guys need to do this differently, and we're going to hold you to it. And as we mentioned, we got personal guarantees and plenty of support. And these are -- these LIHTC loans are very valuable loans, and they're really good projects and they're housing that's sorely needed and there are tax benefits to it.

And so I'm not worried about the outcome, but sometimes this is just the right thing to do. And so I would say they're similar as to how we did it last year and that we expect the ratios to migrate better over several quarters. There are large relationships. And I think we just kind of set expectations a little bit more aggressively than maybe they had been set in the past for the borrowers.

Okay. And then maybe could you speak, while we're talking about credit. Could you just speak about the legacy Square 1 book from PacWest? Obviously, software is a big topic. But just remind us, overall, the makeup of the book, I know it changed over the years when you were independent, how you're viewing about tax.

So here's the -- our venture ecosystem generally, which is outlined in our deck, is -- because the whole Square 1 was more than just "tech". So I think it's important to kind of lay out what everything is. So we have Fund Finance, which is capital call lines or credit to private equity and venture capital firms. That's approximately $1.4 billion. And its deposits is about the same amount. Okay? So $1.4 billion of deposits and $1.4 billion of loans, those are Fund Finance.

The rest of our venture and Square 1 ecosystem is about $950 million of loans, split evenly between Fund Finance -- excuse me, split evenly between tech and life sciences. So call it $450 million or $475 million of tech and $475 million of life sciences. And they have $5 billion of deposits against that $950 million of loans.

Of the $450 million in tech, we did an analysis of where we thought software might be disrupted by AI or any of our tech clients might be disrupted by AI in a negative way such that their business model was disrupted or their funding potential was disrupted. And we ran this a couple of different ways, and we came up with a handful of loans and a little over $4 million of outstanding loans that we thought were kind of on the watch list on the high-risk watch list. That's it.

So I would say that while we keep monitoring this, we have to keep looking at it. It's not something that we see as something that is materially disrupting our portfolio today, although we're going to continue watching it. But it's important to remember, out of our $24 billion of loans, that tech group is $450 million, $475 million, of which a small portion would be attached to what people think about as software that could be disrupted. And $5 billion of deposits between tech and life sciences.

The next question comes from Gary Tenner with D.A. Davidson.

I had a follow-up on the NIM question, Joe. You had mentioned the kind of pace of NIM expansion over the course of the year. Just wondering, is that expansion and your projections pretty exclusively driven by the asset side and the yield side? Or is there any material contribution from further reduction in funding costs over the course of the year?

Well, I would say that there's a combination of both. There's definitely benefit from loans continuing to grow. But as we -- we have deposit growth in conjunction with our loan growth. And then that deposit growth is, hopefully, we focus -- we're really focused on bringing in noninterest-bearing deposits. It's our life and blood and we continue to try to grow that.

And every time -- there's a few things we can do that's more profitable to us than grow a noninterest-bearing -- add a noninterest-bearing deposits. So as that -- you saw that NIB percentage grow slightly this quarter, and we expect that to continue to hopefully grow towards this year. And as our mix of our deposits grows to be more heavily weighted towards the NIB and other lower cost interest bearing, we expect to pick up a little bit of NIM from that as well as from the loan growth.

Gary, I think this quarter, you -- Gary, I think this quarter, we saw more contribution from the full quarter benefit of deposit cost reduction from the Fed cuts in the fourth quarter. And -- but our -- the fact that our loan portfolio -- loan yield is flat and the declining rate environment is pretty powerful. And so I think in an uptick environment, you'd see a lot more from the loan yield. And I think in a downtick environment, you see a lot more from the deposit side.

Yes. No, that all make sense. I mean, just thinking about a prospective neutral environment, perhaps for the rest of the year, kind of just trying to get a sense of room on one side versus the other.

Yes. I think in a neutral environment, a lot of it, to your point, is probably loan based. Because the loans we're putting on are such higher rate than the loans coming off. So I think that's probably a fair way to think about it.

Yes, makes sense. And I just wanted to ask if you have any updated thoughts you could share on the BancEdge product, having brought on Chris Healy a couple of months ago to kind of head that business?

Chris is doing a great job with the team, and I'm actually getting an updated budget. This week we're talking -- we're looking at kind of the expectations for our BancEdge, which is our merchant acquiring platform as well as our card products where we're issuing. And both are doing extremely well. We expect the back half of the year to have -- to provide more guidance on how we think these things will contribute going forward. But I'm really pleased with our focus here. And I think Chris is going to bring some ideas to the bank that he brought to his prior -- that he brought to his prior institution about how they accelerated growth in -- on both the card side and the merchant acquiring side through partnerships and direct selling. And so more to come on that.

The next question comes from Anthony Elian and JPMorgan.

On NII, last quarter, you gave us a range of up 10% to 12% for the full year, including accretion. Does that still feel like the right level? And can you talk about the cadence of NII over the course of this year?

Yes. We're still feeling pretty comfortable about all of our guidance we provided at the end of '25, which we'll see is as loans pick up. And as we definitely -- Jared has already mentioned, we have -- we do have some seasonality, and the first quarter is usually -- has historically been one of our weaker quarters. We usually -- it usually picks up a bit in the second quarter and continues throughout the year. So we still feel pretty confident about those numbers and that those will be coming in.

Okay. And then on comp expense, Joe, can you quantify how much the seasonal resets contributed to 1Q? And how much of that you expect to come out of 2Q and going forward?

Well, I think you can just look at it on the noninterest expense page. And you can just see that the amount of the compensation increase from the fourth quarter to the first quarter, that's almost -- that's substantially all driven by the resets. And I'm sorry, what was the second part of the question?

I think you answered it. Just how much is expected to come out?

All right. Well, not all of it will come out. So over the year, maybe half to 2/3 of it then come out, that those increases come out over the course of -- people -- as people hit their Social Security limits where they hit their 401(k) match limits, those will roll off.

This concludes our question-and-answer session and Banc of California's First Quarter 2026 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.

Hello, and welcome to Banc of California's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I'll now turn it over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.

Good morning, and thank you for joining Banc of California's fourth 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 to 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 will include forward-looking statements, including statements about our targets, goals, strategies and outlook for 2026 and beyond, which are subject to risks, uncertainties and other factors outside of our control, and actual results may differ materially.

For a 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 Factors section of our most recent 10-K. Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer; and Joe Kauder, 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, Ann, and good morning, everyone. I have a prepared script here, but let me go off script for a minute. This was a really great quarter, and end to the year. I really couldn't be more pleased with the execution of our team. And as you all know, we spent 2024 integrating the merger that was completed at the end of '23. And so 2025 was supposed to be business as usual. Well, in my view, there really was nothing usual about what we did in 2025. It really represented very strong performance by our teams on both sides of the balance sheet, solid credit management, great expense controls, and we did a great job bringing new high-quality relationships to the bank. Our production in these last several quarters has been particularly good.

And as I frequently say, we try to move the ball down the field each quarter. And sometimes it's a lot of plays that work. Other times, it's just a long past that gets us there. But at least this quarter, it felt like we played a ton of offense. Our time of possession was very long, and we strung together a lot of good plays. In my view, we did this very well throughout all of '25, expanding our core earnings power and profitability, strengthening our balance sheet and creating a ton of value for our shareholders. So let me highlight a few of our many accomplishments for the full year of '25. Our loan production disbursements were $9.6 billion, up 31% from '24. We added nearly 2,500 new NIB deposit accounts and nearly $530 million of new NIB deposit balances, getting us close to that 30% NIB on a percent of total deposits.

Our margin expanded 30 basis points, driven by a 47 basis point decline in deposit costs. Expenses came down 7% year-over-year, and our adjusted efficiency ratio dropped nearly 900 basis points. Our adjusted pretax pre-provision grew 39% and adjusted EPS of $1.35 was 69% year-over-year -- up 69% year-over-year. And we had tangible book value per share growth of 11%, including a pretty substantial growth in tangible book value per share in the fourth quarter. And opportunistically, importantly, we returned significant capital to our shareholders by repurchasing 13.6 million shares or 8% of our common stock outstanding at a weighted average price of $13.59, far below where it's trading today, as we all know. If we turn to the specifics of the fourth quarter, our Q4 earnings per share grew 11% sequentially to $0.42, reflecting strong positive operating leverage and great momentum across our core earnings drivers. During the quarter, we grew pretax pre-provision income by 10% and generated annualized loan and noninterest-bearing deposit growth of 15% and 11%, respectively.

We also achieved double-digit return on average tangible common equity of 10.75%, an increase of 319 basis points since the start of the year. This quarter, like the complete 2025 year, as I said, there was nothing usual about it. I think our teams did a phenomenal job. Q4 core deposit trends were very positive as we saw a continuation of the strong growth in noninterest-bearing deposit balances that we had in Q3. And for the second half of '25 as a whole, we achieved 10.5% annualized growth in NIB deposits, which was broad-based across our businesses and attributable to both new accounts as well as average balance growth. This growth reflects the continued success of our relationship-driven deposit strategy and our ability to attract and deepen very high-quality client relationships.

Loan production and disbursements were very strong in Q4 at $2.7 billion, up 32% quarter-over-quarter, resulting in total loan growth of 15% annualized. As we said in our materials, loan growth was heavily weighted toward the end of Q4 and actually had a very limited impact on fourth quarter financial results. The late quarter loan growth positions us very well for earnings expansion in 2026 and beyond. Unfunded new commitments also grew significantly, up 90% quarter-over-quarter to $1.7 billion, providing an additional tailwind for further balance sheet growth. Loan growth during the quarter was driven by C&I generally as well as in venture equipment finance, warehouse, fund finance and our lender finance businesses. And we saw strong production from all of our business units, including construction, LIHTC and mini-perm financing.

We also continue to complement our origination activity with selective single-family loan purchases. Our pipelines remain strong, and we expect loan production activity to remain healthy in '26 across all of our business units. As we sit here today, so far in the quarter, deposit activity has continued to remain strong and our pipelines look very, very good. We'll see where we end the quarter, but as of right now, things look very, very good. The average rate on new production in the quarter remained healthy at 6.83%, well above the rate of loans that have been maturing, and we expect to continue benefiting from the remixing of our balance sheet as our higher rate loan production more than offsets maturities of lower-yielding loans.

We continue to see positive trends in credit quality as well with most credit metrics improving during the quarter. Importantly, nonperforming and special mention loan balances each decreased 9% quarter-over-quarter. Classified loan balances increased partially driven by a nearly $50 million CRE loan due to a delay in the closing of the loan. That closing actually happened yesterday. Excluding this loan, our adjusted classified loan ratio would have declined 17 basis points quarter-over-quarter to 3%. And as I mentioned, that loan paid off yesterday. Our delinquency rate increased during the quarter due to 2 loans totaling $36 million, which became current in the first week of January. So excluding these loans, the adjusted delinquency ratio would have declined about 1 basis point to 66 basis points. Our coverage ratios were stable with our allowance for credit losses at 1.12% of total loans and our economic coverage ratio at 1.62%.

We believe our reserve coverage remains appropriate, reflecting both loan growth and portfolio mix as net charge-offs remained very minimal in the quarter. Our strong Q4 and full year results underscore the strength of our franchise and our consistent execution across the organization by a truly phenomenal team that we have here. The momentum we achieved is broad-based, spanning both loan and deposit growth, margin expansion, positive operating leverage credit performance and obviously generated a fair amount of capital. Our team is firing on all cylinders, and we believe we are very well positioned to continue delivering consistent high-quality earnings growth and long-term value for our shareholders in '26 and beyond. Let me turn it over to Joe, who's going to talk about some of the details and give some comments on what we expect for 2026. And then I'll come back with some comments, and we'll go to questions. Joe?

Thank you, Jared. For the fourth quarter, we reported net income available to shareholders of $67.4 million or $0.42 per diluted share, which was up 11% from $0.38 per diluted share in the third quarter. Net interest income of $251.4 million was down modestly from the prior quarter as the benefit of lower deposit costs was muted by the timing of our loan growth occurring late in the quarter. Lower loan income in Q4 was also driven by the impact of rate cuts on floating rate loans and lower accretion income, which was elevated in Q3 due to loan prepayments.

While the fourth quarter loan growth had minimal impact on Q4 financial results, we expect this growth to be a tailwind for net interest income in Q1. A full quarter impact of the strong loan growth we had in Q4 represents about $13 million in loan interest income before any associated funding costs. As we look ahead, we expect 2026 full year net interest income to increase 10% to 12% from 2025. Our net interest margin in Q4 was 3.20%, while our spot NIM at December 31 was 3.22%, which is up 4 basis points from the September 30 spot NIM of 3.18%, driven mainly by lower cost of deposits. We expect NIM to expand throughout the year as margin expansion should come from both sides of the balance sheet. We expect to continue to drive deposit costs lower and our loan production continues to originate at rates higher than loans expected to pay off.

We do not assume any additional Fed rate cuts in our outlook. Average yield on loans declined to 5.83% versus the Q3 loan yield of 6.05% and versus the September 30 spot yield of 5.90%, which normalizes for the elevated accretion income and rate cut that we had in the third quarter. The Q4 loan yield reflects the impact of the 2 Fed rate cuts on the rates for new production and on our floating rate loan portfolio, which has grown to 39% of total loans. Spot loan yield at the end of Q4 was 5.75%. As a reminder, our strong loan growth had minimal impact to net interest income and yields in Q4 given the late timing of when those loans came on. And as a result, we expect to see a more pronounced benefit to our results as we move into the first quarter of '26 and beyond.

Total loan balances of $25.2 billion were up 15% on an annualized basis for the quarter and 6% for the year. Total average loan balances were essentially flat quarter-over-quarter given the timing of the loan growth. In '26, we expect full year loan growth in mid-single digits, dependent upon broader economic conditions. For now, we expect that growth to be broad-based across all our C&I and real estate lending areas that meet our credit criteria. Deposit trends were generally favorable with a continuation of strong NIB balance growth in the quarter. We temporarily increased short-term broker deposits during the quarter to support our strong late quarter loan growth.

Cost of deposits declined 19 basis points quarter-over-quarter to 1.89%, driven by growth in noninterest-bearing deposits combined with the benefit of Fed rate cuts. We remain disciplined around our deposit pricing and achieved a 60% beta on interest-bearing deposits following the recent rate cuts. Spot cost of deposits at the end of Q4 was 1.81%. Looking ahead into '26, we are forecasting another good year of deposit growth in the mid-single digits. The interest rate sensitivity of our balance sheet for net interest income remains largely neutral, although the proportion of floating rate loans has increased. The net interest income impact is largely neutral when adjusting for deposit repricing betas.

From a total earnings perspective, we remain liability sensitive due to the impact of rate-sensitive ECR cost on HOA deposits, which are reflected in noninterest expense. Should rate cuts occur, every 25 basis points currently represents about $6 million of ECR pretax savings. We expect fixed rate asset repricing to continue to benefit net interest margin as we remix the balance sheet with higher quality and higher-yielding loans. We have $2.5 billion of total loans maturing or resetting over the next year with a weighted average coupon rate of 4.7%, which is way below our Q4 average rate on new production of 6.83%. Our multifamily portfolio, which represents about 1/4 of our loan portfolio has approximately $3.2 billion repricing or maturing over the next 2.5 years at a weighted average rate that offers significant repricing upside. Noninterest income of $41.6 million was up 21% sequentially, driven by gain on the sale of a lease residual as well as higher market-sensitive income.

Commissions and fees income increased 16% year-over-year, primarily due to our stronger loan production. While noninterest income can be lumpy at times, we still expect normal run rate for noninterest income of about $11 million to $12 million per month. Noninterest expense of $180.6 million declined 3% from the prior quarter, largely due to lower compensation expense from hitting tax and benefit accrual limits and other adjustments, a reversal from a prior quarter FDIC special assessment expense of around $2 million and lower customer-related expenses related to impact of the Q3 Fed rate cut. As a result, our adjusted efficiency ratio improved to 55.6%, down 266 basis points from the prior quarter. We remain focused on managing expenses prudently while continuing to invest selectively in talent and technology to support long-term growth.

In 2026, we are targeting full year expenses to increase 3% to 3.5% from 2025. Note that for Q1, we expect lower customer-related expenses as the impact of Q4 rate cuts flow through. Also, the first quarter typically includes some seasonality around resets of compensation expense accruals, so expenses in Q1 to be seasonally higher in a few categories. Provision expense of $12.5 million was largely driven by the strong loan portfolio growth and updates to risk ratings. We maintained our allowance for credit losses at 1.12% of total loans, and net charge-offs were minimal. And as Jared mentioned earlier, overall credit performance trends were mostly positive.

We are very pleased with the strong progress we made in 2025, scaling our franchise and delivering positive operating leverage while protecting our balance sheet and generating significant returns to our shareholders. In 2026, we are projecting pretax pre-provision income to grow 20% to 25%, reflecting our ability to drive earnings growth while maintaining disciplined expense management. As we continue into 2026, we believe we are well positioned to continue building on our momentum in delivering high-quality, consistent results. And with that, I'll turn the call back over to Jared.

Thank you, Joe. Q4 was a strong finish to a great year for Banc of California. As we look ahead, we believe we are in a superior position to continue building on this momentum, and we have meaningful tailwinds to help accelerate our growth in '26 and beyond. The consistency of our results, the strength of our balance sheet, the momentum in our business and the quality of our people reinforce our confidence in the path ahead. Our focus remains on growing high-quality, consistent and sustainable earnings. We plan to achieve this by continuing to scale our franchise, maintaining disciplined expense management while investing in technology and talent to support long-term growth, as Joe mentioned, protecting the balance sheet through prudent risk management and deploying capital strategically to drive long-term value.

Our markets and niche businesses offer compelling opportunities as we continue to capitalize on the dislocation in the California banking landscape and beyond. Recent bank M&A activity has provided further disruption in our markets with good opportunities to attract new clients and talent. Our relationship-driven approach and best-in-class franchise continues to resonate with clients, and our teams are executing at a very high level. Our fourth quarter loan and deposit growth reflect the talent of our teams and position us well for further earning growth as we continue in 2026. I'm excited about the opportunity ahead, and I want to thank our talented employees who accomplished so much in '25 and set the stage for a successful '26. I'm incredibly proud of our team's hard work and dedication and look forward to all the great accomplishments we can achieve together in '26. With that, operator, let's go ahead and open up the line for questions.

[Operator Instructions] The first question comes from David Chiaverini with Jefferies.

So I wanted to start out on net interest income and the net interest margin. The guide you gave does not include rate cuts. Just curious about the NIM trajectory as well as NII. What could happen if the Fed does cut rates?

So I'll start and then let Joe jump in. Typically, our margin expands a couple of basis points every quarter. And it's 3 to 4 basis points a quarter. Sometimes it jumps a little bit more, you get some accelerated accretion or something like that. But we think that's kind of a reasonable guide for that. In terms of what happens if rates get cut, we do believe that our margin would expand a little bit faster. Joe, what do you want to comment on that?

Yes. So I think we said earlier in the call that 25 basis point cut gives us about $6 million annually in lower ECR cost. But I agree with Jared, it's when we do our technical ALM calculation, we come out to be neutral, and that's what I believe we are in a pure net interest income were neutral. However, when you have rate cuts, you also have -- you tend to have a lot of times improved economic activity. You have more things that are happening to your balance sheet that are advantageous to bank. So I think we would benefit a little bit in our pure net interest margin from lower rates.

Great. And in terms of your deposit beta, can you comment on what your expectation is with another couple of cuts?

We've achieved in excess of 50% beta, I think, every single quarter. It's hard to maintain that momentum. We obviously started from a much higher place. But I think we're also very good at managing our deposits on a very granular basis. And so I -- my expectations for the time being is that we would achieve a 50% deposit beta until -- and hopefully outperform that until we modify it, that's kind of what our expectation is. And hopefully, we get into the high 50s, low 60s.

The next question comes from Matthew Clark with Piper Sandler.

Just want to clarify some of your guidance on the NII growth for the year of 10% to 12%. Is that including accretion? Or is that excluding accretion?

Matthew, that includes accretion, but we don't really have -- it's just basically the baseline accretion. It's very little, if any, any accelerated accretion.

We haven't -- we really haven't had any. Matthew, just to stay on that for a second. It's been one of those things that just hasn't shown up. And it's going to show up because we have all these loans that are going to mature. And so it's going to force itself on the balance sheet, and it's going to be a great kind of annuity for our shareholders when it happens. It just hasn't been happening. And it's got to eventually. And so when that happens, it will be good.

Yes. Good. Okay. Great. And then within the PPNR growth guide of 20% to 25%, can you just clarify the base that you're using for fee income and noninterest expense, just to make sure we're on the same page because there's...

Yes. The base is the year-end 2025 results.

So it's off the fourth quarter run rate or it's off the full year?

Full year.

Full year. Okay. But in terms of dollars, I don't know if you have it off hand, we can follow up, but just curious what base you're using in terms of dollars for fees and expenses because there's nonrecurring items, obviously.

Maybe we can take that offline and do that in the follow-up call, Matt.

Okay. And then just on the loan growth this quarter, pretty broad-based. Maybe first, just if you could quantify the amount of single-family purchases you did in the quarter and whether or not that you plan to do some within that mid-single-digit growth guide for the year? And I guess in terms of the stronger growth this quarter, what may have changed in the market?

So we just -- let me -- go ahead, Joe.

I was just going to say. So on a net basis, SFR has increased about $216 million. I think the purchases were a little bit north of $250 million, and then we had some runoff as well. So Jared.

Yes, that was right. And we expect to continue SFR for a while. We want -- that portfolio is doing really, really well. The prepayment speeds are much lower than what we model. And so the returns have been very good with really limited credit noise at all. These are very strong loans, and we are fortunate to have access to them, and our team does a great job sourcing them. So -- and we buy a lot of them off our warehouse lines with our clients. And so it's a very good program that we have. And our balance of SFR, which are fixed rate, 30-year fixed rate, most of them are mostly owner-occupied as opposed to investor, and they're well distributed geographically throughout California.

So in some ways, it's a hedge to other floating rate portfolios that we have. And so we like that portfolio for that reason. So we'll try to continue it in moderation, but it probably will continue to grow a little bit, Matthew. In terms of loan growth overall, our teams have just been hitting the streets and have done a really good job being out in front of clients and pipelines take a while to build. And the last -- the end of the year, it kind of came together really, really well. And some -- you can't really control the timing. So it was a lot of -- we saw the pipeline in Q4. We weren't sure when it was going to hit, and it really -- a lot of it hit pretty late and then some stuff picked up in the beginning of this year. So it seems just broad-based, and our teams are doing a really, really good job.

The next question comes from Christopher McGratty with KBW.

Jared, on the expense growth, the 3%, 3.5%, you made a couple of points in the remarks about investing in technology. I'm wondering if you could just unpack it a little bit, whether you think this is kind of a 2026 little bit of a push? Or is this kind of a new rate of investments required?

Yes. So just let me say as a starting point, Chris you and I have talked about this, but maybe others might find it interesting. I mean we're a growth company at this point, and we're spending to support the growth that we have in our company. It's very positive in my view. Like we're not going to spend -- we're going to keep expanding earnings and earnings are going to grow hopefully pretty fast. But we're going to make sure that we have the right infrastructure to give this company the talent and the technology that we need to do it the right way. We are getting benefits from AI. We've deployed AI across the company in a couple of different ways, and I've challenged our team to manage to that and figure out where we can deploy it better.

We don't think about it as a way to shrink our employee base. We think about it as a way to maybe slow the growth of employment and also to redeploy our employees to do things that are more upskilled. And so AI is something that we're leaning into. In terms of technology projects overall, there's a couple that I think will be ongoing. One is just back-end and workflow technology, whether it's nCino or Salesforce or less Salesforce, but more nCino and we have ServiceNow and some other things. We have a project to improve our data, a major project in the company where we're looking at how to optimize the data that we have and streamline it and make sure that it is organized in a way that our employees can self-serve around it and build reports and kind of know what's coming ahead.

And so that's a really important project for us, including kind of our back-office finance modernization as a project. We are investing in our payments business. We continue to do that, although that's a smaller portion of spend. We have our HOA platform, which we're investing in to make sure that it's really a top-tier platform that we have in SmartStreet so we can really serve our clients well and other client-facing technology. So there's a number of things, Chris, that are kind of here, but we all think that there's a good return on them. And some of them are back office and some of them are client-facing.

Got it. Understood. And my follow-up with Jared, just on the medium-term targets, any updated thoughts now that you're making a lot of progress towards them? Any timing updated what needs to happen to get that bridge rectified a bit?

Sure. Yes. Without putting a specific date on anything, we obviously liked the progress that we made in the fourth quarter on our return on tangible common, which was a pretty big clip up. It doesn't stay steady, so it will back up a little bit and then it will move forward again. In Q1, I think it probably drops a little bit and then it moves back up as we get through the year. But we're making really, really good progress. And I mean -- and if you look at how much we're clipping in tangible book value quarter-over-quarter, that's one of the things I think that people also don't really focus on is how much extra tangible book value we're putting on the table every quarter, which feels really good. I'm not going to put a date out there, Chris, for that, but we have line of sight into our targets, and we feel very, very good about them.

Awesome. And then maybe, Joe, just to clarify 2 quick ones. The FDIC benefit you can give us $2 million? And then any help on the tax rate going forward?

Yes. So $2 million is -- yes, that's about what the FDIC benefit was in the fourth quarter. And then 24.5%, probably 25% is a good tax rate going forward.

Chris, also on kind of our profitability targets, One thing that people should also remember is we have preferred stock that's a $40 million tax on the common. It's $10 million a quarter that comes out before we pay the common after tax. That matures next year. And so pretax, it's a pretty big number. And after tax, it represents -- before you figure out what the funding cost would be to replace it, it's over $0.20 a share -- $0.20 and so -- of earnings. And so it should be maybe it's $0.16 or $0.17 of earnings that paying off that preferred stock is going to contribute to our company in 2027, which we feel really good about. So that's going to be an accelerant along with a whole bunch of other things.

Okay. So that's definitely coming out next year is what you're messaging on the...

Yes, it matures. It matures -- we have a couple of ways...

I think it's September '27.

Yes. So we've already planned for how we're going to handle that preferred stock, and there's a lot of ways we could take it out. But it's going to be -- it's expensive, [it's 7.75%]. And so we have much lower ways to fund that. So even if you put a 3.5% funding cost on it, you're saving 4.5-plus percent, and that contributes $0.20 -- $0.15 to $0.20 earnings.

The next question comes from Ben Gerlinger with Citi.

I just wanted to double check. I know we talked through the guidance here on NII assumes no cuts. Is that fair to say the same thing as well for the expense growth of 3% to 3.5% that implies no cut?

Yes. We have no cuts in our forecast in any of our forecast numbers.

But what the expense guidance does pick up is that the cuts that occurred in the fourth quarter don't benefit us until the first quarter of '26. So yes, it does kind of.

Yes, your HOA cost is going to be lower in 1Q, which should be, obviously, the fourth quarter cost. I just think like if there's a cut in June or something that's not contemplated in the forward expense guidance.

Not contemplated at all.

Got it. Okay. So it could be a little downside there. In terms of just the longer-term strategic, it seems like you -- like you said, Jared, you went from defense to a lot more offense in '25. When you think about '25 going into '26, the hirings that you've made and kind of personnel and balance sheet cleanup has been pretty tremendous throughout the year of '25. Is there anything on '26 that really hasn't even left the starting blocks yet? Or is it momentum that from things we currently see today and then just continuing that game plan?

I think it's more momentum. I'd love to point to something that says, God, this is low-hanging fruit. We haven't even grabbed it yet. I think that preferred stock is probably a good example. But in terms of kind of our core operations and what we're doing, Ben, it's just blocking and tackling and building on -- our marketing team has done a superb job. We had a client -- we have a client that's in Vegas, and he was out here. I'm just sharing this as an anecdote. He was out here for a Lakers game for his son, and he's like driving to downtown and his wife takes a photo of our new building downtown and he says, "God, that's great signage." And I'm like we haven't even moved in yet, and our sign is already up.

And then he's driving the next day to Orange County because he's going to Newport. He sees our building on the 405, and he sees 3 billboards on the most trafficked highway in the country for Banc of California and he's driving. Our name is out there a lot. And that's representative of all of our markets, not just Southern California. And so we are really capitalizing on that. I'd like to say that our marketing and branding opens the door before we get to the building. It allows our teams to show up. People know who they are. They know the bank. They know the reputation of the bank. And it helps, I guess, increase the opportunity for us to be successful with clients. It gets us in the door for sure. But our team is the one that have to do the hard work of talking to the clients about the opportunity that they have here versus where they are and why we can deliver a better solution in a more reliable way and in a cost-effective way.

And it takes really talented people to do that well, and we keep hiring them. And we do plan to do significant hiring in '26 to support our teams, both in the front office and the back office, and that's going to continue to, I guess, support the momentum that we have. It is more momentum than kind of finding an opportunity that we haven't really latched on to yet.

Was there a follow-up, Mr. Gerlinger? The next question comes from Andrew Terrell with Stephens.

I was hoping just to go back to expenses quickly. Do you have the -- are you able to quantify the amount of benefit you guys got this quarter from the lower tax or benefit accrual in compensation?

Yes. It was probably around $5 million for the quarter, $4 million to $5 million.

Okay. Great. And I guess just overall on expenses, I'm trying to kind of...

Can I -- I'm going to clarify that. I'm going to say that that's when we look out to first quarter, that's how much I think is going to -- when we reset into the first quarter, that's the kind of the change that you're going to see.

Got it. Okay. That's helpful. Yes. And I guess I'm just overall trying to bridge the gap for the 3.5% growth off of $735 million was the baseline the 2025 reported. At kind of the midpoint, that's $190 million a quarter in expense in 2026, but you've got a little bit of headwind from the comp picking up, but you'll get the benefit back on ECR costs that should drop in the first quarter as well. So I guess I'm just trying to get a sense of what's driving the kind of lift of expenses into 2026.

Well, we continue to remain conservative. And I think one of the things that we did and Joe and the team did a really good job of last year is guide conservatively and have the opportunity to have some things that come up to make sure that we don't get caught. And then if things don't come in and our teams manage their budgets well, we come in lower. One of the successes that we had last year was we actually distributed -- we decentralized some of our expense management. I gave to all of our business unit leaders and functional leaders their own budgets and said, you guys manage your budgets. I'm going to stop approving everything. And so they did that really, really well. They have the authority to hire who they need to hire to move the company forward.

And so there's some of it that we're letting people do. So part of our guide and being conservative is that we're going to let our teams do what they think is right because they did a great job last year. And if it comes in higher a single quarter, it's going to show up in a benefit later in the year, and we're comfortable with that. So we feel like we're in a really good spot. And part of this is less science and more art in terms of knowing where we're going to go. If the growth isn't there, we're not going to spend the money. But if the growth is there, we plan to spend the money. And so we're going to get some efficiencies, too, but we are being conservative, Andrew, for those reasons.

Yes. No, makes total sense. You guys did a great job this year on expenses.

The next question comes from Jared Shaw with Barclays.

Maybe just go back to the loan growth. In the past, you've sounded really optimistic about some of the tailwinds in the market from whether it's the World Cup or the Olympics or even rebuilding coming out of the fires. But when we look at the expectation for loan growth, how do you view sort of the local markets versus some of the national lines? And how should we be thinking about sort of the appetite for CRE going forward as well, just as you sort of maybe look at those as 3 different areas.

Well, starting with -- on real estate and specifically construction, one of the things that happened in '25 is we had a lot of payoffs of construction loans, and we also offloaded some long-term fixed rate financing that comes with our LIHTC deals. Oftentimes, when you do LIHTC, you get construction upfront and then you have a long-term fixed rate loan that can be 30 years that's at rates that might not be too desirable. Our team did a great job of figuring out a way to do the front end at good rates and have other people take out -- do the takeout -- because we can't use the -- we can't really use the tax credit. And so that's one thing that happened. So that reduced our balances in an area where I think we're going to grow going forward because what they figured out is 2 things. One is we can do the front end, which gives us the opportunity to kind of build that back up without taking the long-term risk.

But second of all, on the longer-term loans that I have seen, the pricing has been really good. So like we just approved a 17-year loan that was for the permanent piece of a tax credit deal, but it was at 6%, which felt like these were -- in the past, they were like 3.5% or 4%, just to give you some context. And we get a lot of good deposits, and we have good relationships. So I think on the real estate side, specifically speaking to construction, we're going to have some opportunity to kind of build and grow that business. And I think that will provide some balances. The permanent piece obviously sticks around and the construction financing is 2 to 3 years generally.

In terms of bridge financing, some of that stuff went down. We're still seeing opportunities. And as I mentioned in my prepared remarks, we're still doing mini-perm. We're just being careful about it. The pricing can be a little thin, and we want to make sure that we are putting on good loans at good rates. We have a lot of opportunities to use our balance sheet, and our teams have been disciplined to say, are we getting the right returns to use our balance sheet for this type of loan. But we absolutely want to support our clients that have their deposits with us and have been long-term clients that do repeat business with us. Those are the clients we want to support and we try to be competitive on the rate side. Our other business lines that are not kind of geography-based are niches.

One more thing on that, Jared. So I would say that what we think about is our commercial and community bank, which is kind of our not only our branch network, but our regional teams that are throughout California and Colorado, they did a really good job last year. And as I mentioned, we had a lot of runoff. But I think we're still grounding ourselves with the right focus. And I think that our expectations this year is that, that part of the business is going to grow faster than it did last year. It grew slower last year than other kind of our niche verticals that are not geography-based. This year, I think we expect more balance, and we expect to see our kind of our geographic teams growing pretty much at the same pace as some of our other teams like lender finance, fund finance, warehouse grew a lot faster last year. I think the growth in those teams this year, my expectation is it will be good, but they don't need to grow as fast as we're going to get contribution from other parts of the company.

Okay. All right. And then just looking at the deposit side, you had really good DDA growth. Should we think as the balance sheet continues to grow that DDAs or stay a consistent part of total deposits? Or do you think they could be growing from here?

Well, I will say that I've been surprised -- pleasantly surprised by the acceleration of NIB. And we did a pretty big analysis of where that's coming from, what it looks like. Some of it is operating accounts, it's all relationship-based. Some of it is operating accounts for businesses that use a lot of services of our company. Some of it is part of our venture and fund finance business where they put in NIB because that's what they do, but it might be a little bit more volatile and it moves up and down. But it's all relationship-based based on clients that are -- they have their deposits here and they're not somewhere else. They're operating accounts and the bulk of their deposits. So it's hard for me to say it depends on the pace at which we grow loans.

I've been very pleased that we've been able to maintain our NIB rate at 28% to 29% while our loans have been growing that fast because usually, it's going to cause you to have to dip into other sources of funds, and it's going to dilute the percentage of NIB. Our loan-to-deposit ratio has creeped up to about 91%, which is fine. We can manage it there, and we'll continue to manage it. But the answer is I don't know. Like it would be great to get NIB percentages up to 30%. That would mean that those deposits have to grow at the same speed or faster than our loans. So I don't know if that's reasonable. It could happen on a given quarter. We could get a whole bunch of success from pipelines that have built up, and it just happens that we got a really good quarter. So it's possible. But I think loans are growing faster than we expected. So the likelihood is that it won't stay at that rate -- at that percentage.

Okay. And then just finally for me, just on capital and the buybacks. You didn't do anything this quarter, but you were busy earlier in the year. Should we -- I mean, is 10% really a floor for CET1 here? Or should we think that the buyback is opportunistic around that? Or how should we think about sort of incremental purchases with capital right here?

So I think both are true. I think that we expect to have an active buyback program that we'll use opportunistically. We're still not trading at peer median for tangible book, right? So we're trading at a discount there. And we like where we see where we're going. So we like the opportunity to buy our stock given where it's trading and where we think we're headed and how much tangible book value we're building up, et cetera. But I also think that 10% should be considered a floor of sorts for CET1.

And I think our shareholders appreciate that, that we're not going to run this company within capital, and we're going to be good stewards. So hopefully, we'll build up capital at a rate where it gives us the flexibility to buy back stock opportunistically when we can. We have -- our buyback program is for a year. We've applied -- it's still active. We're ahead of it. We're applying for approval for renewal of the buyback program. And so hopefully, that will stay live, and we'll always be -- have the opportunity to be in the market for it.

The next question comes from David Feaster with Raymond James.

You touched on -- we spent a lot of time on the expense side. And obviously, we've talked about that the benefits from Fed cuts on the ECR deposits is not embedded in your guidance. To the extent that we do get cuts, how do you -- we've talked about a lot of investments that you guys have on the horizon, a lot of disruption in the marketplace for potential hires and you got a lot of things going. Would you expect that incremental expense savings to flow to the bottom line or -- and beat your expense guide? Or would you maybe accelerate some investments in hiring or anything else that you're considering?

No, I think we can achieve the efficiencies of those. I think our expense guide is appropriate. I don't think we're going to need to dip into it more than what we -- you never know. But right now, we feel like our expense guide is reasonable for all the things that we foresee, and there is some upside in our numbers from rate cuts. Because what you're asking, if I understand is, would we absorb those rate cuts by spending more money, and therefore, we wouldn't get the -- it wouldn't drop to the bottom line. And I think the way we see it now, it would drop to the bottom line.

The only thing I would add to that is if we had a blowout year on the revenue side, an absolute blowout year where we were -- where the revenue growth was higher than -- significantly higher than we expected, you could see a little bit higher cost. But net-net, you would end up higher because of the revenue growth.

Yes, that would be a good problem to have. I think we would continue -- everything we're doing is with the goal of growing earnings in a sustainable way. And if we're able to grow earnings faster and we're spending money to grow earnings faster, I think that would be a good problem to have.

Absolutely. And on that -- the guidance slide that you have, one of the bullets there talked about growing fee income and the rollout of the payment’s products. It's something we haven't spent a lot of time talking about recently. It sounds like we're closer to a rollout of that. How -- I guess, where are we in the build-out of the product? How has the early reception been the time line for revenue growth? And to the extent that you can help us maybe quantify the potential impact from that business?

I'll be prepared to do that mid this year. But let me just say that we are fully committed to our payments business. Our issuing and acquiring businesses are going very well. We've been rolling it out to our existing clients and some new clients. I was just reviewing the budget the other day. We are very committed to this business, and I'm excited about it, and I hope midyear, I can lay out some big successes.

And so that's kind of the time line for that rollout is more mid this year?

Well, it's happening now. I just feel like I'll be able to give more visibility into it.

The next question comes from Anthony Elian with JPMorgan.

On the balance sheet growth, so in 4Q, you grew loans 15% annualized, deposits up 10% annualized. But the guide for '26 is up mid-single digits for each. I'm curious, it seems like you have a lot of momentum, especially on the loan side. What's keeping you from having a stronger loan and deposit growth outlook for this year?

I think just there's a lot of noise on the market. I mean, your Chairman, who I'm a fan of, I think, would say that the outlook is very cloudy. And it's just hard, man. It's hard to be that bullish. First of all, even if we did do that, Tony, if we -- I mean, would anybody believe it? If we said we're going to grow 15% for the year, 10% for the year, would anybody believe it? We had to pull -- we got a little bit criticized we were mid- to upper single digits and then we pulled it back to mid-single digits, even though I thought it was just like, okay, well, this is just what we're seeing, even though we had a really strong year. So I think we want to avoid doing things that have only downside into upside, if that makes sense.

It does. And then, Joe, for my follow-up, you gave some puts and takes...

Tony, it doesn't mean I'm any less bullish, just to be clear. Like I feel great about where we're going for all the reasons you mentioned. And I hope to outperform the numbers that we put on the table. But I don't want to be so bullish that people say, well, there's only downside from there. So that's to complete my answer. Sorry about that.

That's clear, Jared. Joe, for my follow-up, you gave some puts and takes to interest income and NIM. I'm wondering where you think the 1Q printed NIM could come in at inclusive of the loan growth you saw late in 4Q. I think last quarter, you gave a jumping off point for '26, somewhere in the 3.25% to 3.35% range.

Yes. Well, as I said earlier, our step off is 3.22%. And as I think we can expect it to increase quarter-over-quarter, a few basis points. We don't give a specific NIM guide. We give our PTPP target. But I think if you assume a few basis point expansion every quarter, I think you'd be in the right range.

One of the things that -- let me add to that. One of the things that we have -- that Joe and I have run a couple of models on and Ann has led this is, do we make more money growing loans at what rates, letting the margin slip, high-quality loans. So the margin for us really is an output. It's pretty dynamic. And we're optimizing everything for like what's the right balance of loans and yield to grow earnings in a sustainable way in a variety of interest rate environments. We've got floating rate loans on right now. Rates could drop. We still think we're going to put on loans at higher rates because of our production level. But at some point, that's going to flatline and rates aren't going to drop anymore, and they're going to go back up. And how are we setting ourselves up to continue to make money and continue to expand the margin.

I'm okay if our margin doesn't expand fast as long as we're moving in the right direction, and we're making more money reliably, meaning that we're not going to give it back another quarter. We made it this quarter, but it's not going to show up again. So I'm comfortable with our margin clipping a few basis points every quarter in a reliable way. And then like this quarter, the loan showed up late, so we didn't get the margin benefit. It will come in early next quarter, but the spot was pretty good at the end of the quarter, but the average was only a couple of basis points. So we know people care about the margin. It's a reflection of profitability, but we also have other tools to -- it's not the sole thing that we think about. We think about how do we fix our loans and deposits in a way that's going to optimize earnings and see what that means for the margin.

Yes. And one thing, just as a reminder, the first quarter has 2 fewer days in it than, say, the fourth quarter. So that impacts your margin for the first quarter as well.

The next question comes from Tim Coffey with Janney.

Jared, on the call, you talked about some of the disruption that you're seeing in the marketplace across your footprint. And I'm wondering on the commercial side of the business, does that -- are you looking at -- if you do any hires on that side from the disruption, would you be looking to add to existing business lines or exploring new opportunities?

No. I think we're well covered in terms of the business lines that we have. And this is bringing in leaders and teams and people to complement the businesses that we have. We are constantly -- like some of it's outbound and some of it's inbound. We reach out to people that we think would make be able to have a strong contribution here and may be a fit for our culture. And we also get phone calls, people that I know from other organizations that I've been at or just -- who I or our teams know from their relationships. Tell me what's going on in Banc of California. It seems like you guys are doing really well. I'd love to learn more. And the next thing you know, they're like, "Hey, I'm thinking about making a move. Can we talk?" And so it really does work both ways. But there's no big lines that we're looking to add currently. It's not to say that we wouldn't, but that's not on the table today. It's mostly to fill in our teams and products that we have today.

Okay. And Joe, I'm assuming that the expense guide includes any increase in real estate expenses?

Yes, it would.

Okay. And then Jared -- what's that?

I was going to say, I don't think we -- I think real estate expenses are going to be fairly flat year-over-year, but it would include any increases.

Okay. And then, Jared, just one last question. For a while you were kind of looking at fintech acquisitions, have those kind of interest kind of slowed down?

Yes, I don't know that there's anything that makes sense for us today. Like everything, we keep our ear to the ground, and we have a good channel with the talented investment bankers from all the shops that are connected to those opportunities, and we want to make sure that we're in front of them and that we see them. And -- so we will always be willing to look at stuff. But I think the bar is pretty high for us to divert from our organic story right now. It's pretty good.

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

Hello, and welcome to Banc of California's Third Quarter Earnings Conference Call. [Operator Instructions] I'll now turn it over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.

Good morning, and thank you for joining Banc 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 a 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 Factors section of our most recent 10-K. Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer; and Joe Kauder, 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, Ann, and good morning, everyone. We're pleased to report another strong quarter for Banc 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 $0.38 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 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 noninterest-bearing deposits up 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 5 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 paydowns 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 remain 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 continued to proceed well.

In Q3, we liquidated $263 million of held-for-sale 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 remained 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 Banc 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, and net interest margin expanded to 3.22% driven by higher loan yields and lower deposit cost. 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 favorable mix shift towards more noninterest-bearing deposits and reduction in broker deposits. As a result, cost of deposits declined 5 basis points to 2.08%. Our spot cost of deposits at 9/30 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 cost on HOA deposits, which are reflected in noninterest 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 2.5 years at a weighted average rate that offers significant repricing upside.

Noninterest 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 noninterest income remains at about $10 million to $12 million per month. Noninterest 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 revenue 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 remained 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 net interest margin to remain within our 3.20% to 3.30% 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 Banc 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 4 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, the strength of our balance sheet and momentum in our business demonstrate why Banc 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.

The first question comes from Jared Shaw with Barclays Capital.

Just to start off, the credit trends this quarter were really good. And Banc of Ca was pulled into sort of a story of the Cantor loans and I think, 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?

Yes, 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 to -- on a hotel on the beach in Laguna. That loan has been on nonaccrual, has been classified, and we filed a lawsuit many quarters ago. It's been in our numbers. But that was not -- 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 the [indiscernible], 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 Zions 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 2 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. Just 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 are -- we have a great team. It's really well done. We've had it for years.

We put -- 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 ask people to put in the 10-year historical loss rate so that we could go back as far as we can because PacWest has been doing this for a long time and mortgage warehouse at Banc 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 do -- 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. 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.

Yes. No, that was great color. I think good insight into how you're structuring it. Maybe just as a follow-up, shifting over to the margin. When we look at the guide for the margin of 3.20% to 3.30%, is that a good normalized level? Or as we sort of end the year and start looking into '26, how should we be thinking 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. So I'll start, and I'll let Joe chime in. So we -- certainly with -- we are liability sensitive when you factor in the ECRs. And so we do expect our margin to expand. The accelerated accretion we had last quarter was in the middle of the quarter, which is why it affected -- and it was -- it affected our overall margin. It took it to 3.22%. But when you strip it out, we were at about 3.18%, which is 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. So 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. I mean, 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. 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 2.5 years. But that portfolio is at 25% of our balance sheet and it's -- of our loan portfolio, and it's at 4%. So even with rates coming down, our loans coming on are coming on at much higher rates. And even a lot of those loans happen to be floating rate loans, but they're still coming on at much higher rates. And generally, we'll have floors on those loans as well. Joe, anything to add there?

No, I think you captured it, Jared. As we look out into the future, your original question, I think, Jared, was, is it a solid run rate looking at 3.20% to 3.30%. I think that's a starting point. And then as Jared Wolff mentioned, I think we intend to grow it from there. And the loans -- obviously, the loan -- 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 noninterest-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 -- get through the fourth quarter, it will 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 3.20% to 3.30% right now, we're going to end up -- obviously, we're going to end up there given that we are at 3.18% in the fourth quarter, and we don't even have a full quarter of rate cuts. And so we'll end up low 3.20s in the fourth quarter, most likely. And then I would expect the jumping off point for '26 is going to be 3.25% to 3.35% or whatever 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.

The next question comes from Timur Braziler with Wells Fargo.

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 upfront 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 in 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?

Yes, that's correct. We're -- right now, as we stand today, we're a neutral balance sheet if you were just to -- if you were to exclude the HOA deposits with the ECR benefit.

And Timur, we kind of debate this internally. 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 -- 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 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 cost 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. So -- but the technical answer is we are completely neutral.

Okay. That's good color. 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 4Q 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.

Yes, 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 cost come up. But -- 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 we've been -- I would say that the deposit growth was pretty broad-based. I've been -- 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 activity from some existing clients as well. We'll see what shows up -- I'm sorry, 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 on bringing new deposit relationships in.

The next question comes from Matthew Clark with Piper Sandler.

Just on the loan and deposit growth for the year, 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 is 4% to 6%, so 4% would kind of be in that range on the loan side. But on the deposit side, it just implies a steeper step up.

Yes, 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. We're -- 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 in earnings. And I'd 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, 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 has 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 we can -- there's a spectrum of deposits. And if loan growth -- to the extent loan growth is robust in the fourth quarter, we can scale those deposits to fund that.

Yes. No, Joe, that's -- 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 our liquidity 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 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 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 classified?

Yes. Sure. So we -- 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 to 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 discretely. And generally, what we're doing in the Venture space is lending to give somebody a line of credit that bridges around 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 $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 $2 million or $3 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 less -- greater than the cash level and most of the time our debt is 0, 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're going to -- we need a little bit more time. We have 9 months of cash, and we think it's going to take us down to about 4 months of cash. Okay. And they're asking us 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 remaining months of cash. 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 8 or 10 things that we look at. And it's hard for me to go deeper than that, Matthew, but I just want 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.

The next question comes from David Feaster with Raymond James.

I guess maybe touching on the loan growth side. 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 is pricing today?

Yes. Let me start at the back end of your question. So we see a very strong pipeline this quarter. It's looking really good. 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 that probably bodes well for a good quarter. Pricing is holding up at 7.08% of new production. 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 almost -- was a little bit up. C&I 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 it is -- 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. So -- 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. It's a very dynamic active. Our clients are very active. 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 it happens. We didn't know that, that was going to happen, and it did, that'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 question. Can you restate...

Yes, the other part was just 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 C&I overall is doing really well. So in California, across our commercial and community bank, we're seeing broad-based good production. 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 that -- for businesses that are all over the country, which is great. Lender Finance continues to shine. And one of the things that Ann mentioned in a note to me was that we provided back leverage for the loans sold last quarter that were 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 pay up, but it's -- that's doing very, very well. And I would say that Warehouse, there's always people that are refinancing and buying homes even up or down, we seem to have good demand in Warehouse. So that's growing as well. So I'd say those are the drivers right now. Fund Finance is 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 really 3 really strong quarters. So we'll see what happens in the fourth quarter. I know they have some good fundings 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 today, just given some of the recent issues that we've seen in the industry. I think you kind of put the NDFI issue to bed. 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 competitive dynamics or underlying issue? Just kind of curious if there's anything you're seeing.

Yes. As strong as the market is, I would say the areas where we have been very cautious have been -- certainly, we have not backed off any of our office comments about. We still think that, that is -- I was at an event with one of the investment banks held with Blackstone, and Jon 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 let others do it. And so we have -- 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're -- we have 2 offices that we consolidated in Downtown Los Angeles, got the same square footage a little bit more, got rooftop signage for less than we were paying for the other 2 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 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, but it was completely stable. So that's where we've been proactive as well.

The next question comes from Chris McGratty with KBW.

Jared, on the -- I know 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?

Yes. I mean I think the right number is between 10% and 11%. And I think more people are coming -- as I've said in prior quarters, I think more people are coming down to us than going up to above 11%. I had said before, I thought 10.5% was totally fine. And so we're between 10% and 10.5% now. And I think we've got plenty of capacity, and we're building up CET1 at faster than we're growing earnings due to some benefits that we have on the tax side that Joe can walk through. And so 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. So -- 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 of opportunistic and be able to maintain capital levels in the right range.

Okay. Continuing to buyback. Got it. And then on the ECR betas, maybe a question on for Joe. I guess what are you assuming 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, that Jared 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 generated from net operating losses that have occurred in the past, also have a 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, those -- the way the tax law works is there is a -- you're kind of restricted in the benefit of that deferred tax asset in your CET1. So as you use up the deferred tax asset, it comes back in, it gets recycled back through CET1. So our CET1 is probably growing a little -- is growing a little faster than our earnings as the amount of pullback from the NOL dissipates over time. It's pretty complicated, and we can get into it more if you want to get into it.

Yes. 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.

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

The next question comes from Andrew Terrell with Stephens.

I had a question just around the classified loans. Jared, I heard you mentioned in the prepared remarks, the $50 million of the pickup sequentially was more of a timing issue. So I guess, 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 I have to -- things always pop up, and it doesn't mean you're going to have a loss, but stuff just happens. So Andrew, I want to be careful to say -- all things being equal, if we didn't have a dynamic balance sheet, yes, it would go down. 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 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 this -- we had been rolling out this venture thing over several quarters. And so this was just kind of the one that -- the quarter that had the most impact as we got through it and 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 what I would say.

Yes, I know it's been a focus for a while.

The next question comes from Gary Tenner with D.A. Davidson.

Most of my questions were asked, but I wanted just to ask about the timing of the buyback through the quarter. It looks like just based on the average purchase price, it was kind of weighted towards the last bit of the quarter after the stock had run up a little bit. Was that kind of delay 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 can confirm that, 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. These are average prices that we're giving you and it affects 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...

Well, in the deck 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 [indiscernible], right?

Yes.

And if I look at just kind of 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 -- the stock was there through September. So that's what drove the question.

Okay. So we -- 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?

[indiscernible]

Yes. So let me try to address that. We absolutely want to make sure that when we buy back our stock, our capital levels are going to be sufficient. And we -- so we definitely look at where do we think capital is going to be when we buy back stock. So 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 comfortably above. It's also pretty hard to calculate because of what Joe said about our dynamic range of our taxes and the NOLs that we have and how it impacts our CET1.

And it's a little bit iterative how that calculation works and sometimes you don't have all the feedback. But I think what we experienced last quarter coming out of -- we were at 9.90% or 9.95% or wherever we were on CET1. Now that we're comfortably above 10%. I mean I think that, that might have been a 1 quarter kind of item that isn't really a concern going forward. Yes. And also, let me just say, look, 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 $0.25 plus per quarter. So it seems like knowing where we're likely going to end up, we can figure out like if we're not trading at $1.25, $1.30 or more of tangible book, which we should be given kind of our clear earnings path and the solid balance sheet that we have and the quality of the franchise and how big a footprint we have in California and how unique this is, I just think our stock is undervalued. So we'll be opportunistic.

The next question comes from Anthony Elian with JPMorgan.

Jared, just a direct follow-up to your comments you just made on the buyback, right? Why not be more aggressive here given the stock is still trading near tangible book value before you potentially get to that $1.25 or $1.30 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 just -- I'm sure you can understand that dynamic. I don't think we should be -- 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 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. 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 3.20% to 3.30% guide? And then if we assume the forward curve next year, how would that impact the jumping off point of 3.25% to 3.35% you mentioned earlier?

Yes. So as we mentioned earlier, the -- our core net interest income is neutral, but we have the 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 -- if there's a rate cut upcoming here in the fourth quarter, we will not get benefit of that until January 1. 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.

Specifically on the 3.20% to 3.30% 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?

I think we have -- hold on, Joe, just one second. I think we have to see because so much of our NIM -- since we're kind of neutral, but for the ECR, which doesn't -- which is HOA, I think a lot of our NIM depends upon our loan production. Tony, so we -- 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 ECR -- HOA ECR, it relates to about $6 million a year of pretax income. But there's other factors that factor in. If rates go down and there is -- 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 a little bit more complex than just saying that it's -- how fast can we bring down deposits, what kind of deposit beta can we get with our customers. It's a little bit hard, but I think the technical answer is what I said earlier.

And Tony, the nontechnical 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 than deposits are going -- and deposits are going down given stuff paying off. And so if we're at 3.20% to 3.30% now, and we think we're going to end the year in the low 3.20s, right, have a -- I don't know what it's going to be for -- whether it's 3.20%, 3.21%, whatever it is for Q4. And then off that 3.18% 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 -- we will a little bit, but we are slightly sensitive to them. So if the guide next year is 3.25% to 3.35% or whatever it is, I think we'll just kind of be updating it as we go from there.

The next question comes from Tim Coffey with Janney.

Jared, if we were to look at your noninterest expenses and back out the earnings credit rates, 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 provide 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 as we've spent a lot of money on technology. And we've said to people, unless you're seeing a benefit of this technology, why are we doing it?

So you need to factor into your hires for 2026. What benefits you're getting from technology and how you're gearing ratios, which we think about as the -- 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 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. We've been very disciplined about the headcount and about projects, and those are really the 2 drivers that move the needle in cost for us. And the -- on headcount, people have just been really thoughtful in the way they've gone about in areas where we needed to add people, maybe we found efficiency somewhere else to offset that. And on the projects, we start at the beginning of the year. We have a list of projects we want to do and it's 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 has 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.

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 a third form when they've already filled out 2 others, they have the same information or they can get 2 forms down to 1 or we can do something faster for our clients so 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 great color. And then my next question has to be on the expense guide. I mean it's -- I don't think you're getting credit for your expense the fact that they've been flat for the last 4 quarters. So I'm kind of curious, it seems to me the guide for expenses is conservative. Is there -- are you expecting big investments in the business this next quarter, next year?

Joe, go ahead. I mean...

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 say somewhat consistent with what we've seen. So we're beginning to lean into that. And yes, I think it is fair to say maybe we've been a little conservative to date.

Look, the project spend is real, Tim. Like 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 of 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 5 things really, really well. And I've been at a couple of 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 5 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 got to -- 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.

No, 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 around 4%. What strategies have you implemented to maybe bring forward some of those repricing time lines?

Well, it's very hard to encourage somebody who's got a rate at 3.5% to reprice sooner, okay? What -- 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 5-year fixed rates or they're 5-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 5.75% and 6% for a -- maybe 5.50% and 6% depending on the loan for a 5-year fixed rate loan. We're offering between 5.90% and 6.1% for a 3-year fixed rate loan with a different prepay. Fannie, Freddie will have a prepaid 54321 or something like that. They'll have lower fees, lower cost. 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 successful about 1/3 of the time of the ones that we've gone to.

And we have a follow-up from Chris McGratty with KBW.

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% ROE a little quicker?

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.

This concludes our question-and-answer session and Banc of California's Third Quarter Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.