Banc of California (NYSE:BANC) held its first-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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The full earnings call is available at https://edge.media-server.com/mmc/p/nsw7ch8h/
Summary
Banc of California reported a strong financial performance for Q1 2026, with a 50% increase in EPS to $0.39 and a 28% rise in pre-tax pre-provision income.
Strategic initiatives included a share buyback program, a dividend increase, and plans to redeem subordinated debt, reflecting confidence in long-term value creation.
The company expects continued net interest margin expansion and stable credit quality, with plans to further optimize its balance sheet and leverage AI for operational efficiency.
Loan production remained robust at $2.1 billion, driving balance sheet remixing towards higher-rate loans despite a declining rate environment.
Management reaffirmed guidance for 20-25% pre-tax pre-provision income growth and 3-3.5% non-interest expense growth for 2026, highlighting confidence in their strategic execution.
Full Transcript
OPERATOR
Hello and welcome to Banc of California’s first quarter 2026 earnings conference call. If you need operator assistance, please press star then zero. I’ll now turn it over to Ann DeVries, head of investor Relations at Bank of California. Please go ahead.
Ann DeVries (Head of Investor Relations)
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 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 Wolf, Chairman and Chief Executive Officer and Joe Couder, 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.
Jared Wolf (Chairman and Chief Executive Officer)
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. Pre-tax, 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 27th 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 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 non interest bearing deposits of 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 non interest bearing deposit balances ramp up and 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 remain 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 or 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 and 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 mentioned 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 two 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 two 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 non performing status in 1Q25 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 reserve 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 to 160 million dollars of additional CET1 ratio 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 $150,000 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 and long term shareholder value. Let me now turn it over to Joe for some additional financial details and I’ll return afterwards.
Joe Couder (Chief Financial Officer)
Joe thank you Jared. For the quarter we reported net income of $62 million or 39 cents per diluted share which was up 50% from 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 Federal Home Loan Bank (FHLB) stock. Net interest margin expanded to 3.24% up 4 basis points from Q4 and 16 basis points from a year ago driven primarily by lower funding cost. Our spot NIM at 3-31- was 3.22. After normalizing for the Federal Home Loan Bank (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 three to four 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 two 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 pay downs which were primarily in warehouse fund finance and other cre. We continue to expect full year loan growth in mid single digits dependent on broader economic conditions. Deposit trends remain solid with average non interest bearing deposits continuing to grow in the quarter and average core deposits excluding one way ICS deposit sales also increasing modestly. We used one way ICF 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 cost 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 remained 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 would 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 or 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 two and a half years. That embedded repricing opportunity remains an important earnings tailwind. Non interest 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 remain 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. The we are reaffirming our guidance for pretax pre provision income growth of 20 to 25% and non interest expense growth of 3 to 3.5%. Our net drivers of earnings growth remain firmly in place including continued loan portfolio remixing, disciplined expense …
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