BANC - NYSE

Good day, and welcome to the Banc of California's Second Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference 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 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 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, President 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, everyone, and welcome to our second quarter call. We delivered a strong second quarter with meaningful growth in core profitability. Pretax pre-provision income grew 6% quarter-over-quarter as solid revenue growth outpaced a slight increase in expenses. Our core earnings drivers, which included loan growth, net interest margin expansion and disciplined expense management all remain firmly on track with our strategy. We achieved our third consecutive quarter of robust broad-based commercial loan production, which helped drive total annualized loan growth of 9%. Our team also continued to make steady progress in attracting new business deposit relationships. During the quarter, we opportunistically engaged in the sales process for approximately $507 million of commercial real estate loans, which we have transferred to held for sale with expected proceeds net of reserve release of 95%. We expect the strategic sales of these loans will further optimize our balance sheet and contribute to delivering high-quality, consistent, sustainable earnings growth for our shareholders. This move also helped to drive improvement across our credit quality metrics in the quarter. We will touch on more of this -- we will touch on more about the loan sales later in the call. Our strong second quarter earnings helped us achieve our fifth consecutive quarter of growing tangible book value per share to $16.46. Our balance sheet remains strong with capital and liquidity and healthy levels. As mentioned on our first quarter call, we opportunistically repurchased $150 million of common stock or about 6.8% of our shares early in the second quarter. We have $150 million remaining in our buyback program, which can be used towards both common and preferred stock. We will continue to be prudent with the remainder of this program and use it opportunistically. And while our outlook may change, we do not expect to deploy all this remaining capacity in the near future. Our second quarter loan production included unfunded commitments was $2.2 billion and included our highest level of originations of $1.2 billion since the closing of our merger. Strong production levels drove 9% annualized growth in our total loan portfolio, while core held-for-sale loans were up 12% annualized. Growth was broad-based, led by continued momentum in lender finance and funder finance originations and complemented by expansion in our purchase single-family residential portfolio. Our loan origination volumes reflect strong execution by our team and our ability to capitalize on our attractive market position. Partially offsetting this growth was a decline in construction loans due to payoffs and completed projects some of which moved to permanent financing in our CRE portfolio and some of which were included in the loan sale. We have remained disciplined in our pricing and underwriting standards. The rate on new production averaged 7.29%, which was up from 7.2% in Q1, and that helped drive expansion in our average loan yields and our margin. You've heard us emphasize many times now that proactively managing credit risk and quickly identifying any credit concerns is a key priority for us. In accordance with that philosophy, we took decisive action during the quarter to opportunistically sell the commercial real estate loans that I mentioned earlier. While many of these loans are money good and well collateralized, they exhibited characteristics that contributed to credit migration that were not guaranteed to resolve in the near term. Rather than have the potential overhang while we continue to work through the credits, we took the opportunity to reset and align our balance sheet with our focus on growing high-quality, consistent and sustainable earnings. Our second quarter credit quality metrics improved meaningfully from Q1, mainly driven by the loan sale process. But otherwise, our credit was stable. Nonperforming loans, classified loans and special mention loans as a percentage of total loans declined by 19, 46 and 115 basis points, respectively, from Q1. Second quarter net charge-offs, excluding the impact from the loan sale actions, were just 12 basis points of loans. Proactive credit risk management will remain a top priority as we strive to maintain strong credit quality metrics. Our headline reserve levels at 1.07% of total loans our economic coverage ratio was substantially higher at 1.61% of loans, which incorporates the unearned credit mark on the Banc of California loan portfolio acquired in the merger as well as coverage from our credit-linked notes. Our investor deck does a good job of laying out how our loan portfolio has changed over the last 12 to 18 months. And how our coverage ratios reflect that migration to a much higher percentage of loans with short duration and no historical losses in warehouse, lender finance and fund finance. Along with SFR, these loans now account for almost 30% of our loan book. While some uncertainties remain in the broader macroeconomic environment, we have been encouraged by the resiliency of the market and continued strong demand from our clients for our products and services. We remain confident that the great work of our team members, our continued execution, strong balance sheet and differentiated market position will drive growth and profitability, tangible book value per share and long-term value for our shareholders. Now I'll hand it over to Joe, who will provide some additional information, and then I'll have some closing remarks before opening up the line for questions. Joe?

Thank you, Jared. For the second quarter, we reported net income of $18.4 million or $0.12 per share and adjusted net income of $48.4 million or $0.31 per share. Adjustments this quarter included $20.2 million after-tax provision expense related to the sales process of $507 million of commercial real estate loans with expected proceeds net of reserve release of 95%. During the quarter, we completed sales totaling $30.4 million, with the remaining $476.2 million transferred to held for sale. The loss we took during the quarter through the provision line item is the net mark on the loans that were either sold or transferred to held for sale and reflects our estimate of market value based on either active bids or other market inputs. We anticipate $243 million of loan sales to close in 3Q and expect the remaining $233 million of loans to be sold over the next several quarters. We also recorded a onetime noncash income tax expense of $9.8 million, primarily related to the revaluation of deferred tax assets following changes to California state tax apportionment methodology. This change in methodology positively impacts our tax rate going forward and retrospective to the beginning of 2025. However, the day one impact of the lower tax rate on our deferred tax asset position resulted in the negative charge. Going forward, we expect our effective tax rate to be approximately 25%. Moving to our core results. Net interest income of $240 million was up 3.4% from the prior quarter, driven by strong growth in loan balances and higher loan yields. Net interest margin expanded in the quarter to 3.10%, driven by a 3 basis point increase in average loan yields to 5.93%. The increase in loan yields was due to the full quarter impact of strong growth in higher-yielding loan categories. The rates on new loan production averaged 7.29% and total loans grew by 9% annualized, led by growth in lender finance, fund finance and purchase single-family residential loans. As of quarter end, our spot loan yield was 5.94%. Total cost of funds of 2.42% remained flat quarter-over-quarter as a 41 basis point decline in average cost to borrowings to 4.93% was offset by a one basis point increase in cost of deposits to 2.13%. The decline in borrowing cost was driven by the redemption of $174 million of 5.25% senior notes which we replaced with lower-cost long-term FHLB borrowings. Average core deposits were up 5% annualized and the average cost of deposits increased slightly as the need to fund strong long growth -- strong loan growth drove a mix shift towards interest-bearing deposits. While we continue to steadily grow the number of new NIB business relationships, the average balance per account has been under pressure which we believe is attributable to both seasonal and macroeconomic factors. As of June 30, our spot cost of deposits was 2.12% and our spot net interest margin was approximately 3.11%. The interest rate sensitivity of 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, however, 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 NIM and as we remix the balance sheet with high quality and higher-yielding loans. We have $1.8 billion of total loans maturing or resetting through the end of 2025. With a weighted average coupon rate of 5%, offering good repricing upside. Our multifamily portfolio, which represents 26% of our loan portfolio, has approximately $3.2 billion repricing or maturing over the next 2.5 years at a weighted average rate that will offer significant repricing upside. Total noninterest income was $32.6 million, down 3% from the prior quarter, primarily due to mark-to-market fluctuations on CRA- related equity investments and credit-linked notes. Noninterest income remains in line with our normalized run rate of $10 million to $12 million per month. Noninterest expense of $185.9 million increased $2.2 million from Q1 or remaining below our target range of $190 million to $195 million per quarter. The quarter-over-quarter increase was primarily driven by a $2.1 million increase in insurance and assessments, and a $1.9 million increase in compensation expense, which were lower in 1Q due to a onetime FDIC expense reversal related to prior periods and 1Q compensation expense reversals related to some staff exits. Looking ahead, we expect our quarterly expenses in the back half of 2025 to settle into the low end of the aforementioned range of $190 million to $195 million as we increase comp expense and invest in our infrastructure to support growth. However, we do expect positive operating leverage to continue as higher expenses are expected to be more than offset by continued revenue growth. Excluding the impact of loan sales actions, our core provision for credit losses totaled $12.3 million, an increase of $3 million quarter- over-quarter. We added to the quantitative reserve to reflect updates to our economic forecast and also increase the quality of reserves related to our office loan portfolio. As our loan portfolio continues to expand, our credit reserves remain well aligned with the risk profile of that growth. As Jared mentioned, we've seen meaningful shifts towards loan categories with historically lower losses, including warehouse, fund finance, lender finance and residential mortgages. These lower loss loan portfolios as a percentage of our total loans increased to 29% of total loans, up from 26% in Q1 and 20% a year ago. Under CECL, these portfolios require lower reserves due to the historically low loss content and shorter duration, and their growing share will continue to influence overall reserve levels. Excluding these lower risk categories, the remaining portfolio would carry an ACL coverage ratio of 1.44% compared to 1.07% for the total portfolio. Including the impact of credit-linked notes and purchased accounting marks, our total economic coverage ratio stands at 1.61%. And we believe the assumptions and economic scenarios embedded in our ACL models remain appropriately conservative. Our 2Q results reflect the substantial progress we have made and successfully growing core profitability through our consistent and strong execution. We have continued to strengthen core earnings drivers, including high-quality loan growth, stable funding and deposit cost, net interest margin expansion and prudent expense and risk management. We remain on track with our 2025 guidance with tweaks to our outlook for margin and NIB percentage. We see good balance sheet and earnings growth continuing with mid-single-digit growth in average earning assets for the back half of the year. We also expect mid-single-digit increases in quarterly net interest income in the back half of 2025 and achieving our margin target range in Q4. As we look forward for the second half of 2025, we expect to continue to drive consistent and meaningful growth in our core profitability. And at this time, I'll turn the call back over to Jared.

Thanks, Joe. Our second quarter results clearly demonstrate our success in pivoting our business towards profitable growth, following our substantial transformation last year. We are growing adjusted EPS at a double-digit rate quarter-over-quarter. Our loan engine is working, and we are moving our credits to try to eliminate noise for the benefit of future earnings. We're expanding our lending relationships in areas that have historically lower areas of loss where we have some great niches, and we are bringing new relationships to the bank. Our loan-to-deposit ratio has remained very comfortable. We have been opportunistically growing all types of deposits to fund our loan growth. NIB did not expand this past quarter, but as I've shared in the past, it's not necessarily a straight line. We are doing the right things, the right way for the long term and we have confidence that our results will pay off over time. To that end, we've continued to expand market share in key attractive markets, particularly California, which is now the fourth largest economy in the world. We're continuing to capitalize on the dislocation in California's banking landscape and are the go-to business bank for people, including clients who want to bank with us and talented individuals who want to join our team. Our teams execute with consistency and discipline, bringing in new deposit relationships and originating high-quality loans while maintaining prudent operating and risk management practices. We continue to move the ball down the field every day, growing our profitability, scaling our business and providing high-quality, reliable earnings growth. We are optimistic about our growth trajectory for the remainder of 2025. And indeed, our estimates for 2026 are only growing higher. I want to take a moment to thank our exceptional team at Banc of California. Their unwavering commitment to our clients, communities and our shareholders is remarkable. I'm very proud to work alongside such a dedicated and talented team. Thank you. And with that, let's open up the line for questions.

[Operator Instructions] And your first question comes from Matthew Clark with Piper Sandler.

Just on the loan sales, the loan sitting in held for sale, it looks like they're kind of range in that 5.3% to 6% yield range. I guess what's the plan on the other side of the balance sheet? What do you plan to unwind and at what rate?

Matthew, I'm not sure I fully understand what you're asking when you say on the other side of the balance sheet. You're talking about the deposits that we plan to -- maybe just clarify a little bit.

No, with the loan sales, I assume you're going to unwind some wholesale funding as well.

Well, we've been growing, right? We've been growing pretty fast. And so I don't know that we kind of match funded it that way. We also are providing some leverage on those loans that we're selling. And so we don't need -- there's not really a one-to-one relationship. I'll let Joe comment on that as well to see if there's anything specific that I missed. But let me just say as well, I got a couple of questions offline about what we sold and whether it was a rate mark or a credit mark, I would say that I think we were pretty pleased with a $95 price for the loans. I think that reflects probably it's truly in the hands of the buyer to decide whether what the purpose of their price was. But from our perspective, it was really more rate than credit. As I mentioned in my comments, we just didn't want to hold the loans on our balance sheet for as long as we would have to, many of them were close to $300 million were kind of construction projects that were completed, and we had appraisals as is that we're above the value of our loan substantially, but they were taking much longer to lease up. And so there are private credit out there who have much longer duration and willing to work with it and we provided them some leverage. And the rates on the notes themselves, the underlying notes allowed them to get a good return. And so we feel good about the 95% that we got. Specifically, to your question about funding that $500 million, Joe, is there anything specific that we're letting go related to that $500 million?

No, I think you hit the nail on the head. We're providing -- we intend to provide leverage on these transactions, which will kind of offset some of the balance sheet impact. For example, the one deal that we closed in -- by June 30, it was a $30 million tranche, we provided leverage in the 80% to 85% range, just to give you an example.

Got it. Okay. That's helpful. And so your loan growth guide, is that kind of all in? Or is that just HFI?

That is held for investment.

Okay. Okay. And then on the expense run rate guide, the kind of low end of the range of $190 million to $195 million came in well below that this quarter. Sounds like you continue to make investments. But on the ECR side, I know you're not assuming any rate cuts in your outlook, which obviously would help. But it did look like the rate on those ECRs did come down. I guess, can you speak to what you did there? And what your plan is going forward?

I mean we're just -- we work it hard. I mean we're trying to manage those costs as much as we can. On the ECR, you're right, we don't have any cuts in our forecasts. But each 25 basis point cut provides $6 million to $7 million in annual pretax income from a reduction in ECR. And the ECR shows up really the quarter after the cut is announced since you're not going to get the full benefit in the quarter. So the impact of 2 cuts fully baked in, in the quarter would be reducing ECR costs of about $3 million per quarter. So it's a -- there's a lot of benefit there for us should rates get cut, although we don't have it in our forecast.

Yes. And Matthew, the decrease, we do work it hard. Jared is exactly right, but some of that decrease was just the timing of the way the rate cuts that happened at the end of '24 flowed through the way some of the contracts work, there's a little bit of a delay. Do we get the benefit. And so that was just full quarter benefit of some of those rate cuts in 2Q.

And your next question comes from Ben Gerlinger with Citi.

Not to beat a dead horse. For the loan sale, I know you guys gave quite a bit of commentary and there's -- it's kind of broken up the remaining $233 million over the next several quarters. Is it -- like do you have a buyer in the timing? Or is it just held for sale hoping to find a buyer?

We don't -- we have not identified buyers for every -- we had bids on all of it. Some of the stuff we decided to put out for sale rather than sell it to an individual buyer and some we actually have contracted. We're drafting the contract now. We have determined who the buyer is and we've drafted the contract, and we will sell it. But we wanted to provide ourselves more time to sell some of the other ones. But we think our markets -- look, we marked it at 95%. We think that's conservative. We might end up at 96%. We could end up at 94% but I think it's -- the range is right. It's going to be around there.

Got you. Okay. And then it looks like a majority was construction. Were these bank loans or potentially PacWest loans? I'm just kind of curious who underwrote them originally?

Yes. So they were -- I don't -- the reason I don't want to differentiate is because, as a company, we've worked really hard to make sure that we all own everything today. And so let me just say that these were larger loans. I'm not sure we would do these sized loans again. Two of the loans were industrial construction out of California. They are projects that have really big sponsors behind them. They -- we have as is appraisals that are well above our loan value. There's tons of equity in the projects, but they're competing for lease-up and it was going to take a while. And so while we weren't going to lose any money they we're going to sit there as kind of classified loans, and we just took the opportunity to move them off our balance sheet. We didn't think we're going to lose money, but why not free up the capital and use them for something else. So that's kind of a common theme with a lot of the loans that we let go.

Got you. That's helpful. And then if I could sneak one more in. Expenses came in under guide again. You guys kind of reiterated the range. Should we expect to tick up? Or is it conservatism? I'm just kind of curious like you're beating your own guide, but are you previewing expenses going up?

Yes. Joe, you want to address that?

Yes. I think we've -- as I said in the -- in my remarks, we do expect to settle in the lower end of the range, the $190 million to $195 million range. And really, it's just making investments both comp and infrastructure really to support our growth going forward. And we were pretty disciplined in the first half of the year in terms of the timing of some of that, but it's -- the plan was always a little back-end loaded. And so I think we'll see a little bit of an increase here in the back half -- maintaining positive operating leverage.

David (sic) [ Benjamin ], I'll give you a little more color there. I mean -- so through last year, I was approving every single hire in the company. Just I wanted to see it. I want to make sure it was necessary. I wanted to challenge people. This year, we gave all of our business unit leaders and all of our function leaders we gave them their own budget. and said, go higher whoever you want, just stay within your budget. And if you're growing faster, you can have more expenses. If you're growing slower, then we expect your expenses to be down. The teams are just doing a really good job of managing their budgets. Our revenues are higher, but their expenses are coming in, and it's -- some of its timing and some of it is just discipline. And so the reason we're coming in lower is not because we intended to really, it's because our teams are doing a really good job. And so some of it is timing.

And your next question comes from Jared Shaw with Barclays.

So should we assume that there's no more sort of loan restructurings coming out of the portfolio and that you're focused on growth opportunities from here almost exclusively?

I think that's right, Jared. We certainly tried to take as much as possible in the quarter. What I don't want to say is kind of we've cleared the deck, because stuff always comes up, right? That's just going to bite you. So we have to leave space for the idea that something else could pop up somewhere, but we certainly try to take the opportunity to make this a onetime event and hopefully, it is.

Okay. All right. And then on the growth, I mean, you guys are now the hometown bank or one of the hometown banks of a really strong, large economy. Are you -- is your growth optimism, is that coming from taking market share? Or are you just seeing your customers be a little more optimistic and starting to do more work? What's sort of driving that growth optimism?

Yes, it feels like the split is 50% existing customers and 50% new relationships to the bank. Our teams are working really hard to bring in new relationships. And then our existing customers are out there just doing more stuff. In the lender finance area, that's all new customers to the bank today, but they're old relationships that our lender finance team had. Fund finance and warehouse are growing. They're bringing in new logos and new clients and there's some expansion from existing clients, too. In our commercial and community bank, which is kind of our platform in California, our 80 branches plus Colorado and North Carolina. We're just -- things are going really well, and our teams are working really hard. So far this quarter, deposits are way up. So when I talk to my comments about it being timing, that's kind of why. You're seeing the loan growth, okay, maybe deposits aren't there, you're funding it with a different mix that you got. You're pulling in wholesale, but that's temporary. And when good deposits come in, you'll let it go and you'll reduce your costs. But we want to certainly be there to fund the loan growth and keep our loan-to-deposit ratios in check. And we have a lower wholesale funding level than historically the bank has. So we have the flexibility to do that. I would say, just in California, we seem to be growing our market share pretty meaningfully though. It's pretty exciting to see what's going on here. Our team is really jazzed.

And then if I could just sneak one more in. I mean, with that backdrop, so you've improved the credit profile with this loan sale, you feel good about growth. Yes, with your stock at these valuations and below tangible book, why wouldn't you just be buying more stock here? It sounds like you got a good price earlier on, but I mean, why not be a little more aggressive with the buyback in the near term?

We might do that. I certainly don't expect stock to be at these levels. I mean we are growing pretax pre-provision at a really good annualized clip. Core EPS is growing double digits quarter-over-quarter, and we see our earnings expanding going forward. Our NIM guide came down a little bit, but we're only doing that because we're growing and we're acknowledging the mix shift and we don't have any rate cuts built in. So we -- our internal numbers keep getting guided higher for earnings, which we feel really good about, and 2026 is going to be going to be a great year. And obviously, we're adding -- our momentum in 2025 is really strong. Our loan volumes are really strong. So I don't expect our stock to be at these levels, but if it is, we wouldn't hesitate to do what's necessary while keeping an eye on our capital levels. We've got to make sure our capital is within the right range. And assuming it is, we wouldn't hesitate to be an active buyer.

And your next question comes from Andrew Terrell with Stephens.

I wanted to ask a question around the single-family resi growth this quarter. I think in the prepared remarks, you mentioned some was purchased single-family. Do you have the dollar amount of what was purchased? And can you just describe kind of the -- I mean, it sounds like -- and clearly, growth is strong in other verticals. Just curious like what would drive the strategy of purchasing single- family here?

Well, we -- first of all, as I think I've mentioned in the past, Andrew, we only purchased single-family. We don't have a single-family origination platform. We have access to single-family through -- we're a good-sized mortgage warehouse lender. We lend to nonbank lenders, nonbank mortgage lenders. We are secured by the individual mortgages on all of those lines. So we might have $150 million line or a $75 million line that they're making $800,000 or $3 million mortgages. We secured by each of those individual mortgages and were taken out by -- usually it gets securitized or there's a forward purchase contract, but they're all hedged or have a forward contract. So we see all those mortgages, and we have the opportunity from time to time to buy those off the lines. We already like the credit. We can give our warehouse borrower more capacity when we buy those credits. We -- what we'll do when we come into an agreement with them to buy those credits, we'll give them more capacity on their line. We won't count that purchase against them. So they have more freedom, which they appreciate, and then we get a good deal on the loans. The coupons right now on the single family that we're buying is pretty good. It's -- we're getting stuff in, let me just say, around [ 7 ]. And these are non-QM mortgages, they're often 30-year fixed, really high credit quality, really mid-700 FICOs, a lot of California, low debt to income. And importantly, these are owner-occupied loans -- owner-occupied homes. They're not very low percentage of second homes or investor homes, which I think carry a lot more risk and you usually don't get paid from a coupon standpoint. So we like that profile. We don't really have a lot of exposure to consumers being a business bank. And therefore, we thought that it would be healthy to have some exposure to consumer, and this is the way that we chose to do it. We've had a very strong history with the mortgages, so we know how they perform. And they've held up really well, and we like the risk-adjusted return. We also buy them from partners that we have. It could be a large national bank that originates mortgages and things like that. And every now and then, we'll look at pools. But that's why we do it is because we think that, that's a good way to balance out our portfolio. Also, warehouse has the ability to balloon up and down, less so now with the size that we are, but it has in the past. And so having single-family that's got a little more duration on it is a hedge against kind of the warehouse portfolio, which could go up and down. So that's why we do it. In terms of the volume of single-family in the quarter -- and by the way, the resi production portfolio yield -- excuse me, production yield in the quarter was $759 million. So I said [ 7 ], it's much higher than that. I was trying to be conservative. And Ann, I think the number was around $450 million in the quarter?

400 million.

Around 400. Okay. Thanks, Joe.

Yes, a little bit north of 400. It was right around 400 in the quarter. And Andrew, we're at 13 -- resi mortgage is about 13% of our portfolio. We could see that increasing a little bit, 14%, 15%. I don't think we'd be upset if it went up to 15%.

Yes. excluding the purchases, which were higher this quarter than prior quarters, we were still north of $700 million of production. I mean we had a very, very strong production quarter. Our teams just did a great job.

Understood. Okay. I appreciate it. And then on the on the loans that were transferred -- or yet, transferred to HFS, the $507 million, do you have how much of that was previously sitting in credit size. I'm looking at the decline in credit size sequentially. It was a little bit less than that $507 million figure. So just wondering if you had the credit size amount HFS?

We can get you that. I don't have it off the top of my head. Ann or Joe, would you just look that up.

And your next question comes from Gary Tenner with D.A. Davidson.

I wanted to go back to some of the commentary around deposits and the kind of costs this quarter versus last quarter. And I appreciate, Jared, the commentary around kind of the need to fund growth and kind of the timing of deposits versus loan growth. But on an absolute basis, the rate paid on interest checking and on money market moved up quarter-over-quarter. So just as we're thinking about the back half of the year and certainly, you could pay that and still put loans on that are accretive to the overall margin. I get that. But just thinking about those kind of rates paid, do you think those still trend higher over the back half of the year? Is there a competitive dynamic that has made -- that has kind of stabilized?

No, it's a good question. So interest-bearing checking went up almost 9 basis points in the quarter and money markets went up about 2 basis points. CD surprisingly went down by 13 basis points and savings went down by about 7 basis points. So overall, we saw a little bit of an uptick in the cost of deposits. It's very, very competitive right now. I approve because I want to -- we have a committee that approves pricing exceptions on deposits for relationships, and I get involved if there's a lending relationship and stuff like that. And so I'm seeing the requests that are coming in and our teams are doing a great job. It is more competitive than we've ever seen. And -- or I should say in a long time, we just haven't seen this kind of -- and so there's obviously a demand for liquidity out there. I think part of it is that there's less liquidity and a lot of demand for loans. And so all banks are kind of looking for the same stuff. We are getting our share of loans better than others, I think because we have a solution that really works and that's bearing itself out. And you're not going to grow deposits as fast as loans. You're just not going to do it unless it's a slow growth environment and then you're going to outpace with deposits, which is what we did last year in anticipation of this year. So we saw that coming a little bit and prepared ourselves for it. Obviously, we think the kind of heat around deposits is going to slow down when rates come down. If they come down, although we don't have it in our forecast. But for some reason, right now, the dynamics are really competitive. And we generally will get some rate benefit. We -- our teams do a good job of trying to hold deposits. We're seeing some uptick in deposits. People have money markets, and they're waking up, believe it or not, that they were at 2%. They're like, hey, why aren't they at 3.5%? We're trying to hold the line and say, look, we're not going to pay you 4%, which some banks are absolutely doing. But we're going to try to keep it in the 3s and hopefully, the mid-3s for those clients who have more rate-sensitive relationships, not every deposit in the bank, is operating accounts. We want to have that and we focus on that, and our teams are doing a great job. But as Joe also mentioned in his comments, we are tracking average balances and average balances are actually down in accounts themselves. So if we're staying flat, we're kind of winning or if we're able to grow, great. But average account balances are down. People are closing their accounts. Just liquidity is flowing out of the system for some reason and hopefully, it comes back.

Appreciate that. And then as it relates to the loan sale and your comment about offering or providing back leverage for private credit buyers, et cetera, how much of the amount that you have scheduled to sell in the third quarter? How much of that do you think comes back to HFI just in a different part of the loan portfolio?

I think you could assume 50% to 60% is probably fair. Could be 70%. But I don't know that it's going to be much above that. Hard to tell because some of the stuff is just going to go without leverage. But we have relationships with private credit with nonbank lenders through our lender finance group. And our team, our Chief Credit Officer and our Head of Lender Finance, and people on the lender finance team have great relationships, and they were able to suggest and bring in the stuff, which I thought was good. We have it modeled that we're going to have more leverage than that, but I don't know that we're going to get there. So to be conservative, I would say it's less.

Okay. And then last question. In terms of that loan tranche, you've talked about...

Gary, just on that point, like we don't need it because we're growing loans fast otherwise. And so it doesn't really matter to me either way. It's only a couple of hundred million dollars, but to be conservative, that's why we're saying it's less. But we certainly would be willing to offer it to the right buyer. Sorry to interrupt you.

Yes. No problem at all. I just wanted to clarify one thing. You've talked about marking these at 95%. But if you consider the charge- offs of $37 million specific to these loans, that's about -- that's almost 7.5%. So are you only thinking of the kind of incremental provision that went through the P&L this quarter related to the loans for transfer?

We released the reserve as well. So the net amount is -- the 5% is the charge-off, but then you have to add back the reserve that we hold against loans that we released. Joe, do I have that math right?

Yes, you have it right. There was also some small amount of FAS 91 fees and deferred fees on it as well. But I think Jared has it right.

Yes, FAS 91 never factors in the money. My math, I need to brush up on that.

And your next question comes from Timur Braziler with Wells Fargo.

Looking at the margin outlook in that kind of 3.20% to 3.30% 4Q, that assumes some level of acceleration here in the back end of the year. Can you just talk me through what the driver is? Is that mostly on the fixed asset repricing side? Are you assuming some mix shift benefit with just the deposit growth earlier in the quarter? And I'm just wondering if we do get some rate cuts, is that going to be beneficial at this point? Or is that going to be maybe a little detrimental towards that guide?

So rate cuts would be beneficial because we would immediately move down deposit costs. And I think that's going to move a little bit faster because we're originating loans so fast. I think we're going to get -- loans don't move down as fast from my perspective. And so I think we'll be okay there. In terms of -- I'll let Joe comment on the components of our margin expansion. But before I do, one thing that we haven't seen this year, which we expected to see was accelerated accretion. And that it can have a meaningful impact on our margin, and we haven't seen any really at all even though we saw a good amount last year. So if we get rate cuts, we're going to see accelerated accretion as well, which is going to help our margin. but that's not what we have planned here. So Joe, what is the -- how would you describe kind of where we see margin expansion coming from?

Yes. The margin expansion is primarily coming on the loan side. So as we showed in our remarks, we're -- and in the deck, we're putting large amounts of loans on at very good rates. We also have a fair amount on our -- we have the page where we talk about how much loans are rolling off. Well, all those loans are rolling off at lower rates. That loan roll on, roll off is going to be -- have a significant benefit to us. And then on the cost of deposits -- like we don't -- we're pretty conservative on that in our forecasting estimate. We're assuming it's going to be pretty flat. I would agree with Jared that we didn't -- we've basically taken out any accelerated depreciation or accelerated accretion in our forecast. So -- and we have no rate cuts. So we stand to benefit on -- if either of those 2 things would happen.

Okay. And just looking again at the loan transfer, I'm just wondering how much this accelerates the asset quality trends at the bank. And as you're looking ahead, can you just give us a level of internal expectations for provisioning and charge-offs going forward?

Yes. Well, so this quarter, on a normalized basis, we provisioned a little over $12 million. And I think at the level of loan growth that we had, that's probably a fair estimate going forward. But the difficulty is that it really matters what type of loans that we're growing. I don't think fund finance is going to continue growing at the same pace. I think we're going to get more kind of traditional commercial loans out of the commercial and community bank. And so those are going to carry a weighting that's a little bit higher. And therefore, I think that $12 million is probably, Joe, is that kind of where we're guiding to $10 million to $12 million a quarter on the provision?

Yes, a little bit at the low end of that. I think we're right in the middle of that range.

Okay. So $10 million to $12 million is kind of the fair estimate there. We certainly feel good about the opportunity that we have ahead of us on the loan side, things seem to be working right now and our teams are doing a great job.

Okay. And then just last for me. We've seen a frenzy of kind of M&A conversation, reenter the regional bank sector here in recent weeks. I'm just wondering, you guys are now really the only game left in town in Southern California. I'm just wondering how you guys are thinking about maintaining independence here? And maybe what considerations would be needed in order for you guys to consider partnering with a larger institution?

Well, what I'm really proud of is how hard our teams are working at growing the bank organically and we're doing that. And we have a huge opportunity in front of us to grow this bank organically. I mean we're showing it, right? And so I think the bar is very high for us. But we're a public company. We're out there every day. And I think it will be interesting to watch how these dynamics change over the next several quarters and over the next 12 months. I mean there's a lot of noise out there, obviously. I think the environment is very frothy right now. The regulatory environment is turning favorable from an M&A standpoint. And I think that people are excited about that. I would expect us to have the opportunity to go buy somebody when we have a normalized multiple on our stock, which I expect to get there soon as a reflection of our consistent growth in earnings. And we're building up tangible book value pretty fast. And as you point out, we've kind of -- we've got a very valuable franchise here in California. We're sitting here at $35 billion in assets, the largest independent bank, really in California that is not -- that is not focused on a niche. I think East West might be considered a little bit more niche. They're a tremendous bank, but not for all types of partners. And so we're really pleased with what we got here, and we're just going to keep our head down and keep working. And I think things will take care of themselves.

Our next question comes from Christopher McGratty with KBW.

Jared, this is more of a big picture question for you. The 13% ROE that's been out there and the timing still in the future. I'm interested in your -- just giving you the mic for a minute, just the takes of how you get there, what kind of environment does that look like? Obviously, there's a numerator and denominator impact? Any updated thoughts would be great.

Yes. So I don't have a date to put out there, as you can imagine. But I think what we're doing right now, growing core earnings at a pretty fast clip is going to result in that happening sooner rather than later. We keep growing tangible book value, but we're growing earnings faster and we're going to be efficient with our capital to make sure we're carrying the right amount, and we want to make sure that we have a good return on our capital for our shareholders. So I don't know if there's anything specific that you want me to answer regarding that, Chris, other than when I look at our earnings profile, we keep pushing up what we have internally is our forecast quarter-over-quarter and year-over-year because it's just -- it seems to be working right now. I feel like our pace of growth is going to expand quite a bit, given how quickly now our earnings are probably going to expand. We're getting some real operating leverage. Our earnings are growing faster than our revenues because our expenses are in check. And so we're -- I expect that to continue.

And your next question comes from David Feaster with Raymond James.

I just wanted to follow up maybe on the growth side in some of your comments there. I mean, obviously, the...

David, can I pause you just for one second? I apologize. Yes. Chris, if you're still on, I don't know if you got cut off too early and if you had another question, so please just jump back in the queue if you're still on, and we'll come back to you after David, but maybe you were done. Sorry to interrupt you, David.

All right. It's okay. Shifting gears back to kind of the growth side. I mean the increase in production is extremely encouraging and especially with the rates that you guys are getting. And first of all, I'm kind of curious how the pipeline is shaping up heading into the third quarter and how the complexion of the pipeline is? You touched on maybe a bit less opportunity in the fund finance side. Just kind of curious how the complexion of the pipeline is shifting as well.

Yes. We're seeing -- so in the quarter, kind of the breakdown, we had about half as much multifamily in the second quarter as we did in the first quarter. But CRE kind of bridge lending was up. Construction was kind of flat. This is production. Obviously, we had a big uptick in resi. Venture was up quarter-over-quarter. Warehouse was flattish. Equipment lending was kind of doubled quarter-over- quarter. Fund finance was just another strong production and lender finance was just another strong production. I would expect lender finance to continue. Fund finance, I think they had, they're maybe hitting a high watermark here, so that might come down a little bit. Warehouse, I think, has room to expand. And then just general commercial and good lending from our commercial and community bank, I expect to pick up here. We're seeing some traditional mini-perms and things like that, that seem to be taking hold now. If rates come down at all, I think you're going to see even more lending. I think people are holding out a little bit. But it's pretty broad-based, David. I've been very happy with what our teams have been doing. I really, really have.

That's great. And maybe shifting gears back to deposits. I mean, you've alluded to the competitive landscape for deposits. I'm curious where do you see the most opportunity to drive core deposit growth? Are there -- is there any segments that you see more opportunity? I know you guys are always working to drive NIB and core deposits. We've talked in the past even about growing ECR deposits potentially. I'm just kind of curious where you're focused on today and where you see the most opportunity.

Our teams across the bank are focused on bringing in business relationships where we can serve them better than where they're being served now. And there's still the opportunity to bring in, and we are being successful here clients that ended up at U.S. Bank or ended up at JPMorgan from banks that have been acquired or kind of went under. And those are big targets for us, and we're not hearing a lot of people who are a midsized client who are really happy with the transition to JPMorgan. They're a great competitor for -- and great bank for many clients, but they can't be everything to everybody. And so we still see a lot of opportunity there. And then from a niche perspective, every single one of our business units is focused on bringing in deposits even if they haven't in the past. We're about to launch this quarter, we have a new digital platform for onboarding deposits digitally and through Salesforce. And when that digital account opening goes live, it's going to give us even more capacity to bring in deposits nationwide for clients that want our services. So traditionally, when you're doing an SBA client, we have a nationwide platform for SBA, we ask for the deposits. We get deposits, but it's not as easy if there's not branches nearby and things like that. And but this digital account opening is going to really accelerate some stuff for us. So we're excited about that. And I think that's going to go really, really well.

That's great. And then maybe just last one, touching on the credit side. Exclusive of the loan transfer, look, the past couple of quarters have been a bit noisy. You guys have been very proactive managing and addressing potential issues. I'm just curious, exclusive of the transfer, like is there anything on the credit side that you're seeing that you're cautious on? Or do you think the kind of the active management in the -- is like the worst is behind us and we should see pretty solid credit leverage going forward?

I really believe that, David. I think that we got ahead of it, as I suggested we would, and we proactively moved this stuff out. I don't see any big warning signs for me. These are some pretty large credits that we were sitting on our balance sheet that we were able to move away. And I give our team all the credit for proactively coming up with this solution, working through it. It was a lot of work in the quarter, and they did a phenomenal job with a phenomenal result. And so I feel really good about where we are. Stuff pops up, though, it does. but I feel like the things that we were most concerned about we've had now the opportunity to move. And that feels really good. Our charge-off rate was 12 basis points, I think, excluding all this stuff, which was low. And I think our ratios now are pretty healthy, and I certainly feel good about our coverage from a reserve standpoint. So I feel really good about where we are.