Banc of California, Inc.

Hello, and welcome to the Bank of California Analyst and Investor Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to take the conference over to Jared Wolfe. Mr. Wolf, please go ahead.

Good morning, and welcome to Bank of California's third quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. At the beginning of the year, we laid out our strategic objectives for 2021, which if successfully executed on, would lead to profitable growth in the company and improved earnings power. Our strategic objectives were to maintain strong asset quality and capital as we continue to manage through the pandemic, grow our earning assets and accelerate our loan growth, further reduce our cost of deposits and increase our net interest margin, keep expense levels relatively stable and realize more operating leverage as we build the balance sheet, and execute on strategic opportunities that could increase earnings and enhance the value of our franchise. We take a lot of pride in being a company that delivers on the expectations we set and doing what we say we're going to do. We did that in 2020, and we're doing it again this year. Through the first nine months of 2021, we have executed very well and been able to achieve all of these strategic objectives. Our asset quality and capital have remained strong through the year, and we've experienced a very low level of loss in the loan portfolio. On a year-to-date basis, our average earning assets have increased 5.3%, while our period and total loans are up 7.4%, excluding PPP loans. Our cost of deposits has declined from 29 basis points at the end of the fourth quarter of 2020 to eight basis points at the end of the third quarter of 2021, which has helped support our net interest margin during the year. We've been able to keep our expense levels relatively flat, which has resulted in substantial improvement in our efficiency ratio. and we were able to redeem our Series D preferred stock early in the year, and then complete the acquisition of Pacific Mercantile Bancorp earlier this week, both of which accelerate our improvement in profitability. Our third quarter results very clearly demonstrate the greater earnings power and improved profitability we have as a result of the progress we have made on all of these strategic objectives. We generated diluted earnings per share of 42 cents, up from 34 cents in the prior quarter, including pre-tax, pre-provision income of $30.7 million, an increase of 31% from the prior quarter. Our pre-tax, pre-provision return on average assets totaled 1.5% for the third quarter, an increase of 30 basis points compared to the prior quarter. We had another strong quarter of business development activity as we continue to build Bank of California's reputation as the go-to bank for small and medium-sized businesses. While the emergence of the Delta variant slowed demand relative to Q2 as we expected, we still achieved solid new loan production of $864 million. This production, together with prior loan commitments, resulted in total loan fundings of $763 million in the third quarter, including $503 million of new fundings and $260 million of line advances, of which $178 million related to net warehouse line advances. Excluding PPP loans, which continue to be forgiven. Our strong loan production resulted in 16% annualized loan growth in the third quarter, despite payoffs and paydowns remaining at a very high level. We continue to see growth across all of our loan portfolios, including a pickup in the C&I portfolio, which increased 6.6% from the end of the prior quarter. The acceleration of growth in commercial loans reflects the continued progress of the talented bankers we have, the positive impact we are seeing from new additions to our banking team, and our success in effectively winning new relationships based on our expertise and ability to execute for clients. Our loan production was well balanced across industries and asset classes. We continue to see strength in health care and bridge real estate lending, and we also continue to see activity in entertainment finance, which specializes in financing the production of content and television for streaming services. We ended the quarter with over $75 million in commitments, and have visibility to continue growth in that sector. We believe this will be a sizable opportunity for us in the coming years, as it's projected there will be billions of dollars invested in streaming production. We've built a very strong team that has extensive relationships in this industry and expertise in structuring these types of credits, which we believe will help us steadily increase our market share and grow this portfolio. Our healthcare vertical, which lends to healthcare practices, specialty hospitals and surgery centers, and healthcare real estate, also continues to expand, surpassing 330 million in commitments in the third quarter. Our production is also becoming more diversified from a geographic perspective. The bankers we've added in Northern California, the Central Coast, and the Central Valley have been very productive, and we are seeing their contributions positively impacting our level of loan growth. Importantly, we're able to fund this loan growth with continued strong inflows of low-cost deposits generated from our business development efforts across all areas of the bank. Over the past few years, we've focused on getting the right people, the right products, and the right incentives in place to create a robust deposit-gathering engine, and we continue to see the positive results from these efforts. During the third quarter, newly opened DDA accounts contributed $88.3 million of low-cost deposits, which produced our ninth consecutive quarter of DDA growth. Our strongest growth came in non-interest-bearing deposits, which increased more than 16% from the end of the prior quarter and represented approximately 32% of total deposits at the end of the third quarter. The further improvement in our deposit mix and pricing drove our cost of deposits down another eight basis points to average just 15 basis points in the quarter. And as mentioned, our quarter-end spot rate on deposits was down to eight basis points, which should lead to another decline in our average cost of deposits in the fourth quarter. The growth we are seeing in our client roster is driving higher levels of both net interest income and non-interest income. Compared to the prior quarter, our revenue increased 7%, while our non-interest expense declined as we continued to maintain disciplined expense control. As a result, our adjusted efficiency ratio improved to 60% from 66% in the prior quarter. And we believe we will continue to see improvements in this area, as the infrastructure we have in place can support a bank several billion dollars larger than our current size. The infrastructure we have built reflects our forward-thinking approach to technology. Along those lines, we recently made a small investment in a fintech company called Finexio, which is a B2B payments platform. The investment in partnership with Finexio is part of our larger strategy to grow our capacity and capabilities in payments so that we can increasingly add value to our customers in this area in the years ahead, while also improving our other sources of non-interest income. Our investment in FinExU is part of a larger, multi-pronged strategy to ensure we remain tech-forward in our operations and in terms of client-facing technology and value-added services. We will be expanding on this in greater detail in future quarters. Our improvement in operating leverage will be further accelerated now that Pacific Mercantile Acquisition is closed. We are very excited to welcome our new colleagues who will be additive to the significant business development capabilities that we have already built and provides superlative service and operational expertise. As we announced in connection with the closing of the merger, we're also thrilled to welcome a few new board members whose talent and expertise will be particularly valuable to us as we continue to grow. The integration is proceeding well. The system conversion is scheduled for mid-November, and we continue to expect that most of the cost savings will be realized by the end of this year. This will put us in position to begin fully realizing the benefits of this transaction as we begin 2022. Now I'll hand it over to Lynn, who will provide more color on our operational performance. Then I'll have some closing remarks before opening the line for questions.

Great. Thank you, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website, as I review our third quarter performance. I'll start by reviewing some of the highlights of our income statement, and then we'll move on to our balance sheet trends. unless otherwise indicated, all prior period comparisons are with the second quarter of 2021. Net income available to common stockholders for the third quarter was $21.4 million or 42 cents per diluted share. This compares to 17.3 million or 34 cents per diluted share for the second quarter of 2021. We had a few items that impacted the comparisons of our net income between the third quarter of 2021 and the prior quarter. In the third quarter of 2021, net income available to common stockholders included $1.8 million in pre-tax gains on investments in alternative energy partnerships, $2.2 million in pre-tax net recoveries of indemnified professional fees, and $1 million of pre-tax merger-related costs. In the prior quarter, on a pre-tax basis, we had $829,000 in gains on investments in alternative energy partnerships, $1.3 million in net recoveries of indemnified professional fees, and $700,000 of merger-related costs. When backing out these items in each quarter, net of our normalized effective tax rate of 25% to get a better sense for our operating performance, we had adjusted net income available to common stockholders of $19.4 million or $0.38 per diluted share in the third quarter of 2021 compared to $16.3 million or $0.32 per diluted share in the second quarter of 2021. This $3.1 million increase is attributed primarily to higher net interest income and our continued expense control measures as we leverage our resources. Total revenue in the third quarter increased $4.5 million, or 7%, compared to the prior quarter, including the $3.1 million increase in net interest income and a $1.3 million increase in non-interest income. Net interest income benefited from one additional day in the third quarter, higher average interest earning assets, and a decrease in the cost of interest-bearing liabilities, which altogether more than offset a decrease in interest earning asset yields. The increase in non-interest income stemmed mainly from higher other income driven by an $841,000 gain on a sale-leaseback transaction of one of our branch locations. Our net interest margin was 3.28%, up one basis point from the prior quarter, as our overall interest-earning asset yield and our total cost of funds each decreased by eight basis points. Our earning asset yield decreased to 3.73%, due mostly to lower loan yields. Our average loan yield declined 12 basis points to 4.18% during the third quarter, due in part to lower prepayment penalty fees offset by higher PPP fee amortization. Our average cost of funds decreased 8 basis points to 49 basis points, due mostly to lowering our average cost of deposits by 8 basis points to 15 basis points for the third quarter. This decrease was due to the improvement of our funding mix and our continued efforts to reprice our funding sources into the current interest rate environment as they mature. Non-interest-bearing deposits averaged 30% of total average deposits in the third quarter compared to 28% in the prior quarter. Also, during the third quarter, 428 million of higher-cost deposits with a weighted average rate of 1.88% repriced, or matured. This is reflected in our lower period end deposit spot rate, and we expect to receive a full quarter's benefit in the fourth quarter. Our adjusted expenses decreased $1.2 million from the prior quarter due mostly to lower salaries and benefits, a $365,000 gain on the sale of other real estate owned, which is included in other expenses, and lower net losses of equity investments also included in other expenses. In addition, and as previously mentioned, we incurred $1 million in merger-related costs, had net recoveries of $2.2 million in indemnified professional fees, and $1.8 million of gains on alternative energy partnership investments during the third quarter. The effective tax rate for the third quarter was 27.2 percent compared to 25.6 percent for the second quarter. Turning to our balance sheet, our total assets increased by $251.3 million in the third quarter to $8.3 billion. Our gross loans held for investment increased by $243 million, or 4.1% during the third quarter, as growth in CNI, SFR, Warehouse, and our CRE portfolios more than offset lower SBA construction and multifamily loan balances. The $72 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process. As of September 30th, we had $116.5 million in PPP loans consisting of $27.5 million from round one and $88.9 million from round two. The $106 million increase in the SFR portfolio stemmed from $249 million in loan purchases, which offset payoffs and paydowns in this portfolio. Deposits increased $337 million during the third quarter, and as previously mentioned, our mix and average costs continue to improve thanks to our success in adding new commercial deposit relationships and runoff of higher cost time deposits. Noninterest-bearing deposits increased to 32% of our total deposits at quarter end, up from 29% at the end of the second quarter. Demand deposits, noninterest-bearing plus low-cost interest checking, increased by 7% from the prior quarter. This represents our ninth quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. We expect this favorable shift in our deposit mix to help support our net interest margin in the fourth quarter. Over the past year, demand deposits increased to 66% of total deposits, up from 58%, reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower rate environment and our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 51 basis points in the third quarter of 2020 to the 15 basis points achieved in the third quarter of 2021. Our securities portfolio decreased by 50 million to end the quarter at 1.3 billion. The CLO portfolio declined by 35 million during the third quarter, as we are seeing an increase in payoffs resulting from CLO resets. A higher level of payoffs is accelerating reductions in the CLO portfolio, which is part of our longer-term balance sheet management strategy. For the sixth consecutive quarter, the unrealized loss in our CLO portfolio improved, which was down to $2.5 million at the end of the quarter. Overall, our entire securities portfolio ended the quarter with a net unrealized gain of $15.5 million, down from $20.9 million at the end of the second quarter, resulting in a reduction of our tangible book value per share of seven cents. Our credit quality remained strong in the third quarter, and we saw positive trends in asset quality. Nonperforming loans decreased $5.7 million to $45.6 million in the third quarter. About 50% of this balance, or $22.7 million, represented loans that are in current payment status but are classified nonperforming for other reasons. Delinquent loans increased $10.1 million in the third quarter to $45.1 million, or 0.72% of total loans. This increase was due to $24.9 million in additions, offset by $12.4 million in loans, returning to accrual status, and $2.3 million in other reductions due to paydowns and other resolutions. Delinquent loans include SFR loans of $19.1 million, SBA loans of $14.9 million, of which $10.6 million is guaranteed. and $11.1 million of other loans. During the second and third quarters, we repurchased $9.3 million in guaranteed SBA loans, which are included in the delinquent and nonperforming loan totals as of September 30th, and are pending resolution with the SBA. Let me turn to our provision for the quarter. Although we had some provision requirement related to the growth in the loan portfolio, this was more than offset by net recoveries during the quarter, positive asset quality metrics and trends, and the improving economic forecast used in our model. As a result, we recorded a modest negative provision for credit losses of $1.1 million in the third quarter. Net of this provision release, our allowance for credit losses for the third quarter totaled $78.8 million, and our allowance to total loans coverage ratio stood at 1.26%. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.62% at September 30th. With a decrease in our non-performing loans, our ACL coverage to non-performing loan ratio remained healthy at 173%. Our capital position remained strong with a common equity Tier 1 ratio of 10.89%, and has benefited from the strategic actions completed over the past several quarters. We will continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to continue building franchise value. At this time, I will turn the presentation back over to Jared.