Banc of California, Inc.

Hello and welcome to Bank of California's fourth quarter earnings 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 telephone keypad. To withdraw your question, please press star then two. Today's call is being recorded and a copy of the recording will be available later today on the company's investor relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release. The reference presentation is available on the company's investor relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Gerard Wolf, Bank of California's President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to Bank of California's fourth 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. We had a very strong fourth quarter that capped a tremendous year for Bank of California. We substantially grew core earnings while also making investments that have strengthened our franchise and positioned us very well for continued growth in the years ahead. We are quite proud of what we accomplished in 2021. We exceeded our growth targets as our new business development efforts produced high-quality loan and deposit relationships that enabled us to grow our balance sheet, realize more operating leverage, and improve our level of returns. We continued to reduce our deposit costs and build the type of deposit franchise that we believe is the foundation of high-performing banks. We attracted substantially new talent to the company, which has not only strengthened our business development capabilities, but also increased the breadth and depth of our presence across the state of California. We laid the groundwork for our verticals in payments and tech while bolstering our capabilities in real estate, healthcare, media and entertainment, treasury management, and other core verticals. And we continued to optimize our use of capital to increase earnings and enhance franchise value, first with the redemption of our Series D preferred stock, and then with the acquisition of Pacific Mercantile Bancorp. We were able to do all of these things while managing through the continuing impact of the pandemic. I want to thank all of our colleagues at Bank of California for their extraordinary efforts that enabled us to achieve all of these goals that we set for 2021. During the fourth quarter, we completed our acquisition of Pacific Mercantile and integration has proceeded in line with our expectations. The system conversion was completed in mid-November. By the end of the year, we had put in place all measures necessary to achieve our target of 40% cost savings. which should be fully realized by the end of Q1 2022. Of course, we will continue to look for other opportunities where we can enhance efficiencies and realize additional cost savings. It is worth noting that the tangible book value dilution we expected from the transaction has come in much better than previously announced. And accordingly, our earn back will also occur much faster than originally anticipated. Our fourth quarter earnings were impacted by the merger related costs and day two provision expense for the Pacific Mercantile portfolio, which Lynn will discuss later in the call. But the core performance of the business was very strong, as our adjusted pre-tax, pre-provision income increased by 18% from the third quarter due to our continued organic growth and a partial quarter revenue contribution of Pacific Mercantile, with the impact of the cost savings to be realized in a more meaningful way in 2022. We ended the year with our largest quarter of new loan fundings and total loan fundings, which reflects our revenue growth engine, the strength of our commercial banking team we have built over the past few years, and the initial impact of the bankers we added from the PMB deal. Our production continues to be broad-based with good contributions across markets, asset classes, and industries. We had total loan fundings of $906 million in the fourth quarter, including $583 million of new fundings and $323 million of line advances, of which only $80 million related to net warehouse line advances. This represents an increase of 16% in new fundings and 19% in total loan fundings compared to the third quarter. However, we also saw a substantial increase in loan payoffs and paydowns, which were up by approximately $300 million from the prior quarter and impacted our level of organic net loan growth this quarter. Our loan production engine remains strong, and accordingly, we anticipate meaningful loan growth in 2022. We also had another solid quarter in terms of bringing in new low-cost deposit relationships. During the fourth quarter, we opened more than $200 million in new non-interest-bearing and low-cost checking accounts. We used a portion of the excess liquidity we added from Pacific Mercantile to reduce approximately $300 million of higher-cost deposits, which further improved our mix of deposits. With the continued improvement in our deposit base resulting from our business development efforts and the acquisition of Pacific Mercantile, we finished the year with a spot rate cost of deposits of seven basis points. A key driver of the improvement in our cost of deposits is our increasing mix of non-interest-bearing deposits, which represented 37% of total deposits at year-end, up from 32% at the end of the third quarter. Let me hand it over to Lynn, who will provide more color on our financial performance, then we'll have some closing remarks before opening up the line for questions.

Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website, as I review our fourth 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 third quarter of 2021. With the impact of closing the Pacific Mercantile acquisition during the quarter, net income available to common stockholders for the fourth quarter was $4 million, or $0.07 per diluted share, down from $21.4 million, or $0.42 per diluted share, for the third quarter of 2021. The fourth quarter results included, on a pre-tax basis, $13.5 million of merger-related costs and $11.3 million of provision for credit losses related to the non-purchased credit deteriorated loans and unfunded commitments acquired from PMB. Given the noise created from the Pacific Mercantile acquisition, we'll focus on our adjusted pre-tax, pre-provision numbers this quarter, which are more reflective of our core performance. Our adjusted pre-tax, pre-provision net income totaled $32.6 million, an 18% increase compared to $27.6 million for the prior quarter. This $5 million increase was due to higher net interest income of $10.1 million driven by higher average loans from both organic growth and acquired loans, offset by lower non-interest income of $659,000 and higher operating costs of $4.5 million, as we included PMB's operations since the date of acquisition. Our annualized adjusted pre-tax, pre-provision return on average assets increased 4% to 139 basis points from the 134 basis points achieved in the third quarter. Our net interest margin remained steady at 3.28% during the quarter as our overall asset yield decreased by seven basis points and our total cost of funds decreased by eight basis points. Our earning asset yield decreased to 3.66% due mostly to an increase in lower yielding other interest earning assets as a result of the level of cash balances acquired from Pacific Mercantile and then subsequently deployed in the quarter. Our average loan yield increased two basis points to 4.2% during the fourth quarter due in part to higher prepayment fees and a greater mix of commercial real estate, multifamily, and construction loans. Our average cost of funds decreased eight basis points to 41 basis points due mostly to lowering our average cost of deposits by four basis points to 11 basis points for the fourth quarter and a reduction in other borrowings. The decrease in our average cost of deposits reflected an increase in our mix of non-interest-bearing deposits, which averaged 35% of total average deposits during the fourth quarter, compared to 30% during the third quarter. During the fourth quarter, 330 million of high-cost deposits with a weighted average rate of 53 basis points repriced or matured, including deposits acquired from Pacific Mercantile. This is reflected in our lower period end deposit spot rate, and we expect to receive a full quarter's benefit in the first quarter. Our adjusted expenses increased $4.5 million from the prior quarter due mostly to higher salary and benefits, occupancy equipment, data processing, and other expenses associated with adding Pacific Mercantile's operations since the October 18th acquisition date, followed by the system conversion in mid-November. In addition, we incurred $13.5 million in merger-related costs and had $642,000 in indemnified professional fees during the quarter. The effective tax rate for the fourth quarter was 32.4% compared to 27.2% for the third quarter. The increase in the effective tax rate during the fourth quarter was due mostly to the impact the Pacific Mercantile acquisition had on our annual effective tax rate and other permanent items. Our annual effective tax rate is approximately 25%. Turning to our balance sheet, our total assets increased by $1.1 billion in the fourth quarter to $9.4 billion, and total equity increased by approximately $220 million. In the Pacific Mercantile Acquisition, we issued approximately 11.9 million shares, increasing equity $222 million. and we recorded goodwill and other intangible assets of $62 million. At December 31st, our tangible book value per common share was $13.88, down from $13.99 at the end of the third quarter. The PMB acquisition reduced our tangible book value per share by 10 cents, which was less than we had previously estimated. Our gross loans held for investment increased by $1 billion, or 16.4%, during the fourth quarter, with growth across all lending categories attributable to the impact of the acquired Pacific Mercantile loans and organic production. Excluding the $905 million of loans added in the Pacific Mercantile acquisition and outstanding at year-end, loans increased by $117 million. This growth included $696 million in production and $210 million in SFR loan purchases, offset by $789 million in payoffs, paydowns, and other reductions. The overall activity increased the mix of commercial-related loans to 79% of total loans, up from 77% at the end of the third quarter. As of December 31st, we had $123 million in PPP loans, consisting of $27 million from Round 1 and $96 million from Round 2. Deposits increased $896 million during the fourth quarter, due mostly to approximately $1.1 billion of deposits added from the Pacific mercantile acquisition and outstanding at year-end, offset by utilizing excess liquidity to fund outflows of higher-cost deposits. We acquired $479 million in cash and cash equivalents, which gave us the flexibility to exit higher-costing deposits during the quarter. Demand deposits, non-interest-bearing plus low-cost interest checking, increased by 20% from the prior quarter. This represents our 10th consecutive 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 further support our net interest margin in the first quarter. Over the past year, demand deposits increased to 70% of total deposits, up from 60%, reflecting the improvement we have made in our deposit base. This increase, combined with our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 36 basis points in the fourth quarter of 2020 to the 11 basis points achieved in the fourth quarter of 2021. We believe we are very well positioned to benefit from the coming cycle of rising interest rates. Due to the transformation of the franchise to our relationship-based banking model, with higher percentages of non-interest-bearing deposits and variable-rate commercial loans, Our one-year gap ratio, which compares the percentage of earning assets that are scheduled to mature or reprice within one year to the percentage of rate-sensitive term liabilities that are scheduled to reprice or mature within one year, has steadily increased. At the end of 2021, our one-year gap ratio stood at 38%, up from 7% at the end of 2019. This is one measure of asset sensitivity and with a significant increase in this ratio, we expect to see some expansion on our net interest margin as short-term rates increase. Our credit quality remains strong in the fourth quarter, and we saw positive trends in most categories, excluding the impact of the loans added from Pacific Mercantile. Non-performing loans increased $6.9 million to $52.6 million in the fourth quarter, including the addition of 21.6 million of loans acquired in the Pacific Mercantile Acquisition that was largely offset by payoffs, paydowns, charge-offs, and sales. The non-performing loans acquired in the Pacific Mercantile Acquisition included a $12.8 million CNI loan and $5.5 million in PPP loans, which were all known to us through our acquisition due diligence. At December 31st, 55% of non-performing loans are either in a current payment status but are classified non-performing for other reasons or are SBA loans guaranteed through the PPP or 7 programs. Let me turn to our provision for the quarter. The provision for credit losses was $11.3 million in the fourth quarter compared to a reversal of $1.1 million for the third quarter. The fourth quarter provision for credit losses included an $11.3 million charge related to non-purchased credit deteriorated loans and unfunded commitments added as of the Pacific Mercantile Acquisition Date. In addition, we recorded no provision expense related to other loan portfolio and unfunded commitment activity during the quarter. We determined that the impact of the quarter's net loan growth was offset by improving economic forecasts utilized in our model, improved credit quality in our loan portfolio, and lower unfunded commitments. Our allowance for credit losses at the end of the fourth quarter totaled $98.2 million, and our allowance to total loans coverage ratio stood at 1.35%. The increase in the coverage ratio from 1.26% at the end of the third quarter is due to the general and specific reserves established for the acquired Pacific Mercantile loan portfolio. 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 1.7% at December 31st. Our ACL coverage to non-performing loan ratio remained healthy at 187%. Our capital position remains strong and has benefited from the strategic actions completed over the past several quarters. We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value. At this time, I will turn the presentation back over to Jared.