Banc of California, Inc.

Hello, and welcome to the Bank of California's first quarter earnings conference call. All participants will be in a 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. And 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 to the earnings press release, which is available on the company's investor relations website. The reference presentation is also 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, including in both the earnings release and the earnings presentation. I would now like to turn the conference over to Mr. Jared Wolfe Bank of California's President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to Bank of California's first 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 great start to the year with many positive trends and actions that have continued to drive our financial performance forward. High quality loan growth, solid inflows of non-interest-bearing deposits, margin expansion, higher levels of non-interest income, and strong asset quality. These efforts directly resulted in an increase in our adjusted pre-tax pre-provision income, which was up 10% from the prior quarter, while our adjusted pre-tax pre-provision return on average assets increased 16 basis points to 1.55%. The increased level of returns reflects our franchise momentum, representing both our ability to continue generating profitable organic growth and the accretive benefits of the Pacific Mercantile acquisition. As always, we also remain focused on growing and deploying capital to enhance our franchise value. As previously reported, we recovered over $31 million related to a loan previously charged off in 2019, which contributed to growth in our tangible book value. We also successfully redeemed all of our Series E preferred stock in the quarter and authorized and initiated an opportunistic stock repurchase program. We had a solid quarter of business development with $679 million in new loan fundings and total production increased 7% compared to the prior quarter. Loan demand was partially impacted by some level of seasonality that we typically experience at the beginning of each year. We also had some commercial clients delaying planned investments and expansion due to the sudden surge in Omicron that hit early in the year. While several opportunities in real estate lending were put on pause, as clients digested the rising rate environment and how it could impact pricing on properties. Notwithstanding these tempering factors, we still grew our total loans at a double-digit annualized rate, while also keeping our warehouse line balances relatively stable, despite the higher mortgage rates that have impacted production volumes across the industry. This reflects the outstanding job that our team has done developing numerous relationships and giving us many levers to pull in order to achieve our targets. Even as warehouse loan balances may moderate a bit, we expect our balance sheet to expand and earnings growth to meaningfully follow. We saw some firming up of loan pricing during the quarter, which resulted in higher average loan yields on both core CNI loans and bridge and permanent CRE loans. We are always disciplined about loan pricing, but ahead of the interest rate increases, we have been more selective in adding long-term fixed rate loans to our balance sheets. Our momentum has been strong notwithstanding the rate environment, and our loan pipeline is currently more than double what it was at the same time last year. On the liability side, we saw further improvement in our deposit mix, driven by continuing inflows of low-cost deposits resulting from our business development efforts. During the first quarter, we opened $122 million in non-industry sparing and low-cost checking accounts for new clients, in addition to inflows from existing clients. These new relationships helped to drive a $170 million, or 6% sequential increase, in non-interest-bearing deposits, which brought non-interest-bearing to 40% of total deposits at the end of the quarter. As many of you know, this is a threshold we targeted from the moment I got to the bank, and I am truly proud of our team for reaching this milestone. More importantly, I am proud of how we reached this milestone. There is no shortage of hard work, and we have built a terrific deposit engine. While I expect in the coming quarters we might move above or below this level, our overall trajectory will be to keep increasing our percentage of non-interest-bearing deposits. As we mentioned on our last earnings call, following the Pacific Mercantile acquisition, we took a number of balance sheet management actions, including running off their higher cost deposits and beginning to redeploy the cash balances that were added in the transaction. The full quarter impact of these actions along with the continued growth in non-sparing deposits, further reduced our cost of deposits, and contributed to a 23 basis point increase in our net interest margin from the prior quarter. This benefit began before the Fed started to increase the Fed funds rate. Given our asset sensitivity, we expect our margin to react positively, albeit not necessarily at the same pace that we enjoyed in the first quarter. That said, as mentioned before, our margin is an output of many items, And while our yearly trend will be upward, various factors could cause it to move up or down during a given quarter. In addition to our strong financial performance, we had a very productive quarter in terms of executing on key strategic initiatives to optimize our balance sheet, accelerate our earnings growth, strengthen our franchise, and create value for shareholders. First, we've mentioned in the past that Bank of California has become a talent magnet. And in the first quarter, we were able to add some exceptional bankers to support the strong growth opportunities we are seeing in many areas. These hires are bringing additional expertise, relationships, and skill sets that complement our existing teams and will enable us to continue expanding our business development capabilities in both CRE and CNI, particularly in some of the large attractive vertical industries where we have built good momentum and see the potential to substantially grow these portfolios over the next few years. Second, Consistent with our expected timing, we were able to redeem our Series E preferred stock, which simplifies the balance sheet and will positively impact net income available to common stockholders by approximately $7 million annually. Third, through the successful efforts of our legal team, we were able to recover over $31 million on a loan previously charged off in the third quarter of 2019. We continue to pursue a number of other recovery opportunities, both credit and insurance-related. If successful resolutions are obtained, we will benefit shareholders and add to our tangible book value down the road. And fourth, given the substantial progress we have made in both strengthening our balance sheet and growing earnings over the past few years, we enhanced our capital allocation strategy with the authorization of an opportunistic $75 million stock repurchase program. That's equivalent to approximately 6% of our current shares outstanding and should further optimize our balance sheet and create value for shareholders. As we've said before, Our goal is to continue moving the ball down the field every quarter. Some quarters will make more progress than others, but every quarter we want to execute and deliver in a way that grows our financial performance and strengthens the franchise. Through the positive trends we continue to see in our financial results and our strong execution on other initiatives that positively impact earnings and shareholder value, we had an exceptional quarter of moving the ball down the field and creating shareholder value. Now I'll hand it over to Lynn who will provide more color on our financial performance And then I'll have some closing remarks before opening up the line for questions. Lynn?

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 first quarter performance. I'll start by reviewing some of the highlights of our income statement, and then we'll move to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the fourth quarter of 2021. I invite you to read our earnings release, which provides a great deal of information, so I will limit my comments to some of the areas where additional discussion is warranted. Net income available to common stockholders for the first quarter was $43.3 million, or 69 cents per diluted share, up from $4 million, or 7 cents per diluted share, for the fourth quarter of 2021. The fourth quarter results included, on a pre-tax basis, a $31.5 million reversal of provision for credit losses, of which $31.3 million related to a recovery from a settlement of a loan previously charged off in 2019, and a $3.7 million after-tax expense related to the preferred stock redemption. There were no similar items in the prior quarter's results. However, the fourth quarter included, on a pre-tax basis, $13.5 million of merger costs and $11.3 million of provision for credit losses related to loans and unfunded commitments acquired in the Pacific Mercantile acquisition. Given the noise created from these items, 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 income totaled $35.8 million, a 10% increase from $32.7 million from the prior quarter. This $3 million increase was due to higher net interest income of $3.4 million driven by higher average loans and an increase in net interest margin, as well as higher non-interest income of $1.1 million offset by higher operating costs of $1.3 million. A portion of these increases related to the impact of including Pacific Mercantile's operations for a full quarter. Our net interest margin increased 23 basis points to 3.51% during the quarter. as our overall earning asset yield increased by 21 basis points and our total cost of funds decreased by two basis points. Our earning asset yield increased to 3.87% due to a favorable shift in the mix of our earning assets as we deployed our excess liquidity and increased average loans, both from the impact of including PMB's balance sheet for a full quarter and our own net loan growth. In addition, the yields on loans and securities increased during the first quarter. Our average loan yield increased six basis points to 4.26%, primarily due to higher average yields in our commercial real estate, CNI, and SFR portfolios. This increase also includes a lower contribution from PPP-related income, which was measured at two basis points of our net interest margin this quarter compared to five basis points in the prior quarter. Our average cost of funds decreased two basis points to 39 basis points due mostly to lowering our average cost of deposits by three basis points to eight basis points for the first quarter. The decrease in our average cost of deposits reflected an increase in our mix of non-interest-bearing deposits, which averaged 38% of total average deposits for the first quarter compared to 35% for the fourth quarter. Our adjusted expenses increased $1.3 million from the prior quarter, which was primarily due to including PMB's operations for a full quarter, the seasonally higher salaries and benefits expense that are typical of the beginning of each year, and the additions we have made to our banking teams to support our continued balance sheet growth. As of the end of the first quarter, we had met our goal of realizing cost savings of greater than 40% of Pacific Mercantile's operating expenses. The effective tax rate for the first quarter was 27.9% compared to 32.4% for the fourth quarter. The decrease in the effective tax rate was due mostly to the impact the Pacific Mercantile Acquisition had on our annual effective tax rate and other permanent items in the fourth quarter of 2021. Our annual effective tax rate for 2022 is estimated to be approximately 28%. Turning to our balance sheet, Our total assets increased by $189.8 million in the first quarter to $9.6 billion, and total equity decreased by $86.3 million. The decrease in total equity was due mainly to the full redemption of our Series E preferred stock, higher net unrealized losses in the investment portfolio, and other capital actions, all offset by our net earnings for the quarter. Our other capital actions included our preferred and common stock dividends, as well as repurchasing $4.3 million in common stock under the program we announced in mid-March. At March 31st, our tangible book value per common share was 14.05, up from 13.88 at the end of the fourth quarter. The change in our AOCI resulting from higher unrealized losses in the investment portfolio reduced our tangible book value per common share by $0.43, and the impact of the redemption of our Series E preferred stock reduced our tangible book value per common share by $0.06. To position the balance sheet for potential increases in market interest rates and to insulate our tangible book value from the impact of further decreases in AOCI, we transferred $329 million of longer-duration assets consisting of agency-collateralized mortgage-backed securities and municipal securities with high credit quality. from available for sale to held to maturity. The unrealized loss on the data transfer totaled $16.6 million and will be deducted from the amortized cost. Our gross loans increased by $200 million or 2.8% during the first quarter. The growth in the first quarter included $968 million in fundings including $364 million in SFR loan purchases as we continue to opportunistically leverage our relationships with mortgage warehouse clients to add high-quality earning assets. Total commercial loans, which include CRE, multifamily, construction, CNI, and SBA, decreased $10 million. However, when PPP loans and warehouse lending are excluded, This portfolio increased 83 million or 8.3% on an annualized basis. Deposits increased $40 million during the quarter with all the growth coming from non-interest bearing deposits. Demand deposits, non-interest bearing plus low cost interest checking increased by 3% from the prior quarter. Over the past year, demand deposits increased to 72% of total deposits up from 62%. 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 to eight basis points in the first quarter. This compared to 28 basis points in the same quarter a year ago. Our credit quality remained strong in the first quarter. Total delinquent loans decreased 11.8 million to 61 million, while non-performing loans increased $2 million to $54.5 million in the first quarter. At March 31st, 36% of non-performing loans were either in a current payment status but were classified non-performing for other reasons or SBA loans guaranteed through the PPP or 7 programs. Let me turn to our provision for the quarter. We recognize the negative provision for credit losses of $31.5 million in the first quarter. which included the impact of the $31.3 million recovery of a previously charged-off loan as a result of a legal settlement. In 2019, we had recognized a $35.1 million charge-off for this loan, and we are extremely pleased we were able to recoup this stockholder value. Excluding the impact of this recovery, we had a negative provision of $200,000 due mostly to changes in the portfolio mix, improved macroeconomic variables used for modeling purposes, and the general credit quality of the portfolio, all offset by overall loan growth. Our allowance for credit losses at the end of the first quarter totaled $98.6 million, and our allowance to total loans coverage ratio stood at 1.32 percent, which is lower than at the end of the prior quarter as we continue to see positive trends in asset quality. This enabled us to release a portion of the reserves built up during the height of the pandemic. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels than our reserve methodology, the ACL coverage ratio stood at 1.63% at March 31st. Our ACL coverage to non-performing loan ratio remained healthy at 181%. At this time, I will turn the presentation back over to Jared.