Banc of California, Inc.

Hello and welcome to Bank of California's second 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, which is available on the company's Investor Relations website. The referenced 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 included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Jared Wolf, Bank of California's President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to Bank of California's second 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. Our performance in the second quarter was highlighted by a 7% increase in adjusted pre-tax pre-provision income and a 10 basis point increase in adjusted pre-tax pre-provision return on average assets. The quarter was a good representation of the strong commercial banking franchise that we have built over the past three years. 25% annualized commercial loan growth, excluding warehouse and PPP loans, funded with a low-cost deposit base, disciplined expense control, and solid asset quality in our conservatively underwritten, well-secured loan portfolio. We are proud of our continued sequential growth in earnings per share, excluding the legal settlement that positively impacted our results in the prior quarter. Our tangible book value per share also remained flat, despite an increase in negative AOCI and the repurchase of $38.9 million of our common stock during the quarter, which represented approximately 3.5%. of our outstanding shares. There is uncertainty in the operating environment due to the macro headwinds of inflation, higher interest rates, supply chain disruption, and labor shortages. Nevertheless, the economy in Southern California and the other California markets where we operate continues to show resilience. We are also benefiting from our focus on loan verticals, which aren't supply chain dependent and where inflationary pressures don't impact demand for services as much as in other industries. While we remain selective, the commercial real estate market continues to be active and we continue to see quality lending opportunities. We do expect some moderation in activity, however, from the most recent increase in rates as buyers and sellers adjust to the economic impact. With the highly productive banking teams we have built, we are effectively capitalizing on the economic strength and loan demand seen in our markets to add new clients and expand existing relationships. This resulted in $1.2 billion in loan fundings during the second quarter, which was our highest level of fundings since I joined the bank in 2019. Importantly, we continue to drive growth in our targeted areas of the portfolio, most notably commercial loans excluding warehouse, commercial real estate loans, and multifamily loans, all of which increased at double-digit annualized rates during the second quarter. In addition, we continue to make key hires in new verticals that we believe will enhance franchise value and earnings, such as the payment space that I will touch on more towards the end of our prepared remarks. We are pleased that Jagdeep Sohoda has joined us as EVP and Chief Payments Officer, which we announced in a press release earlier this month. During the second quarter, a drop in the demand for refinancings reduced our warehouse line utilization, which we were able to partially offset with purchases of high-quality SFR loans through relationships with our warehouse clients. This helped us to mitigate the impact of the decline in warehouse balances on our overall loan growth. As we previously indicated, we expected our other portfolios to grow and warehouse to become a relatively smaller portion of our portfolio while not affecting our earnings and growth. This quarter reflected that balance as we expanded earnings even as our warehouse balances declined. A portion of our loan fundings in the second quarter were loans that were priced prior to the recent rate increases. so we have not yet seen the full impact of higher rates on our average loan yields or the benefit to our net interest margin. Our loan pipeline remains strong and relatively consistent with the level we saw at the end of the first quarter, while being at higher average rates than the production we had in the second quarter. On the liability side, since the increase in rates, the behavior of our depositors has generally been in line with our expectations. Institutional clients, which usually are the first to move, have asked to receive some contribution for increase in rates, while some commercial depositors who have built up balances in their operating accounts over the past couple of years have shifted some of those funds into interest-bearing accounts. Lower warehouse line utilization drove corresponding lower non-interest-bearing deposit balances, but we offset some of this impact with our continued success in developing new deposit relationships, and this helped to keep our average balance of non-interest-bearing deposits consistent with the prior quarter. Our total deposit costs increased during the second quarter consistent with our expectations, but the overall asset sensitivity of our balance sheet resulted in an increase in our net interest margin, even with most of the second quarter loan production not reflecting the higher rates that we now see in our loan pipeline. Year-to-date, our balance sheet growth and strong cost controls are driving higher earnings and increased returns, while we continue to effectively manage risk and demonstrate our ability to execute and deliver in a variety of economic and interest rate environments. 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 questioning. Lynn?

Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website, as a review of our second 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 first quarter of 2022. Our earnings release provides a great deal of information, so I'll limit my comments to some of the areas where additional discussion is warranted. Net income available to common stockholders for the second quarter was $26.7 million, or $0.43 per diluted share. When the first quarter legal recovery and preferred stock redemption charge are excluded, our diluted earnings per share increased by 3 cents in the second quarter. Our adjusted diluted earnings per share totaled 45 cents for the second quarter when indemnified legal costs and net losses on investments in alternative energy partnerships are excluded. Our net interest margin increased 7 basis points to 3.58% during the quarter as our overall earning asset yield increased by 17 basis points and our total cost of funds increased by 10 basis points. Our interest earning asset yield increased to 4.04% due to higher yields on both loans and securities during the second quarter. Our average loan yield increased nine basis points to 4.35% due primarily to higher average yields in our warehouse and SFR portfolios and the impact of higher market interest rates. The average yield on securities increased 39 basis points, to 2.68% due mostly to the CLO portfolio resetting with the interest rate increase that occurred in March. The CLO portfolio resets during the first month of each quarter, so the 50 and 75 basis point increases in the federal funds rate that occurred in May and June have not yet impacted the yield on this portfolio. Our average cost of funds increased 10 basis points to 49 basis points, due mostly to our average cost of total deposits increasing by 9 basis points to 17 basis points for the second quarter. The increase in our average cost of deposits was primarily driven by rate increases in our money market and interest-bearing checking accounts, as well as the addition of some CDs to help fund our strong loan production. As part of our interest rate management strategy, we elected to lock in some longer-term funding ahead of further increases in interest rates that are expected. Our non-interest income increased by approximately $1 million from the prior quarter, which was attributable mostly to higher income from equity investments of $2.1 million and an increase in our customer service fees compared to the prior quarter, consistent with the growth in our client base. This was partially offset by the first quarter including a $771,000 gain on the sale of a branch building. There were no similar items in the second quarter. In addition, the second quarter included $455,000 in fair value write-downs on loans held for sale. Loans held for sale total $4 million and are included in other assets. Our adjusted non-interest expense increased $570,000 from the prior quarter, with the largest contributor being higher professional fees, a portion of which related to the development of our payments business. Also, during the second quarter, we consolidated one branch as we continued to look at cost savings opportunities throughout the organization to help offset our investment in new banking talent and technology to support our future growth. The effective tax rate for the second quarter was 27.6%, relatively consistent with the prior quarter, and we continue to estimate our annual effective tax rate for 2022 at approximately 28%. Turning to our balance sheet, Our total assets decreased by $81.4 million in the second quarter to $9.5 billion, and total equity decreased by $29.9 million. The decrease in total equity was due mainly to higher net unrealized losses in the investment portfolio and capital actions, partially offset by our net earnings for the quarter. Our capital actions included our common stock dividends, and the repurchase of 39 million in common stock under the program we announced in the first quarter of 2022. At June 30, our tangible book value per common share was 14.05, consistent with the end of the first quarter. The change in AOCI resulting from higher unrealized losses in the investment portfolio reduced our tangible book value per common share by 25 cents. Our gross loans were essentially unchanged from the end of the first quarter as growth in CNI, CRE, multifamily, and SFR portfolios was offset by the decline in warehouse and the continued forgiveness of PPP loans. Deposits increased $79 million during the quarter, primarily due to the continued inflows from new commercial relationships and the CDs that were added to support our strong loan production. Our credit quality remained strong in the second quarter, with non-performing loans decreasing $10.1 million to $44.4 million at the end of the second quarter. A little more than half of the decrease was the result of loans returning to accrual status, with the rest attributable to payoffs, paydowns, and charge-offs. At June 30, 41 percent 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 7 program. We did not record a provision for credit losses in the second quarter given the flat loan balances, net recoveries, and general improvement in asset quality. Our allowance for credit losses at the end of the second quarter totaled $99.7 million, and our allowance to total loans coverage ratio stood at 1.34%, which is a bit higher than the end of the prior quarter. 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 1.54% at June 30. Our ACL to non-performing loan ratio remained healthy at 224%. This time, I'll turn the presentation back over to Jared.