Banc of California, Inc.

Hello and welcome to Bank of California's third 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 the touchstone phone. 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 gap 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 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 included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Jared Wilkes, Bank of California's President and Chief Executive Officer. Please go ahead, sir.

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. We'll talk in more detail about our quarterly results. During the third quarter, we continued to capitalize on the core strength of our franchise, which is our ability to deliver on clients' needs in our markets in an exceptional way. This enables us to consistently add new commercial clients and expand existing relationships, which resulted in growth of non-interest-bearing deposits despite a rapidly rising rate environment that has put a premium on low-cost deposits. The rapid increase in rates and expectation of further rate increases has made for a challenging operating environment, but our core earnings power demonstrated our ability to continue to drive earnings, despite a slightly smaller balance sheet, which was primarily a result of lower warehouse balances. Our strong earnings power, combined with the actions we took during the first quarter to mitigate the impact of rising rates on our investment portfolio, resulted in growth in tangible book value per share this quarter, excluding the impact of the deep stack acquisition, and even as we continued to implement our stock repurchase program. We recorded another quarter of core double-digit annualized loan growth, excluding warehouse. At the start of the quarter, we continued to see the same level of business development momentum that we experienced in the second quarter. During the latter part of the quarter, however, we experienced a pullback in loan demand as the expectation of further rate hikes weighed on economic activity. While this resulted in a pipeline slowing and our overall loan fundings coming in below the level we had experienced in the first half of the year, Our loan production was at higher rates, and the repricing on our variable rate loans resulted in a 19 basis point increase in our average loan yields compared to the prior quarter. Excluding both warehouse and any SFR purchases, we had annualized commercial loan growth of 11% during the third quarter, which reflects our continued success in growing the core areas of the portfolio. As expected, mortgage warehouse line utilization continued to decline. which we were able to partially offset with purchases of high-quality SFR loans through the relationships with our warehouse clients. Further, our warehouse unit is best in class, and they continue to manage our portfolio very well. With one-third to a half of our warehouse portfolio self-funded with low-cost deposits, it remains a very profitable business unit. I'm particularly pleased that on an adjusted earnings basis, we were able to earn about the same amount of money as the prior quarter despite a smaller balance sheet. This is consistent with our stated plans to diversify our lending without a decline in earnings. Further, while our margin was flat for the quarter, our margin is expected to expand based on our asset sensitivity to further support earnings growth going forward. The strength of our deposit franchise continues to show through, as non-interest-bearing deposits held at 38% on average for the quarter and grew to 40% at the end of the quarter. We continue to attract new commercial clients to the bank, During the third quarter, we increased non-interest-bearing accounts by 117 million, or 17% annualized. This was fueled by a continued increase in the number of commercial accounts for an eighth consecutive quarter. We highlight this information in a new slide in the investor deck. As we have added new clients, we have exited certain deposit relationships in products with higher rate expectations, particularly those that are pegged to the Fed funds rate. This resulted in a decline in interest checking and money market account balances that we had this quarter. Going forward, we will look to continue to replace these types of relationships with continued growth in non-interest-bearing deposits while balancing our overall funding needs to support future loan growth. We also added some longer-term fixed-rate funding in the form of FHLB advances and time deposits to strategically lock in some of our funding costs going forward as interest rates continue to rise. While this had the effect of increasing our cost of funds in the third quarter, we were still able to keep our net interest margin consistent with the prior quarter, and we believe it puts us in a better position to realize margin expansion over the next year, as we expect to see higher earning asset yields and non-interest-bearing deposit growth. While our loan-to-deposit ratio remains around 100%, we're able to manage our balance sheet efficiently, as we observe the net interest margin starting to expand in the latter part of the quarter. As I mentioned earlier, our warehouse business influences our loan to deposit ratio based on the variability of line utilization and the level of funding provided directly from this business line. On average, approximately a third to half of our warehouse lending is self-funded, and we fund the rest of it with core deposits and flexible short-term sources that we utilize to match the remaining outstanding balances. For the third quarter, when warehouse loans and deposits are excluded, our loan to deposit ratio would decline from 100% to 96%. While the economy is showing signs of slowing, to date, we have not seen any impact on our asset quality. We have stress tested our portfolio under a number of scenarios involving rising rates and lower valuations, with a particular focus on credits that were underwritten three or four years ago that will be coming up for renewal in the next 12 to 24 months in a much different environment. And due to the conservative approach we take at initial underwriting, the stress tests indicate that our asset quality should remain strong, even in adverse scenarios. While we continue to deliver strong financial results for our shareholders in the third quarter, we also took another significant step in building long-term franchise value with our acquisition of DeepStack Technologies, an entry into the payments processing business. We closed the acquisition on September 15th, and we have made good progress on integrating DeepStack's technology into our internal platforms. We remain on track to complete the integration by the end of Q4 or early Q1, at which point we will begin ramping up our business development efforts and growing the client base in targeted verticals that we expect will make this a high margin business that also attracts non-industrial sparing deposits. Now let me hand it over to Lynn, who will provide more color on our financial performance. Then I'll have some closing remarks before opening up the line for questions.

Thanks, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations website, as I review our third quarter performance. I'll start with 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 2022. Our earnings release and investor presentation provide a great deal of information, so I will limit my comments to some areas where additional discussion is warranted. Net income available to common stockholders for the third quarter was $24.2 million or $0.40 per diluted share. Our adjusted diluted earnings per share totaled $0.44 for the third quarter when net indemnified legal costs, acquisition costs, and net losses on investments in alternative energy partnerships are excluded. Our net interest margin was unchanged from the prior quarter at 3.58%. as our overall earning asset yield increased by 29 basis points and our total cost of funds increased by 30 basis points. Our interest earning asset yield increased to 433 due to higher yields on both loans and securities during the third quarter. Our average loan yield increased 19 basis points to 454 due primarily to higher average yields in our core CNI and warehouse portfolios. The average yield on securities increased 70 basis points to 338 due mostly to the CLO portfolio resetting and reflecting the 125 basis points of Fed funds rate increases that occurred in May and June. With the additional increases in the Fed funds rate during the third quarter, we expect to see further increases in the yields on earning assets during the fourth quarter. Our average cost of funds was 79 basis points, and our average cost of deposits was 47 basis points for the third quarter, both up 30 basis points compared to the prior 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 CDs that were added to lock in some longer-term funding, offset by the positive impact of maintaining average non-interest-bearing deposits at 38% for the linked quarters. Our non-interest income decreased $1.5 million from the prior quarter due mostly to lower income from equity investments that increased our other income by $2.1 million in the second quarter. This decrease was offset by higher loan servicing income, which we anticipate will continue at this increased level in the near term due to the purchase of mortgage servicing rights at the end of the second quarter and the impact of the higher rate environment on such earning assets. Our adjusted non-interest expense increased $247,000 from the prior quarter, with the largest contributor being occupancy and equipment expense. At the end of the third quarter, we consolidated a branch, which is our third branch consolidation this year, generating an estimated $1.5 million in annualized cost savings. Looking ahead to the fourth quarter, we expect our non-interest expense to be in the range of $48 to $50 million, including approximately $1 million related to deep stacks operations. The effective tax rate for the third quarter was 29.1%, slightly elevated from the prior quarter's rate of 27.9%. The higher effective tax rate decreased third quarter's net income by approximately $500,000. We continue to estimate our annual effective tax rate for 2022 to be approximately 28%. Turning to our balance sheet, our total assets decreased by 133.5 million in the third quarter to 9.4 billion, and total equity increased by 2.9 million. The increase in total equity was due mainly to the 24 million in net earnings for the quarter, partially offset by higher net unrealized losses in the investment portfolio, and capital actions. Our capital actions included common stock dividends and the repurchase of $13 million in common stock under the program we announced in the first quarter of 2022. At September 30, our tangible book value per common share was $13.79, compared to $14.05 at the end of the second quarter. The reduction in the tangible book value per share was due mostly to the following three items, $0.22 related to the change in AOCI resulting from higher unrealized losses in the investment portfolio, $0.34 from the impact of the deep stack acquisition, including the issuance of common stock, and $0.04 related to our stock buyback program. Our non-interest-bearing deposits remain strong, averaging 38% for the quarter. We intentionally exited certain high-costing deposits in the money market and checking categories, which were replaced in part by longer-term fixed rate funding, both FHLB advances and wholesale CDs, which we believe will help us better manage our cost of funds in a rising rate environment. This resulted in overall deposits decreasing $278 million during the quarter, despite the growth we had in non-interest-bearing deposits and the CDs we added in the quarter. The growth in noninterest-bearing deposits and the change in our deposit mix had the effect of increasing noninterest-bearing deposits to 40% of our total deposits at the end of the third quarter. Our credit quality remains solid in the third quarter with nonperforming loans decreasing $1.8 million to $42.7 million at the end of the third quarter. At September 30th, 66% of our nonperforming loans were either in a current payment status but were classified non-performing for other reasons, or have an SBA government guarantee. We did not record a provision for credit losses in the third quarter, given the lower loan balances and favorable trends in asset quality, which offset the impact of weaker economic forecasts. Our allowance for credit losses at the end of the third quarter totaled $98.8 million, and our allowance to total loans coverage ratio stood at 1.36%. which is a bit higher than the end of the prior quarter. Excluding our warehouse loans, which have a lower relative risk level in our reserve methodology, the ACL coverage ratio stood at 1.47% at September 30th. Our ACL to non-performing loan ratio remained healthy at 232%. This time I'll turn the presentation back over to Jared.