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. If you need assistance, please press star then zero. There will be a question and answer session following today's presentation. To ask a question, please press star then one. To remove yourself from queue, 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 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 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 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. Bank of California generated record net income in 2022, and I am tremendously proud of our entire team. Our results and overall performance reflect the strength of the franchise and high quality balance sheet that we have built over the last several years. We were able to achieve what we set out to do in 2022, which was to generate solid earnings by capitalizing on our strong, stable deposit base and disciplined expense management. As we have continued to demonstrate over the last several quarters, our balance sheet has migrated to a balanced portfolio of high quality loans and stable commercial deposits. As we forecast on this call many quarters ago, we said that warehouse balances would migrate down, but we would continue to move our earnings forward. These last several quarters have proven out that plan. Our fourth quarter was strong even as we remained selective in our new loan production, given the macroeconomic uncertainty. As a result, while we had a slightly smaller average balance sheet in the fourth quarter, our core earnings were a bit higher than the prior quarter, and we generated a significant increase in our tangible book value per share. Our growth in tangible book value per share is important to highlight as it reflects our steady financial performance and prudent balance sheet management. For the full year, our tangible book value per share increased by more than 2%, notwithstanding the impact of higher interest rates on AOCI and the significant capital actions we took. including the completion of our $75 million stock repurchase program, our $24 million acquisition of DeepStack Technologies, and the repositioning of a portion of our securities portfolio this quarter that will contribute to our future earnings. Lynn will discuss this repositioning a bit later in the call. Our loan fundings were lower than the prior quarter due to a combination of lower loan demand resulting from higher interest rates and borrowers being more cautious given the economic uncertainty. as well as our decision to be more selective in the loans we are adding in the current environment. But excluding warehouse, we were able to slightly increase our commercial loan balances during the quarter and keep our overall loan balances essentially flat. We continue to see higher yields in the portfolio, which enabled us to realize more margin expansion, when combined with the actions we have taken this year to manage our funding costs and our stable non-inspiring deposit base that remained around 40% of total deposits. In terms of the launch of our payments business, we remain on track with our projected schedule. Earlier this month, we completed the integration of DeepStack technology into our internal platform, and we have begun processing payments on our rails with Bank of California as the sponsor bank for select smaller clients. We continue to build out the infrastructure necessary to process transactions at scale, with targeted completion around the end of the second quarter, after which we will be more broadly developing our pipeline. 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.

Thanks, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations website, as I review our fourth 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 third quarter of 2022. Our earnings release and investor presentation provide a great deal of information, so I'll limit my comments to some areas where additional discussion is helpful. Net income available to common stockholders for the fourth quarter was 21.5 million, or 36 cents per diluted share. As Jared mentioned, we repositioned a portion of our securities portfolio during the fourth quarter and recognized a pre-tax loss on sale of securities of 7.7 million. which had a $0.09 impact on diluted earnings per share. On an adjusted basis, net income totaled $26.8 million for the fourth quarter, or $0.45 per diluted common share, when the loss on sales securities, net indemnified legal costs, and net losses on investments in alternative energy partnerships are excluded. This compared to adjusted net income of $26.7 million, or $0.44 per diluted common share, for the prior quarter. There were no securities sold in the prior quarter. It is also worth noting that on an adjusted basis, net income has more than doubled since the fourth quarter of 2021. Our net interest margin increased 11 basis points from the prior quarter to 3.69% as our overall earning asset yield increased by 46 basis points and our total cost of funds increased by 38 basis points. Our earning asset yield increased to 4.79% due to higher yields on both loans and securities during the fourth quarter. Our average loan yield increased 38 basis points to 492 due in part to the higher rate on loan production, and the average yield on securities increased 81 basis points to 419. The higher securities portfolio yield is due mostly to the CLO portfolio resets and the impact of the investment portfolio actions we accomplished in mid-November. We sold 119 million in securities, recognized a net loss of 7.7 million, and reinvested the net proceeds in securities with a higher average yield of approximately 230 basis points compared to the securities we sold. We estimate this allocation of capital has a tangible book value earn-back period of about three years, and will cause the overall investment portfolio yield to increase 20 to 25 basis points going forward. Our average cost of funds was 117 basis points, up 38 basis points compared to the prior quarter, and our average cost of deposits was 79 basis points for the fourth quarter, up 32 basis points. This 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 impact of the CDs that we have added to lock in some longer-term funding as market interest rates have continued to climb. This was partially offset by the positive impact of our average non-interest-bearing deposits increasing to 41% of total deposits in the fourth quarter from 38% in the prior quarter. As market interest rates have increased and liquidity has continued to be absorbed by the market, the expectation of deposit yield has also increased. And while our cost of deposits increased 32 basis points quarter over quarter, the average federal funds rate increased 147 basis points over the same time period. As a result, the difference between our average cost of deposits and the average federal funds rate widened from 171 basis points last quarter to 286 basis points for the fourth quarter. The net interest margin drivers page in the investor presentation deck illustrates this information. Our non-interest income decreased $7.1 million from the prior quarter due to the loss on sale of investment securities. Other areas of non-interest income were relatively consistent with the prior quarter, with the most significant variance being higher gains from equity investments of $724,000. Our adjusted non-interest expense increased $1.1 million from the prior quarter, which was a reflection of an increase in a variety of areas focused on internal projects, including but not limited to DeepStack. All of our other areas of non-interest expense were relatively consistent with the prior quarter as we continue to maintain disciplined expense control while investing in areas of the business that we believe will create long-term franchise value. The effective tax rate for the fourth quarter was 29.6%, up from the prior quarter's rate of 29.1%. The higher effective tax rate for the current quarter decreased net income by approximately $170,000 compared to the prior quarter. For 2023, we estimate an annual effective tax rate to be approximately 28%. Turning to our balance sheet, our total assets were $9.2 billion at December 31st. down slightly from the end of the prior quarter. Our total equity increased by $7.6 million during the fourth quarter as $21.5 million in net earnings and a $1.7 million positive shift in AOCI were offset by capital actions, which included common stock dividends and the repurchase of $19 million in common stock. With the fourth quarter repurchases, we completed the $75 million stock buyback program announced earlier this year, and during 2022, we repurchased 7% of our previous outstanding shares. Our non-interest-bearing deposits remained strong, averaging 41% for the quarter and ended the quarter at 40%. We continue to use wholesale funding sources to strategically manage both liquidity and funding costs, when we believe these sources are better options than rate-sensitive client deposits. This included adding $100 million in FHLB term advances in the fourth quarter. Turning to credit quality. Our credit quality remained strong in the fourth quarter. Non-performing loans, excluding single-family residential loans, or SFRs, decreased slightly quarter over quarter. While SFR MPLs did increase, They are well secured with very low loan-to-value ratios, and we do not see loss exposure in our SFR portfolio. SFR MPLs represented 38% of our MPLs at year-end. In addition, at December 31st, 35% of our non-performing loans were either loans in a current payment status but classified non-performing for other reasons, or the guaranteed portion of loans that have and SBA government guarantee. Similar to MPLs, most of the increase in delinquent loans was driven by SFRs, which totaled 60.8 million, or two-thirds of total delinquencies at period end. As frequently happens, we saw a drop in delinquency after quarter end, and our SFR delinquencies dropped by 23.7 million by the middle of January. We did not record a provision for credit losses in the fourth quarter given the lower loan balances, which offset the impact of weaker economic forecasts. Our allowance for credit losses at the end of the fourth quarter totaled $91.3 million compared to $98.8 million at the end of the prior quarter, and our allowance to total loans coverage ratio stood at 1.28% compared to 1.36% at the end of the prior quarter. The $7.6 million decrease in the allowance for credit losses was due primarily to a $7.1 million charge off of a specific reserve for a purchased credit deteriorated loan from the PMV acquisition. Excluding the reserves associated with loans individually evaluated for impairment, the total coverage ratio increased from 1.24% to 1.25% quarter over quarter. Excluding warehouse loans, which have lower relative risk in our reserve methodology, the ACL coverage ratio stood at 1.36% at December 31st. Our ACL to non-performing loan ratio remained healthy at 165%. At this time, I will turn the presentation back over to Jared.