Banc of California, Inc.

Hello and welcome to Bank of California's first quarter earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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 included in both the earnings release and the earnings presentation. I would now like to turn the conference 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 first quarter earnings call. Joining me on today's call is Ray Rendoni, our Interim Chief Financial Officer, who will talk in more detail about our quarterly results. Before discussing our performance, I would like to express our sympathy for those affected by the recent tragic events in banking. The horrible shooting in Kentucky was an unspeakable tragedy. and the failures of two banks have unsettled the banking community generally. We understand the concerns and uncertainty that these events can create, and we remain committed to providing stability and support to our clients, communities, and colleagues, and to those displaced by these unfortunate events. We've been able to effectively manage through the recent turmoil in the banking industry due to the strong franchise, client base, and balance sheet that we have built over the last four years. The fundamental strength of our franchise is reflected in all of our key metrics as of the end of the first quarter, including the following. Our average non-interest-bearing deposits remain strong at 38%, ending the quarter at 36%, with overall net core deposit outflow of only around 2% for the quarter. We have significant available excess liquidity, with our cash and available borrowing capacity representing approximately 2.2 times our level of uninsured and uncollateralized deposits. which were only 27% at quarter end. A low level of total unrealized losses with approximately 47 million on 958 million of available for sale securities, representing less than 4% of CET1 capital after tax. We have a very high level of capital and strong capital ratios, bolstered by one billion of cash sitting on the balance sheet. We repurchased approximately 1% of our common shares outstanding under our recently approved program. We have strong asset quality, which includes 20% decline in both delinquent loans and classified assets in the first quarter. And since mid-March, we have seen strong net inflow of core deposits with a solid pipeline of non-industrial-sparing operating accounts and new relationships. As I have said for several quarters, the effect of the Fed's tightening has been to contract the economy and pull deposits out of the system across all categories. The recent events only accelerated the outflow of deposits from mid-sized banks to some of the largest banks. Given that backdrop, I think our team performed extremely well and validated not only the strength of our franchise overall, but the solidity of our deposit relationships. Our focus is on providing solutions to businesses who value our service and expertise that is unmatched at other banks. Those accounts are rate neutral, and we continue to focus on clients that value what we have to offer. The strength of the relationships that we have with our clients has proven to be extremely valuable throughout this recent period. We were proactive in reaching out to remind them of the financial strength and stability of Bank of California, and where appropriate, we used programs like ICS to reduce uninsured exposure for clients who expressed a desire for such coverage. We added many new clients over the past several weeks who were looking to move to a stronger financial institution, and one of the slides in our presentation shows the growth we continue to see and commercial deposit accounts. While the deposit base has been largely stable since the recent banking crisis began, given the uncertainty of the macro environment and our conservative approach to risk management, we increased our level of overnight borrowings and added some short-term broker deposits to increase our liquidity. The overnight borrowings brought cash balances to approximately $1 billion at quarter end, which was $750 million more than the approximately $250 million we have averaged in the past. While these actions had an impact on our profitability in the first quarter, we believed it was prudent from a risk management perspective, and the short-term nature of the borrowings and broker deposits gives us the flexibility to quickly make adjustments in our liability mix in the future. In terms of new loan production, we have the capital and liquidity to continue serving our clients, and we are still finding good lending opportunities in many verticals that we focus on, including bridge real estate, healthcare, entertainment and media, and education. Overall, we continue to see loan demand muted in the current environment due to higher rates and concern about the potential recession, and our total fundings were lower than the prior quarter. We saw a decline in our CNI portfolio during the first quarter, which was entirely attributable to three loans totaling $90 million that matured and we chose not to renew. These were legacy loans originated many years ago that didn't provide meaningful deposits, and we didn't like the risk-adjusted yield associated with the renewal of these credits. We were also in a strong position due to stable credit quality, relatively high levels of reserves, and very limited exposure to areas with scrutiny, such as general office. Our investor deck details our very limited exposure to this sector and the strength of our portfolio. As we indicated we would do on our last earnings call if we didn't see enough attractive lending opportunities, We added to the investment portfolio given the higher yields that are now available. As part of this strategy, we grew our securities portfolio $90 million, or 8%, and our new securities purchases are relatively short-term maturities, which will give us the flexibility to redeploy these funds into the loan portfolio as economic conditions and loan demand improve. One of our key objectives over the past few years has been to right-size the expense base while investing to support our future growth. As part of our regular review of appropriate staffing levels, we made a reduction in FTEs of about 3% during the first quarter. This reduction will help us to effectively manage our expense levels while also enabling us to reallocate some of the cost savings to areas we are investing in, such as our payments processing business, which continues to proceed on the timeline we have previously indicated. As I mentioned earlier, we have focused on maintaining strong capital levels. Given the high level of capital that we have, we were able to increase the amount of capital that we returned to shareholders by increasing our quarterly cash dividend by 67% during the first quarter, while authorizing a new $35 million stock repurchase program. We were also able to take advantage of the market dislocation during the quarter to repurchase approximately 1% of shares outstanding, much of which we were able to do below tangible focus value. We'll continue to be opportunistic with respect to implementing the stock repurchase program, while ensuring that we maintain high levels of capital to manage through the current challenging operating environment and support the continued growth of our franchise. Over the past four years, as we've built Bank of California into the go-to bank for small and medium sized businesses in California, we have focused on building sustainable franchise value and in the process, creating an institution that can perform well and deliver for both clients and shareholders in a variety of economic and interest rate scenarios. It's worth mentioning again that as a true relationship-focused bank, we typically have the operating accounts that our clients utilize for businesses, and we are deeply connected to them through the services we provide. Quarter after quarter, this has proven to be a truly sticky deposit base that provides stability even during times of stress in the banking system like we are currently experiencing. Now I'll hand it over to Ray, who will provide more color on our financial performance. Then I'll have some closing remarks before opening the line for questions.

Thank you, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations website as I review our first 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 fourth quarter of 2022. Our earnings release and investor presentation provide a great deal of information, so I'll limit my comments to some of the areas where additional discussion is warranted. Net income for the first quarter was $20.3 million, or $0.34 per diluted share. On an adjusted basis, net income totaled $21.7 million for the first quarter, or $0.37 per diluted common share, when net indemnified legal costs and investments in alternative energy partnerships are excluded. This compared to adjusted net income of $26.8 million, or $0.45 per diluted common share for the prior quarter. The fourth quarter's adjusted earnings excluded a $7.7 million loss on the sale of securities. Our net interest margin decreased 28 basis points from the prior quarter to 3.41%. Our overall earning asset yield increased by 20 basis points to 4.99%, while our total cost of funds increased 51 basis points to 1.68%, which was partly attributable to overnight borrowings and short-term broker deposits we brought on during March to temporarily increase our liquidity, which impacted the margin by seven basis points. Our average loan yield increased 15 basis points to 5.07% as the variable rate loans in the portfolio continue to reprice and we are seeing higher rates on new loan production. The average yield on securities increased 47 basis points to 4.66% due to portfolio resets and the impact of the repositioning we did in the prior quarter to sell lower yielding securities and reinvest the proceeds in higher yielding securities. Our average cost of deposits was 122 basis points for the first quarter, up 43 basis points compared to the prior quarter, while the average Fed funds rate increased 86 basis points over the same time period. As a result, the difference between our average cost of deposits and the average cost of the Fed funds rate widened from 286 basis points last quarter to 329 basis points for the first quarter. As Jared mentioned, we are carrying approximately $1 billion in cash, which is about $750 million more than we normally hold. We intend to hold this excess cash until such time as we see sufficient stability in the banking landscape and specifically in overall depositor confidence. Our non-interest income increased $9.3 million from the prior quarter, due partially to the previously mentioned loss on the sale of investment securities. Other areas of non-interest income were relatively consistent with the prior quarter, with the most significant variances being in other income due to a $1.1 million recovery on a loan acquired in the Pacific Mercantile Bank transaction that had been charged off prior to the acquisition and higher income from equity investments of $750,000. Our non-interest expense in the first quarter included approximately $1 million in severance expense related to the reduction in staff that Jared mentioned. Our adjusted non-interest expense increased approximately $800,000 from the prior quarter which was primarily due to higher salaries, payroll taxes, and benefits that impact the first quarter. We also had an increase in FDIC insurance expense of approximately $300,000 due to higher FDIC assessments that are now in place. The effective tax rate for the first quarter was 26.7%, down from the prior quarter's rate of 29.6%. For 2023, we estimate our annual effective tax rate to be approximately 27 to 28%. Turning to our balance sheet, Our total assets were 10 billion at March 31, an increase of approximately 9% from the end of the prior quarter due to the increase of our liquidity position. Our total equity decreased approximately 700,000 during the first quarter, as 20 million in net earnings were partially offset by a $10 million shift in AOCI and capital actions, which included both common stock dividends and the repurchase of approximately 5.2 million of our common stock. Our loans were down approximately 61 million from the end of the prior quarter. This was primarily due to three loan payoffs that we had in the CNI portfolio that Jared mentioned and runoff in the DSFR portfolio. The decline in these two areas was partially offset by an increase in the CRE portfolio as we continue to see good opportunities in our targeted lending areas. Our total deposits decreased $169 million from the end of the prior quarter. The decline was primarily due to outflows we saw during January and February, which was a continuation of the trend we had been seeing of clients seeking higher rates for their excess liquidity combined with our focus to grow low-cost commercial deposit relationships. As Jared indicated, since the second half of March, our total deposits have increased, excluding broker deposits. Our credit quality remained solid in the first quarter. We had stable non-performing loan and non-performing asset balances, while our delinquent loans declined by 19 million or 20%. While our asset quality was stable, we recorded a provision for credit losses of $2 million, which was primarily attributable to net charge-off activity and an increase in the general reserve, partially offset by changes in the portfolio mix and a decrease in total loan balances. Our allowance for credit losses at the end of the first quarter totaled $89.4 million, compared to $91.3 million at the end of the prior quarter, and our allowance to total loans coverage ratio stood at 1.27%, compared to 1.28% at the end of the prior quarter. At this time, I'll turn the presentation back over to Jared.