Banc of California, Inc.

hello and welcome to bank of california's fourth quarter earnings conference call all participants will be in a listen-only mode should you need assistance listen to 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 and one withdraw your questions you may press star and two today's call is being recorded 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'd 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. At this time, I'd like to turn the floor over to Mr. Jared Wolf, Bank of California's president and chief executive officer.

Good morning. Welcome to Bank of California's fourth quarter earnings call. Joining me on today's call are Joe Cowder, our CFO, and Bill Black, our head of strategy. Our investor presentation, along with our earnings release, were designed to provide a great deal of information given the unusual nature of the fourth quarter, which was impacted by the closing of the merger and several one-time items related to our balance sheet repositioning actions. We aren't going to do a detailed walkthrough of the changes in various line items from the prior quarter. Instead, we'll utilize the time on our call today to introduce the new Bank of California. provide an update on the progress we have made on the balance sheet repositioning, and lay out the timing for our integration and provide insight into the key financial metrics for Q1 and beyond. We'll be happy to answer any specific questions to our fourth quarter results later in the call. I'm truly thrilled that we delivered on so many of the key objectives that we outlined when we announced the deal. Thanks to the hard work of our talented colleagues and advisors, and the work of the regulators, we received approval for our transaction in record time and closed the transaction on the front end of our range. We delivered CET1 on top of our 10% target, notwithstanding a complicated rate environment and considerable moving items on the balance sheet. And we nearly hit $15 in tangible book value after guiding to the mid to low $14 range when we announced Q3 earnings. Many other key metrics were delivered in line as well. Since closing the merger on November 30th, our team has been collaborating exceptionally well, and we've made excellent progress on the balance sheet repositioning actions that we indicated at the time of the merger announcement. As a result, we have created the well-capitalized, highly liquid financial institution with strong earnings power and a strong position in California, as we envisioned. Today, we are the third largest bank headquartered in California based on assets, with an enviable presence up and down the state clean credit, and an exceptionally talented team of colleagues who are focused on serving businesses with high-tech service and tailored solutions that our target clients aren't getting from others. The closing of our merger reflected the relentless execution that Bank of California has become known for. Among the most notable items, we completed the planned sales of Legacy Bank of California's $1.7 billion SFR portfolio approximately $700 million of the multifamily portfolio, and $1.2 billion of the investment portfolio, as well as approximately $2 billion of PacWest securities. The proceeds, along with the excess cash from PacWest, were utilized to reduce the higher-cost wholesale funding on the balance sheet. We retired the $1.3 billion repurchase agreement with Atlas and have also continued to reduce the volume of higher-cost broker deposits which are down nearly $4 billion from the time of the merger announcement through the end of 2023. We also repaid $2.3 billion of the bank term funding program balance, choosing to retain a portion in order to maintain a higher level of liquidity and pay down higher cost broker deposits. In total, we sold approximately $6 billion of assets with an average yield of 3.6%, and paid down approximately $9 billion of wholesale funding with an average cost of 5.2%. contributing more than $90 million annually to the net interest margin. This was nearly all completed in the month of December. As mentioned, we decided to retain a portion of our multifamily portfolio rather than selling the entire portfolio as originally planned. These are well-performing loans, and after the purchase of the accounting mark, they have attractive yields and an approximately four-year effective duration that we determined were in our best interest to retain given the outlook for potentially declining rates. As noted, we were able to execute on most of our planned balance sheet repositioning actions in a short period of time, strengthening our balance sheet and repositioning the company for improved performance and enhanced flexibility. We will continue to evaluate all available options as we seek to optimize our balance sheet going forward. We have also started to see some of the potential benefits that we believed we would have following the merger. With the strength of the restructured balance sheet and superior level of service that we can provide, we have started to bring back many of the operating deposit accounts of PacWest clients that left the bank during the turmoil early last year. We also felt that there would be opportunities to further capitalize on our position as a talent magnet. We have already added a number of individuals and will look to continue adding exceptional banking talent that we believe can positively contribute to the profitable growth of our franchise in the coming years. Now let me hand it over to Joe, who will provide some additional financial information, and I'll have some closing remarks before opening up the line for questions. Joe.

Thank you, Jared. I'm going to start by providing the spot rates for balance sheet items as of December 31st to provide some visibility to our net interest margin for the first quarter. As of December 31st, 2023, our estimated spot rate for loan yields was 6.18%. Our estimated spot rate for the yield of all interest earning assets was 5.63%. Our spot rate for the cost of deposits was 2.69%. Our spot rate for the cost of funds was 2.99%. And our estimated spot rate for our net interest margin was 2.75%. Compared to 1.69% for the fourth quarter, and 2.15% for the month of December of 2023. We are exiting the quarter with a much higher net interest margin due to the benefits of the merger and our balance sheet repositioning actions, and we expect our first quarter net interest margin to approach 3%. The expected increase in our net interest margin in the first quarter from December 31st spot rate will be driven by an approximate 15 basis point improvement in earning asset yields driven mostly by loan repricing and new originations at higher rates, currently between 7% and 8%, and an approximate 10 basis point improvement in cost of funds driven by the pay down of higher cost wholesale funding and an increase in the relative percentage of lower cost core deposits. Putting aside changes in interest rates, we expect to see a steady decline in our interest expense as we move through 2024 and continue to replace higher-cost wholesale funding sources with lower-cost deposits acquired through our business development efforts. There are also some additional actions that we may take that could have a positive impact on our net interest margin, including additional asset sales and using off-balance sheet options for higher-cost customer deposits. At this point, we are moderately liability sensitive and will benefit from a reduction in interest rates. Once we have completed our balance sheet repositioning, including reaching our internal targets for low-cost deposits, we intend to manage the bank to a neutral or slightly asset-sensitive position. Looking at non-interest expense, it will be reasonable to expect our first quarter 2024 OPEX ratio to be in the range of 210 to 220%. As we have indicated previously, The expected cost savings from the merger will be phased in over the course of 2024. Major contributors to the cost savings include the completion of the systems conversion, which is scheduled to occur in May, a reduction in FDIC assessment expense, which we anticipate to start declining in the first quarter, and office consolidation with approximately 18% of the leases on PacWest offices expiring during 2024. By the fourth quarter of 2024, we expect our OPEX ratio to be down around 2.0%, and we are targeting the quarterly run rate for non-interest expense to be approximately or below 2% of total assets from that point forward. With all of the integration and balance sheet repositioning actions proceeding on schedule, the guidance we provided for our level of returns that we announced at the time of the merger has not changed. Rather than focusing on the full year, our primary focus is on ensuring our ending Q4 run rate is in line with our targets of approximately 1.10% ROAA and 13% ROTCE, given the timing of achieving cost savings throughout the year. At this time, I'll turn the call back over to Jared.