Good day, and welcome to the PacWest Bancorp second quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. William Black. Please go ahead, sir. Thank you. Good morning, and welcome to PacWest second quarter 2022 earnings conference call. Investors have been eager for us to do a call for some time, and we're excited to add this to our ongoing investor relations activities. With me and speaking today will be CEO Matt Wagner, CFO Bart Olson, COO and leader of our venture banking business, Mark Yung, and our newly appointed president, Paul Taylor. Before I hand the call over to Matt, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties, and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our company's SEC filings, including eight-K filed yesterday afternoon, which is available on the company's website. I'd now like to turn the call over to Matt. Thank you, Bill, and good morning, everybody. I just wanted to make one comment before we get into the results for the second quarter. I'd like to welcome Paul Taylor to the PacWest team. Of course, Paul has been on the board since May of 2021, so he's not new to the PacWest story. As announced on June thirteenth, Paul joined PacWest as president and will succeed me as CEO upon my previously announced planned retirement at the end of 2023. Paul and I have known each other for many years, and many of you probably know Paul from his days as CEO of Guaranty Bancorp here in Denver from 2011 to 2018, and then Opus Bank from 2019 to 2020. We're very excited to have completed the search for my successor earlier than planned, and I look forward to working closely with Paul during the transition over the next 18 months. Paul, would you like to say a few words? Thanks, Matt, and good morning, everyone. Like Matt, I'm very excited about the new opportunity. My time on the board has provided me with the opportunity to get to know both the board and the management team, which has allowed me to hit the ground running. I'm looking forward to building on the success of the company and leading it into the future. Thanks, Paul. With that, let me turn it back over to Bill for a summary of the key highlights for the second quarter. Thanks. Thanks, Matt. We continue to focus on two strategic priorities, optimizing the balance sheet through remixing earning assets and rebuilding our capital ratios. The second quarter was marked by exceptional loan growth, which has been a culmination of our colleagues' hard work over the last 12 to 18 months. That growth has had four material impacts on our second quarter. First and foremost, the loan growth helped drive the $15 million of net interest income growth quarter to quarter. Second, the $2 billion increase in unfunded commitments led to a loan loss provision for the first time since the fourth quarter of 2020. Third, expenses were elevated due to higher bonus accruals and commissions, as well as higher loan-related expenses. These items accounted for about $7 million of the Q to Q increase. Finally, the strong loan growth was a factor in upsizing our preferred capital rates. The second quarter saw an incredibly volatile rate environment and significantly more economic uncertainty, which has caused us to tap the brakes with the expectation of slower loan growth in the second half of the year. We expect the higher interest rates to benefit our earnings over time and will start to show up in the second half of 2022. We saw continued deposit headwinds in our venture business with deposit outflows of $1.9 billion in the quarter, which was offset by increases in wholesale deposits. Our credit quality metrics remain near historic lows with net recoveries in the second quarter. We added to the ACL to be prepared for whatever the economic environment and greater uncertainty deliver. We strengthened our capital position with the $513 million preferred equity raise advancing our capital plan. We will continue to grow our capital ratios from here with increasing profitability and slower balance sheet growth. With that, I'd like to hand it over to Bart for some specific commentary on the financial results before we go into Q&A. Thanks, Bill, and good morning, everyone. Hopefully, you've all had a chance to review the press release and the earnings release deck. I thought I'd just touch on a couple items before we go into the Q&A portion of the call. As Bill mentioned, we booked a provision for credit losses of $11.5 million in the second quarter, $10 million related to loans and $1.5 million related to our held-to-maturity investment portfolio, which I'll talk about in a few minutes. The loan loss provision was due primarily to the significant increase in unfunded commitments of $2 billion. The ACL remains a robust 1.07%, down slightly from the 1.12% as of the end of the first quarter and above our CECL adoption date ACL of 97 basis points. Looking at noninterest income, there was really nothing unusual here in the second quarter. Warrant income was $1.6 million, in line with the historical quarterly averages when excluding the significant record gains from the fourth quarter of 2020 to the fourth quarter of 2021. Noninterest expenses were higher than the prior quarter, but keep in mind that the first quarter included $3.4 million in OREO gain and a lower commission expense of $2.4 million related to the significant valuation write-downs of equity investments during Q1. Adjusting for these items, the first quarter noninterest expenses would have been about $173 million compared to the $183 million in the second quarter, or an increase of $10 million. This increase was primarily driven by an increase in compensation expense, including commissions by about $2.5 million, bonus accruals by about $2.5 million, both due to the strong loan growth. The remainder was largely due to a full quarter of annual merit increases, along with an increase in FTEs of 95. The FTE increase was primarily related to Civic, the community bank, and our digital and innovation strategy. I now want to turn to the balance sheet for a couple comments and actions taken during the quarter. On June 1, we moved $2.3 billion of available-for-sale securities to held-to-maturity to mitigate the impact on accumulated other comprehensive income for future increases in interest rates. As previously mentioned, at quarter end, we booked $1.5 million provision for credit losses on this HTM portfolio. The OCI related to this portfolio at the time of transfer was about $217 million. During the quarter, we also sold approximately $393 million of investments out of our bond portfolio at a loss of $1.2 million. We used those proceeds and the normal cash from the portfolio to fund loan growth while not making any significant new bond purchases. As mentioned, venture banking deposits declined $1.9 billion during the quarter for many of the same reasons as they declined in the first quarter. As a reminder, most of our venture banking deposits are related to late stage companies which are highly impacted by the capital markets, which again saw virtually no IPO activity during the quarter and the lowest level of venture investments in three years. This lack of capital market activity is a key driver in the decline in deposit balance. Other contributors to the decline included normal cash burn of the underlying clients, cash used for acquisitions and cash management activity, which could be a transfer to a money center bank or a transfer to our off-balance sheet entity, Pacific Western Asset Management, or PWAM. In the second quarter, transfers to PWAM were about $500 million. From a capital perspective, the preferred stock offering drove an increase in capital despite the strong growth in both loans and unfunded commitments, which increased risk-weighted assets by $2.7 billion. At quarter end, this put our tier one capital at 10.15%, up from 9.07%, and put our total risk-based capital at 13.12%, up from 12.27%. This increase in capital aligns with our strategy to increase capital and operate at levels more similar to those in the first half of 2021. This concludes our prepared remarks. Operator, could you please open the line for questions? Yes, sir. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll take our first question from Jared Shaw with Wells Fargo Securities. Hey, guys. Good morning. Hey. Jared. Hey, could you just spend a little time on the outlook for funding growth and deposits? You know, I hear the headwinds on the venture side and it seems like that's likely to be there for a little while. What other sources could you tap to start to see growth there? And would you look to growing, you know, continue to grow brokered to fund loans here? Yeah, Jared, this is Bart. Yeah, as you saw during the quarter, we did use some wholesale deposits to fund some of the loan growth. Wholesale deposits were up about $2.9 billion. As we look into the second half of the year, you know, we talked about the slower loan growth that we anticipate. With the deposit outlook, I expect we'll have some further increases in wholesale deposits during the quarter and looking ahead. Okay. When we look at the deposit base, what's the expectation for, you know, for beta as we if we assume sort of a 350 Fed funds and some of these changes, should we expect to see an accelerating beta as we go into the end of the year here? Our second quarter beta on total deposits was 15%. I think looking forward, we'd expect that to increase to roughly, you know, within the first year, probably north of 22% and then probably move towards, you know, 30% as you look out over a two-year horizon. Yeah, Jared, just keep in mind the absolute level of interest costs that are there. You know, a beta of X on a very low cost of deposits is not as impactful as just the overall thing. As we're looking at it, you know, we're looking to grow net interest income. And if the beta is X but your overall cost of deposits is still low, and that's really the foundation of the business, right? Yep. Yep. Great. Okay. Thank you. I'll step back and actually, what's the rate that you're paying right now on brokered and new CDs? Yeah, the brokered, it ranges, you know, from and during the quarter ranged anything from 50 basis points to about 185, and it's up slightly, obviously, more recently. Okay, thanks. We'll now take our next question from Andrew Terrell with B. Riley. Hey, good morning. Morning. Maybe just sticking on the kind of core deposit growth outlook. I'm curious if we don't see any kind of improvement in capital markets and kind of private fundraising heading into third quarter versus the second quarter, do you think we could see a similar level of core deposit declines as what you saw in 2Q, or should it moderate from here? Yeah. You want to take it, Bill? No, go ahead. Yeah. No, I think we're starting to see it moderating already, but it's pretty hard to predict, Andrew. Yeah, Mark, I don't know if you want to add to that. I mean, again, what we've seen here in Q2 even versus Q1 is the continued reduction in fundraising activity. I mean, I think we've all seen the data at this point coming out of the venture capital community. We are in the lull of the summer months as well that we get part of it here through Q3. That probably should continue in terms of transaction levels. We are seeing, you know, some deal activity in our portfolio that is encouraging, some larger round sizes for companies that still had plenty of cash on hand. I think that's an encouraging sign. To Matt's point, I mean, I do think as opposed to Q1 that there's a little bit more sensitivity obviously around yields. We saw a larger movement towards PWAM, an example of where it spelled it out, $500 million big bucks in a quarter. Obviously that's something that we're, you know, working very closely with our portfolio companies, to make sure that they see all of our liquidity product opportunities to obviously keep those monies on balance sheet. Okay. Thank you. Yeah. If I can move over. I know when you first closed the Civic deal, we talked about how you were comfortable with the credit quality there. I guess just given what we've seen kind of in the real estate market, has the comfort level changed at all? What gives you kind of confidence in the underwriting of the business? Well, we've got a track record of performance that we've been buying the loans since 2017. I mean, since inception, we've originated a significant amount of assets and had, you know, de minimis levels of any real issues. We feel good in the underwriting, and we've been able to prove that out, Andrew, just from the ins and outs of loans that we've, you know, had. We feel really good about that. Yeah. Andrew, we've always been aggressive at downgrading loans where there might be an issue here or there, but it doesn't mean that there's necessarily charge-off implications to that. I think, you know, if you look at the track record over the past two and a half years, you'll see that, and I don't see that changing. The underwriting is very strong. Even our venture business, which as you know, lots of those portfolio company loans could be sort of air balls. We've had, you know, zero charge-offs literally for the last two and a half years. Net charge-offs, I should say. Okay, great. Thanks for taking the question. I'll step back. Sure. We'll now take our next question from Brandon King with Truist Securities. Hi, Brandon. Good morning. Hey, just wanted to touch on the loan growth guidance, anticipating slower loan growth in the back half of the year. I know Civic is kind of surpassing expectations as far as your production levels. I just want to know what the percentages are for loan growth in the back half of the year. What categories you see slowing more than others, and kind of where you see Civic run rates in the back half of the year. Yeah, Brandon, I think you're going to see slowing overall. You know, higher rates, you know, more economic uncertainty. I think you're going to see a natural slowdown at a real high level. But obviously we will continue to, you know, monitor and really try to optimize the balance sheet. I think you're going to see slowdowns in general, and I think from here we will be clearly more selective, and I think when you look at putting that together, you'll see that slowdown from the pace we saw in the second quarter. Now, what does that mean business by business? I mean, what there's not a prescribed limit, but I think you would imagine that, you know, it would be if you're looking to optimize the balance sheet, you could probably figure out, you know, where that is. I mean, we're hearing that from our customers too, Brandon. You know, projects that may be penciled out at 4.5% interest rates don't really pencil out at 8% or whatever you might be anticipating rates going to. That, you know, in terms of how it relates to construction projects and then also your supply chain issues and just cost of materials. Rarely have we seen a project that's been completed in the last 12 months that didn't have some cost overruns in one line item or another. Okay. Got it. I wanted to touch on the uptick in classified loans. I was wondering if you could walk me through there, what the source of that was, and if there's any data notes on that. Yeah. Yeah. Yeah, no problem. Yeah, you did see a tick up in some of the credit metrics. It was a few credits where we had some administrative type issues. You know, I think these are things where we feel really good about them. We're very well secured, and we expect those credits to be either remediated or resolved in the coming months. I would tell you that the risk rating downgrades here, I think are more of an indication of our conservative, you know, credit culture more than anything else. As you saw in 2020, we certainly were aggressive in downgrading things, but that didn't lead to losses. It's certainly not a sign of any form of credit deterioration. We feel really good about where credit is right now. Okay. Just to reiterate, those are kind of just more one-off issues and not sort of a result of deteriorating macro environment. Yes. Got you. You know, you're going to get a little extra activity from Civic, as you can imagine, as those loans become near completion or whatever. One of the customers could opt not to make payments. Make his last couple payments because the property's under contract or whatever. We're gonna put that loan on special mention for sure. You know, you can get a handful of those. Again, they're granular. They do get resolved. We've seen we haven't had a charge-off yet, I don't think, have we, Bill? I don't think so, no. No. Thanks for answering my questions. Sure. We'll now take our next question from Matthew Clark with Piper Sandler. Matt Wagner, good morning. Yeah, Matthew. First one for me, just on the expense outlook. Understand what contributed to the increase in comp this quarter, but can you give us a better sense of where you think the run rate will be in the second half? Yeah, sure, Matthew, this is Bart. I think it's gonna be, you know, in that upper $170s-low $180s. I think if you know, kind of normalize, like I mentioned in my opening comments, you know, Q1 and Q2, you know, it's been what we talked about during the year thus far, which is starting in the low $100s and working its way up to about $180. Loan growth and the pace of that will affect that. Again, with the loan growth expected to recede a little in the second half of the year, I'd expect some of those expenses to go down. I'd say something around the $180-ish area. Okay, just on the credit risk transfer, any update there in terms of potential timing and just overall plans there? Yeah, we're still working through that. Plans are to be something in the third quarter. That's what I would anticipate at this point. Okay. Last one for me, just maybe for Paul. You've been on the board for some time now. I know it's still a little early, but it would be great to get your kind of initial thoughts on how you think the you know what might change when you formally take over in terms of the way that the bank's managed. Thanks. Yeah. Good morning. You know, I've known Matt for almost 20 years, and I've known John for the same period of time. You know, this is a great bank. I mean, this in many respects is an easy job to take over because the bank is very well run. I think that it's just more of the same and then improving, you know, various products and pieces where Technology. Yeah. You know, technology is one of the big pushes today. It's a pretty huge project. PacWest has been through a number of acquisitions and, you know, in doing that, there's some holes in the technology and, we're working hard to get a much better technology platform for the company. Great. Thanks, again. Once again, that is star one if you would like to ask a question. We'll now take a question from Gary Tenner with D.A. Davidson. Thanks, guys. Morning. Just thinking about the commentary on optimizing the balance sheet and, you know, outlook for some lighter loan growth in the back half of the year. You know, to what degree do you think you would continue to run down the securities portfolio or cash balances to kinda offset maybe some of the, you know, possible deposit headwinds that may still gather in the back half of the year? Do you have optimal levels that you'd like to have the mix look like, I guess is the question. Yeah, Gary. I think, you know, we ended the quarter with cash around 6% of earning assets, investments around 24% of earning assets. I could see the investment portfolio running down a little bit further, but I would see cash, you know, staying around that 5%-6%. A little bit on the investment portfolio, you could see. Okay. As you think about the back half of the year, essentially overall balance sheet growth is something lower than the amount of net loan growth but on the balance sheet. Is that fair? Yeah, I think that's fair. Okay. Thank you. My other questions were asked. We'll now move to our next caller, who is Christopher Marinac with Janney Montgomery Scott. Hey, thanks. Good morning, and thanks for hosting the call, everyone. I wanted to dig into the pace of loan growth on some of the other lines, such as lender finance and equity fund loans and et cetera. Is the pace there kind of indicative of the macro environment? Do you think that may be different in the next couple quarters? Mark, you wanna take that? Yeah. I can speak to that. I mean, the pace of lender finance and equity. Let's start with fund finance, right? I mean, there was limited growth in the quarter. That really honestly is more indicative of just one-off fundings that can happen on individual transactions given our portfolio construction. As you see, fundraising activity has been very robust, about $120 billion raised in the venture market alone in the first half of the year. Fund formation continues to be at a relatively healthy clip. Obviously, we're watching very closely. Fundraising is starting to become a little harder, especially for emerging managers. That's something we're watching carefully. Given that dry powder I would expect transaction levels to pick up here in the second half of the year, and fund finance should benefit from that. I would say lender finance is kind of cut from the same cloth in the sense that there's still a tremendous amount of dry powder out there, $780 billion in the private equity landscape in the U.S. alone. They're all looking for to deploy that capital, and obviously we provide lending opportunities that enhance their these private credit fund returns, number one. Number two, you know, we do provide a lot of warehousing facilities that are subject to the securitization market that has been a little kind of I would say intermittent in its activities. Obviously we're watching that very closely as for the remainder of the year. There's some securitizations that could happen that could quickly impact the lender finance growth as well. With higher interest rates, do these become better spread businesses for you just as we're in this part of the cycle? Yeah, absolutely. I mean, we're seeing opportunities here to enhance our spreads. Well, especially in the lender finance side. I'd say fund finance, that business is relatively commoditized. We play within a certain niche, more VC focused there, so we can capture a better yield vis-a-vis our competitors. In lender finance, yes, we're seeing opportunities here to enhance our spreads and make some better yields in our new originations. Great. I guess one other question for you, Mark, just on the technology build. How much extra expense is out there for the expense run rate, or is most of that technology build already in today's numbers? No, there's obviously some more expenses as we indicated, Chris, early days, right? Matt said it best. I mean, you know, for as much as I love to spend more on technology today, it's, you can't spend it overnight. We're getting some good traction here in headcount growth and in terms of some of our milestones around technology. There's still obviously additional investments to be made. I don't know, Bart, what we're indicating to the market here in terms of incremental vis-a-vis run rate. Well, I mean, it's, yeah, I mean, I think, you know, it's in the numbers I talked about earlier. Again, the real change is just the pace of that. We obviously highlighted that we had a growth of FTEs of 95 during the quarter. Obviously, some of that is related to the digital technology strategy. I think about 15, if I remember. Yeah. Yeah, around 15. They're not cheap necessarily either. Correct. That's, you know, certainly the plan has more than 15- Yeah. Building in the plan. It is not easy to hire those people. Obviously, everybody knows the kind of market conditions right now is challenging for certain skill sets. So- Yeah. We'll continue to work on that initiative. Chris, some of those expenses are gonna be subject to capitalization as well, right? Because we're building software with a longer shelf life here. There's that dynamic as well. Sure. Does it all make sense? Bart, the additional hires beyond the 15 in tech, are those mainly in production staff roles? Yes. Yeah. Yeah. Yeah. Within Civic and the community bank. Great. Thanks for all the information this morning. Thanks, Chris. Once again, that is star one if you would like to ask a question. Our next question will come from Christopher McGratty with KBW. Hey, good morning. Hey, Chris. Maybe Bart, a question for you. I know you guys don't like to talk about margin, given the recent optics of just balance sheet size. You mentioned in your prepared remarks, NII was up $15 million this quarter. Just given what you're doing with the balance sheet and also what the Fed's doing, should we think about that, you know, quarter-over-quarter growth accelerating from the second quarter levels in the back half of the year? Yes, I think so. If you think about, you know, the timing of the different rate hikes, I mean, the last big hike was in mid-June. What we've said all along is you're really gonna see more of the real benefits from the hikes and growth in net interest income in the second half of the year and into 2023. In the NIM too. In the NIM as well. Yeah. You know, we had about $6 billion of loans on their floor at the end of the first quarter. That dropped to $1.9 billion with the rate moves during the quarter. Certainly the next move or two will take the majority of the remaining loans off their floors. I would expect that by the end of the third quarter, the amount of loans on their floors is very small. I would expect that to continue to grow like it has. Net interest income has been growing nicely over the last several quarters, and we expect that to accelerate. Great. On the comment about slowing growth. You guys have made a huge effort to rebuild the growth profile in the last couple of years. Like, do you worry about the messaging and talent loss given how competitive it is right now? No, I don't think so. I mean, did you say talent loss? Yeah. No, I don't think that I'm concerned about that, really, Chris. People seem pretty happy. I mean, people have, you know, they've done such a great job in the first half of the year. They've pretty much made their bonuses, which is good, and they gotta stick around to get them. I think, you know, we'll be back. I think you're gonna see a change. You know, we had this extraordinary deposit growth in 2020 and 2021, really driven by the venture banking, but also the community bank had good, solid, high single digit growth. I think you're gonna see Venture world, that's changing again. These companies have to raise money. It's gonna come into the bank. It won't be at the level that we saw in 2020 or 2021, but you're gonna see that come back in, and we'll be able to, you know, kick certain businesses growth in. I think you're gonna see a pullback definitely in construction lending. It's just, these projects become less feasible. There's still a great need. As you know, most of our construction lending is multifamily. There's still a great need for the housing out there. I just, I think it's tougher to finance the projects. The numbers don't work as well. So I've, you know, talking to some of our biggest clients, and Paul and I are gonna be meeting with some next week. You know, they're predicting, you know, volumes of 50% of what they did in 2021 and maybe down even as much as another half in 2023. You know, that's part of it, and that's a big sector of what we do. I think lender finance continues to grow and other businesses continue to grow. Of course, we've had great luck with our guys at Civic. Thanks for that color, Matt. Just the last one on the tax rate. Is 25% about right? Yeah. I mean, I think, you know, we've talked about a range of 25%-27%. I would still say in that range. Okay. Thank you. As a final reminder, that is star one if you would like to ask a question. We'll now take a question from Matthew Clark with Piper Sandler. Hey. Just wanted to ask if you had the spot rate on interest-bearing deposits at the end of June? Spot rate interest-bearing deposits end of June? Yeah. Spot rate, deposits end of June was 30 basis points. 30? Okay. Thank you. It appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks. Hey, thanks, everybody. We appreciate your time and effort, and we will talk to you soon. Thank you. Call us if you need us. Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.