Banc of California, Inc.

Hello and welcome to the Bank of California's first quarter earnings conference call. All participants will be in a 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 your telephone keypad. 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 on the company's investor relations website. A presentation management will reference on today's call is also available on the company's investor relations website. Before we begin, we would like to direct everyone towards 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, everyone. Welcome to Bank of California's first quarter 2019 earnings conference call. This is a special call for me, as it's my first earnings call since joining the bank as President and CEO just over five weeks ago. And I look forward to sharing updates on the performance of Bank of California with you for many quarters to come. With me today is John Bogler, Bank of California's Chief Financial Officer. Before I share some of my initial observations and vision for the bank, I will first ask John to talk about the results for the first quarter. Following his comments, I will discuss my thoughts on where we want to take the bank going forward. John?

Thank you, Jared. In the first quarter, we made progress in our efforts to optimize our balance sheet and remix our asset base, with total assets decreasing to $9.9 billion from $10.6 billion at the start of the year. As mentioned last quarter, we expected to reduce assets in Q1 due to the $132 million sale of the CMBS portfolio, And then as we saw favorable market conditions develop for certain assets, we made opportunistic asset sales that were in line with our overall balance sheet strategy. In connection with these sales, which occurred late in the quarter, we also began to reduce our most expensive sources of funds and reduce our cost of funds. Taking a closer look at assets, securities decreased sequentially by 521 million, driven by the CMBS portfolio sale, as well as a $386 million reduction within the CLO portfolio. The CLO portfolio is now down to $1.04 billion versus $1.42 billion as of the year end 2018. We will continue to execute dispositions within the CLO portfolio at or above the book value of each position sold. And as a result, we expect this portfolio to continue to shrink in the coming quarters. However, Our ability to further reduce the CLO position is market dependent and will require market spreads on our positions to further tighten. The loan portfolio decreased by $144 million during the quarter, driven by our stated goal to more closely align loan growth with core deposit growth. And additionally, we further emphasized relationship-based lending during the quarter. For the overall loan portfolio, there was a $203 million decrease in SFR loans, due mostly to a profitable $243 million sale, which settled in March. As part of that SFR trade, there will be an additional $100 million or so anticipated to settle in the second quarter, and you will see that reflected in our Q2 ending balance in addition to further transactions related to reducing our concentration in lower-yielding single-family and multifamily loans. Loan production totaled $536 million for the first quarter, with average production yields increasing from the prior quarter by three basis points to 5.29%, which is a much higher yield than the blended portfolio loan yield of 4.76%. In the coming quarters, as we sell lower yielding single family and multifamily loans, along with pulling back from broker source production, the overall loan portfolio yield should continue to increase, all else being equal. The single-family sales drove the overall decline in net held for investment loan balances. However, total commercial loan balances provided an offsetting increase of 67 million for the linked quarter. Included in the net commercial loan growth are increases in multifamily of 91 million and construction of 8 million, with another 6 million coming through SBA. We did see decreases in commercial real estate of 1 million and CNI of 37 million. As of March 31st, Commercial loans make up 71.3% of our total HFI loan portfolio, compared to 69.1% last quarter and 66.9% a year ago. As we continue to reorient the balance sheet towards being a relationship-based community bank, the mix of commercial loans is expected to increase. Moving on to deposits, we are strengthening our resolve to de-risk our balance sheet and bring down the overall cost of deposits through carefully targeted deposit outflows. As a result, brokerage CDs decreased by $248 million in Q1 and savings deposits reduced by $114 million. The outflow of some of our transactional and higher interest-bearing deposits were partially offset by an increase of $97 million in non-interest-bearing checking deposits. Non-interest deposits are now at the highest level we've seen in the past five quarters. Overall, there were smaller increases in interest-bearing checking, money market, and non-brokered CDs of $17 million, $26 million, and $30 million, respectively. These changes contributed to an improvement in our wholesale funding mix, down to 24% at quarter end from 30% last quarter. We are going to continue creating opportunities within the business to increase relationship-based deposit balances, with special attention being paid to the cost of those deposits. Bringing the overall cost deposits down is a long-term effort, and our March 31st balances are indicative of tangible actions taken to make progress toward that goal. Core deposits, or non-broker deposits, now account for 83% of total deposits, up from 81% last quarter and 86% a year ago. Shifting gears to the income statement, net income available to common stockholders for the quarter was $2.7 million or $0.05 per diluted common share. The quarterly results were impacted by net non-recurring expense items totaling $5.8 million, including $7.7 million of legal and indemnification expenses and $2.8 million of restructuring expenses, all partially offset by a $4.7 million insurance recovery related to ongoing legal and indemnification expenses. As a reminder, Legal expenses associated with indemnification of past and current directors and officers is generally eligible for insurance reimbursement, and reimbursement is recorded as a contra expense as it is received. We expect to continue to incur legal and indemnification expenses for the next several quarters with the insurance reimbursement naturally lagging. After adjusting for these non-recurring items, along with the amortization expense associated with our solar tax equity program, Our operating expenses for the fourth quarter were $54.1 million, of which we have provided a reconciliation on slide seven of today's deck. After excluding the non-recurring items for the first quarter and normalizing our tax rate to 20 percent, adjusted operating earnings for continuing operations were 18 cents per diluted common share for the first quarter, the reconciliation of which is detailed on slide eight of today's deck. The bank's net interest margin decreased by seven basis points during the first quarter to 2.81%. In the quarter, we significantly reduced our CLO portfolio and sold $243 million of lower-yielding single-family loans with the sales occurring late in the quarter. The proceeds from the asset sales were used to reduce high-costing FHLB advances, and coupled with other planned asset sales in the second quarter, we expect the net interest margin to improve in future periods. Average interest earning assets were up slightly from the linked quarter at $9.8 billion, with the average yield increasing six basis points over the same period to 4.59%, including a two basis point increase in average loan yields to 4.76%. The securities portfolio average yield increased 25 basis points to 4.13%. As a reminder, the CLO investments reset quarterly and are indexed to the three-month LIBOR. The cost of interest-bearing liabilities increased 15 basis points to 2.12 percent, mostly due to the CD deposit costs increasing 16 basis points to 2.35 percent and money market deposit costs increasing 32 basis points to 1.89 percent. FHLB borrowing costs did increase 10 basis points over the quarter to 2.59 percent. The income statement impact was muted due to recent efforts to reduce FHLB advances within our funding profile. Net interest income decreased by $2.9 million from the prior quarter to $67.8 million. For the first quarter, loan interest income increased by $2.3 million due to a $314 million increase in average balances and a two basis point increase in the average yield. This was partially offset by a decline of $2 million in interest income on securities as these average balances declined by $281 million. We expect the average balances of securities to come down further next quarter as we continue to transition the balance sheet. On the liability side, interest expense on deposits increased by $2.5 million as the average balance increased by $118 million and the average rate increased by 15 basis points. Interest expense on FHLB advances were basically flat quarter over quarter due to a mix of a 10 basis point increase in rate versus a $25 million decrease in average balances. With the decline in the first quarter ending balance for FHLB advances, interest expense for this category is expected to decline in the second quarter. The composition of interest income should continue to improve as we accelerate the optimization of the balance sheet towards a traditional community bank profile. Commercial loan interest income now represents 59% of total interest income in the quarter, compared to 57% last quarter. Loan interest income now comprises 82% of total interest income in the quarter, up from 79% in Q4. The provision for loan losses in the quarter was $2.5 million and reflected largely of deterioration in four credits. A single leverage loan credit totaling $17 million was downgraded to substandard and accounted for $1.8 million of the provision, and three SBA loans were deemed impaired with a specific reserve of $1.1 million. It should be noted that we hold just two leveraged loans. Additionally, $819,000 of net charge-offs were recorded in the quarter. These provision increases were offset by $1.7 million of general reserve decreases driven primarily by the $144 million decline in the loan portfolio for the quarter. The ARLL balance coverage ratio of non-performing loans is 224% while the overall ATLL ratio was 85 basis points. Total non-interest expenses for the quarter were $61.8 million, which included the previously discussed one-time expenses of $5.8 million and $2 million of expense from solar investments. The quarter also included $2.9 million of elevated professional fees related to projects that will be completed in the second quarter. Our current solar tax investment commitment is completed, and we expect the annual HLBV depreciation to wind down toward immateriality in future periods. Non-interest expenses included a number of items which we do not consider to be core operating expenses. Adjusted for those items and the depreciation from solar investments, core operating expenses came in at $54.1 million, or 2.09% of average assets on an annualized basis. We are working on a plan to normalize our run rate expense base to a level that is aligned with our size and footprint, but recognize the operating expense reductions will naturally lag any asset reductions. In the short term, we can see expenses remain at the current level and then come down toward the end of 2019. This likely will translate into an increase in our operating expense ratio initially, then begin to decline. Our capital position remains solid as the common equity Tier 1 capital ratio was 9.72% and Tier 1 risk-based capital totaled 13.03%. As we continue the transition of our asset base to resemble that of a strong community bank, we expect that our capital position will remain solid. Lastly, let's move on to credit and asset quality metrics. Our non-performing asset ratio for the quarter was 29 basis points, up eight basis points from the prior quarter. Although we saw an increase in Q1, we still have a very low level of non-performers, which is indicative of the credit culture at the bank. The credit performance of the portfolio is in line with expectations, and we do not see any indication of broad deterioration in our portfolio. Non-performing assets to equity continues to remain strong at 3%. Delinquent loans increased $18.9 million during the quarter, resulting in a delinquent loans to total loan ratio of 79 basis points for the quarter. Subsequent to the quarter end, the level of delinquent loans returned to the level at the end of the fourth quarter of 2018 million returned to current payment status. Finally, net charge-offs for the quarter were 819,000, or only four basis points, annualized based on average loans and consistent with our expectations. With that summary of our first quarter financials, I'll now turn the call back over to Jared. Thank you, John.