Banc of California, Inc.

Hello, and welcome to the Bank of California Second Quarter 2019 Earnings Conference Call. All participants will be in the send-only mode. Should you need assistance during the call, please contact your conference specialist for 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 try your question, please press star then two. Please note, today's event is being recorded. I now would like to turn the call over to your host today, Jared Wolfe. Mr. Wolf, please go ahead.

Good morning, everyone. Welcome to Bank of California's second quarter 2019 earnings conference call. With me today is Bank of California CFO John Vogler. I'm very pleased with the results of our second quarter, delivering net income available to common stockholders of $11.9 million and diluted earnings per common share of $0.23. John will talk in more depth about the quarterly results shortly. But before I hand it over to him, I'd like to take a few moments to highlight some progress we've made on our business strategy. As I mentioned on last quarter's call, I tasked our management team with focusing on three key areas of the business, which will have short and long-term benefits for our community banking franchise. First, we're taking meaningful steps to reduce our funding costs generally, and more specifically, our cost of deposits. We undertook several initiatives to accomplish this quarter. including the runoff of some higher costing deposit accounts, which did not fit within our relationship banking centered approach to business. In addition, we lowered our rates on consumer CDs and reduced brokered CDs to further trim our interest expenses for those products. And in combination, this resulted in a five basis point decrease in average cost of total deposits, the first sequential decrease since Q3 of 2015. Overall, Funding costs decreased by four basis points during the quarter as we further reduced our reliance on FHLB advances. I expect those balances to continue declining in the near term, and John will have more to say on that shortly. We took additional actions during the quarter to enhance the value of our franchise by moving more of the lower margin products off our balance sheet. We reduced the size of our securities portfolio by almost 21% from the first quarter and sold 178 million in multifamily loans in June. Furthermore, we reclassified an additional $574 million of multifamily loans as held for sale in anticipation of an upcoming Freddie Mac securitization that will close in early August. We are pleased with MIM improving five basis points as a result of our efforts to reduce funding costs by allowing high-cost CDs to run off while maintaining healthy loan yields. Lastly, we need to ensure that our expenses are aligned with our size and footprint. I was delighted to see that our non-interest expenses in Q2 decreased by 30% from the prior quarter to $43.6 million, although this was driven in part by a benefit from some one-time items. This will probably be a low point for the year, and we should see a more normalized run rate in the second half. As such, we will continue to be surgically focused on areas where we can create efficiencies and enhance the client experience. We executed on some very important initiatives these past three months, and making great progress on our business strategy. Our community banking franchise has been strengthened, and our focus on relationship banking is already showing positive results within our business. I'll go ahead and turn the call over to John to give you some more detail on our quarterly operating results, and then I'll return to highlight a few other initiatives. Go ahead, John.

Thank you, Jared. Our total assets in the second quarter were $9.4 billion, a $500 million decrease from the prior quarter, driven mainly by our strategy to optimize our balance sheet. We reduced our securities balance to $1.2 billion at quarter end through the disposition of $298 million of CLOs. In addition to the $178 million of multifamily sales Jared mentioned, we also sold $131 million of single family loans. The multifamily and single family loans that were sold were longer duration, tended to be lower coupons, and were not central to our relationship-driven approach to lending. Jared also touched upon the upcoming multifamily securitization through the Freddie Mac Q program. In preparation for that, we moved $574 million of multifamily loans from HFI to HFS, and we expect this to settle in August. The loan pool and the related hedge was structured to achieve an overall break-even position and has a weighted average coupon of approximately 3.80%. The proceeds from the sale will be used to improve our funding profile by paying down overnight advances, which currently cost 2.49%. We placed an economic hedge against the peer interest rate movement, which resulted in a one-time accounting loss of $9.6 million for the second quarter. However, this will be offset by the realization of the increase in the fair value of the loans at the completion of the securitization. The overall loan portfolio yield increased four basis points to 4.80% during the quarter. Although we did see some pressure on yields from a decline in LIBOR during the quarter, the activities we took to dispose of some of our lower yielding SFR and multifamily loans more than offset any negative impacts from the LIBOR move. Preparing for the securitization, along with the previously mentioned multifamily and SFR sales, drove the decline in HFI loans to $6.7 billion from $7.6 billion in Q1. Currently, CNI and SBA balances are 30% of our total HFI portfolio, up from 26% in the prior quarter, reflecting our efforts to transform the mix of our balance sheet to a more relationship-based portfolio. Moving on to deposits, brokered CDs decreased by $916 million, or 71%, to $379 million by quarter end. higher-costing money market and savings accounts fell by $98 million and $90 million, respectively. Overall, our targeted efforts to reduce our cost of deposits reduced the average cost by five basis points from Q1 to 1.62%. We further reduced our wholesale funding by $88 million in Q2, which left us with an ending wholesale funding mix of 24% flat from Q1. When the multifamily securitization closes and we apply the proceeds toward overnight advances, this ratio should drift lower towards 20 to 22 percent. Core deposits, or non-broker deposits, now account for 92 percent of total deposits, up from 81 percent last quarter. Turning to the income statement, net income available to common stockholders for the quarter was $11.9 million, or 23 cents per diluted common share. The quarterly results were impacted by net non-core benefit items totaling $5.6 million, including $6.2 million of legal and identification expenses, which was more than offset by a $12.6 million insurance recovery related to the same line item, with an additional $158,000 reversal of the restructuring charge recorded in Q1. After adjusting for these non-core items, along with the amortization expense associated with our solar tax equity program, Our operating expenses for the second quarter were $49.5 million. Normalizing our tax rate to 20%, operating earnings from core operations were 29 cents per diluted common share for the second quarter, with reconciliations located on slide 9 and 10, respectively, of today's deck. The bank's net interest margin increased by five basis points during the quarter to 2.86%. This is mostly due to a lower average funding balance, and lower cost of funds combined with a smaller asset base from loan and security sales, and mixed with a slight negative impact from rate resets. Average interest earning assets decreased from the prior quarter to $9.1 billion, with an average yield remaining flat at 4.59%. Since the CLO investments are indexed to the three-month LIBOR and reset quarterly, the securities portfolio average yield decreased by 30 basis points to 3.83%. The CLO book largely reset at the end of April and will reset lower again towards the end of July, based on LIBOR rates from 90 days prior, or about 20 basis points from the current level. Net interest income decreased by $3 million from the prior quarter to $64.8 million. Loan interest income decreased by $1.4 million in Q2 due to a $269 million decrease in average balances, somewhat muted by a four-basis point increase in the average yields. This was partially offset by a decline of $5.4 million in interest income on securities on lower average balances, including the LIBOR rate reset previously mentioned. Loan interest income and commercial loan interest income now comprises 86% and 64%, respectively, of total interest income in the quarter, up sequentially from 82% and 59%, respectively. On the liability side, Interest expenses on deposits decreased by $2.8 million on lower average balances and a three basis point decline in the average cost of interest-bearing deposits. Interest expense on FHLB advances fell by $792,000 from the first quarter, also on a lower average balance and with a sequentially flat average cost. The overall average cost of interest-bearing liabilities fell by three basis points in Q2 to 2.09%. With respect to potential reductions in the Fed funds rate or other indices, our modeled interest rate risk position is slightly liability sensitive over the first 12 months, assuming a 100 basis point parallel shift down, and more asset sensitive in months 13 to 24. Slides 14 and 15 included in today's deck presents information regarding the indices, rate floors, and timing of rate resets for loans, investment securities, deposits, and FHLB advances. The provision for loan losses in the quarter was impacted by our balance sheet optimization, resulting in a net reversal of $2 million. Included in that is $2.4 million in net charge-off activity and a $900,000 increase in specific reserves due mainly to one impairment. This was offset by a $6.3 million decrease, mostly driven by a balance reduction in the multifamily portfolio from the sales and the pending securitization. The A-triple-L balance coverage ratio of non-performing loans is 207%, while the overall A-triple-L ratio is 89 basis points. Total non-interest expenses for the quarter were $43.6 million, which included the previously discussed non-core benefit of $5.6 million and a $400,000 benefit from solar investments. Adjusting for non-core expenses, Q2 core operating expenses were $49.5 million or 2.06% of average assets, annualized. Q2 benefited heavily from the previously mentioned insurance recovery, and as we continue to align run rate expenses with our size and footprint, we should see a more normalized run rate expense level over the coming quarters. Our capital position improved during the quarter, mainly due to a reduced asset base. The common equity Tier 1 capital ratio was 10.4%, and Tier 1 risk-based capital totaled 13.9 percent. Lastly, let's move on to credit and asset quality metrics. Our non-performing asset ratio for the quarter was 31 basis points, up two basis points from the prior quarter. Total delinquent loans declined by 7.3 million, or 12 percent. We have a strong credit culture at the bank, and the credit performance of the portfolio is in line with expectations. 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 decreased $7.3 million during the quarter, resulting in a delinquent loans to total loan ratio of 78 basis points. With that summary of our second quarter financials, I'll now turn the call back over to Jared.