Banc of California, Inc.

Hello and welcome to Bank of California's third quarter earnings conference call. All participants will be in 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 touch-tone phone. To withdraw your question, please press star then 2. 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 of which and additional required information is available in the earnings press release. The reference presentation is available on the company's investor relations website. Before we begin, we would like to direct everyone toward 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.

Good morning, everyone. Welcome to Bank of California's third quarter 2019 earnings conference call. With me today is Bank of California's CFO, John Bogler, who will talk in more detail about our quarterly results shortly. We finished the quarter with a net loss to common stockholders of $22.7 million and a diluted loss per common share of 45 cents. As you know, the main reason for the quarterly net loss is we incurred a charge-off related to a $35 million line of credit originated by the bank in November of 2017 that to a borrower purportedly the subject of a fraudulent scheme. The effects of this charge off had a very clear impact on our quarterly earnings. Notwithstanding this event, our team continued to make significant progress during the quarter on our core strategic initiatives, which we will discuss momentarily. Let me first address what we have done since learning of the fraud. In addition to evaluating the loan itself and ensuring we are taking the necessary steps to pursue recovery, I wanted to evaluate our existing portfolio to make sure there is nothing else we should be aware of now. Following this event, I directed an extensive review of all loan C&I relationships $5 million and above not secured by real estate. Through the use of internal audit and outside parties, we looked at loan, security, and collateral documentation for each credit and confirmed the existence of our collateral if held by a third party outside of the bank. I also requested a review of the top 10 relationships in our warehouse lending group to confirm that we have appropriate documentation in place. While the reviews are not yet complete and we await final confirmations for certain loans, to date we have not identified any other instances of fraud or concerns that the collateral held by third parties does not exist or material concerns with our documentation. Turning to our overall business, I want to highlight some of the significant accomplishments this past quarter which are much more indicative of our overall performance and represent our ability to execute on our strategic plan. As you may recall, we set forth three areas of focus for 2019, reducing our cost of deposits, lowering our quarterly operating expenses, and eliminating non-core assets. All of this is intended to create the foundation upon which we will grow in 2020. We view cost of deposits as one of the key litmus tests for how we're executing on our plan. In Q3, we continued to make great progress and reduce our cost of deposits by 14 basis points. While lower rates have helped, our ability to generate non-interest-bearing deposits has been a key component as the mix of our deposit portfolio is most important for the long term. This progress reflects the significant effort we have made internally to transform the bank into a relationship-focused business bank. In the third quarter, we saw non-interest-bearing deposits increase by 11% from the prior quarter to over $1.1 billion, and they now comprise almost 20% of our total deposit portfolio. Additionally, we eliminated a significant amount of broker deposits, which now make up less than 2% of our deposit balances. We expect our broker balances to move up and down, like FHLB advances, to bridge funding, but we anticipate running broker and wholesale funding at reduced levels going forward, as we continue to make progress on increasing our low-cost deposit base. On the asset side of our balance sheet, in the third quarter, we opportunistically exited lower coupon and longer duration mortgage-backed securities, with the remainder to be sold in the fourth quarter. This will give us the opportunity to begin the process of building a more traditional and balanced securities portfolio, consistent with what you would expect at a community bank. It will take time to build, but will be more creative to us long-term. We have significantly reduced CLO balances over the last year, and we'll look for opportunities to reduce those balances to the extent we can find comparable yield and duration. As a result of our targeted efforts to eliminate non-core assets, we ended the third quarter at $8.6 billion, with core assets playing a more prominent role in our profitability. Expenses were nearly flat, and came in slightly below last quarter when adjusted for the gain on investments in alternative energy partnerships. This quarter was particularly good given we viewed the second quarter's non-interest expense as potentially a low point for the year. John will talk in greater detail on overall expenses and operating expenses specifically, but at a high level, we remain focused on simplifying our operations and improving the client experience which in both cases will help us manage expenses to an appropriate level based on the size and complexity of our business model. We continue to place an emphasis on hiring very talented and experienced professionals. This past quarter, we brought on a trio of talented executives. John Statuta to head our Community and Business Banking Division, Hamid Hussain as Head of Commercial and Real Estate Banking, and Bob Dyke as Executive Vice President of Credit Administrations. Bob will step into the chief credit officer role when our current CCO, Chris Gagnon, retires early next year. These talented executives, along with the rest of our executive team, are among the most accomplished bankers I've ever worked with. Our story and opportunity is incredibly compelling, and we are highly focused on taking advantage of it. The entire team at Bank of California is very dedicated and talented. These leaders are reflective of the tremendous talent we have throughout our organization. With that, I'd like to now turn the call over to John to provide more detail on what was mostly a positive quarter for the bank. Then I'll come back to wrap it up before we take questions. Go ahead, John. Thank you, Jared.

As mentioned, we have continued to opportunistically shed non-core assets. Our total assets ended the third quarter at $8.6 billion, a $735 million decrease from the prior quarter. The change was driven by the $574 million multifamily securitization that mentioned on the last earnings call, which settled in August. Additionally, as part of our efforts to begin diversifying and building a more traditional securities book, we sold 371 million of mortgage-backed securities during the quarter, the majority of which occurred at quarter end. We still hold approximately 40 million of MBS and expect to sell the remainder of those during the fourth quarter. As a reminder, the MBS portfolio was long duration and low coupon. With the decline in the middle portion of the Treasury curve, we were presented with an opportunity to exit the position and begin the process of diversifying into less price-sensitive securities that provided better cash flow structure. The sale of the MBS resulted in a $5.8 million loss, inclusive of an other-than-temporary charge, and a loss on interest rate swaps used to partially mitigate the price fluctuations of the securities. The securities sold at the end of the quarter are shown as a receivable on the balance sheet, and we expect by the end of the year, the securities to total assets ratio will be approximately 10 to 15%. Held for investment loans decreased to $6.4 billion this quarter, due mainly to a $220 million net reduction in SFR and multifamily balances, driven by an increased level of loan payoffs. This was expected as we are focusing on more relationship-oriented loans that are less price sensitive. The loan portfolio mix of SFR and multifamily loans is 52% at quarter end, down from 59% at the end of the prior year, and we expect this mix to continue to decline to a more reasonable percentage component of the loan portfolio. Our net C&I balance has decreased by $162 million due to lower production for the quarter, the $35 million charge-off exiting one large relationship, lower utilization of revolving facilities, and other credit-related exits as we continue to prudently monitor our loan portfolio, ensuring potential credit risks are being managed actively and swiftly. Rounding out the changes in the loan portfolio, our CRE and construction balances increased by $54 million. The overall loan portfolio yield decreased five basis points to 4.75% during the quarter due to variable rate loans resetting and higher coupon commodity loans being refinanced to other institutions. The loan yield did see a benefit of four basis points due to a higher level of loan prepayment fees and accelerated discount from the repayment of purchase loans, in addition to the securitization of the low-coupon multifamily loans. However, the combination of higher prepayment fees and the multifamily securitization was not enough to offset the negative impacts of falling LIBOR. Currently, C&I balances are approximately 29% of our total HFI portfolio, and relatively flat compared with 30% last quarter. Going forward, we expect a mix of C&I loans to comprise 25 to 30% of the overall loan portfolio. Moving on to deposits, higher-cost brokered CDs decreased by $325 million, or 86%, to $54 million by quarter end. Additionally, higher-costing money market and savings accounts fell by $105 million and $19 million, respectively. Overall, our targeted efforts to lower our funding costs reduced average deposit costs by 14 basis points from Q2 to 1.48%. We further reduced our wholesale funding by $562 million in Q3, primarily due to applying the proceeds from the multifamily securitization toward paying down overnight FHLB advances. We expect our wholesale funding to progressively decline with alternative lower-cost funding and as we continue growing relationship-based lower-cost deposits. Core deposits, or non-broker deposits, now account for 98% of total deposits, up from 92% last quarter. Turning to the income statement, our net loss to common stockholders for the quarter was $22.7 million, or a loss of $0.45 per diluted common share. As Jared described earlier, the quarterly results were negatively impacted by the $35 million charge-off in the quarter, $5.8 million loss in the sale of mortgage-backed securities, and $5.1 million loss from the preferred stock redemption. The charge-off pushed up our historical loss factors used in our ALLL calculation, which added an additional $3 million to the quarterly provision expense. These outlying charges were partially offset by net non-core expense benefit items totaling $2.5 million. After adjusting for non-core items, along with the amortization expense associated with our solar tax equity program, our operating expenses for the third quarter were 46.7 million. Normalizing our tax rate to 20%, operating earnings from core operations were 19 cents per diluted common share for the third quarter. Reconciliations for this are located within today's earnings presentation. Average interest earning assets decreased from the prior quarter to 8.2 billion, with the average yield decreasing nine basis points to 4.50%. Since the CLO investments are indexed at three-month LIBOR and reset quarterly, the securities portfolio average yield decreased by 23 basis points to 3.60%. The CLO book largely reset at the end of July and is currently resetting lower again based on LIBOR rates from 90 days prior or about nine basis points from the quarter end level. The bank's net interest margin was flat to Q2 at 2.86%. This was mostly due to the effects of lower cost of deposits, LIBOR rate resetting in the securities portfolio, higher mix of wholesale funding, and a LIBOR-driven decline in loan yields. Net interest income decreased by $5.9 million from the prior quarter to $58.9 million. Loan interest income decreased by $8.9 million in Q3 due to a $746 million decrease in average portfolio balances, as well as a five basis point decline in the average yield. Interest income on securities declined by $2.4 million on lower average balances and a LIBOR rate reset previously mentioned. On the liability side, interest expense and deposits decreased by $5.8 million or by 20% on lower average balances and 11 basis point decline in the average cost of interest-bearing deposits. Interest expense on FHLB advances increased by 230,000 from the second quarter due mostly to a higher average balance, slightly offset by the average cost being five basis points lower from the prior quarter. The overall average cost of interest-bearing liabilities fell by six basis points to 2.03%. With respect to potential reductions in the Fed funds rate or other indices, our model interest rate risk position is slightly asset sensitive. The provision for loan losses in the quarter increased to $38.5 million and included a $35 million charge-off and the related additional $3 million provision described earlier. The A-triple-L coverage ratio of non-performing loans is 139%, while the overall A-triple-L ratio to health for investment loans is 99 basis points. Total non-interest expenses for the quarter were $43.3 million, which includes the previously discussed net non-core benefit of $2.5 million. Adjusting for non-core expenses, Q3 core operating expenses were $46.7 million, or 2.17% of average assets annualized. As we continue to align run rate expenses with our size and footprint, we expect to see near-term quarterly operating expenses remain below $50 million. Our capital position improved during the quarter mainly due to a reduced asset base. The common equity Tier 1 capital ratio was 10.3%, and Tier 1 risk-based capital totaled 14.31%. Tangible common equity increased to 7.8%, up from 6.57% one year ago. During Q3, we completed a partial tender offer for shares of the Series E and Series E preferred stock for an aggregate total consideration of $46 million, inclusive of premium and accrued dividends. We continue to maintain a fairly robust capital position, which provides us with flexibility to allocate and execute on capital strategies, which the Board deems appropriate. Lastly, let's move on to credit and asset quality metrics. Our non-performing asset ratio for the quarter was 52 basis points, up 21 basis points from the prior quarter. This is due mainly to a $14.5 million shared national credit which was reclassified to non-accrual late in the quarter. This SNCC continues to remain current on its payment status, and any subsequent payments received will be fully applied to reduce the loan amount. Total delinquent loans increased by $4.1 million, resulting in delinquent loans to total loan ratio of 88 basis points. The upturn was mainly driven by SFR loans. Since the end of the quarter, $8.7 million of delinquent loans have cleared and are now current. With that summary of our third quarter financials, I'll turn the call back over to Jared.