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, 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 touchtone phone. 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 today on the company's investor relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and the additional required information is available in the earnings press release. The referred presentation is 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.

Good morning, and welcome to Bank of California's fourth quarter 2019 earnings conference call. Joining me on today's call is Lynn Hopkins, chief financial officer, who will talk in more detail about our quarterly results and Mike Smith, Chief Accounting Officer and Director of Treasury, who will also be available during Q&A. 2019 was a terrific year for Bank of California, and in the fourth quarter, we continued to make meaningful progress on our core initiatives, resulting in net income available to common stockholders of $10.4 million and diluted earnings per common share of $0.20. I'll talk some more about the highlights in a moment, but first I want to welcome Lynn to our first earnings call with Bank of California. Lynn joined us just last month and brings a wealth of experience and knowledge to our leadership team. As we have previously discussed, Lynn and I have known each other for nearly 20 years and worked closely together for over a decade, so I know how much value she brings to our organization. She shares my vision of how we are transforming Bank of California into a relationship-focused community bank, and I look forward to working alongside her as we continue executing on the business strategy. I'll turn the call over to her in a few minutes. However, I want to first talk about some of the business results and trends that set us up well for 2020. When I joined the bank three quarters ago, and after careful analysis of the business, I gave our management team three initiatives to focus on in order to build short and long-term value for the bank. First and foremost, we needed to reduce our cost of deposits. During the fourth quarter, our cost of deposits was 1.27%. down significantly from the 1.67% we reported on my first earnings call. Through internal deposit incentive programs and a concentrated effort to remix our deposit portfolio, demand deposits made up almost 50% of our total deposits at year end, with non-interest-bearing deposits comprising just over 20% of total deposits, up from 13% when the year began. The second goal we set out to accomplish was lowering our quarterly expenses. Total non-interest expenses for Q4 were $47.2 million, which, when annualized, would be a 17% improvement over the full year of 2018. As we continue to transform the balance sheet and invest in business initiatives aligned with our core objectives, our operating expenses may fluctuate. I expect our operating expenses are currently in the lower end of the range for the near term. However, we will remain diligent to ensure our expenses are at an appropriate level and we'll continue to look for efficiencies. Finally, we targeted the asset side of our balance sheet, specifically non-core assets, with the goal of remixing the balance sheet in order to optimize the bank's earning power and lower our overall risk profile. During 2019, we lowered our securities portfolio from 19% of total assets at the start of the year to under 12% in Q4, and we significantly reduced balances of brokered multifamily and brokered single-family loans by 33% and 31% respectively. Our balance sheet is now much stronger with total assets at 7.8 billion. Further, as a result of these efforts, our NIM expanded to 3.04% for the quarter. As discussed when I joined the bank, the purpose of these three goals was to create a foundation that would have a sustainable franchise value and set us up for future success. We believe that foundation has now been established And while there is more work to do, in many ways we are a very different, more focused bank today than we were nine months ago. A key area of focus for us in 2020 will be keeping our balance sheet at the right size. As non-relationship loans pay off and we originate new, high-quality relationship loans that result in changing the mix of our balance sheet. This is a process, and our transition will continue through the year, but we are doing it from a base that is more representative of the bank we want to be. In addition to adding Lynn to the team, we also welcome Conan Barker and Andrew Thaw to our board of directors during the fourth quarter. Conan and Andrew have deep roots within the Southern California business community, and I look forward to their valuable contributions in 2020 and beyond. With their addition, our board is now comprised of ten directors, nine of whom are independent. Staying on the topic of corporate governance, in December we were pleased to be notified by the SEC staff that they have concluded the investigation opened in January of 2017, and that they do not intend on recommending an enforcement action against the company to the Commission. As you know, I expressed a desire to move past as much of this as possible, and we are excited to close that chapter and finish 2019 a much stronger company than when the year began, with a clear focus and stable foundation from which we intend to become a high-performing, relationship-based bank. I'll end my opening remarks by thanking our amazing colleagues at Bank of California for their tireless work this year. Our organization is filled with highly professional and capable team members dedicated to excellence and determined to ensure our clients receive the best possible service. It is through their significant efforts this year that we were able to successfully execute on all of our initiatives and are now poised to enter the new decade, a stronger and more focused community bank. Now I'd like to introduce Lynn Hopkins, who will provide more color on our operational performance. Then I'll have some closing remarks before opening up the line for questions.

Thank you, Jared, and thank you for the kind introduction. First, I'd like to start off by saying how pleased I am with the teamwork and enthusiasm I have gotten to be a part of since starting with the bank about six weeks ago. It's clear the team has been able to accelerate the bank's transformation considerably over the past ten months, and I think that is a reflection of their exceptional commitment to the company's vision, as well as the high-performance culture Jared has built in partnership with the executive team and throughout all levels of the organization. I am inspired to have joined such a great team and look forward to making a meaningful contribution for the benefit of all of our key stakeholders. Moving on to our quarterly results. Assets declined $797 million, resulting from a net decline in loan balances of $431 million, along with a decline in unsettled security sales of $335 million and a decline in cash of $153 million. These declines were offset by an increase of $137 million in securities. The bank benefited from this decline by reducing reliance on wholesale funding. During the quarter, in furtherance of our plans to create a more traditional securities portfolio, we sold the remaining $39 million of our longer duration agency mortgage-backed securities and purchased $192 million of new securities comprised of $126 million of agency commercial mortgage-backed securities, 53 million of municipal bonds, and 14 million of corporate debt securities. At the end of the year, CLOs represented 79% of our securities portfolio, and we remain comfortable with the credit quality. We will opportunistically look to transition out of the CLOs to the extent we find other interest-earning assets that provide an equivalent yield at the same or lower risk profile. At the end of the fourth quarter, our overall securities portfolio has a lower duration, and outside of our CLO balances, is transitioning to a more distributed and traditional bank securities portfolio, representing 11.7% of total assets. We expect to complete the rebalancing of our securities portfolio in the first quarter, and that securities will stay in a range of 10 to 15% of total assets going forward. We also saw positive effects from changing the mix of our loans within our total portfolio, as total commercial-related loans represented 72.4% of our loans held for investment, up from 71.3% at the end of the prior quarter. The overall decline in loan balances was due mostly to accelerated payoffs in the brokered single-family and multifamily portfolios, payoff from a few large CNI loans as we continue to timely manage our potential credit risk, and lower total warehouse loans. The decline in loans included reductions in most categories, including lower single-family residential mortgage loans of $185 million, CNI loans of $98 million, commercial real estate loans of $72 million, and multifamily of $69 million. The loan portfolio mix of brokered single-family and multifamily loans is 52% at quarter end, which is consistent with prior quarter end, but down from 59% at the end of prior year. And we expect these loans to represent a lower percentage of the total portfolio over time. In addition, C&I balances are 28% of our total held for investment portfolio, and within our target range for CNI loans of 25% to 30% of the overall portfolio. The new loan production totaled $182 million during the quarter at a weighted average rate of 4.82%. The average production rate has come down in line with the decrease in market interest rates generally. However, the fourth quarter average production rate is 11 basis points higher than the current average portfolio yield of 4.71%. On the margin, We believe this will continue to be the case as the loans we're bringing in are more relationship-based, which will then contribute to a better earnings profile and a stronger balance sheet in the long term. In the short term, the challenge, of course, will be to maintain our earning capacity as we rebuild the balance sheet against the backdrop of payoffs in the brokered portfolio. Overall, the loan portfolio yield declined by four basis points, quarter over quarter, as we have originated and repriced our loans in the lower rate environment, and as higher coupon commodity loans continued to be refinanced to other financial institutions. The fourth quarter loan yield does include seven basis points due to a higher level of loan prepayment fees and accelerated discount from the repayment of purchase loans. However, the positive impact of higher prepayment fees was not enough to offset the impact of lower market interest rates. Turning to deposits, total deposits decreased by $343 million during the fourth quarter, driven mostly by controlled runoff of higher costing deposits, including matured CDs that were not renewed and other non-maturity accounts. Brokered CDs decreased $54 million to zero, higher costing savings decreased by $157 million, and non-brokered CDs decreased $163 million. In addition, non-interest bearing deposits declined $19 million, while interest checking increased $31 million. While spot balances were down for non-interest bearing checking, average non-interest bearing checking and interest checking increased $95 million for the quarter. Non-interest bearing checking represented over 20% of our total deposits at year end. Overall, Our efforts to place a higher priority on gathering lower-costing, relationship-based deposits combined with the impact of lower market interest rates reduced our average deposit costs by 21 basis points to 1.27% from the prior quarter. We reduced our reliance on wholesale funds, including lower FHLB advances during the quarter. We used the proceeds from our prior quarter asset sales to pay down the FHLB advances by $455 million or 28%. We should continue to see the reliance on higher costing wholesale funds decrease in the coming quarters as our funding needs are expected to be achieved through our deposit initiatives. Looking at the income statement, net income available to common stockholders for the quarter was $10.4 million, or 20 cents per diluted common share. After adjusting for non-core items, along with the amortization expense associated with our solar tax equity program, our operating expenses for the fourth quarter were $48.1 million. Normalizing our tax rate to 24%, operating earnings from core operations were 18 cents per diluted common share for the fourth quarter. Reconciliations for this are located within today's earnings presentation. For 2020, we expect our tax rate to be in the 22% to 24% range. Net interest income was $56.7 million in the fourth quarter, down $2.3 million from the prior quarter due to the impact of lower average earning assets offset in part by a higher net interest margin. Average earning assets decreased $781 million and our net interest margin increased 18 basis points to 3.04%. The net interest margin expansion is due mainly to a 20 basis point decline in our overall funding costs to 1.55%, while the yield on interest earning assets remained flat at 4.50%. The earning asset yield remained flat due to an improved asset mix as higher yielding loans represented a higher percentage of our interest earning assets combined with an increased yield on our securities portfolio and offset by a lower loan portfolio yield. Loan interest income was down by $6.4 million from the third quarter due to a $478 million decrease in average portfolio balances combined with the four basis point decline in average yield as previously described. Interest income on securities declined by $2.2 million on lower average balances offset by a 12 basis point increase in the average yield to 3.72%. The increase in the securities yield is due to the higher yielding CLO portfolio representing a higher percentage of this earning asset class, offset by an overall lower yield on the CLO portfolio as the CLOs have reset lower based on three-month LIBOR. Fourth quarter interest expense from deposits decreased by $4.6 million due to lower average interest-bearing deposits of $468 million and a 21 basis point decline in the average cost of such deposits. Interest expense on FHLB advances decreased by $2.1 million from the prior quarter due to a lower average balance of $313 million and a four basis point decline in the average cost of these funds. The overall average cost of interest-bearing liabilities decreased by 18 basis points to 1.85%. Average deposit balances decreased by $408 million due to the decline in average interest-bearing deposits offset by a $60 million increase in average non-interest-bearing deposits. Average non-interest-bearing deposits represented 19.4% of total average deposits and this contributed to the lower total deposit costs and lower total funding costs as previously described. Looking ahead to the first quarter, we have a good opportunity to continue this trend and maintain our net interest margin above 3%. We will continue to focus on remixing our loan portfolio away from single family and into other high yielding loan types, which should help to offset the impact of the September and October market rate changes. In addition, With continued emphasis on relationship banking, we expect to improve both the mix and pricing of our funding base. We recognize the reversal in our provision for loan losses during the quarter of $2.7 million due to the $431 million reduction in total loan balances. The allowance for loan loss coverage ratio of non-performing loans is 133%, while the overall allowance ratio to held for investment loans is 97 basis points. Total non-interest expenses for the quarter were $47.2 million, and as I mentioned a few minutes ago, adjusting for non-core expenses, fourth quarter core operating expenses were $48.1 million, or 2.42% of average assets annualized. We expect, on average, our quarterly run rate expenses to remain below $50 million for the near term. As a reminder, there are historically more expenses built into the first quarter of the year, so we expect to see an uptick in expenses for Q1. Our capital position remains robust and above well capitalized, due mainly to a smaller asset base. Tangible common equity increased to 8.68%, up from 6.34% one year ago. Our Series D preferred stock is redeemable in June 2020, and we're currently evaluating various options for funding the redemption of our Series D preferred stock. In addition, the company filed a shelf registration statement on Form S3 with the Securities and Exchange Commission yesterday to provide the company with flexibility and enable it to access the public capital markets to respond to financing and business opportunities that may arise in the future. The company's prior shelf registration statement expired in August 2019. Finally, I'll move on to credit and asset quality. Asset quality remains strong as total criticized and classified loans declined by $25.8 million in the quarter. Our non-performing assets also decreased $1.8 million to $43.4 million as of year end. The decrease in non-performing loans was due to the sale of 11.9 million of non-performing loans and 4.1 million returning to performing status. offset by 14.3 million of loans being placed on non-accrual status. Our non-performing loan balance includes two large loans that make up 54% of our total non-performing loans. One is a $14 million shared national credit that went on non-performing status in the third quarter, and the other is a $9 million single-family residential mortgage with a 38% loan-to-value ratio that went on non-performing status in the fourth quarter. Aside from those two loans, non-performing loans totaled $20 million and approximately 48% are single-family loans. We believe the risk of loss on the single-family portfolio is low and that we are appropriately reserved, but due to consumer rules, single-family loans tend to take longer to work through. Our nonperforming loans to total assets ratio was 55 basis points at the end of the year, up from 52 basis points at the end of the prior quarter. The increase is due to a decline in total loans relative to the decline in nonperforming loans. The total delinquent loans increased by 1.3 million to 57.6 million, resulting in a year-end delinquent loans to total loans ratio of 97 basis points. The increase in delinquent loans for the linked quarters includes the addition of one $5 million CNI loan with a real estate developer that is expected to be worked out. Single-family loans represent 75% of the total delinquent loans, and the other segments reflect continuing positive results. That will finish up my summary of the fourth quarter financials, so I'll go ahead and turn the call back over to Jared.