Banc of California, Inc.

Hello and welcome to the Bank of California first quarter earnings conference call. 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 regulation for these and additional required information is available in the earnings press release. The reference presentation is available on the company's investor website. Before we begin, we'd like to direct everyone towards the company's Safe Harbor Statement. On forward-looking statements included in both earnings release and earnings presentation. I'd 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 first quarter earnings call. Joining me on today's call are Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results, as well as Mike Smith, our Chief Accounting Officer, and Bob Dyke, our Chief Credit Officer, who will all be available during Q&A. We recognize that the past couple of months have been challenging on many levels. We hope that in the coming months, we will see a return to some semblance of normalcy. In the meantime, we are doing everything we can to support our employees, our clients, and our communities. We hope that you, your families, and your colleagues are healthy and doing well. While no one saw the pandemic coming, our decision to shrink and de-risk our balance sheet last year could not have come at a better time. As a result of these efforts, we entered this period of uncertainty with high levels of capital and a well-underwritten credit portfolio, predominantly secured by Southern California real estate with relatively low loan to values. From this position of strength, we look to support our clients and build upon our reputation as one of the premier relationship-focused business banks in Southern California. As the potential for a domestic outbreak of the pandemic increased, we implemented our business continuity plan and also initiated an enhanced outreach program with our clients to identify early signs of stress in our portfolio. Our ongoing efforts have kept us in front of our clients to build dialogue and gather data about the local economy while providing assistance where needed to keep problems at bay. We decided early on to participate in the Payroll Protection Program, primarily to support our existing clients, but have also had success in using it to establish deposit relationships with new clients. As our materials report, we have been actively getting applications approved and funding loans on behalf of clients. We estimate these funds have helped protect well over 7,000 jobs in the communities we serve. We also have provided support to clients by granting loan deferments, when requested and supported by our borrowers. As of April 27th, in our SFR portfolio, we had 122 active deferments on 123 million of principal balances, approximately 8% of the portfolio. With respect to our non-SFR portfolio, as of April 27th, we had 68 active deferments, 257 million of principal balances, or 6% of our non-SFR portfolio. As with our entire portfolio, we will continue to actively monitor and manage our lending relationships manner that supports our clients and protects the bank. None of this would have been possible without the full support of Bank of California's more than 600 employees who have worked tirelessly to adapt to the rapidly changing environment and still service our clients' financial needs. In early March, we implemented our business continuity plan, transitioned to a remote work environment, reduced branch hours, and temporarily closed a few branches that we sought to balance employee and community safety with the financial needs of our clients. Our recent investments in technology, including video conferencing tools we put in place early last year, made these changes much more manageable. To support our community, Bank of California partnered with Food Finders to provide over 300,000 meals to our most vulnerable neighbors in Southern California. We made a donation to the Los Angeles Fire Department, among others, to help supply critical personal protective equipment to these first responders. Despite the pandemic-related disruption, transformation of Bank of California into a relationship-focused business bank continues. We made progress in all three of the objectives we've highlighted in the past that I believe are key to creating long-term franchise value for our shareholders. First, of note, we grew non-interest-bearing deposits by 168 million, or 15% in the first quarter. The significant quarter-over-quarter growth also came with growth in average deposits, making it the fifth consecutive quarter in which our average non-distributing deposits increased. We have continued to reduce rates as relationship deposits replaced legacy transaction-oriented deposits, reducing our total cost of deposits by 16 basis points this quarter. Second, we reduced our core expenses by $5 million, or more than 10 percent. Third, we continued our repositioning of the balance sheet with further reductions in our non-core assets, which will be replaced in time with relationship-based loans and appropriate investments in our securities portfolio. I feel it's important to highlight these accomplishments, as the events of the past two months have shifted focus to the future and risk overshadowing the significant progress we have made and continue to make. As Lynn will explain, there was a fair amount of noise in this quarter's results, but our core earnings were largely in line with Q4. In summary, hard work of the past year to reposition the bank is taking shape, We entered this crisis with high levels of capital and a relatively conservative credit profile. We are moving forward with the vision that the relationship-based business bank we are building will create tremendous long-term value that will be able to be unlocked when this crisis has passed. Now I'll hand it over to Lynn, 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. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website. We significantly revised our format this quarter to provide more granularity in certain areas, including the new current expected credit losses methodology, or CECL, our loan portfolio, and the CLO portfolio. The net loss available to common stockholders for the first quarter was $9.7 million, which or negative 19 cents per share due to the impact of a $15.8 million provision for credit losses combined with the impact of declining market interest rates and a $355 million decline in average interest earning assets. Pre-tax, pre-provision income was $7 million for the first quarter and adjusted pre-tax, pre-provision income was $10.6 million. Despite the volatility in market rates, our net interest margin was relatively stable at 2.97%, down seven basis points from prior quarter. Let me begin with the CECL discussion to provide some context for the largest driver of this quarter's net results. The first quarter results included the adoption of CECL, and we recorded a $6.4 million increase in our allowance for credit losses on day one, which increased the allowance to $68.1 million, in the allowance coverage ratio from 1.04% to 1.14%. Our day one forecast scenarios included unemployment rates ranging from low to mid single digits and near term GDP growth of approximately 2 to 3%. As we turned to March 31st, we evaluated the effects of the pandemic being felt throughout the entire economy. and we recognize the provision for credit losses of $15.8 million, resulting in a total allowance for credit losses of $82.1 million, or an allowance coverage ratio of 1.45%. This provision reflects the new CECL methodology using current economic forecasts and the estimated future impact of the COVID-19 pandemic on lifetime credit losses. Using the Moody's model and forecasts published at the end of March, approximately $19 million of the provision for credit losses was attributed to the change in economic forecasts since the beginning of the year. And this was offset by a $5 million downward adjustment to account for changes in the portfolio. The forecasts used to inform our reserve levels generally indicated a recession, followed by a relatively quick return to the long-term trends. These forecasts included a sharp contraction in annualized GDP growth ranging from negative 13% to negative 26% and a sharp spike in near-term unemployment rates ranging from 8% to 13% before returning to moderate long-term trends. Our visibility at the end of the quarter indicated that local unemployment was heading higher and that the economic recovery would likely be slower. Accordingly, we incorporated qualitative factors to address an economic outlook that was worse than the late March forecast used in the model. As Jared mentioned, our capital position is very strong, with a CET1 ratio over 11%, and has benefited from the strategic actions completed over the past several quarters. Prior to pausing our common stock buyback program on March 17th, We repurchased approximately 828,000 shares of common stock for an aggregate amount of $12 million, and we took the opportunity to repurchase par value $2.2 million in the aggregate of Series D and Series E preferred stock for a total purchase price of $1.6 million. Looking forward to June, our Series D preferred stock is redeemable, and we are evaluating options regarding the redemption. We will continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to continue building franchise value while protecting our very well capitalized position at a time when the economic outlook remains uncertain. Our balance sheet repositioning continued as we reduced total assets by $166 million to $7.7 billion. The largest driver was expected runoff of our legacy single family residential portfolio. As you may remember, we stopped originating SFRs in the second quarter of 2019, consistent with our focus of being a relationship-focused business bank. Accordingly, we expect to see additional declines in this portfolio as we concentrate our efforts on originating core relationship-based loans. As noted in the past, we expect production to outpace payoffs in the second half of the year, resulting in a relatively stable level of assets. With economic conditions having deteriorated and being mindful of credit quality, loan production will likely be less robust. However, we will look to add quality earning assets in the loan and or investment portfolio to improve our level of interest income and earning assets going forward. This year, we will continue to build the foundation that will drive improved performance in 2021 and beyond. The investor presentation includes details about our loan portfolio, and there are a few points worth making. First, we have limited exposure to the sectors that are most at risk from the pandemic, energy, hotels, restaurants, airlines, and hospitality. Second, we have a well-diversified portfolio and an increasing focus on relationship-based commercial loans, which is supported by high-quality collateral, including residential real estates. Total loans held for investment at the end of the first quarter were $5.7 billion, with an average yield of 4.56%. Real estate loans, which include multifamily housing, CRE, construction, and single-family, totaled just under $4 billion, 88% of which had current LTVs of less than 70%. Our single-family portfolio totaled $1.5 billion, 80% of which have LTVs of less than 70%. The commercial real estate and multifamily portfolios, which totaled $2.3 billion, have an average LTV of approximately 62%, are well diversified, and are mainly secured by California real estate. The CNI loan book totaled $1.6 billion with an average loan size of about $2 million, and like our other portfolios, have limited exposure to industries that have seen the greatest impact from the COVID-19 pandemic. Turning to asset quality, there are a few key takeaways. Overall, asset quality is strong, but the legacy SFR portfolio adds some noise, so we show asset quality metrics for both the entire loan portfolio and for the portfolio excluding SFR. Setting the SFRs aside, total delinquent loans would have been $13.6 million, or 24 basis points. And the non-performing loans would have been $32.1 million. As we've discussed before, the NPLs include a legacy $16.4 million shared national credit. The growth of delinquencies and SFR loans is expected given the dynamics in that portfolio. While the growth in delinquencies was considerable in the first quarter, we believe the risk of loss on single-family portfolio is low given the conservative LTVs. However, due to consumer rules, single-family loans tend to take longer to work through and can temporarily elevate our total delinquent and non-performing loans. Our securities portfolio totaled $969 million at quarter end and had an average yield of 3.3% in the first quarter. 95% of this portfolio is AAA or AA-rated securities, with the remaining 5% in BBB corporate debt securities. About 64% of our total securities portfolio was comprised of investments in CLOs, which, due to the market dislocation during March, ended the quarter with an unrealized pre-tax loss of $80 million, of which $64.8 million occurred during the quarter. In addition to our regular credit monitoring and quarter end, other than temporary impairment evaluation for our CLOs, we conducted additional stress testing analysis and continue to conclude the credit quality and cash flow will support the invested CLO balances. The additional stress testing analysis considered constant prepayment speeds ranging from zero to 20 and recovery rates ranging from 50 to 70%. Our holdings include only AA and AAA CLOs and the collateral underlying the CLOs is well diversified across many industries without concentration in any one sector and specifically no significant exposures to industries, which have been hardest hit in the recent weeks due to the health crisis. That being said, the effects of the recent market movements have touched the entire economy, so all industries have been adversely affected to some degree. Given our current view of the credit risk and the underlying collateral and the significant unrealized loss position of the CLOs, we will not look to exit the CLOs at this time at a loss. However, should credit spreads improve and as CLOs run off in the normal course, we expect to continue to diversify out of our CLO concentration, and we will continue to add non-CLO investments with appropriate levels of risk and yield. Volatility in the CLO credit spreads did have a negative impact on our tangible book value, specifically lowering at $45.7 million, or $0.91 per common share, as of quarter end due to the after-tax unrealized loss. In response to the unknown potential impact of the COVID-19 pandemic, we increased our on-balance sheet liquidity to 18% of total assets, up from 16% in the fourth quarter. This additional liquidity was used to purchase $147.4 million of corporate debt and government agency securities and increased cash balances by $62.5 million. We did not observe any significant credit line utilizations during the back half of March, and they continue to remain stable. We anticipate maintaining this liquidity until the longer-term impacts of the pandemic on the economy and to our operations become clear. Deposits increased $136 million to $5.56 billion at the end of the quarter, with non-interest-bearing deposits reaching $1.26 billion, nearly 23% of our total deposits. A summary of our current and historical deposit mix in the investor presentation highlights the progress we have been making in improving the composition of our deposits and bringing down their total cost over the past five quarters. Demand deposits increased from approximately 35% to nearly 51% of total deposits from the first quarter of 2019 to the first quarter of 2020, which, when combined with the rate environment and our proactive efforts to lower deposit costs, drove the all-in average cost of deposits down from 1.67% to 1.11% over the same time period. As we previously mentioned, we believe building a strong, truly low-cost deposit base is one of the most important things we can do to create franchise value. Overall, our progress is slightly ahead of plan due to the tremendous dedication of our team. As Jared mentioned, we have shown five consecutive quarters of growth in average non-interest-bearing deposits, and our mix of non-interest-bearing and BDA to total deposits is continuing to grow. We look forward to continued progress in this area and having it be one of the hallmarks of Bank of California. Brokered CDs grew from $0 to $208.7 million in the first quarter as we took advantage of attractive pricing in that market to reduce some of our remaining higher-cost interest-bearing deposits. FHLB advances decreased $217 million in the first quarter, resulting in a stable amount of wholesale funding. Our net interest margin decreased 7 basis points to 2.97% for the linked quarters, despite significant volatility in market rates. and illustrates the progress we have made in managing our cost of deposits and asset mix. At the end of the quarter, our deposit cost spot rate reached 89 basis points, well below the quarter average of 1.11%. We are seeing the benefits from our focused efforts to increase lower cost deposits as a portion of our total deposit portfolio and expect further declines in the average and period end rates. Another area of focus for us has been managing expenses to match the size of our business. While there has been a fair amount of volatility in non-core expenses, which I'm happy to address in the Q&A, core expenses decreased 21% over the last year to reach $43 million in the first quarter of this year and down $5 million from last quarter. While the core expense to average asset ratio was 15 basis points higher than it was a year ago, It's important to remember how dramatically average assets have declined as we've worked to run off non-core assets and transform into a relationship-focused business bank. And lastly, I would like to comment that when we look at pre-tax, pre-provision income and exclude the unrealized fair value adjustment on loans held for sale and illegal settlements that concluded an acquired bank's leaked legacy issue, we made approximately $13.1 million for the first quarter, and this compares to $13.3 million for the prior quarter. Accordingly, our core underlying earnings when adjusted for these items are largely in line for the linked quarters. At this time, I will turn the presentation back over to Jared.