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 star then zero on your telephone keypad. 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 today on the company's investor relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release. The referenced presentation is available on the company's investor relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement, 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 third 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. As noted on our earnings call for the second quarter, we expected our third quarter to demonstrate the earnings momentum we had been building toward following nearly 18 months of restructuring. I'm pleased to report that we executed well and delivered strong operating and financial results that we anticipated in the third quarter. We will get into more details later in the call, But here are just a few highlights of the positive results we generated on many fronts this quarter. We had significant improvement in our level of profitability, generating net income available to common shareholders of $12.1 million, or $0.24 per share this quarter, and $19.4 million in pre-tax, pre-provision income. Our net income benefited from a lower than normal tax rate, which Lynn will detail later. Adjusted for a normalized 25% tax rate, Net income available to common stockholders would still have been strong at 9.9 million or 20 cents per share. We were able to maintain a stable net interest margin due in large part to our continuing ability to improve our deposit base as we recorded our fifth consecutive quarter of DDA growth while further lowering our cost of deposits. We've continued to reduce our cost structure without impacting our ability to service existing clients and bring in new business. and we are actively managing and monitoring our asset quality with the majority of our deferred and non-SFR loans returning to their regular payment schedules and deferments dropping to just 5% of total loans at the end of the third quarter from 11% at the end of the second quarter. With the improvements seen in our deposit base, operating efficiencies, and asset quality, our third quarter performance underscores many of the attractive characteristics of our franchise that we have been building and that we expect will drive further improvement in our financial results going forward. We've kept a sharp focus on credit quality, closely monitoring our loan portfolio, and actively reaching out to our clients. Our loan portfolio continues to hold up well, and our exposure to areas most impacted by the current crisis remains limited. With a well-underwritten credit portfolio, predominantly secured by Southern California real estate, with relatively low loan-to-values and strong debt-service coverage ratios, we are seeing encouraging asset quality trends with limited loss exposure, a decline in problem loans, and a significant reduction in loan deferrals. This trend contributed to a lower level of provision expense this quarter, following our significant reserve build during the first half of the year and the rapid decline in deferrals. In addition, our conservative approach continues to keep us very well capitalized with a high level of liquidity. Even with the progress we have made, we still have several opportunities to improve operating leverage to further enhance financial performance, many of which are timing dependent and will benefit us in quarters to come. In the third quarter, the most notable progress came in the continued improvement in our deposit base, our mix of earning assets, and our operating efficiencies, all of which led to a higher level of earnings and improved returns. Our total cost of deposits continues to decline, as we successfully expand existing client relationships and bring new business customers to our service platform, which is further shifting the deposit base toward lower cost, relationship-based deposits. Our total cost of deposits hit 39 basis points at the end of the third quarter, down 20 basis points from the end of the prior quarter. At the same time, we've been able to effectively protect our average loan yield, as we have relatively limited exposure to repricing within our existing portfolio, given the level of fixed rate in hybrid loans, which are not scheduled to mature or reprice for at least two years. As a result, our average loan yield was relatively stable in the third quarter, declining just two basis points from the prior quarter. The lower deposit costs and relatively stable loan yields helped us to offset pressure on yields in the securities portfolio, and we held our net interest margin steady at 3.09% for the quarter. We also continue to see the positive impact of our actions to reduce our cost structure. On an adjusted basis, our non-interest expense declined by more than 2 million from the prior quarter, resulting in further improvement in our efficiency ratio and our ratio of non-interest expense to total assets. Positive trends we are seeing in these key areas resulted in a strong earnings improvement this quarter. Simply put, despite the very challenging operating environment, Relative to 2019, we are now making more money with a smaller balance sheet. The financial performance this quarter is a result of the significant changes we have made and the type of customers that we bank, the talent we have added at all levels of our organization, and the strong execution on the strategies we have identified to enhance franchise value. And importantly, having solidified our foundation through the strategic actions we have taken over the last 18 months, we are very pleased we were able to deliver results that clearly demonstrate our improved earnings power. While the operating environment created by the pandemic remains challenging, we are seeing some encouraging signs within our markets and in the financial health and behavior of our customers. Most of our commercial borrowers that received a loan deferral have returned to their regular payment schedules, and we have had very few require a second loan deferral. Total deferments and forbearances decreased by 53 percent from the end of the second quarter. Deferments are lower across the entire portfolio, with commercial deferments decreasing from $440 million to $145 million, and SFR forbearances decreasing from $164 million to $138 million. Of these balances at September 30th, the majority of the loans are on a second deferment or forbearance period. We are also beginning to see some clients utilize the liquidity they had built up in their deposit balances during the first half of the year to fund transaction and investment opportunities. For the most part, though, we were able to offset these deposit outflows through the acquisition of new clients and the expansion of existing relationships, which kept our deposit balances relatively stable. During the third quarter, newly opened DDA accounts contributed more than $340 million of low-cost deposits. The deposit engine that we have built continues to produce strong results with contributions coming from all of our business units, private and specialty banking, community and business banking, and commercial and real estate banking. Our lending teams are also gaining traction, and we are bringing in new loan relationships to help offset the planned runoff in our single-family portfolio. As a result, our total loan balance has increased at an annualized rate of 4% during the quarter, while the mix in the portfolio continued to move in the desired direction. At September 30th, loans to commercial customers increased to 78% of our total loans, up from 75% at the end of the prior quarter and 71% at this time a year ago. As I've said in the past, our goal is to show progress each quarter and keep moving the ball down the field in terms of improved operating leverage, quality deposit growth, and higher earnings. We clearly did that this quarter and improved our franchise value in the process. Now I'll hand it over to Lynn, who will provide more color on our operational performance, and then I'll have some closing remarks before opening up the line for questions.

Thank you, Darren. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website as I review our third quarter performance. I'll start by reviewing some of the highlights of our income statement before moving on to our balance sheet trends. Net income available to common stockholders for the third quarter was $12.1 million for 24 cents per diluted share. Our adjusted pre-tax, pre-provision income was $18.9 million, an increase of $2.8 million from the prior quarter. As Jared mentioned, our net income benefited from a lower than normal effective tax rate, which I will detail later. Adjusted for an effective tax rate of 25%, net income would have still been strong at an estimated $9.9 million, or 20 cents per diluted share. Total revenue declined $1 million, or 1.7%, compared to the prior quarter, as a 1% increase in net interest income was offset by a decline in non-interest income. The decrease in non-interest income was due primarily to a gain on sales securities of $2 million in the prior quarter versus none in the third quarter. The half a million dollar increase in net interest income was due mainly to lower funding costs more than offset by a decline in interest income. Our net interest margin of 3.09% was unchanged from the prior quarter as a decline in our cost of funds was largely offset by our lower yield on average earning assets. Our earning asset yield declined 20 basis points due primarily to our CLO portfolio repricing down into the current market, as well as the impact of temporary excess liquidity being held in lower yielding assets. The average yield on our $686 million CLO portfolio declined from 3.22% in the second quarter to 2.16% in the third quarter. However, with LIBOR beginning to stabilize after the significant declines earlier this year, we anticipate limited repricing pressure on the CLO portfolio yield in the fourth quarter. Our average loan yield declined by just two basis points from the prior quarter, due in part to lower yields on SBA loans as we extended the estimated average life of our PPP loans to 12 months from nine months. The change in the estimated life is to provide additional time to account for the government's delay in processing forgiveness applications. As of October 16th, about 25% of our PPP loan count, representing about 30% of our PPP loan dollars, were in the forgiveness process. We are actively working with our clients to help them through the forgiveness process. and using the opportunity to deepen relationships and identify additional lending opportunities. We will continue to monitor our estimated life relative to the government's ability to manage the forgiveness process. As Jared highlighted, our period end total cost of deposits fell 20 basis points to end the third quarter at 39 basis points. The average total cost of deposits for the quarter was 51 basis points, or 20 basis points below our second quarter average. Looking ahead, we have $541 million of CDs and FHLB advances maturing over the next six months with a weighted average rate of about 1.6%, which will further reduce our cost of funds. With our cost of funds likely to continue trending lower and considering our meaningful opportunities to deploy excess liquidity into loans, we see the potential for NIM expansion in the fourth quarter. Non-interest income decreased $1.6 million to $4 million. As I mentioned on our last call, the three-year earn-out from the sale of the bank's mortgage banking division, which contributed average quarterly fee income of approximately $800,000, concluded in the second quarter, which lowered our other income. In addition, the prior quarter included a gain on sales securities of $2 million, while the current quarter included a gain of approximately $300,000, on the sale of $17.8 million of loans held for sale. We continue to drive operating efficiencies as core expenses decline to $40.7 million for the third quarter, a 13% decrease from the same quarter last year, and a $2.1 million or 5% decrease from the prior quarter. The most significant contributors to the decline from the last quarter were lower salaries and benefits expense, lower advertising expense, and lower legal settlements expense, the latter of which were included in other expenses. Based on our actual and projected level of earnings and tax differences for 2020, we've made a change in our estimated effective tax rate for the full year to a negative tax rate ranging from approximately 10% to 15%. As a result of the change, the effective tax rate applied in the third quarter was 13%, and we expect our fourth quarter effective tax rates to be approximately 25%. Turning to our balance sheet, our total assets decreased by $32 million in the third quarter to $7.74 billion. Towards the end of the third quarter, we reduced a portion of our excess liquidity to repay maturing broker deposits, and this temporarily reduced the size of our balance sheet. But as we selectively add high-quality earning assets in the future, both in terms of loans and investment securities. We have the flexibility to add overnight and other wholesale funding, if needed, to strategically support our growth entering assets. Our growth loans held for investment increased by $50 million during the third quarter, as growth in CNI, CRE, and multifamily loans more than offset ongoing runoff of our legacy single-family residential portfolio. The investor presentation includes updated details on our loan portfolio. The portfolio continues to be largely weighted towards real estate loans, which are supported by high quality collateral and underwritten with strong debt service coverage and low loan to value. We continue to closely monitor credits in all sectors within our portfolio. We have very limited exposure to the sectors that have been most impacted by the pandemic. Deposits were relatively flat at $6 billion at quarter end, but our mix and cost continues to improve as a result of our very focused initiative. The activity included a $90 million decrease in broker deposits, offset by a $59 million increase in non-interest bearing deposits and a $26 million increase in other interest bearing deposits. Non-interest bearing deposits represented 24.1% of our total deposits at quarter end, up from 23% at the end of the last quarter. Demand deposits, non-interest bearing plus low-cost interest checking, increased by 8% from the prior quarter, representing our fifth consecutive quarter of DDA growth, a goal we remain very focused on to drive franchise value. Over the past year, demand deposits increased to 58% of total deposits, up from 45%. reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower rate environment and our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 148 basis points a year ago to 51 basis points achieved this quarter. Our securities portfolio increased $70 million to $1.25 billion last driven mostly by security purchases of $48.5 million and lower net unrealized losses of $23.9 million. We ended the quarter with a slight net unrealized gain of $1.8 million. The composition of our portfolio at the end of the quarter was 88% in AAA and AA rated securities and the remaining 12% in BBB corporate securities. The majority of the BBB rated securities are subordinated bank debt investments. For the second consecutive quarter, tighter credit spreads reduced the unrealized loss in our CLO portfolio. The improvement in pricing this quarter added 25 cents to our tangible book value per share relative to the prior quarter. As the economy stabilizes and the CLO spreads continue to narrow, the improvement will contribute directly to our tangible book value. Next, a few comments on asset quality. Credit quality overall continues to show resiliency in spite of the challenges created by the pandemic. We are pleased by the trends in our loan deferrals that Jared highlighted earlier. Delinquent loans decreased $12.2 million in the third quarter to $83 million, or 1.46% of total loans at September 30th. Non-performing loans decreased $5.8 million to $66.9 million as of September 30th, 2020. However, 31.5 million or 47% of this balance represented loans that are in current payment status but are classified non-performing for other reasons. The $5.8 million decrease is a net number and included $10.2 million of cured loans since last quarter, offset by $4.4 million of new non-accrual loans. The quarter end balance includes three large loan relationships totaling $34.9 million or 52% of our total non-performing loans. These consist of one $16.1 million legacy shared national credit, a $9.1 million single-family residential mortgage loan with a loan-to-value ratio of 58%, and a $9.6 million legacy relationship well secured by commercial real estate and single-family residential properties with an average loan-to-value ratio of 51%. Aside from those three relationships, non-performing single-family residential loans totaled $17.7 million, and the remaining non-performing loans totaled $14.3 million. Based on our current discussions, we believe that it is likely a resolution will be reached during the fourth quarter on our largest non-performing loan, the $16.1 million shared national credit, without any additional reserve requirements. All things being equal, this would put us in a good position to once again show improved asset quality at the end of the year. Let me turn to our provision for the quarter briefly. As we've discussed in the past, our ACL methodology uses a nationally recognized third-party model that includes many assumptions based on our historical and peer loss data, our current loan portfolio, and economic forecasts. Economic forecasts published by our model provider, which include numerous assumptions, have improved modestly since the second quarter. Accordingly, the forecast component of our ACL methodology did not derive additional provision expense in the third quarter. This, combined with the improved asset quality metrics and modest loan growth, resulted in our third quarter provision for credit losses being just $1.1 million. Following the provision expense recorded in the third quarter, our total allowance for credit losses totaled $94.1 million, which represents an allowance to total loans coverage ratio of 1.66%. Excluding the PPP loans, which have a 100% government guarantee, the ACL coverage ratio was 1.74% at September 30th, while the allowance to total non-performing loans coverage ratio was 141%. Our capital position remains strong with a common equity tier one ratio of 11.64% and has benefited from the strategic actions completed over the past several quarters. We will continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value while protecting our very well capitalized position at a time when the outlook remains uncertain. As we have noted in prior quarters, when the environment is supportive, there remains an opportunity to repurchase preferred stocks with a cost of over 7% with our current capital or through other vehicles, such as the issuance of lower coupon tax-deductible subordinated debt. At this time, I will turn the presentation back over to Jared.