Banc of California, Inc.

Hello and welcome to the Bank of California's fourth 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 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 on forward-looking statements. included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Jared Wolf, Bank of California's President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to Bank of California's fourth quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. We ended 2020 with an exceptional quarter. one that demonstrates the potential of the franchise that we are building. We continue to execute well on all of the key initiatives that have led to our improved financial performance in recent quarters. And in the fourth quarter, we were able to add in the loan and earning asset growth that enhanced our profitability. As a result, we finished the year with a return on average assets north of 1.1% for the fourth quarter. On our last couple of earnings calls, we indicated that we expected to end the year with a larger balance sheet than the first half of the year to drive greater profitability. Our fourth quarter results reflected these efforts as we realized strong operating leverage and a significant increase in our pre-tax, pre-provision income, net income, and earnings per share. Looking back on 2020, we are proud that we delivered on the key objectives that we laid out for the year. We dramatically improved our deposit mix and reduced our cost of deposits. We maintained good stability in our net interest margin despite the dramatic decline in interest rates. We reduced expenses and increased our operating leverage. We shifted our loan portfolio more towards business-related relationship loans. We ramped up commercial loan production in the second half of the year to replace the runoff of the single-family loan portfolio and finished the year with a balance sheet that was just about even with the end of the prior year. We managed credit quality and improved our overall credit quality ratios despite the pandemic, no less, while still building up reserves. And we had several large wins that will accelerate our earnings growth going forward, including exiting the LAFC contract in a way that eliminates future payments, issuing sub-debt at attractive pricing, setting the table for preferred redemption that we hope to complete this year, restructuring expensive FHLB long-term borrowings, and obtaining sizable legal and insurance recoveries on old matters that contributed meaningfully to tangible book value. The result of these accomplishments is that we made significantly more money on a core basis in 2020 than we did in 2019, while operating with a smaller balance sheet for most of the year. And we were able to do it while dealing with the challenges presented by the COVID-19 pandemic and operating in a low rate, low growth environment. We closely evaluate our performance relative to other community and regional banks. And in many of these key areas, most notably reducing deposit costs, holding our loan yield, and improving our net interest margin. As laid out in our investor presentation, our relative performance since the beginning of 2019 has been among the best in the entire country. These results speak to our ability to execute on the strategies we have put in place to enhance the value of our franchise. We are consistently adding new commercial banking relationships with clients who are choosing Bank of California because they value our level of service and execution, not necessarily based on our pricing of loans and deposits. Our ability to effectively identify and cultivate these types of customer relationships and the value proposition we can offer them has been critical to our success in adding low cost transaction deposits and originating loans with attractive risk adjusted yields that support our net interest margin. We have also continued to optimize our operations to reduce expenses and enhance efficiencies with investment in technology to improve and provide exceptional banking experiences for our customers. In a year when the ability to serve clients digitally became even more critical to the financial services industry, we were able to leverage our technology platform effectively to not only drive increased efficiencies, but also to deliver more convenience and superior service to our customers at critical moments, like the rollout of the PPP program. It was a year of incredible progress, and I want to extend my gratitude to our entire organization for their dedication and hard work. I believe that together we have truly made Bank of California the go-to relationship-focused business bank in Southern California. And the positive reputation we have built is yielding more referrals every day and giving us more opportunities to add the type of high-quality deposit and lending relationships that will further enhance our growth and profitability in the future. Specific to our fourth quarter performance, we generated net income available to common shareholders of $17.7 million, or 35 cents per diluted share, and $29.6 million in pre-tax, pre-provision income. As I mentioned, one of the initiatives we had in 2020 was pursuing insurance recoveries for historical legal matters where we might not have received sufficient reimbursement from the insurance company or where we determined we should have seen a recovery through litigation. We successfully recovered approximately $2.8 million in the fourth quarter, which added to our earnings and growth in tangible book value during the quarter. We continue to work on behalf of shareholders to pursue recoveries on other matters, though the timing and resolution of such matters, of course, remains uncertain. Excluding these recoveries, we still had significant growth in earnings, which was driven by a number of factors. Most notably, we continued to drive down our funding costs with our total cost of deposits declining 15 basis points to 36 basis points for the fourth quarter and ending the year with a spot rate of 29 basis points. The lower deposit cost was primarily driven by the continued improvement in our deposit mix. We are sixth consecutive quarter of DDA growth, with strong inflows coming from both our traditional banking groups and our specialty deposit areas. The growth in DDA enabled us to reduce our balances of higher cost time deposits and other wholesale funding. The reduction in deposit costs, combined with good stability in our earning asset yields, helped drive a 29 basis point increase in our net interest margin to 3.38%. We continued to maintain good expense control, and our core expenses decreased 9 percent from the same quarter a year ago. And we saw positive trends across our asset quality metrics, with a 45 percent reduction in our non-performing loans to $36.6 million and a 29 percent decrease in loan deferrals to $202 million, as our credit team has been very successful in resolving problem loans at a pace that exceeds the amount of inflow. During the quarter, we resolved two of our largest non-performing loans with no additional reserves required for either loan. Given the positive trends in asset quality and the substantial allowance that we have built, we had just a small provision requirement in the fourth quarter. As I mentioned earlier, the most significant difference in our fourth quarter performance relative to earlier in 2020 was our level of earning asset growth. We added $773 million of newly originated loans in the fourth quarter, which was up 39 percent from the third quarter and which resulted in net loan growth of $220 million, as we are still seeing considerable runoff in certain legacy areas of the portfolio. Loan production is coming from both new relationships to the bank, as well as from expansion of existing relationships. Due to the good production we had in the fourth quarter in our targeted areas, loans to commercial customers increased to 79% of our total loans, up from 78% at the end of the prior quarter and 72% at the end of 2019. While many borrowers remain cautious and the environment is extremely competitive, we are still seeing good, high-quality opportunities throughout our markets, and our banking teams are doing an outstanding job of filling our pipeline and closing relationship loans. The pipeline remains healthy as we begin the new year, and the volume of opportunities that our bankers are generating allows us to select credits with attractive risk-adjusted yields and achieve the type of profitable growth that we are targeting. As a result of our pricing discipline, we are able to maintain good stability in our average loan yield throughout 2020, which ultimately helps to support the significant increase we saw in our net interest margin at the end of the year. Overall, we are pleased that despite a difficult environment, we were able to deliver on our key objectives for 2020 and deliver strong profitability that we will continue to build upon in 2021. 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. Lynn.

Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website as I review our fourth quarter performance. I will start by reviewing some of the highlights of our income statement before moving on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the third quarter of 2020. That income available to common stockholders for the fourth quarter was $17.7 million, or 35 cents per diluted share. Our adjusted pre-tax, pre-provision income was $24.5 million, an increase of $5.6 million from the prior quarter. This resulted in a return on average assets of 1.11%, and an adjusted return on average assets of 92 basis points. Total revenue increased $8.7 million, of 14.6% compared to the prior quarter as net interest income increased by $5.7 million and non-interest income rose by $3 million. The net interest income growth reflected the ongoing benefit from lower funding costs combined with the impact of a larger balance sheet. The increase in non-interest income stemmed mainly from higher settlements and insurance recoveries on past legal matters. We achieved a net interest margin of 3.38% of 29 basis points from the prior quarter due to both an increase in our overall earning asset yield and a decline in our cost of funds. Our cost of funds declined by 12 basis points to 70 basis points, despite having two months of carrying costs associated with our $85 million subordinated debt issuance. Our earning asset yield increased 18 basis points due to the combination of a higher total loan yield and an improved mix of interest-earning assets as we deployed excess liquidity into higher-yielding loans. The average yield on loans increased 12 basis points to 4.58 percent during the fourth quarter due to higher average commercial and industrial loans and higher prepayment fees from refinancing activity and accelerated accretion from PPP loan forgiveness. As Jared highlighted, Our average total cost of deposits fell 15 basis points to 36 basis points for the fourth quarter, as we successfully lowered our cost of interest bearing deposits by 19 basis points and increased our average non-interest bearing deposits by $91 million. We ended the year with a spot rate of 29 basis points for our all-in cost of deposits. Looking ahead, we expect our funding costs to continue to trend lower in 2021. albeit not as much as in 2020. With that said, we have a few larger money market accounts and time deposits that should move down our cost of deposits once they reach the end of their agreed terms. Over the next six months, we have $324 million of CDs and FHLB advances scheduled to mature with a weighted average cost of 1.3%, which should further reduce our cost of funds. With our cost of funds likely to continue declining and our balance sheet likely to attain modest growth, we see the potential for further net interest margin expansion over the course of 2021, excluding the impact of PPP-related income. Non-interest income increased $3 million to $7 million. While customer service fees increased by $455,000 and processing fees for credit facilities increased by nearly $300,000, The biggest driver of our non-interest income growth in the quarter was higher settlements and insurance recoveries of $2.4 million from several historical legal matters. The opportunities and timing of recovering such monies are not predictable, but we will continue to strategically pursue them. We continue to drive operating efficiencies as adjusted expenses of $44 million for the fourth quarter declined 9% from the same quarter last year. our adjusted expenses increased $3.4 million, or 8%, from the prior quarter, due mostly to higher incentive compensation related to our balance sheet growth and profitability. The effective tax rate for the fourth quarter was 24%, compared to 13% for the third quarter, and the effective tax rate for all of 2020 is approximately 12.5%. Turning to our balance sheet, our total assets increased by $139.2 million in the fourth quarter to $7.9 billion. We deployed a portion of our excess liquidity into high-quality commercial loans and we continue to replace high-cost deposits and brokered CDs with core deposits in the quarter. As we selectively add high-quality earning assets in the future, both in terms of loans and investment securities, We continue to have flexibility to add overnight and other wholesale funding, if needed, to strategically support our earning asset growth. Our gross loans held for investment increased by $220 million, or 3.9%, during the fourth quarter, as growth in C&I loans more than offset lower multifamily, CRE, and SBA balances. The CNI loan growth of $501 million in the quarter was primarily due to growth in mortgage warehouse lines. The $47 million decline in SBA loans in the quarter was primarily due to PPP loan forgiveness. As of year end, about 39% of our PPP loan count, representing about 56% of our remaining 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. In addition, we have already started participating in round two for PPP loans to support our existing and prospective clients. Deposits were relatively flat at $6.1 billion at year end, but our mix and costs continue to improve thanks to our focused initiatives. Our activity in the quarter included a $64 million decrease in brokerage CDs and a $65 million decline in non-brokered CDs. These decreases were substantially offset by a $63 million increase in low-cost checking and growth of $109 million in non-interest bearing deposits. Non-interest bearing deposits represented 26% of our total deposits at quarter end, up from 24% at the end of last quarter. Demand deposits non-interest bearing plus low-cost checking increased by 5% from the prior quarter, representing our sixth consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. Over the past year, demand deposits increased to 60% of total deposits, up from 48%, reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower interest rate environment in our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 127 basis points from a year ago to 36 basis points achieved in the fourth quarter. Our securities portfolio was substantially unchanged at $1.2 billion. However, $16 million of CLOs were called, and for the third consecutive quarter, tighter credit spreads reduced the unrealized loss in our CLO portfolio to $9.7 million. The improvement in CLO pricing this quarter added 11 cents to our tangible book value per share relative to the prior quarter. Our entire securities portfolio ended the quarter with a net unrealized gain of $11 million. One of the highlights from the fourth quarter was our strong credit quality performance. We resolved a couple of our largest MPAs during the quarter, leading to the 45% reduction in our non-performing loan balance. Our loan deferral numbers also declined by $81 million to 3% of total loans held for investment, down from 5% at the end of the third quarter. Delinquent loans decreased $51.4 million in the fourth quarter to $31.6 million, or 0.54% of total loans. Non-performing loans decreased $30.3 million to $36.6 million as of year end. However, $17.7 million, or 48% of this balance, represented loans that are in current payment status but are classified non-performing for other reasons. The $30.3 million decrease is a net number and included $35.8 million of loans resolved since the end of the last quarter. offset by $5.5 million of new non-accrual loans. Let me turn to our provision for the quarter. 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. We saw less volatility in economic forecasts during the second half of the year, which resulted in a lower impact on our allowance for credit losses. This combined with the improved asset quality metrics resulted in a fourth quarter provision for credit losses of just $1 million. Following the provision expense recorded in the fourth quarter, our total allowance for credit losses totaled $84.2 million, which represents an allowance to total loans coverage ratio of 1.43% or down 23 basis points from the third quarter. This decline reflects a number of factors, including our improved asset quality metrics, the charge-off of the specific reserve related to our largest non-performing loan that was resolved in the quarter, the mix of our loans, as much of our growth in the quarter occurred in our mortgage warehouse portfolio where historical loss experience is extremely low, and our view on how the current economic forecast will impact our specific portfolio. Excluding our PPP loans, the ACL coverage ratio stood at 1.48% at December 31st, while the allowance to total non-performing loans coverage ratio also remained healthy at 230%. Our capital position remains strong, with a common equity tier one ratio of 11.19%, 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, although improving, still remains uncertain. The successful subordinated debt raise of $85 million in the fourth quarter further positions the company to move forward on capital actions during 2021, subject to regulatory approval, that are expected to be accretive to earnings. At this time, I will turn the presentation back over to Jared. Jared?