Banc of California, Inc.

Hello, and welcome to the Bank of California's first quarter earnings conference call. All participants will be in listen-only mode. If 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 a 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 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 to 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 Wolfe, Bank of California's President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to Bank of California's first 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. Q1 continued the progress we have made for several consecutive quarters on a core basis in terms of growth in earning assets, strong asset quality, improving our deposit mix, reducing our cost of deposits, increasing our fee income, in maintaining disciplined expense control, all of the things that enhance franchise value and drive profitability. As we indicated on our last earnings call, we expected that our first quarter results would not be as strong as our fourth quarter for a variety of reasons. There's quite a bit of noise in the results for each quarter that impact the net income comparison, which Lynn will discuss later in the call. But from the perspective of our core operating performance, and our execution on strategies designed to build long-term shareholder value, we had another strong quarter. Business development in terms of loan and deposit production was very good, which continues to support our balance sheet and earning assets. We continue to experience high levels of payoffs, however, in certain legacy portfolios, which temper our overall growth. As the vaccine rollout continues and restrictions on business operations are gradually rolled back in our markets, We are beginning to see an increase in loan demand, albeit below normalized levels. Nonetheless, our banking teams are doing an excellent job of developing and capitalizing on opportunities. We are seeing well-balanced production between C&I and commercial real estate loans, and having particular success in areas where we have built expertise, such as healthcare financing and specialty commercial real estate projects, where we work with very experienced real estate entrepreneurs that require bridge and permanent financing. While continuing to be selective and pursuing very high-quality credits, we were able to fund 550 million in loans in the first quarter, comprised of 487 million of new fundings and 63 million of line advances. Our fundings for new loans were 136 million higher than Q4, and rates on new loans excluding PPP was nearly 10 basis points above Q4. Our average loan balance has increased by 39 million in the first quarter, But on a period-end basis, we were lower due to fluctuations in warehouse line utilization and a period-end reduction in multifamily balances, resulting from a very competitive environment for that asset class and pricing that we were not willing to match. We still expect to reach mid- to upper-single-digit loan growth we are targeting for 2021, given the positive trends we are seeing in loan production and our expectation that loan demand will continue to increase as economic conditions improve throughout the year. Our business development efforts also continue to produce strong deposit inflows from both new and existing clients and further improvement in our mix of deposits. The robust deposit gathering engine we have built and our successful efforts to target deposit-rich verticals, such as the education and not-for-profit market, has produced seven consecutive quarters of DDA growth. During the first quarter, our non-niche sparing deposits increased 141 million, which are replacing the higher-cost time deposits that we continue to run off. As a result of the improved deposit mix, our average cost of deposits declined eight basis points to 28 basis points in the first quarter, with our spot rate declining to 24 basis points at the end of March. During the first quarter, we updated our deposit service fees, which is enabling us to generate more non-interest income. This initiative was in recognition of both the quality of service being provided by Bank of California and that certain service fees were below market. With growth in our commercial client base, the new deposit fee schedule, and higher exchange fees, our customer service fees were up nearly 60% over the first quarter of last year. At this run rate, this represents nearly $3 million of annual incremental revenue that essentially falls straight to the bottom line. This is an area that we will continue to focus on and to identify more opportunities to generate additional revenue. Looking at asset quality. We continue to see positive trends in the health of our commercial borrowers, with total deferrals of business-related loans declining by nearly 50% during the quarter and now representing just about 1% of total business-related loans. Some downgrades in our legacy SFR portfolio resulted in an increase in non-performing loans. However, our NPLs are very well secured with average loan-to-values of 62%, so we are not seeing the potential for material losses, but rather the noise that the legacy SFR portfolio generates. 58% of our NPLs are SFRs with very low loan-to-values, and credit quality remains very strong. Accordingly, we are very well-reserved, and the positive trends we are seeing in the rest of the portfolio resulted in a small reserve release this quarter. Outside of the continued progress on our core operating strategies, we had a very productive quarter in terms of executing on other key initiatives. First, we continued to optimize our capital stack by redeeming our Series D preferred stock on March 15th. The elimination of this preferred stock will be accretive to our earnings per share going forward. And second, and more significantly, we announced that we entered into a definitive agreement to acquire Pacific Mercantile Bancorp. With its similar geographic footprint business model and focus on serving commercial clients, this is a transaction that checks all the right boxes. It's manageable in size but large enough to have a meaningful impact on profitability. It's straightforward with low expected execution risk. It has a similar focus, geographic footprint, and business model, as I mentioned. Third, it accelerates key objectives in terms of deposit mix, loan mix, and profitability. There's clear visibility to cost savings, and we expect the transaction to deliver double-digit EPS accretion with a relatively short tangible book value earn back period, even with conservative cost savings assumptions. In terms of scaling the company and generating more operating leverage, this transaction should accelerate our progress by about one year, and does so by adding a $1 billion seasoned loan portfolio, funded by a significant base of non-sparing deposits, with good opportunities to expand our relationships as these companies continue to grow and their financing needs increase. We expect the addition of PacMerc's loan portfolio will also enable us to accelerate the shift in our loan mix toward business-related loans and continue running off the legacy SFR portfolio without it serving as a material headwind to our overall growth. With this transaction, we expect to add acquisitive growth to our accelerating organic growth, with the goal of harnessing this powerful combination to build additional shareholder value going forward. And of course, we welcome the terrific colleagues at PAC-MERC who will be joining our company. 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.

Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website as I review our first quarter performance. I will start by reviewing some of the highlights of our income statement, and then we'll move to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with our fourth quarter of 2020. Net income available to common stockholders for the first quarter was $7.8 million, or 15 cents per diluted share. This compares to $17.7 million, or 35 cents, per diluted share for the fourth quarter. We had quite a few items that impacted the comparison of our net income between the first quarter of 2021 and the prior quarter. In the first quarter of 2021, net income available to common stockholders included $3.6 million in pre-tax losses on investments in alternative energy partnerships, $1.4 million of pre-tax merger-related costs, an indemnified professional fee, net of recovery, and $3.4 million in Series B preferred stock redemption expense. These items were offset in part by a lower effective tax rate resulting from $2.1 million in tax benefits on the exercise of all of our previously issued stock appreciation rights. In contrast, in the prior quarter, we had pre-tax gains on our investments in alternative energy partnerships, of $673,000 and pre-tax net recoveries of indemnified legal expenses of $4.2 million. When backing out these items in each quarter, net of our normalized effective tax rate of 25%, to get a better sense of our core operating performance, we had adjusted net income available to common stockholders of $12.9 million or 25 cents per diluted share in the first quarter of 2021 compared to $13.9 million or 28 cents per diluted share in the fourth quarter of 2020. Total revenue in the first quarter decreased $6.2 million compared to the prior quarter as net interest income decreased by $3.6 million and non-interest income decreased by $2.6 million. The net interest income decline reflected the impact of two fewer days in the current quarter, lower prepayment fees of $1.6 million, lower interest income related to the status of non-accrual loans of $737,000, and lower amortized PPP loan fees of $197,000 due to forgiveness activity. The prior quarter included net recoveries of foregone interest while the current quarter included net reversals of interest income. The decrease in non-interest income stemmed mainly from lower settlements and insurance recoveries on historical legal matters, as the fourth quarter of 2020 included $2.8 million of such income. Our net interest margin was 3.19%, down 19 basis points from the prior quarter, due to a 26 basis point decrease in our overall earning asset yield, offset by a seven basis point decrease in our cost of funds. Our earning asset yield decreased to 3.78% due primarily to a lower average loan yield. Our average loan yield decreased 28 basis points to 4.30% during the first quarter due mostly to lower prepayment penalty fees from refinancing activity. Lower income related to loans placed on monocruel status and lower PPP fee amortization due to forgiveness activity. When the impact of these items is excluded, our average loan yield was down seven basis points, 4.17% in the first quarter, compared to 4.24% in the fourth quarter. The decrease in this part of our average loan yield is due primarily to a higher percentage of lower yielding commercial and industrial loan balances and the impact of the payoff and purchase activity in the SFR portfolio. We ended the first quarter with a spot rate of 24 basis points for our all-in cost of deposits. Looking ahead, we expect our funding costs to continue to trend lower for the remainder of the year, albeit at a slower rate. 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 term. Through the end of the year, We have $580 million of these deposits with a weighted average cost of about 1.56%. We expect this reduction in higher cost balances to boost net interest income and support our margin in the back half of the year. Non-interest income decreased $2.6 million to $4.4 million. The biggest driver of our non-interest income decline in the quarter was the lower legal settlement and insurance recoveries. With respect to the customer service fees line item that Jared mentioned earlier, while the total for both quarters was fairly similar, we had a higher contribution of deposit service charges in the first quarter due to our new fee schedule, which offset a lower level of unfunded commitment fees recognized in the current quarter. Our adjusted expenses decreased $2.3 million, or 5%, from the prior quarter due mostly to lower professional fees occupancy equipment expenses, and other expenses. We incurred $700,000 in merger-related costs and $721,000 in indemnified professional fees during the first quarter. The effective tax rate for the first quarter was 13.8% compared to 24.1% for the fourth quarter due to a tax benefit resulting from the exercise of all of our previously issued stock appreciation rights. Going forward, we would expect our effective tax rate to be in the 25% to 27% range for the remaining quarters in 2021. Turning to our balance sheet, our total assets increased by $56.1 million in the first quarter to $7.9 billion. We redeployed a portion of our excess liquidity into higher quality commercial loans, the redemption of our Series Z preferred stock, and we continued to replace high-cost time 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 the flexibility to add overnight and other wholesale funding, if needed, to strategically support our growth in earning assets. Our gross loans held for investment decreased by $134 million, of 2.3% during the first quarter, as our growth in CRE, SFR, and SBA loans were more than offset by lower CNI, multifamily, and construction loan balances. The $65 million increase in SBA loans in the quarter was due primarily to Round 2 PPP loan origination, which totaled $132 million to the end of the first quarter. As of March 31st, about 55% of our PPP loan count, representing about 69% of our remaining PPP loan dollars from the first round, were in the forgiveness process. The $23 million increase in SFR loan balances stemmed from loan purchases which outpaced payoffs in this portfolio as we opportunistically participated in the significant refinancing activity and given we no longer originate this asset class in-house. Deposits increased $56 million during the first quarter, and our mix and average costs continue to improve thanks to our focused initiative. Non-interest-bearing deposits represented 28% of our total deposits at quarter end, up from 26% at the end of the last quarter. Demand deposits Non-interest bearing plus low-cost interest checking increased by 3% from the prior quarter, representing our seventh 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 62% of total deposits, up from 51%, reflecting the significant improvements 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 111 basis points in the first quarter of 2020 to the 28 basis points achieved in the first quarter of 2021. Our securities portfolio increased by $39 million to the end of the quarter at $1.27 billion. For the fourth consecutive quarter, tighter credit spreads reduced the unrealized loss in our CLO portfolio, which was down to $3.6 million at quarter end. The improvement in CLO pricing this quarter added $0.08 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 $7.3 million. Our credit quality remained strong in the first quarter, although some downgrades in the legacy SFR portfolio resulted in an increase in non-performing loans. Non-performing loans increased $19.3 million to $55.9 million in the first quarter. However, about one-third of this balance, or $18.1 million, represented loans that are in a current payment status that are classified non-performing for other reasons. Delinquent loans increased $29.7 million in the first quarter to $61.3 million, or 1.06% of total loans, driven largely by SFR loans as we worked through the forbearance and deferral process with these consumer borrowers. Our loan deferral numbers declined by $143 million to 2% of total loans held for investments, down from 4% at the end of the fourth quarter. Let me turn to our provisions of the quarter. As 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 our economic forecast. We saw improved economic forecasts to start 2021, which resulted in a lower impact on our allowance for credit losses. Although we had an increase in non-performing loans, Given the low loan-to-values and low potential loss, the downgrade did not drive a meaningful reserve requirement beyond what we have already built. As a result of the improving economic forecast and the high level of allowance we built in 2020, we recorded a modest negative provision for credit losses of $1.1 million in the first quarter. Net of this provision release are allowed for credit losses for the first quarter totaled $82.7 million which kept our allowance to total loans coverage ratio unchanged at 1.43%. Excluding our PPP loans, the ACL coverage ratio stood at 1.51% at March 31st, and our allowance to total non-performing loans coverage ratio also remained healthy at 142%. Our capital position remained strong, with common equity Tier 1 ratio of 11.5%. and has benefited from the strategic actions completed over the past several quarters. We are pleased to have redeemed our Series B preferred stocks, and we will continue to be prudent and strategic with the use of our capital to maximize benefits to stockholders and to build franchise value. As we mentioned on the call to discuss the acquisition of Pacific Mercantile last month, we do not expect this transaction to impact our timing around the potential redemption of our Series B preferred stocks which we continue to view as a late 2021 or early 2022 event subject to regulatory approval. At this time, I will turn the presentation back over to Jared.