Banc of California, Inc.

Good day and welcome to the Bank of California Second Quarter 2021 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 a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Jared Wolf, President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to Bank of California's second 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. With economic conditions improving in California and our business development activity continuing to increase, our second quarter results reflect the acceleration of our organic growth ahead of our pending acquisition of Pacific Mercantile Bancorp, which will add more than $1.3 billion in assets, excluding PPP loans, and further improve our level of profitability. In addition to generating significant organic balance sheet growth during the second quarter, we continue to execute well on other key initiatives, including lowering our deposit costs, expanding our net interest margin, and maintaining disciplined expense control, which helped to produce a strong quarter with earnings per share coming in at $0.34, and pre-tax pre-provision income coming in at $23.5 million. While payoffs continue to represent a significant headwind, our strong loan production helped drive 15% annualized loan growth in the second quarter. As the California economy reopens, we are seeing more loan demand and more opportunities to compete for very high quality credits. And with the differentiated experience that we are able to offer Bank of California, we are successfully winning a high percentage of the relationships we are pursuing. while maintaining discipline in our underwriting and pricing, reflected in our loan yield holding steady at 4.3%. In the second quarter, we funded 847 million of loans, comprised of 533 million of new fundings, and 314 million of line advances, including 227 million of net warehouse line advances. Excluding PPP and warehouse, our fundings for loans was 190 million higher than the first quarter, and the average rate on new loan production was 15 basis points above the first quarter. Through some of our strategic relationships, we're also supplementing our own loan production with strategic purchases of high-quality single-family and multifamily loans that offer attractive risk-adjusted yields in the current environment. In the near term, these loan purchases are a good tool to help us profitably redeploy the liquidity we have built up through our continued strong deposit inflows offset payoffs, and keep us on track to achieve our targeted level of loan growth and profitability. The success we were having in generating organic growth is partly a result of our success in attracting new talent to the bank. Over the past two years, we have made significant progress in building Bank of California's reputation as an attractive destination for experienced commercial banking talent. And as we streamlined the company and reduced operating expenses, we have consistently reinvested a portion of the cost savings into adding talented colleagues. Our initial hires supported and accelerated our shift to a relationship-focused commercial bank. In each quarter, we look to add new talent that is further strengthening our loan production and deposit gathering capabilities, and adding expertise that helps us build our franchise. The new bankers we are adding also have enabled us to selectively expand and deepen our presence in key markets throughout California, including Los Angeles, San Diego, Central California, and Northern California. These are proven bankers with deep relationships in these markets that have been able to quickly build substantial new business pipelines and contribute to our growth in loans and deposits, even in markets where we don't have branches. This is a result of hiring quality relationship bankers using targeted and efficient marketing and constantly refining our ability to process and execute on behalf of our clients. As a result, we continue to expand our reputation and brand as the go-to bank for the sectors we serve. In addition to loan growth, our business development efforts continue to generate strong inflows of non-interest-bearing and low-cost interest checking deposits from new commercial relationships. During the second quarter, newly opened DDA accounts contributed $129.3 million of low-cost deposits, which produced our eighth consecutive quarter of DDA growth. The deposit engine that we have built continues to produce strong results, particularly from our specialty and business banking unit this quarter. As a result of our success in adding new commercial deposit relationships, we continue to see a positive shift in our deposit mix, with non-interest-bearing deposits increasing to 29 percent of total deposits, and a further reduction in our cost of deposits, which declined five basis points to average just 23 basis points in the quarter. This helped to drive an eight basis point increase in our net interest margin. The value of the deposit base we have built should become clearer as we head into a rising interest rate environment. Our improved deposit mix has increased our asset sensitivity. And given the trends we are seeing in business development, we would expect further improvements in our deposit mix that will continue to increase our asset sensitivity in the future. The organic growth we are generating continues to drive more operating leverage and an improvement in our efficiency ratio as we are effectively managing our expense levels. Importantly, we are keeping expenses in check while increasing our investments in business development, as I discussed earlier, as well as technology that augments and enhances the client experience, both in terms of the technology platforms that we employ and the products and services that we offer. Our technology spending has increased over the past two years, but we've been able to fund that increased investment through our expense reductions and improved efficiencies in other areas. And as we gain scale through organic growth and the Pacific Mercantile acquisition, we have an even greater ability to increase our technology investment in the future while still achieving the improvements we are targeting in our efficiency ratio. In terms of the Pacific Mercantile acquisition, we continue to anticipate closing the transaction during the third quarter. The two organizations have been working well together, and we've had a very productive few months in terms of integration planning. Within 30 days of announcing the transaction, we had made all the personnel decisions for the combined organization. We have made all the necessary decisions regarding branch consolidations, and we have scheduled the system conversion for the end of the third quarter. Based on the past few months of integration planning, we now feel that we have good visibility on cost savings at or above the 40% level compared to our initial 35% projection, with almost all the cost savings expected to be realized by the end of 2021. Having spent considerable time together over the past few months, we are now even more excited about the opportunities that will be created from bringing our teams together and leveraging our collective strengths. We've gotten a good sense for where we have opportunities to expand existing Packmark relationships, particularly among some of the larger clients who are performing well and will require larger credit facilities to support their continued business growth. And the relationship managers we will be adding will now have more opportunity to expand their target markets to include larger commercial clients and have more resources and support to assist them in business development, which should lead to higher levels of production. At the time of the announcement, we were confident that this was going to be a very positive transaction for our franchise in terms of its impact on the size and composition of our balance sheet, our level of profitability, our business development capabilities, and our ability to generate organic loan growth in the future. And as we've worked together to prepare for closing and integration, our level of confidence has only increased. 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. As mentioned, please refer to our investor deck, which can be found on our investor relations website, as I review our second quarter performance. I'll start by reviewing some of the highlights of our income statement, and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the first quarter of 2021. Net income available to common stockholders for the second quarter was $17.3 million or 34 cents per diluted share. This compares to $7.8 million or 15 cents per diluted share for the first quarter of 2021. With the redemption of our Series Z preferred stock this past March, the second quarter benefited from $1.4 million in lower preferred stock dividends. In addition, we had quite a few items that impacted the comparison of our net income between the second quarter of 2021 and the prior quarter. In the second quarter of 2021, net income available to common stockholders included $829,000 in pre-tax gains on investments in alternative energy partnerships, $700,000 of pre-tax merger-related costs and $1.3 million in pre-tax net recoveries of indemnified professional fees. In the prior quarter, on a pre-tax basis, we had $3.6 million in losses on investments in alternative energy partnerships, $700,000 of merger-related costs, and $721,000 of indemnified professional fees net of recoveries, as well as $3.3 million in Series D 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. There was no similar tax benefit in the current quarter. 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 $16.3 million, or 32 cents per diluted share, in the second quarter of 2021, compared to $12.9 million, or 25 cents per diluted share, in the first quarter of 2021. The $3.4 million increase is attributed to higher net interest income, lower provision for credit losses, and lower preferred stock dividends. offset by higher net losses on equity investments. Total revenue in the second quarter increased $1.7 million compared to the prior quarter, as net interest income increased by $1.9 million and non-interest income decreased by $211,000. Net interest income benefited from one additional day in the current quarter, and the increase reflected average interest-earning assets being comparable between periods while posting a higher yield and a decrease in the cost and volume of interest-bearing liabilities, all of which contributed to an expanded net interest margin. The slight decrease in non-interest income stem mainly from lower servicing income and other income offset by higher customer service fees. Our net interest margin was 3.27%, up eight basis points from the prior quarter due to a six basis point decrease in our cost of funds and a three basis point increase in our overall earning asset yield. Our earning asset yield increased to 3.81%, due primarily to redeploying some of our excess liquidity into loans and securities, combined with a slightly higher yield on securities. Our average loan yield remained steady at 4.3% during the second quarter, due mostly to lower coupon rates from the impact of loans resetting and our current production, offset by higher prepayment fees from refinancing activity higher income related to loans removed from non-accrual status, and higher PPP fee amortization due to ongoing forgiveness activity. When the impact from these items is excluded, our average loan yield was down five basis points to 4.12 percent in the second quarter, compared to 4.17 percent in the first quarter. The decrease in this average loan yield is due primarily to a higher percentage of lower yielding SFR loan balances. We ended the second quarter with a spot rate of 20 basis points for our all-in cost of deposits. And as of July 20th, our spot rate had dropped further to 17 basis points. Looking ahead, we expect our funding costs to continue to trend lower in the second half 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 terms. In the second half of 2021, we have $510 million of these deposits with a weighted average cost of about 163 basis points. We expect this reduction in higher cost balances to boost net interest income and support our margin in the back half of the year. Our adjusted expenses increased $288,000 from the prior quarter due mostly to higher net losses on equity investments of $1.2 million, which are included in other expenses, offset by lower salaries and employee benefit costs, and lower professional fees once we exclude our net indemnified professional recoveries in the current quarter and professional fees from the last quarter. The effective tax rate for the second quarter was 25.6% compared to 13.8% for the first quarter due to a tax benefit resulting from the exercise of all of our previously issued stock appreciation rates in the first quarter. Going forward, we would expect our effective tax rate to be in the 25% to 27% range for the second half of 2021. Turning to our balance sheet, our total assets increased by $94 million in the second quarter to $8 billion. We redeployed a portion of our excess liquidity into high-quality commercial loans and securities, which brought our cash and cash equivalents down by approximately $216 million from the end of the prior quarter. We also continued to replace high-cost time deposits with core deposits. 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 growth in earning assets. Our growth loans held for investment increased by $221 million, or 3.8%, during the second quarter. as growth in warehouse, multifamily, CRE, and SFR portfolios more than offset lower CNI, SBA, and construction loan balances. The $85 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process. As of June 30th, we had $194 million in PPP loans remaining, consisting of $65 million from round one and $128 million from round two. The $35 million increase in the SFR portfolio stemmed from loan purchases, given that we are no longer originating this asset class in-house. The loan purchases more than offset payoffs in this portfolio and enabled us to utilize some of our excess liquidity to add high-quality loans with low LTVs and attractive risk-adjusted yields. Deposits increased $65 million during the second quarter. and our mixed and average costs continued to improve thanks to our success in adding new commercial deposit relationships. Non-interest-bearing deposits increased to 29% of our total deposits at quarter end, up from 27.7% at the end of last quarter. Demand deposits, non-interest-bearing plus low-cost interest checking, increased by 6% from the prior quarter, representing our eighth 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 65% of total deposits, up from 54%, 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 71 basis points in the second quarter of 2020 to 23 basis points achieved in the second quarter of 2021. Our securities portfolio increased by $82 million to end the quarter at $1.35 billion. During the second quarter, we primarily added municipal and agency securities with a weighted average rate of 2.31%. For the fifth consecutive quarter, tighter credit spreads reduced the unrealized loss on our CLO portfolio, which was down to $3 million at quarter end. The improvement in CLO pricing this quarter added a penny to our tangible book value per share relative to the prior quarter. The CLO portfolio declined by $100 million during the second quarter, as we are seeing an increase in payoffs resulting from refinancing. The higher level of payoffs is accelerating our diversification out of the CLO portfolio, which is part of our longer-term balance sheet management strategy. Our entire securities portfolio ended the quarter with a net unrealized gain of $20.9 million, and the total change in unrealized net gains during the quarter added 19 cents to our tangible book value per share. Our credit quality remained strong in the second quarter, and we saw positive trends in asset quality. Non-performing loans decreased $4.6 million to $51.3 million in the second quarter. About 62% of this balance, or $32 million, represented loans that are in current payment status but are classified non-performing for other reasons. Delinquent loans decreased $26.3 million in the second quarter to $35 million, or 0.58% of total loans, driven largely by SFR loans paying off and migrating back to accrual status as we work through the forbearance and deferral process with our consumer borrowers. Our loan deferral numbers declined by $22 million to 1% of total loans held for investment, down from 2% at the end of the first quarter. Let me tender our provision for the quarter. Although we had some provision requirement related to growth in the loan portfolio, this was offset by the improvement in asset quality and the improving economic forecast utilized in our model. As a result, we recorded a modest negative provision for credit losses of $2.2 million in the second quarter. None of this provision released our allowance for credit losses for the second quarter, totaled $79.7 million, which reduced our allowance to total loans coverage ratio to 1.33%. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.70% at June 30th. With the decrease in our non-performing loans, our ACL coverage to NPL ratio remained healthy at 155%. Our capital position remains strong with a common equity Tier 1 ratio of 11.14% and has benefited from the strategic actions completed over the past several quarters. We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value. This time, I will turn the presentation back over to Jared.