Welcome to the Banc of California Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Tim Sedabres, Director of Investor Relations. Please, go ahead.

Thank you, Gary and good morning, everyone. Thank you for joining us for today's fourth quarter 2014 earnings conference call. With me today, Banc of California's President and Chief Executive Officer, Steven Sugarman; Chief Financial Officer, Ronald Nicolas; and Chief Risk Officer, Hugh Boyle. I'd like to remind everyone that today's conference call is being recorded and a copy of the recording will be available later on the company's Investor Relations website. We have also furnished a presentation that management will reference on today's call and that presentation is also available on our website under the Investor Relations section. Before I turn it over to Steve, I'd like to remind everyone that, as always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. The forward-looking statements are outlined on slide 1 of today's presentation, which apply to our comments today. We will provide an opportunity for Q&A at the end of the presentation. And with that, I'll turn it over to our President and CEO, Steven Sugarman.

Thank you, Tim. I would like to welcome everyone to today's Banc of California fourth quarter 2014 earnings call. 2014 marked a significant year for the company as Banc of California has emerged as California's bank. We're now a $6 billion financial institution with 40 branches across Southern California, serving California's diverse private businesses, entrepreneurs and homeowners. Looking to 2015, we believe Banc of California is positioned to deliver shareholder returns that will meet or exceed existing consensus earnings estimates for 2015. I would now like to turn to our fourth quarter presentation as outlined on slide 2. Our results demonstrate steady progress towards achieving our stated financial targets. Let me begin by providing a few highlights. The company earned $0.91 a share on a fully-diluted basis for the full-year 2014 and $0.25 a share on a fully-diluted basis for the fourth quarter. These earnings equated to a 0.7% return on average assets and a 10% annualized return on tangible common equity for the full year. This compares to a net loss to common shareholders during 2013. These results include over $8 million of non-core expenses that related in large part to the Popular Community Bank acquisition, approximately $5.9 million of which were incurred during the fourth quarter. Also notable, we reversed the valuation allowance on our deferred tax asset during the fourth quarter based on the company's earnings profile and management's projections for future earnings. During the fourth quarter, we closed on the transaction for the California branches of Popular Community Bank, which added approximately $1.1 billion of loans and $1.1 billion of deposits to our balance sheet. We continue to believe this transaction is not only financially compelling, but is also a key piece of our strategy to be California's bank. These branches helped to strengthen our footprint…

Thanks, Steve. And good morning, everyone. I will be directing my comments to the supplemental presentation that accompanied our release starting with the highlights for the fourth quarter on slide 3. Today we reported net income of $10.2 million compared with $11.2 million in the prior quarter. Net income available to common shareholders totaled $9.3 million, or $0.25 per diluted share, with a return on average tangible common equity of 11.2%. The shares used in our EPS calculation include the minimum amount issuable under the purchase contracts related to the tangible equity units, approximately 3.2 million shares. During the quarter, we saw approximately 200,000 TEUs convert to approximately 1 million shares. Also, during fourth quarter, we reversed $8.3 million of our valuation allowance related to the deferred tax asset, which resulted in a net tax benefit of $5.5 million for the fourth quarter and $4.5 million for the full year. As a result, going forward the company will have a more normalized tax rate in the 42% range on a combined state and federal basis. Fourth quarter revenues totaled $87.2 million before loan-loss provision, approximately $5 million higher compared to the $82.3 million for the third quarter. Higher net interest income was driven by the Popular acquisition, which contributed $7 million to net interest income during the quarter. The acquisition closed on November 7, meaning we had the loans and deposits on our books for roughly 1.75 months. Non-interest income declined slightly due to the lower net gain on the sale of loans, excluding our Mortgage Banking operation, as the prior quarter included a $7.7 million gain from the sale of approximately $50 million of our seasoned SFR portfolio. This quarter also included slightly lower Mortgage Banking revenues offset by higher advisory fees from the Palisades group. Non-interest expense increased…

Thank you, Ron and good morning everyone. In November of 2014, Banc of California closed and began integrating approximately $1.1 billion in former Popular community bank California-based loans and deposits. With regard to the newly acquired loans, Banc of California immediately began a full credit and risk-rating review of the portfolio. While still early in the process, our initial findings are consistent with our due diligence efforts. Namely, that we have acquired a granular loan portfolio of performing loans in business and product sectors and geographic locations that we know well, with most loans generally having very conservative loan-to-values. We remain pleased to have a loss-share agreement in place with Popular to protect the Bank in the event credit losses exceed 50 basis points on the acquired portfolio. As we have communicated over the last two quarters, the integration of Popular Community Bank expedited by a full year or two our strategic plan of diversifying and repositioning the lending platform of the Bank. Today, Banc of California stands with several strong business legs to our core operating platform, which represents an important expansion to our historical and ongoing expertise in the mortgage sector. And this diversification has the effect of reducing the Bank's historical reliance on Mortgage Banking revenue. As of year-end 2014, Banc of California stands with approximately $5 billion in loans, which is comprised of roughly $4 billion in held-for-investment loans and approximately $1 billion in held-for-sale loans. Of the $4 billion in HFI loans, we have approximately $1 billion in loan balances in each of the three following business lines, commercial real estate mortgages, one to family residential first mortgages and multi-family loans. In addition, with the integration of the Popular loans, our commercial and industrial loan balances are now approximately $500 million as of year-end. The…

Thanks, Hugh and thanks, Ron. Turning to slide 14, you can see the Bank's steady progress towards our publicly disclosed financial targets. We continue to make very good progress towards achieving these targets even with acquisition and integration costs incurred during this quarter. Management's goal is to reach or exceed these targets by year-end. Looking into 2015, we believe the marginal efficiency ratio for our incremental loan growth is attractive and until we reach the $10 billion threshold, we'll remain under 50%. These marginal economics are being utilized and managed to throughout the company, as we think about our business unit plans for full-year 2015. We're committed to growing our many businesses with a focus on increasing marginal profitability with each new loan or transaction. That completes our prepared remarks for this morning. I will now turn it over to the operator for questions.

[Operator Instructions]. And the first question comes from Andrew Lisch with Sandler O'Neill. Please go ahead.

So you mentioned earlier on that you would expect expenses to normalize in the first half of this year. I'm just curious if you can go into a little more detail on that. What does that mean as far as a dollar amount? I recognize there can be variable costs in there, especially related to TPG. But just beyond that, is there a dollar amount that you think they could normalize at?

Yes. Based on the situation as of year-end, we would expect the noise from these transactions to subside by the second quarter. And other things being equal, expenses normalized around $73 million to $75 million.

And then just looking at the provision methodology and maybe some adjustments there, is $4 million kind of the right number for providing a quarter? That had been higher than I was looking for just based on historical loss rates and what not. Is that kind of where we should be now?

No. Andrew, it's Hugh Boyle. Of that $4.2 million, approximately a little less than $3 million was associated with the incremental loan growth quarter-over-quarter. Approximately $800,000 was associated with the accounting methodology enhancement, which we would deem to be more one off. And then the remaining was associated with just a few problem loans.

The next question comes from Jackie Chimera with KBW. Please go ahead.

Looking at the line item of advisory service fees, so is that all TPG or does that include some of the other businesses that you have as well?

High, Jackie. It's Ron. That's 100% TPG fees.

Okay. So as we look at that, understanding that it will be volatile just based on their nature of their business, is it fair to assume that some of the, let's see, what was it, the monetization of client portfolios, is it fair to assume that there will be a component of that in every quarter even though the amount of it will fluctuate?

I want to assume that it would be every quarter. I think that what you will find is that there is a balance between the income they receive on their management fees and the monetization of portfolios where it accelerates some of that income from time to time. So that will be episodic but core. As we move forward with that business, continued assets under custody and growth will be the primary driver for continued be kind of quarter-over-quarter recurring revenue.

Okay. So if I look at it and I take out the $2 million from 3Q and I take out the $5 million from this quarter, it goes from $1.3 million up to $1.7 million. So you have a good trajectory of growth. Is it a fair assumption that that's the core amount that will continue to grow without the fluctuation of the episodic monetization?

I think your reading of the historical is consistent with ours. But I just remind you the Palisades Group is a business that we launched in conjunction with the management team, Steve Kirsch and Jack McDowell, just a little bit over two years ago. So it's a growing business. They have really exceeded expectations from an asset under custody ramp where I believe they were the fastest growing or one of the fastest growing RIAs in the country over this period of time, reaching levels equal to approximately $5 billion of assets under advisory. So I'm not sure that I would be able to have the seasoning and track record in that business to be able to project for you exactly how that growth trajectory goes into the future. But I think that your reading of the past few quarters is consistent with ours.

And then just one other one. You had mentioned $10 billion in the prepared remarks. I realize that you are only around $6 billion now. But are you taking a look at any infrastructure build-out that would be necessary for potentially crossing that threshold?

No. My remarks were intended to focus, as we're focusing on the marginal efficiency ratios of our continued growth and we believe it's compelling in the industry-leading category of the marginal efficiencies we could obtain. That said, you know, as you approach different regulatory hurdles the marginal efficiency calculation would change. So that's purely the guide to the past - the runway we believe we have where our marginal efficiency continues to be very attractive so that when we focus on adding a unit of additional loan or deposit production we feel that we have good visibility into what our marginal economics should deliver.

[Operator Instructions]. The next question comes from Don Worthington with Raymond James. Please go ahead.

In terms of the - you may have mentioned it. I may have missed it. The composition of the gain on sale other than the mortgage banking income, was that just additional sales of the single-family loans? Jumbos?

Yes. Don, you probably will recall - first of all, every quarter we're selling jumbo loans. We sold about the same amount last quarter. Roughly $200 million as we did this quarter. We achieved a little bit better gain on sale largely because with the drop in falling rates some of the economics opened up a little bit. So we did achieve a little bit wider gain to the tune of about a half a point here in the fourth quarter. But the biggest differential between last quarter's $10 million and this quarter's $3.5 million, $4 million number is the almost just under $8 million of gain that we realized in the third quarter related to that $50 million sale of our seasoned SFR portfolio. And we have sold that periodically throughout the year. And since we have acquired that portfolio, mainly to prune, if you will, some of the portfolio profile and economics. But for the most part, that was the primary driver of the decrease.

Okay. Good. And then in terms of merger costs, would you expect more in the first quarter related to Popular?

No. We're substantially complete with the direct merger-related expenses. We have converted the technology infrastructure. We have converted the signage, things of that nature. So that's in the fourth quarter. That being said, there are certain operating enhancements that over the first quarter could hit our expense line, such as the addition of some new capitalized expenses and freshening up some branches. And our experience with these transactions is that you will have a little bit of additional expense as you start operating the franchise for about a quarter or so that are unrelated to the actual acquisition but related to the new business that comes on board and getting it up to our standards. So by the second quarter I think that you will see a pretty normalized run-rate. The fourth quarter shouldn't see any material big-ticket items as far as the integration. But there will still be a few FF&E and other items that may come through.

The next question comes from Gary Tenner with DA Davidson. Please go ahead.

A question about the loan production. I think Ron, you mentioned of the approximately $200 million of growth over and beyond the Banco Popular loans, it was predominantly originated. But it sounds to me as though there were some purchase loans in that. So I wonder if you could differentiate the two numbers.

No. The non-Popular loans were entirely originated by the bank.

So no purchases in that number. And then just small number on just the headcount increase beyond ex the home loan and ex Banco Popular, the 30 headcount. How much of that is building any sort of back office support, regulatory-related personnel versus on the production side?

Yes. That's virtually the entirety of it. It's the 30 headcount that Ron referenced is really - and we showed kind of how it worked with operations, but we ramped up our headcount in anticipation of the closing. Some of that headcount ramped into the first month of the fourth quarter. This included increases in our loan servicing staff, increases in central operation and increases in functions such as BFA and risk. So that's the preponderance of the headcount increase. It's something that we guided to and expected so that we would be in a position pre-closing with the staffing we needed. We think that we're now staffed appropriately for the Popular transaction and so we feel pretty comfortable with that.

The next question comes from Nathan Race with Sterne Agee. Please go ahead.

I was wondering if you could provide an update on the outlook for the margin going forward and just update on the loan pipeline.

Sure. I think you asked about the net interest margin going forward on the loan pipeline. Is that right?

Yes.

So our net interest margin, we saw some positive trends within our net interest margin as it widened a little bit in the fourth quarter. We're optimistic and really working to defend our net interest margin and keep the bank level net interest margin consistent with the targets as we outlined on page 14 of the presentation. It now sits at about 13.82%. We're seeing and believe there is continuing opportunity with our cost of funds and we're hoping to have that continue to move lower which would be consistent with last year's progress. On that front, over the last year we increased our non-interest bearing deposits by about 50%, which is a trend that we're happy about and hope to continue to increase moving forward. And on the loan side we're seeing improving yields on our loans as we start 2015 compared to where we were in the fourth quarter. We're hopeful that those trends will continue. Our net interest margin is dragged a little bit by the HFS portfolio where those loans held for sale tend to have tighter margins than the portfolio we're originating for our book. So for that period of time, until the sale, that's a little bit of a drag on our net interest margin. But we're optimistic to be able to keep the net interest margin at the bank level between 3.75% and 4%.

And I was just wondering if you had the pre-tax contribution from whole lending this quarter?

Did we provide BHL pre-tax contribution margin? We talked about the revenues down about $2 million in the Mortgage Banking business, which is actually ended up being a pretty good quarter for what is typically a seasonally much slower quarter, the fourth quarter.

What I can tell you is we continue to model and budget our contribution margin for bank home loans at approximately 75 basis points of originations. And while we saw some compression in the fourth quarter around the gain on sale margins, we still anticipate as we move forward into 2015 that that's a reasonable target for contribution margin.

Okay. Yes. I guess I was trying to get a sense of the breakdown between the core commercial bank and then bank home loans just from a total dollar amount of pre-tax income.

I'm not sure that we have provided that in the release. Let us kind of take a look and some back to you. To the extent we expect that over the next week or so we will be filing the 10-K as well, which may shed some additional light because we anticipate that the 10-K will reflect operating segment reporting, which will break out the DHL Mortgage Banking contributions specifically. So that will be an enhancement in the 10-K but given kind of the release we have out there right now, I would feel more comfortable getting that out more broadly to the market all at once.

[Operator Instructions]. The next question is a follow-up from Andrew Liesch with Sandler O'Neill. Please go ahead.

Just curious if you can comment on the asset sensitivity of the balance sheet now that Popular is closed?

Actually, Popular, I think, added a little bit more stabilizing and lowered our interest-rate sensitivity, albeit, slightly. It was a pretty nicely matched book, but it did lower our interest-rate risk and sensitivity overall. I would also add that during the quarter, or just after the fourth quarter, we added to our swap position. We put on another $25 million of swaps, which also further protected our interest-rate risk.

And lastly Andrew, this is Steve, I would just mention during the fourth quarter, we also initiated some laddering into our FHLB advances to extend the duration of what was overnight advances.

That's right.

The next question comes from Tim Coffey with FIG Partners. Please go ahead.

Does the bank have a specific plan to reprice deposits in, say, the next two quarters?

The Bank has been taking a focused effort on our deposit costs. We have meaningfully repriced a decent percentage of our deposits. In particular, those deposits that we have under what we call our One account. We believe there are still opportunities with regard to deposit pricing and believe that with the strategies we have, we'll bring our deposits under a blended average rate of 50 basis points in the not too distant future. We've set out a target to do it by year end.

Okay. So no expectation in that, we would see a big drop or meaningful drop in say, the next two quarters? It's more going to be spread out over the course of the year?

We have a couple factors there. I think that we have certain deposits, including some deposits we acquired in the Popular portfolio that were subject to longer-term CD rates, that we'd affirmatively look to reduce, as it's uneconomic for us for a period until we roll those over. We also have certain other deposits that we think we could reprice lower and we'd be comfortable with some runoff. That being said, from the business units we've developed and built over the last couple years, including the private bank, the financial institutions bank and the commercial banking business, we're seeing positive momentum in higher-quality, lower-cost deposits coming in that we believe can replace some of that runoff. So there is a matching function here to make sure that we do it prudently and appropriately. And the success of our deposit gathering efforts along those growing, low-cost deposits business will help set the pace for the repricing of some of our higher cost of deposits.

And then, my other question had to do with the outlook on multi-family production. Do you expect that to be a strong driver going forward like it was for the last say, three quarters?

Yes. We've been very pleased with our progress and success on the multi-family business. It resulted in meaningful asset growth and high-quality asset growth in 2014. That said, we've reset our budgets and expectations for the core multi-family business in 2015 to be much lower because the pricing in that market has tightened to a point where we believe we have a better use of our capital, given that levels of production aren't a gating item for us at this point. So we would expect a more traditional CRE production. That there are opportunities there that we can pursue. And additionally, some of growth in our C&I production and specialties should help replace. But we're constantly looking at the return we can achieve on a risk-adjusted basis for each of our loan products. Multi-family is one that as of year-end, there were other areas for return that we thought on a risk-adjusted basis were more attractive. That being said, as the markets fluctuate, we have a great capability there and we continue to see a lot of demand there. And as that demand meets our return hurdles, it could increase our production again as market conditions fluctuate.

This concludes our question and answer session. I would like to turn the conference back over to Steven Sugarman for any closing remarks.

Well, thanks for everyone who called in today. Appreciate your attention to Banc of California. Hopefully, you found this call helpful and we look forward to telling you about the continued progress we've made in the fourth quarter in a couple months. So thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.