Good morning and welcome to the Banc of California second-quarter 2015 earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Sedabres. Please go ahead, sir.

Thank you, Frank. Good morning, everyone, and thank you for joining us today for today's second-quarter earnings conference call. With me on today for the call is 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 made 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 want to remind everyone that, as always, certain elements of this presentation are forward-looking and are based on our best view of the world and 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. And welcome to everyone for our second-quarter earnings call. At our investor day just over a year ago, we outlined our financial target metrics for our Company. These targets for the consolidated entity included a 1% return on assets, 15% return on common stock, and an efficiency ratio of between 70% and 75%. Management provided guidance that the Company would target achievement of these metrics as of year-end 2015 on a run-rate basis. We are making great progress towards these targets. I'm pleased to report that our second-quarter 2015 earnings have resulted in a return on assets of approximately 1%, a return on tangible common equity of 14.5%, and an efficiency ratio of 73%. While these results are consistent with our long-term target levels, we continue to focus on improving the quality of earnings through our low-cost core deposit strategies, a focus on continuing to shift the mix of earnings towards our commercial banking segment, which now represents 66% of our business segment profit contribution and more fully deploying the capital we raised during the second quarter. Management believes we remain in the early innings of demonstrating the long-term earning power of our franchise. This progress towards our financial targets is a testament to the strong team we have built at Banc of California and the power and soundness of our business model. Second-quarter returns were achieved notwithstanding that the Company raised approximately $290 million of debt and preferred securities during the quarter, which resulted in increased interest and dividend expense at the holding Company. As of the end of the second quarter, the capital remained largely undeployed, which was consistent with our strategy of pre-funding our anticipated growth. Management expects several financial metrics to further strengthen and solidify by the end of the year as the…

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 first quarter on Slide 4. Today, as Steve noted, we reported net income available to common shareholders of $13.1 million after accounting for our preferred dividends, or $0.32 per diluted share, with a return on average tangible common equity of 14.5%. Total revenues were $120.8 million, a 23% increase over the prior quarter. Higher net interest income was driven primarily by higher earning assets. Non-interest income increased by $20.7 million or 45% from the first quarter, due to higher mortgage banking revenues, higher net gain on sale of non-agency loans, and the gross gain on the sale of the Costa Mesa building. Noninterest expense increased to $87.9 million, attributable to higher volume-related expense related to mortgage banking operations, expenses tied to the building sale, and higher compensation expenses. Provision expense for the second quarter totaled $5.5 million, with $4.5 million of that total as a result of the transfer of $475 million of loan balances that were previously held for sale to held-for-investment during the quarter. Lastly, our preferred dividends reflect the additional interest associated with the capital raise completed earlier in the quarter. On Slide 5 we outline the pretax contributions by business segment. The banking segment, which includes the commercial and retail banking activities, produced a pretax contribution margin of $23.7 million for the second quarter, which represents a 66% overall business segment contribution. This includes both the benefit of the building sale as well as the incremental loss provision associated with the jumbo loan transfer. The mortgage banking segment, which includes our traditional agency and conforming mortgage banking activities, produced a pretax income of $10.3 million for the second quarter and…

Thank you, Ron. Asset quality continued to remain strong and stable at Banc of California during the second quarter. Please see Slide 14 in our investor presentation, which highlights our key asset quality metrics. Total loans, HFI and HFS, remained flat for the quarter at roughly $5.2 billion, with HFI loans growing from $3.9 billion in the first quarter to just under $4.5 billion in Q2. The HFI book benefited from a transfer of single-family residential loans from HFS to HFI. Total delinquencies rose on an absolute dollar basis by $11.1 million quarter over quarter but remained flat on a percentage basis, at just over 2% relative to total HFI loans. The modest dollar growth in delinquencies was attributable to our residential mortgage portfolios, which saw a rise of $17.1 million during the quarter, with the increase spread across our portfolio loans, seasoned loans, and our HFS loan pool transfer. Notably, delinquencies fell on a net basis in our commercial lines of business by $6 million, resulting in the $11.1 million net increase for the quarter. Both the absolute dollar level of nonperforming loans and nonperforming assets as well as the percentage of nonperforming loans to loans and NPAs to total assets fell quarter over quarter. Nonperforming assets declined slightly to end the quarter at $42.7 million and represent just 66 basis points of total assets. Net charge-offs remained negligible in the second quarter. The provision for loan losses for the second quarter was $5.5 million, and the key driver of provisions in this quarter was the $4.5 million provision related to the transfer of loans to held-for-investment status and, hence, the resulting establishment of an initial allowance for these assets. Banc of California's ALLL, or allowance for loans and lease losses, increased to $34.8 million at June 30, 2015. The ALLL coverage ratio fell slightly during the quarter, with the ALLL to originated loans ratio declining from 1.35% in Q1 to 1.27% in Q2. This slight decline in our coverage ratio is primarily the result of our continued very low charge-off experience and the portfolio mix shift during the quarter to lower-loss residential mortgages. With that, I will turn back over to our CEO, Steven Sugarman.

Thank you, Hugh. Thank you, Ron. Operator, we are ready for questions.

We will now begin the question and answer session, [Operator Instructions]. First question comes from Gary Tenner from D.A. Davidson, please go ahead sir.

I did have a few questions. Ron, first off, on the expense side, you've talked about the base expenses going up $2.8 million because of increased -- what sounds like bonus accruals, essentially. Is there any first-quarter catch-up in there? Or do we think of elevated bonus accruals for the remainder of the year? And then maybe you could talk about what else may have been increasing the base expenses sequentially.

Yes. Gary, specifically to your question, there was no catch-up with the first quarter. Obviously, we have business lines, and overall many of the executives and staff are bonuses based upon the Company's growth in revenues and profitability. And as that continues to grow, we will accrue more. And accordingly, if it flattens out or decreases in terms of growth, the bonus accruals and that will be adjusted commensurate with that.

Okay. And of the sequential delta on base expenses, you mentioned that $2.8 million. But what's the rest of it? There's like another $3.5 million. Anything meaningful or something worth pointing out for that reminder?

Yes. So in that $6.4 million, of course, we've got some increased staffing expenses. I think roughly about $1.5 million was associated with just overall staff, which increased, I believe, about 46 people during the quarter -- split evenly between the bank and the mortgage company. There's some additional business marketing initiatives that are included in that, some additional occupancy costs. So it's really a potpourri, if you will, of operating expenses across the board.

Okay, thanks. And then I had a question on the gain-on-sale in that multifamily portfolio. Did you say $4.5 million was -- the gain on the $214 million sale?

Yes, that is correct. It is correct.

Okay. So then, ex that, the gain-on-sale of the jumbo portfolio was sequentially -- was it lower? What were the margins or the spreads on the gain-on-sale this quarter?

On the jumbo portfolio we sold, I believe, about $180 million. And we achieved roughly about 1.5% on a gain-on-sale, net gain-on-sale with respect to that -- which is about the norm; sometimes a little higher, sometimes a little lower. But that's what we achieved in the quarter.

Okay. And then what were they on the conforming sales?

The conforming sales -- the margin -- the gain-on-sale margin squeezed during the quarter a little bit as we saw higher interest rates as the quarter progressed. Roughly, we are just under about 3% on a net gain-on-sale for the quarter. I think in the prior quarter we were closer to about 3.5%.

Next question comes from Andrew Liesch, Sandler O'Neill, please go ahead.

So basically, just your comments around the expenses -- it sounds like this $64.7 million to $65 million -- that's a good core run rate to build off? It doesn't seem like there was anything that might go away there? Right?

Yes. I would say there were a couple of smaller, what I would call nonrecurring -- I don't know that I'd call them or term them non-core, but nonrecurring expenses. But for the most part, yes, I think that's a fairly sound bet.

Okay. And then your decision to move some mortgages to the portfolio -- just curious what drove that decision. And then what did that do to the overall duration of the loan portfolio?

It's Steve. With our capital raise that occurred in the second quarter, we modeled the most profitable path for our loan portfolio. We had been selling in HFS certain loans which would be more profitable to hold and was part of the reason to raise the additional capital. And so for those loans, we move them to HFI, because we now believe that for the foreseeable future we are going to hold them in our portfolio. As far as your prior question and the question that Gary also asked around the expenses, there was elevated bonus expense that comes from profitability above targets. So the level of expenses is a run rate if profitability continues to be above our targets on a run rate. And those targets include things like non-core items that lead to profitability. So excluding excess profits, then the bonus pool and the incentive compensation would be much lower.

Okay. And then just the rise in the non-interest-bearing deposits -- are there any temporary funds parked there? Or is that just all good organic growth?

This was probably the highlight of our quarter -- and really, over the last year, where it has grown by more than double. The non-interest-bearing deposits has been a focus of our business as we have transitioned the platform to the commercial Bank. We saw it from a broad swath of deposits. Primarily I think it's driven by our focus on specialty deposit products to niche businesses. A good example of that would be our financial institutions Bank. But it also showed strong deposit growth in our private banking, retail, and commercial banking segments -- and, in fact, we believe is a byproduct of some reorganizations we did a few quarters ago to refocus some of our acquired teams and businesses to the deposit side. Because our organic lending platform continues to be robust, where we can really take our relationship managers and focus them and incentivize them by deposits.

Okay, great. I just realized -- the duration of the loan book -- do you have that handy?

I don't have it offhand. But we can look into that for you.

Next question comes from Don Worthington from Raymond James, please go ahead sir.

Did you receive a special dividend from the Home Loan Bank in the quarter?

Yes, we did.

How much was that?

That was $1.1 million. That was included in our net interest income.

All right. And then I notice you've got about $50 million in deposits held for sale. Is that due to the branch sale?

Yes, that is correct. We have reclassified roughly $50 million of deposits and $40 million in loans. The loans you can't see as clearly, because it's embedded in the agency and the jumbo loans held for sale. But that's both for the announced branch sale transaction, yes.

Okay.

And, Don, I'd just add that there was a couple hundred thousand dollar impairment associated with that reclassification for certain assets that are being sold along with that contemplated branch sale.

Okay, great. Thanks. And I guess lastly, when you had purchased the property in Costa Mesa that has been sold in the quarter, the thought was consolidating; and then, I guess, reducing other lease expenses. Any update on the thought process there in terms of ultimately consolidating operations into fewer buildings?

Yes. The decision to sell the building was something that resulted from an unsolicited offer, which was -- reflected the price that we believed was in the best interest of the shareholders. That will also offset some expenses in future quarters that were associated with the holding of that building and maintenance of it. That said, our current lease continues to run for another couple years. We do believe, long-term, that there are benefits to consolidation. We continue to look for the right opportunity to do so. But we have time, and we thought that the sale of this building at the price we achieved was very attractive for shareholders, and the reduction in ongoing operating expenses that we will see in future quarters will also be a positive in the meantime.

[Operator Instructions], next question comes from Jacque Chimera from KBW, please go ahead.

Just trying to iron out the organic loan growth in the quarter to the moving pieces. So if I look at that roughly around $2 billion in originated loans that you had last quarter, and then that increased to $2.5 billion in the quarter, I'm assuming that the entirety of the $475 million in jumbo loans flowed into that bucket. Is that correct?

Well, the $475 million, Jacque, -- yes, Jacque, this is Ron. The $475 million were loans that were previously originated in prior quarters. So that is an accumulation of, if you will, the last six, seven quarters of origination. So that doesn't count towards our current quarter's worth of originations.

Yes, and Jacque, I would just highlight -- when we think about our core earnings during this quarter, given that those loans were originated in different quarters and it's a management decision on holding it, we don't look at that as a sign of the current-quarter earnings power from core earnings. So the 475 are not part of the $1.9 billion of originations; they are on top of that. And the ALLL associated with them is ALLL associated with loans originated during prior periods and not reflective of current-period loan originations.

Okay. No, definitely understood on those points. So what I'm trying to do is just iron out between the two originated numbers -- what flowed into that that wasn't part of the origination? So I know it was the $475 million, because that was in prior quarters. For the $214 million that were sold in multifamily during the quarter, was some of that in the acquired loan bucket, because it came over from Popular?

No, these were all loans that are multifamily team originated organically. And we thought it was a very positive sign that we were able to demonstrate the value of the lending. I think on prior calls we have had questions about whether our multifamily lending business had attractive margins and was creating value, because folks had seen trends of compressing margins in that space. These were recently, or over the last year or so, originated in multifamily that we originated organically and demonstrated a pretty attractive gain-on-sale margin on sale.

Okay. So if I take that originated loan bucket, then, and I subtract out the $475 million -- because that's what came in that was already there -- and then I add back the $214 million just from other quarters, then essentially what you achieved in your originated bucket was double-digit loan growth in the quarter. Is that a good way to look at it?

I think that Ron -- we tried to do that math for you, and I think that in Ron's comments he put the net originations, which also include offsets, paydowns, and everything else, at about 7% organic loan growth, net of these one-time transactions. But your number is probably correct if you are not including paydowns and payoffs and refis. And the 7% includes kind of a comprehensive view of organic loan growth, the best that we can provide to you.

Okay, thank you. Sorry I missed that; they were collecting my information on the conference call. So that's really helpful. Thank you. And then, do you happen to have the dollar amount of what was transferred from CRE into C&I during the quarter?

Jacque, with the Banco Popular acquisition, Hugh and his team are still working through a lot of the classifications and the appropriate assimilation, if you will -- that portfolio with the way we look at the variety of portfolios that we have on our books. So there was a number of movements to tweak that and sort that out. Ostensibly, we think we are done with the major part of that. We will probably have some fine-tuning of those portfolio classifications. But the numbers, obviously, that you see today we feel pretty good about as far as the right finishing point for June 30 and the right starting point here for the third quarter. Now, on average, roughly about $200 million of the B Pop loans moved around. And then there were a few legacy loans that moved around a little bit, to the tune of about $60 million to $70 million.

Okay. So absent that transfer, then, you still had growth in the CRE portfolio, the formerly classified CRE portfolio?

Yes, that is correct. Right, in my comments I had mentioned that the CRE and multifamily on a combined basis grew almost $55 million in new originations during the quarter.

And it's important to note that that portfolio segment with new originations -- the originations were coming in north of 4.5% as an average yield.

Okay. Great. Thank you both very much. That's really helpful.

This concludes the question-and-answer session. I'd now like to turn the conference back over to Steven Sugarman for any closing remarks, sir.

Well, thank you. And thanks to everyone for joining our second-quarter call. We are very proud of the progress we made during the second quarter and look forward to talking with you about the third quarter in a few months.

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