Good day, and welcome to the Banc of California, Inc. Second Quarter 2016 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Timothy Sedabres, Director of Investor Relations. Please go ahead, Sir.

Good morning, everyone. Thank you for joining us for today's second quarter 2016 earnings conference call. Joining me on the call today to discuss second quarter results are Banc of California's Chairman and Chief Executive Officer Steven Sugarman, Chief Financial Officer Jim McKinney, and Chief Risk Officer Hugh Boyle. Today's conference call is being recorded, and a copy of the recording will be available on the Company's Investor Relations website. We have 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 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 Chairman, President and CEO, Steven Sugarman.

Thank you, Tim, and thank you all for joining us on today's second quarter earnings call. The second quarter of 2016 marked a significant milestone for Banc of California as we crossed $10 billion in total assets during the quarter. We're very proud of this achievement and the fact that Banc of California now stands as one of only four midsize banks headquartered in California. Our team has dedicated itself to building more than just a community bank. We set out in 2010 to build California's premier banking franchise. Our investors knew that our vision was bold and that our path to success would require us to chart our own course. Fortunately, we counted as our partners many of Los Angeles's most respected investors who had built their own California businesses by charting their own course. We began with founding investors like Mark Attanasio and Jean Marc Chapus at Crescent Capital, and also Marshall Geller and his team at St. Cloud Capital. Along the way, we've been humbled by the addition of other strategic capital partners, like Oaktree Capital Management, Endicott, and Kirk Wycoff at Patriot Financial Partners. The advice and support we received from all of our investors has helped us to hone our business model and to avoid many pitfalls along the way. We've always aspired to be California's bank and we have benefited from our partnerships, including with some of California's best regarded financial services firms. Without the support of our key investor partners, we would've been challenged to have invested in and grown such a broad platform with the infrastructure and capabilities that we have today. Their confidence in us, coupled with the top notch teams and talent at Banc of California, have combined to drive the market leading growth and returns we're seeing today. Now,…

Thank you, Steve. Slide 3 recaps our consistent and improving financial performance as the second quarter marked the ninth consecutive quarter of earnings which exceeded market consensus expectations. We continue to demonstrate consistent and predictable earnings and accelerating profitability as we organically grow and scale our Business. Earnings per share for the second quarter was $0.46 to diluted share. When adjusting for the $2.7 million charge related to the reduction of the $85 million senior notes completed during the quarter. On a GAAP basis, earnings per share was $0.43. Pretax income totaled $44.8 million for the quarter, an increase of 36% from the previous quarter, and an increase of 63% from a year ago. Coupled with strong pretax income growth, we achieved both targets for our ROAA and ROATCE, which came in at 1.1% and 16%, respectively, for the second quarter. Slide 4 highlights our growth and recurring spread based revenue. Specifically, net interest income grew by $10.6 million from the prior quarter. This is a 50% increase from a year ago. For the second quarter, earnings by segment came in within our expectations. The mortgage banking segment produced solid results. Nonetheless, the commercial banking segment continues to drive over 95% of our pretax segment profits. It is important to note that the mortgage banking segment was again negatively impacted during the quarter as the 10-year treasury declined to 1.49% at the end of the quarter and is largely responsible for the $9 million fair value adjustment on the MSR portfolio. We seek to maintain effective interest rate controls and balance sheet management strategies to enable us to navigate volatile rate environments and to provide our investors consistent and predictable earnings. During the quarter, the losses from negative valuation marks in our mortgage servicing rights and swaps were offset by…

Thank you, Jim. Good morning, everyone. Asset quality at Banc of California remains strong and stable. Slide 11 in our investor presentation deck addresses a few asset quality highlights and our allowance for loan and lease losses. Overall for the quarter, the bank continued to experience improving asset quality metrics. On a percentage basis, non-performing assets to total assets ratio declined to 45 basis points. The lowest level experienced in over two years. Year-over-year, our non-performing assets to total assets ratio has improved by 21 basis points or 32%. Non-performing loans to total gross loans also improved to 72 basis points in the quarter, down from 81 basis points at the first quarter and down from 95 basis points from the prior year. OREO balances were relatively flat from the prior quarter and de minimus at just $429,000 at quarter end. Total delinquent loans, excluding PCI loans, increased by approximately $15.6 million quarter-over-quarter. The increase in delinquencies was represented by 18 loans, 15 of which have been brought current in July. Net charge-offs after recoveries was only $131,000 for the quarter. Based on the continued stability and our asset quality, and the relatively benign macroeconomic environment, the Bank's allowance for loan and lease losses were ALLL increased by $1.6 million to $37.5 million. Net loan growth was the key driver of provisions and the increased level of reserves. Banc of California is ALLL to total non-performing loans ratio improved during the quarter to end at 83%. When both the ALLL and fair value discounts are combined, relative to total HFI loans, the Bank has a 2.33% coverage ratio at quarter end. With that, I will pass it back to our CEO Steven Sugarman to close our prepared remarks.

Thank you, Hugh. On slide 12, we review our guidance for 2016. During the second quarter, we achieved all targeted metrics we set out to deliver against for the full year. We are focused on continuing this performance for the rest of the year, and we believe we are on track to meet or exceed each element of our guidance for the full year. We continue to believe that growing our franchise at these attractive returns create significant value for our shareholders. Our pace of growth, coupled with a 1% return on assets and a 15% return on tangible common equity, will continue to drive accelerated earnings and profitability for the Company. Looking to the rest of the year, we continue to focus on ensuring we have the highest quality of earnings. Therefore, as we continue to grow we also continue to prune. So that our franchise reflects sound and stable long term value creation. For instance, as a midsized bank, we're finding that certain short term deposits, even if inexpensive or non-interest-bearing, can result in capital and liquidity charges that make them unprofitable. To this end, we have begun a process of minimizing exposures to short term transactional deposits, which can be unhelpful from a liquidity or capital perspective. We expect to continue to use the strong momentum in our deposit gathering franchise to replace lower quality deposits with higher quality deposits, to have longer durations and lower deposit betas. We do not anticipate a material long term impact to our cost or level of deposits from these efforts, but do expect it could change the mix of our deposits in the near term. Similar analytical efforts are recurring with respect to our lending businesses. We seek to ensure that we are focused on those products that work best…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from [Tamer Brasilia] of Wells Fargo. Please go ahead.

Good morning. Now that you've crossed the $10 billion threshold, maybe just provide an update on your interactions with the CFPB, have those meetings changed at all and is there any more color you can provide us to potential change or potential impact from this new regulator?

Sure. We are in the early innings of crossing that threshold that as we final our call report in a few days, the CFPB oversight will begin as we crossed $10 billion, so we are, we have been and are preparing and well prepared for inviting a new regulatory body to oversee our consumer activities. We anticipate over the remainder of the year we'll get more in tune with the CFPB and we anticipate that we will be initiating conversations here shortly. But that actual oversight is in the future.

Okay. Fair enough. And then maybe just switching gears to the lending side. Maybe talk a little bit about the competitive landscape in Southern California from multi-family and CRE perspective. I know last time we talked, it was extremely competitive, but you had another strong growth quarter here in multi-family space.

Yes, I do believe that that market continues to be competitive. There are multiple dynamics occurring in that space. One is you are seeing an increased number of banks that are facing concentration limits within CRE and multi-family there's been a new renewed effort nationally around CRE concentrations. We are fortunate to not be in a position constrained by concentration limits. We've kind of refocused our business to the highest core relationships we have so that we can be a solution for them through cycles and not be coming in and out of that market, but reciprocally require that they be for clients of the bank, not just one-off transactional parties. So, that's been our approach. But the market continues to be competitive, pricing continues to be competitive. We were fortunate in the second quarter, it's the first quarter on record for us where in our commercial banking segment we benefited by having the highest concentration of loans in our C&I segment, which I think partially reflects where we see our future and our kind of near-term opportunity.

Okay. So, are you actually seeing some banks actively pull out of that market that are facing concentration constraints or is that more anecdotal?

I wouldn't say that I'm seeing dramatic shifts from competitors, such as pulling out of markets. But I do think that there are, there is increasing capital markets activity of certain competitors looking to sell down portfolios and I do think that there is anecdotal evidence of maybe slowing down some activity in some places.

Okay. Great. And then if I could just one more for Jim. Looking at NIM trajectory over the last three quarters pretty impressive to hold it flat in this challenging environment. Given what was done on the liability side of the balance sheet this quarter, do you see that trend likely maintaining itself in the next few quarters here or should we start seeing some pressure on the margin without benefits and rates?

Yeah, I think that's a great question. Our loan origination WAC has been pretty strong and we continue to see and continue to focus on making sure that we're seeing the right yields there. I think the biggest areas of compression on the loan side would come from our gain on sale books, like our mortgage banking, where we have a not insignificant part of our portfolio that is sold to the agencies and during the holding period, the interest we collect reflects pretty closely the 10 year swap or broader interest rates. As you know, interest rates have come down in the first two quarters almost 70 basis points and so that would reflect in particular on loans and are held-for-sale or gain-on-sale kind of book. On the deposit side, we have been steady for a number of quarters now, but I do think that there continues to be risk just on deposit costs. It's something that we've been very focused on. We want to enhance and improve the quality of our relationships and the types of relationships and we're expanding them. We are also bringing on new teams that are bringing newer relationships and as we noted, our cost of deposits fell slightly last quarter. But we are seeing parts of our business where there is increased pressure on deposit pricing and it's something we're watching closely and working very hard to maintain kind of the solid NIM margins that we've been seeing.

And our next question comes from Jackie Chimera of KBW. Please go ahead.

Sorry, I just realized I was muted. Good morning, Steve. I wanted to hop into Steve and kind of dig into that a little bit. First off, looking to the other income item, what was it that drove the large increase on a quarter-over-quarter basis?

We have a number of items that fall into Other Income. Those go from wealth management fees, processing fees, we have the TPG sale, and also some legal revenue items. Many of these have offsetting balances in the Other Expense category. As an example, on the legal side, when you look at our professional fees, you know, there is meaningful offset between the income and expense, and in fact, that would be a net negative number for the quarter of about $1 million. On TPG, we had the day one realization which was between $3 million and $4 million, it was partially offset in the Other Expense through the closing expenses, but also we transitioned to a servicing agreement and servicing model with them, where you saw a corresponding increase in quarterly fees that you pay as they’re now a third-party provider. The last one that I just mentioned that will be ongoing is Other Income also now reflects Rental Income from Real Estate Owned, and in particular, the new headquarter building at 3 MacArthur in Santa Ana. While we will be occupying the building, and have started the process of moving our headquarters over there, we also do have tenants in that building which generate a decent amount of Other Income from Rental Fees that would then be offset in some of the Other Expense items around, whether it’s the depreciation or property management fees for the space that they are in.

So, it sounds like the TPG sale and then cost associated with that is kind of the one-time item in both income and expense in the quarter, and the rest of that will be fairly ongoing.

Yes. I mean, it is an item in the quarter alongside with certain legal items. The rest, whether it’s rental income, wealth management fees, processing fees, all of those types of things are recurring, but we have non-core items such as legal that can recur over time. So, it’s hard to just label it entirely one-time.

Okay. And excluding the impact of the $2.7 million in debt expenses, that Delta between 1Q and 2Q and other expenses, is most of that driven by these other items that we just discussed?

There is a decent amount that is, you know, I would note that if you’re trying to get to a non-core expense variance number, we’ve provided the debt extinguishment costs, just because in prior calls we talked about capital cost expenses from capital transactions, and that's one of them. But there's a few million dollars of additional expenses that is primarily captured in the other expense that would also the generally be thought of in the non-core category.

Okay. And understanding that the TPG deal, it only closed in July, early July, do you have any expectations for what kind of income that will produce, given the relationship that you're maintaining with them?

Can you repeat that?

The TPG sale, I'm just wondering what the go forward would be given the relationship that you're maintaining with them, since it'll be so different from what it was in the past when they were a subsidiary.

Yes, the ongoing agreement with TPG just given kind of competitive and proprietary practice I can't get into the details of what they get paid. But it was in place for the preponderance of this quarter and reflected in these numbers.

Okay. That's good. And then just one last quick one and then I'll step back. So, it sounds like from prepared remarks, that loan sales were lower than previously indicated because you're choosing to hold more loans in portfolio. Is that something that could continue in future quarters?

Yes. It's a really important question. I think we've talked previously about our preference for spread business and spread income, and net interest income. And oftentimes there are capital constraints or balance sheet constraints that make it favorable to sell loans, as opposed to hold them. One of the things importantly that happened in the second quarter was our equity capital raise, and while it wasn't that additional capital wasn't fully deployed for the preponderance or the totality of the quarter, it did provide us additional balance sheet capacity where we could improve our IRRs and improve our long term value by holding more of our new originations on balance sheet. We view them as high quality loans were very attractive return cases. Now, that disfavors current period earnings, because a gain on sale accelerates future period cash flows. But it should have a very positive effect as we continue to move forward through the year.

And our next question comes from David Eads of UBS. Please go ahead.

Hi, good morning. So, you guys had especially strong quarter on the C&I front. It sounds like that maybe kind of the payoff from some of the investments you made by getting teams of speed and now here's bearing fruit. Does that mean that you kind of think that this level of activity on the C&I front is what we should be looking for the next couple of quarters? Can you give a little color on the pipelines or outlook there?

Yes sure, and then thanks for the question. We've talked about that we've done a significant amount of hiring and focused a lot of resources on building out our commercial banking team and our C&I business. I think you're starting to see that bear fruit. The benefits are coming in first on the lending side, although we are really focused on the deposit side as well for C&I. That hasn't come through quite as quickly, but it's something that we're hoping to see benefits from in the future. The second quarter was a really good quarter from a loan production origination. It was markedly above prior quarter. So, before I cause these numbers to become a run rate, I'd want to see some follow through, and so I'd probably be in a better position next quarter or the quarter after to kind of provide you total run rate. I can tell you that I'm very pleased with the quality and the relationship nature of the C&I originations, and I'm constructive that it has the potential to be a recurring number. But I think it's just premature to jump to conclusions after one quarter.

Okay. That's helpful. And can you give a little color on what your expectations are for production levels in the mortgage business, now that if we assume rates stay where they are, where we have a little bit of a refi wave?

Sure. We've given guidance. We expect it to have originations this year over $8 billion. I think within the mortgage banking segment, that number was a little bit over $5 billion. So, that's been our guidance, or the assumptions within our guidance, that we believe we are in a position to meet or exceed. There has been a very positive backdrop for the last several weeks in the mortgage banking space, but we should also recall that the first quarter was a particularly difficult quarter in some ways within mortgage, especially coming out of fourth quarter last period. We continue to be confident about the guidance we've given and the production levels that we've targeted, and are hopeful that if our Business is executing as we intend that there could be upsides.

Okay. Great. And just one last one for me. You talked about some of the increases in delinquent loans and it's good to hear that those were mostly cured. Were there any common threads across any of the loans that were new delinquencies at quarter end?

No. Hi, it's Hugh Boyle. We keep a tight finger and pulse on our delinquencies, and the increase that we saw quarter over quarter was mostly broadly based in our residential mortgage book, and as we've said, most of those cured in July shortly thereafter quarter end.

Our next question comes from Bob Ramsey of FBR. Please go ahead.

Hi, good morning. Thanks for taking the questions. My first question, I'm trying to get a little bit better handle on some of the moving parts. I know you said the security gains offset the MSR and swap hits this quarter, and the MSR apparent was $9 million, how much was the swap hit this quarter?

It was just under $1 million.

Okay. Got it. And the MSR hit, is that rolled up into the Mortgage Banking Income line or is that in the Other Expense line?

It is in the mortgage banking line item.

Got it. Okay. And then I was just a little curious to how you guys are thinking about the security, go ahead.

To add just for the clarification it's on the revenue side when you're looking at our segment results that we break out.

Got it. Perfect. And then mortgage banking I guess then including that MSR impairment was still really strong this quarter. I guess I'm curious why you guys think about security gains as a hedge that MSR when I would think that strong mortgage originations would be a natural hedge in that business.

Sure. We do not account for our securities as a hedge, so I'm going to steer clear of that language, but we do look at our interest rates sensitivities, pretty detailed from our outcome model and want to make sure that we have the ability to ensure the interest rate movements that don't impact our core businesses we can be agnostic to. And so, when we look to how we build our securities portfolio and how it lays out against our businesses, we want to ensure that if we have deep volatility in things like interest rates, we can offer our investors some consistency and predictability of earnings as opposed to needing to offer them kind of mathematical adjustments to earnings. In the specific case of the second quarter, it's important to note that Brexit occurred less than five days before the end of the quarter and had a meaningful impact on interest rates and MSR valuations. And therefore, the assumption that locks and mortgage banking revenue incur quarter tie to interest rate fluctuations doesn't quite hold or didn't quite hold in the second quarter where the fluctuations happened so close to the end of the quarter. And so in situations exactly like that that we like to take a portfolio approach, look at our exposures and make sure we can manage to it so that we can deliver against kind of our commitments.

Okay. Okay. Shifting gears a little bit. I know you guys have sort of reiterated targeting the 15% return on tangible common equity for the full year. If I apply that to the back half of the year you've got $615 million in tangible common equity, it shakes out to about $23 million a quarter in net income after preferred dividends or $0.45 a share, is that a fair, ballpark obviously, of course it can vary a little bit, but is that a fair way to think about what you guys are targeting in the back half of the year?

I would probably direct you to slide 12 if you want to think about what our targets are for the year, where we've tried to give some pretty specific guidance. As we manage our business, if there are opportunities in the market that can improve our ROATCE or our ROA or kind of enable us to further our mission through growth and capabilities or otherwise, we'll pursue those. But we'll do them dependent on these targets we set out here. So, kind of taking a static look at strategy when we're operating in a dynamic market it is something that we don't, isn't the way necessarily I'd look at it. But on slide 12, I think that we've provided a pretty good guidance that can support those assumptions that you're trying to drive to.

Okay. I'm trying to build off slide 12, maybe I guess ask another way. The targets that you lay out on slide 12, is that after the preferred dividend expense or before? Because I know some people calculate ROAs, ROTCEs different ways.

Yes, so our earnings per share has recalculated, it's fully diluted which is earnings available to common. And so that would be after preferred.

Okay. And so for the ROA and return on tangible equity, you would treat that the same as the EPS after, after dividend.

Yes, for ROATCE what we’re try to get to is what return our common stock investors can really expect on a tangible common basis. We’d be happy to provide, and I think we may in some of our calculations in the tables, but we’re happy to help you to tick and tie the numbers that are in here to your calculations, and we’ll follow up with you to do that if it would be helpful.

Okay. I appreciate it. Sorry to belabor the point. That’s helpful. That’s all I have.

And our next question comes from Andrew Liesch of Sandler O’Neill. Please go ahead.

Just a couple...

Andrew, just before you, just to follow up on the last question. I think we have a walk in our tables for ROATCE that I just directed callers to, and on ROA, that’s a standard metric that’s off of the pre-preferred, but there’s a walk in the back of our tables that should clarify this. So, with that I will look forward to your question, Andrew.

All right. Thanks. Just a couple, you covered most of them. Securities book is down to about 22% of assets right now. Is that a good level to think about going forward just trying to see, trying to get a sense of what the earning asset mix is going to look like in the coming quarters.

Yes, very good question. We provided guidance earlier which would target a slightly higher mix of securities as we managed through the quarter and saw the opportunity to take some loans and new production into HFI and holds longer. That improved kind of our long-term economic and mission based goals. So that number can be dynamic, and the second quarter was, it probably finished a little bit lower than where we might’ve otherwise anticipated it would finish. So, we’re not trying to take a templative approach to it, but there’s definitely the potential for us to be a higher number, and there’s also the potential for it to stay where it is or fall a little bit.

Okay. And then just looking at the reserve ratio to, just it’s been trending lower the last several quarters. Is there a, I mean, I know it’s [indiscernible] for me, but is there a level where you would like to see that plateau?

We are not driven by kind of levels but I think that where we are with the reserve ratios is a very prudent level. We spent a lot of time focused on this. It’s something that we’re not looking to a results orientation. We’re looking to make sure that it properly reflects the anticipated losses that are probable within the portfolio. And the appropriate kind of counting guidelines. That being said, we do note the level is impacted for us by the amount of acquired loans or purchase loans, and so we also equally look at the level where you include the embedded discounts and purchase discounts within the credit against our entire portfolio. But I think that we are in a pretty stable place where we are if the market were to be consistent with [indiscernible].

Okay. And one last question. Just on the deposit flows in the quarter, looks like big increase in money market and CDs, but then outflows and non-interest bearing. Was that a result of kind of what you alluded to in your prepared comments about some shorter term transactional deposits trying to move them out? I'm just kind of curious, what was the driver behind these different flows?

Yes, it's a good question. I think on the earnings call last quarter, we talked about that we saw the positive trends in non-interest bearing deposits as above our expectations for long term rates, and part of that spike was because there was some relationship based kind of transactional short term non-interest bearing deposits that came in that we got the benefit from but were not long term. I think we gave the guidance last quarter that over kind of rolling periods of time, maybe four quarters you would expect, where we would expect closer to 100 million a quarter on average, and so there has been volatility there. I think mostly things that we understand and are comfortable with and see is consistent with our progress of building up the Bank, but something that we -- you give a lot of attention to.

And our next question comes from Gary Tenner of Davidson. Please go ahead.

Hey, guys good morning. I had a couple of questions. First to revisit the question about the loan sale guidance. You talked about 6 million to 8 million per quarter previously. Obviously 2 million or so this quarter, given the extra capacity from the capital raise for the back half of the year, would you suspect it's closer to the second quarter level or more towards that 6 million to 8 million per quarter run rate you had noted earlier?

Yes. For our kind of long term expectations here, the guidance we gave last quarter is something that I continue to be comfortable with. That being said, from quarter to quarter it could definitely vary, and so we don't give it for any specific quarter, but we believe we have a pretty well functioning and sound ability to originate loans for sale. It's something we've done regularly over the past couple of years when appropriate, and I believe that it's something that we'll continue to do and at a pace higher than it was in the second quarter. That said, we have to look at market conditions, we have to look at the price and we have to look at our own balance sheet to decide if the capital's better spent increasing our spread business or better spent monetizing the value of the production franchise we've built.

Okay. Thanks for that. And then a bigger picture question I guess, with the pace of growth in the commercial business and the allocations that you provide in the segment reporting, obviously the mortgage businesses become a much smaller part of your pretax contributions, so over a cycle or over time given the pace of growth in the commercial side, where do you see that mortgage business or the mortgage segment settling out in terms of contribution?

Sure. Look, we think that lending money to residential properties in California is really a core part of our mission. We do it on the jumbo basis, and we do it within the conforming market. it is something that we expect to continue to do, and that we think furthers our mission. That being said, we think it's really important to get a lower volatility and more stable earnings stream, and so we want to make sure that our activities are right sized on our portfolio. I think we've talked previously about having that mortgage banking segment below 20% of pretax contribution from a segment basis. It is there. And also when we look at our mortgage business and our residential lending business, we want to strategically focus on making it recurring income, making it spread based and reducing kind of volatility associated with the business. So, it's something we're focused on, and something I think we've made meaningful strides on over the past 18 to 24 months. I think it's that we're comfortable with the size of contribution that it's at today. We're very happy that it's gotten to the right size without shrinking that business, enabling it to continue to grow. But it is something that is important to our mission, but we want to take the good aspects of it without all the volatility and less good aspects of it.

And our next question comes from Don Worthington of Raymond James. Please go ahead.

Good morning, everyone. Getting back to the C&I lending in the quarter. Was there anything in there that you would consider to be a particularly large relationship or is it pretty well diversified?

It's pretty well diversified. I would say that as we've grown the Bank and now kind of emerged in the midsize category, we've seen corresponding strength in our ability to serve midsize companies in our footprint and more meaningful relationships. So, it's a pattern that goes back for the last several years, where as our platform broadens and our capital base increases, we see it as a meaningful competitive advantage that while respecting concentrations and granularity, we can serve banks that non-midsize, we can serve companies that non-midsize banks have a real difficult time serving. So when you look at the landscape, out here you have a number of wire houses that compete or large banks. They tend to have a slightly different value proposition than folks like us overall. And then you really only have four midsize banks, a couple of them serve a specialized markets, and at least one of them focuses more on a nationalized platform. So within this market we are finding traction for local businesses who need a local midsized bank that they have confidence is focused on their market and will be here for a while, and there's not a lot of competition there right now, and so I think that', if I were to cite where the traction is coming from, that would be my sense of why we are seeing the traction.

Okay. Thanks. And are you seeing any elevated payoff levels with customers maybe being enticed by lower rates than you're willing to offer by, say the large regional’s?

I mean, we haven't been seeing that. It's something that we track pretty closely, but we haven't been seeing that today.

Okay. And then I guess the last one for me is do you have any further significant costs to be incurred relative to crossing the $10 billion line in terms of a compliance and that sort of thing?

We don't see a material amount of cost to further consider. There are six key aspects to crossing $10 billion. There's new liquidity reporting which you'll start to see through our regulatory reporting. There is annual DFAST stress testing which is substantially built out at Banc of California. There is Durbin amendment impacts. Those are the things that based on current financials aren't material, it's more of a future impact for us. There is the FDIC deposit insurance assessment kind of the way they calculated it changes, not a material impact for us. There's certain governance and enhanced governance standards. Those largely already reflective in our governance structure, such as having a independent risk management committee, which is something that we've set up for some time. And the vocal role and how we clear swaps not a meaningful part of our business. So there's not real cost associated there that's meaningful going forward. There is our own business goals which is to continue to build out our platform and leverage where we think is one of our strengths which is data superiority and really continue to advance the ball there. So, we've set out a targeted marginal efficiency ratio of 40%. It's something we continue to target which means that it provides us a nice metric from which to pace our business investments in platforms, so that we are ensuring that we are not under spending on platform or over spending on platform. It's something we focus on pretty closely.

And this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

We appreciate you guys joining us for the second quarter earnings call. And we look forward to sharing with you further updates and progress in the third quarter. Thank you.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.