Hello, and welcome to Banc of California's Second Quarter 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] Today's conference call is being recorded. And a copy of the recording will be available later today on the company's Investor Relations Web site. A presentation that management will reference on today's call is also available on the company's Investor Relations Web site. I would now like to turn the conference over to Mr. Doug Bowers, Banc of California's President and Chief Executive Officer. Mr. Bowers, please go ahead.

Thank you, and good morning everyone. I appreciate your joining us for today's second quarter 2018 earnings conference call. Joining me on the call today is John Bogler, Banc of California's Chief Financial Officer. Before we begin discussing the quarterly results, I would like to refer you to our Safe Harbor statement included in both the earnings release and the earnings presentation. With that, I will start by saying I am pleased with the progress we are making in executing on our three-year strategic roadmap. While we are only two quarters into our journey, we continue to see positive signs. To remind everyone, that roadmap includes four primary points of focus that we expect to achieve over the ensuing 12 quarters. Before John speaks to the detailed financial results for the quarter, I want to spend some time updating you on our progress and work to date on these strategic goals. In short, we are happy with the early accomplishments, and remain confident in our ability to execute on the full strategic plan. That said, we will recognize we have plenty of work ahead of us. As a reminder, the four focus points on the Banc roadmap, B-A-N-C are B, build core deposits; A, amplify lending; N, normalize expenses; and C, create stockholder value. First and most importantly, build core deposits. On this front we have fully exited the high-rate high-volatility institutional deposits and have accelerated our efforts to grow core deposits. For the quarter core deposits grew by $357 million, allowing for the reduction of wholesale funding sources, namely brokered deposits and FHLB advance. Quarter-over-quarter, brokered deposits declined by $323 million while FHLB advances declined by $100 million. While we saw strong growth in core deposits, it should be noted that this growth was mostly in higher-costing deposits. As…

Thank you, Doug. During the second quarter, we continued on our plan to remix the balance sheet toward more traditional core assets and liabilities, with the overall size of the balance sheet remaining flat at $10.3 billion. On the asset side, we continued to reduce our securities portfolio which declined by $127.5 million, and securities as a percentage of total assets declined to 22%, and continue to trend to the targeted range of 15% to 20% of assets. Included in the ending securities balances are $130 million of CLOs that have been purchased but not settled under our trade data-counting. Further, based on feedback from various sources, an estimated $150 million of CLOs will be called in the third quarter. The net impact is that the CLO portfolio will continue to decline, with the net proceeds expected to be redeployed to loans. Also during the quarter, we completed the sale of additional $3 million of mortgage servicing right or MSRs. The bank will continue to provide services related to the remaining MSR balance which is now immaterial to the core business platform. The asset remix was supported by continued growth of core held-for-investment loan balances which increased by $105 million for the quarter. During the quarter, we elected to sell $132 million of single-family loans, $71 million of multi-family loans. These sales were focused on performing long-duration low-coupon loans with the sale executed primarily for interest rate risk management purposes. Going forward, we may continue to selectively sell portions of the loan portfolio to manage interest rate risk, reduce concentrations in selective borrowers, or to manage overall loan portfolio growth. For the first-half of 2018, the annualized rate of loan growth is 11%, and we remain confident that the full-year growth rate will meet or exceed the long-run target of…

Thank you, John. As mentioned in my opening remarks, we are beginning to see the potential for Banc of California. Earlier this month, we held a full day offsite meeting with over 100 of the top leaders from the bank along with all of our client-facing teammates; the energy optimism, desire to succeed and work as one was all very inspiring. Coupling that kind of tenaciousness with the most robust market in United States and maybe the world Southern California, gives me plenty of optimism and determination that we are indeed on the road to building something special with Banc of California. That concludes my prepared remarks. Operator, now let's open it up for questions.

[Operator Instructions] The first question today comes from Timur Braziler with Wells Fargo Securities. Please go ahead.

Hi, good morning guys.

Good morning.

First question relates to loan growth and the loan sales that occurred this quarter. I'm just wondering as you look out for the remainder of the year, how should we think about the loan sale strategy and how much of that is going to be driven by the ability to generate core deposits?

Well, let's kind of break that apart. I'll talk a little bit about the loan growth and the deposit side, and ask John to comment more on the loan sale side. Loan commitment is a little bit in the second quarter, a little bit below what we had planned. Outlook however, given pipelines and how we are seeing the rest of the year on a fold makes us pretty optimistic both on the top line as well as a loan growth overall, so both outstanding to end commitments. With respect to deposits, obviously that's in many respects comes with, and the quarter was quite good. On the deposit side, we are obviously very pleased, that is as we stated more of the higher rate the Phase 2 of this process and we are doing a lot of work, we started this wall business banking program, restarted it rather. We've commenced with much more rigor, our business banking and little market capabilities particularly now under Jason Pendergist's leadership. And then, all the work that Rita Dailey's team is doing on treasury management side and the specialty deposit side, put all that together with Leticia's retail banking, community banking efforts and the great success that Jay Sanders has had on the private bank, we are pretty happy. We got a lot of work to do on the deposit side, but we are pretty happy there.

John, can you comment on the loan sale side?

Yes, certainly on the loan sales what we did during the second quarter was primarily for interest rate risk management purposes and so the sales were in longer duration, lower coupon type instruments and I think like 10-1, 7-1 hybrid type instruments and many of them were IO in nature. So it was primarily intended just to simply shorten the duration and help us out to the extent we have a rising interest rate environment. So wasn't necessarily about balancing the rate of growth in the loan portfolio. So as we continue to move through the second half of the year, we will continue to look at those opportunities for many interest rate risk management purposes and less from an overall managing the rate of growth in the loan portfolio. We still expect to target something in the mid-teens in terms of the overall loan growth for the year.

Okay, so it sounds like loan growth is going to accelerate and the sale were more from the interest rate perspective than a growth perspective, so with that being the backdrop, should we expect the growth and deposits on the runoff and securities to help fund that loan balance for the remainder of the year or should we see some sort of expansion in the wholesale market as well.

No, I think for the most part you will see the securities continued to decline, we continue to make progress in balancing out on the asset side with securities coming down and loans going up. I will expect that to continue through the second half for the year and I would expect that we see kind of similar event occurring on the liability side where we have a declining concentration of wholesale funding sources and increasing level of core deposits.

Yes, you put all that together, the rate of balance sheet growth will remain muted here for a while longer as we continue to run down the securities portfolio to a more normalized level and have the continued success and growth on the loan side, same is true on the deposit side as we rundown the flab and Prokard and run-up the more traditional deposit side. So again the balance sheet growth will be -- will remain a little bit muted here for a few more quarters.

Okay. And then, maybe just switching gears to the security side, I guess pretty surprised to see the magnitude of yield increase given the linked-quarter reduction of balances and linked-quarter reduction in CLOs, I guess what the total net new purchase of securities was during the quarter, what's that kind of position and what's the new security deal being brought on?

Yes, I don't have the balances here in front of me but for the most part that CLO book of business reset on a quarterly basis, it's tied to LIBOR, we saw a significant increase in LIBOR during the first quarter and a little bit in the second quarter. LIBOR has been relatively flat through the second, latter part of the second quarter. So I would not expect to see the same degree of reprising effect as we go into the third quarter reset. So I just don't, I think in a securities book of business most of those instruments as they are called and we enter back into new ones to the except that we do enter back in a new one, the pricing has been relatively stable. So we don't really see much difference in terms of what's being called because it's a current rate coupon versus what we are purchasing.

Okay, that's helpful. And then, maybe one last one if I can on the expense phase, I'm just wondering of the restructuring that was announced about a month ago now, what portion of that employee base has already been noticed. And then, similarly on the vendor side how many of those relationships have already been terminated?

Yes, we will not go into deep detail there other than to say the majority on both brands.

Okay, great. Thank you.

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

Hi, good morning guys.

Good morning.

I wonder if you could provide a little more color just on what you are thinking in terms of the small business banking platform and I know you mentioned our treasury management and deposit growth from them but just how you see that playing out over time?

Well, first of all, it's a very, very early innings and with Leticia coming on board her teaming with Jason Pendergist, it's a matter of wanting to take advantage of our branch network and ensure that we are focused as much if not more on the small business community, which as you know, is richer in lower cost deposits and we had a degree of that capability and focus here relatively modest and we've worked to aim that both in terms of creating the right credit metrics, right credit box, and ensuring that our teams are well trained to be with that client base. So early innings but that's the intent and it's much more deposit play than it is a loan play, but the loan is usually how you start the relationship.

Okay, that's helpful. Thank you. And then, just in terms of you've obviously done a wonderful job of building out your senior management and helping to transition the company, approximately where are you in that process and it's kind of a cheaper question and of that $15 million in annualized cost savings that you anticipate, how much of that do you expect to generally reinvest in the company?

Well, I will deal with the first portion. In terms of my leadership team, the team that reports directly to me, we are set. So when Jim Hazboun coming on board as our Head of HR and with the earlier announcement we had on the first quarter Kris Gagnon our new Chief Credit Officer now well in the chair, Leticia as I mentioned earlier now well in the chair with respect to running all of our branch operations and capabilities. All of that frontline leadership team for me across both originations and the support areas is in place and I'm really satisfied, really pleased with the degree of teaming and just be degree of adult leadership that we have in place here, so very, very good. And those teams now have -- those leaders have also gotten themselves in a very, very good spot in terms of their chosen senior leaders. So it's' something I suppose you never quite done with, but we are a long way down the path with respect to the teams. On the expense side, in general I want to comment more but first of all we are much more geared towards the expense to asset ratio and driving that to the 2% in lower number. So obviously we are pleased with the expense levels that came in the second quarter. There will be some add backs, we do want to continue to add to our teams on the origination side and where we need to throughout rest of the company. But obviously we are quite focused on the sales runoff the side.

And I guess what I would add is we will continue to focus on back office and creating efficiencies and as we make those gains that will certainly be a benefit towards the expenses but as Doug mentioned we will continue to invest in the frontline units and so that will put some upward pressure but the way I think about expenses again is over the long-term will drive that expense ratio down to something that's 2% or lower of average assets.

Okay. That's helpful and then just one last one. This is regarding footnote four on Slide 9, the $2.1 million, and we will settlement -- that was just captured as a benefit to other income in the quarter?

That's correct. Yes.

Okay, great. Thank you very much.

Thank you.

The next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Hi, good morning. Can you give us a sense for the rates on the brokerage CDs that you ran off relative to the pricing on the new CD that you're offering just trying to get a sense for the differential?

The typically the way we take out the brokerage CDs is going to be in three in six months terms and so you look back at what the rates were at that time which was rate increase or two ago versus the new CDs that are coming on so I don't have the exact numbers but it's relatively short duration on the broker deposits sides and they're continuing to reset at market and then we're bringing on obviously the new CDs that what we believe are market rates but all when we generally on a comparable bases we're able to generate deposits at a lower cost than broker deposits.

Okay, great. And then can you quantify the payoff activity in the quarter just wondering what the payoffs were in the first relative to the second quarter on that loan growth?

No, we typically don't kind of break that out we're just more focused on what it looks like in terms of the overall net loan growth what I can say is that the yield on the gross whack I guess on the new production was 505 which is up slightly from the prior quarter and certainly well above the overall loan portfolio yield.

Okay. And then just on the income statement the loan servicing income, I guess how should we think about that line item going forward I think with the MSRs asset largely going away I guess what else was left there?

What's left is primarily the SBA loans that we service and so there will continue to be a little bit of servicing fee income but it's a relatively small component of the overall income statement and the MSRs is a small component of the balance sheet so it will be relatively small on a go forward basis.

Okay, great. Thank you.

Next question comes from Andrew Liesch with Sandler O'Neill. Please go ahead.

Good morning, guys.

Hello.

Good morning. Can you hear me?

Yes, Andrew. Good morning.

Okay, great, just questions on the yield side here just noticed the C&I, SBA and lease financing yield was up pretty substantially was just a function of the variable rate loans repricing or was there anything else driving that increase?

Now that's primarily the variable rate loans repricing there's substantially tied to LIBOR and again we saw some pretty significant increases in the LIBOR curve in the early part of the year so that results in higher rates in the second quarter.

Okay. So you've got the better rates there generally improving rates on the new production and then certainly deposit costs are coming on higher but what's giving you the little bit of sense that the margins going to continue to decline it seems like you're getting some improvement on the earning asset mix that should help better loan yields and while funding costs are going up you can offset that so it's giving you the sense that the margins are going to going to slip a little bit lower?

Well, I would start by saying that it's still early any means in terms of this team and their production efforts, so really like what we saw in virtually every category in the second quarter but that's second quarter so no one here is declaring victory we've got a lot of work to do. And also you've got a fair degree of still transitioning away from some of the more wholesale funding pieces, so we're just trying to be very cautious and thoughtful about where that that NIM may turn out here over the next couple of quarters. We think it'll be in an around three but it may drop below three.

And then we think about you know just the market itself. We saw a fair amount of competition certainly in the first quarter entering in the second quarter and so we still believe that the market is very competitive in terms of trying to gather deposits so we would expect some ongoing pricing pressure in that arena.

Okay, that makes sense. And then on this the operating expense side with that the cost saves you have coming from the events announced a month ago in the good cost control this quarter recognizing that there is going to still be some hiring. I mean I'm looking at you could reach your 2% to assets ratio middle of next year I'm curious when does that make sense to you guys do you think you could achieve it sooner is going to go a bit longer?

Well, I like how you're thinking. I do think the look a piece of it is, is getting out from under the muted balance sheet growth as we again go through spending down the securities and institutional funding so as always there's two sides to any ratio. But look we're pretty we're pretty optimistic in terms of getting to that 2% or below target in a timely manner.

Great, you've covered my other questions I'll step back.

Thanks.

The next question comes from Ebrahim Poonawala [ph]. Please go ahead.

Good morning guys.

Good morning.

So, thanks a lot for the getting all the initiatives you have on the deposit front and I'm sorry if I missed this, what are the incremental deposits coming on at when you think about on a blended basis at market rates at 2, 2.5 or is it much lower than that?

Well, to begin what you going to be closure in the 2% to 2.5% range, so higher costing deposits the phase to construct that I spoke about earlier, so this is a multi-phase process here and so this round of deposits is unsurprisingly higher rate but and efforts are underway as we go pursue more and more relationship based deposits that would be a lower rate and as we've said many times that portion is underway but it will take longer to show through.

Understood and on the other side when you think about loan origination news coming on is it that means given the mix of the business but on 5 to 5.5 greater than that. I'm going to simplify in terms of how to think about the margin outlook?

Yes, lot of our loan generation is all going to be done at market rates and so it really kind of depends upon the mix and so I think of the general rate the drought there in the markets you're probably in the mid pours in the multifamily you're probably in the low five per C&I and single family probably on a gross keep on base is in the high pours.

That's helpful. Thank you and I'm not sure if you mentioned this loan to deposit ratio where it is do, are you okay with that goes over 100% in the near term or you want to going to keep it sub 100%?

Well, look, we did we'd love to keep it sub 100% and we're doing a lot of work on that front, so that too is a piece that we will play out.

Got it. And just one follow up question of expenses so the operating expense on it was 54.3 I realize you would like to think about it as an expense to asset ratio what we mean when we think about just the absolute expense on the debt in this low 50s, do you think that's kind of the right way to think about it as you look into 2019 given the savings that you're getting about 3.5 million per quarter but then the investments at the other end?

Yes, look I think that's, this is a bit of an interesting journey here and why we're so much more focused on expense to assets. So we talked in terms of we're happy with the $54 million print on the expense side for 2Q but there will be important degrees of investment back into again primarily the origination side as we've said, so we're going to remain focused on the expense asset side of things for now.

Got it. Thanks for taking my questions.

Thank you.

Next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks good morning guys.

Good morning.

I had a couple of questions first, I may have missed the $2.1 million benefits other income, what was that driven by?

That was the legal settlement that occurred.

Okay, so that came in, okay separate. So that's separate one, you called out on the press release.

That's right.

Okay, all right. Great. In terms of the balance sheet, given your kind of pretty steady pace of loan growth and expect the acceleration back half of the year maybe some more color of your securities portfolio, do you think you hit the balance sheet inflection in terms of starting to see growth in first quarter of 2019, do you think you go deeper into 2019 until you spend, until that balance sheet starts to expand again?

Yes, well, we're not going to overly comment on the when, we still have more work to do, we said we want the securities to represent somewhere between 15% and 20%, we're in the low-20s, so we got important work to do there to continue to get loans up and securities down. The same is true on the institutional funding side, the wholesale funding side, we've got certainly more work to do there. So, I don't know that I'd put a precise finger on the quarter when you start to see the acceleration but it's out there for us.

So to make it more clear for me, in terms of when that starts to happen, is it more purely driven by the asset mix and if that happens sooner do you not let as much of the wholesale funding run-offs supported the growth or is it both mix and funding focus?

No, I think you got it. Look we want to this bank will have degrees of institutional funding, wholesale funding for a long, long time to come given the legacy and the work here that needs to be done. So that number will, will stay probably elevated by comparison I suppose. So but we don't want it to be as high as it is today, so we want to continue to work that down and maybe less focus necessarily on the sources what we're most focused on is the NIM, and the net pricing reduction over time and the cost of funds by comparison to where we stand today.

Okay, thanks. And then just last question, in terms of the acceleration of loan growth in the back half of the year that you would need to get to your mid-teens or better target. Is that predominantly from the business banking platforms that you're talking about or is there other segment that you would suggest would be drivers of that acceleration?

Yes, well, first of all we said mid-teens not mid-teens are better just to be crystal clear. And look we think it's out there from across the platforms. So good, our team is much more employee [technical difficulty] and we're going to see kind of pipeline and growth outlook in our commercial business.

All right, thank you.

Thank you.

The next question comes from Steve Moss with B. Riley FBR. Please go ahead.

Good morning.

Good morning.

Just wanted to talk about the core deposit growth and when do you think you'll start getting meaningful traction on getting lower cost deposits into the bank or it's less of a CD base in terms of deposit growth?

Yes, well, a couple of thoughts here. First of all, two of our units the real estate banking business were more modest at this stage of the game is already having that success and our private bank is having considerable success in that arena. So, it's all about the amping of our C&I platforms from small business through business banking through middle market. And then some of our specialty deposit initiatives that what we believe that will bring. And then if you will slowly but surely as we work with our teams and Leticia's efforts on the branch banking side. So it's a journey on the lower cost side, we're having good degrees of success in particular units and we're underway with pretty significant initiatives all across the board.

Okay. And then on the -- I think I heard that there was on the credit front, there are some borrower performance issues driving a little bit of an increase in the reserve just wondering if it was one credit or if there is any particular class of credits?

Nothing in particular, it was much more broad based and so we've just seen some downgrades into special mention and substandard and as we continue to look at those credits that we don't view them as having underlying loss exposure necessarily, it's just more of a borrower deterioration and classification issue.

Are they C&I credits or commercial real estate credits?

Predominately on the C&I side.

Okay. Is it tied to any particular industry or?

No, no particular industry.

Okay. All right, thank you very much.

Thank you.

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

Great, thanks. Good morning gentlemen.

Hello, Tim.

Could you provide little bit color on the changing balances in non-interest bearing deposits this quarter, was it customers moving into interest bearing products or exit from the bank like that?

I don't think there's any necessarily additional color to provide, we continue to see some pricing pressure out there in the market and we continue to see people taking action with respect to how they're managing their own deposits whether it's consumer or whether it's businesses. And so we've just seen a little bit of a migration as we go forward and as we launch the business banking as well as the small business lending initiatives. That's where we would expect to start seeing the non-interest deposits flattened out and begin to grow but that would take some time.

Okay. And then how should we think about the tax rate for the next two quarters, would it be flat in the next quarter and then a step up by 4Q with the alternative energy investments coming down or would it be kind of gradual rise from here going forward?

Yes, we originally expected to have completed our solar equity tax program by the middle part of the year and we have largely done that but it's just a timing recognition so we'll have a little bit of a flow over into the third quarters. So, our effective tax rate won't be back up into the 20% to 25% range that we had targeted, it would be lower than that for the third quarter and then as we get into the fourth quarter, I would expect us to start getting back to something that looks more normalized in the 20% to 25% range.

Okay, all right, thanks. My questions have been asked and answered. Thank you.

Great, thank you.

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

Well, thank you all very much for your participation. I'd close it out by saying deposits, expenses, NIM, credit quality all making degrees of important progress, loan growth outlook as well and our team that is growingly in place and settled putting to work what we think is a special opportunity at Banc of California. So with that, we'll close it down and thank you very much for participating.

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