Hello, and welcome to Banc of California's Third 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 website. A presentation that management will reference on today's call is also available on the Company's Investor Relations website. I would now like to turn the conference over to Mr. Doug Bowers, Banc of California's President and Chief Executive Officer.

Thank you and good morning everyone. I appreciate your joining us for today's third 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 on forward-looking statements included in both the earnings release and the earnings presentation. Our third quarter performance continues to demonstrate progress against our three year strategic roadmap with year-to-date core fundamentals trending towards our long-term targets. To remind everyone that road map included 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 remained confident in our ability to execute on the full three-year strategic plan. That said, we will recognize the path maybe bumpy along the way and from quarter-to-quarter. As a reminder, the four focus points on the Banc B-A-N-C roadmap are B, build core deposits; A, amplify lending; N, normalize expenses; and C, create stockholder value. First and most importantly, build core deposits. For the quarter, core deposits grew by $171 million; and for the year-to date period, core deposits have grown by $584 million or 14% annualized. The 14% annualized rate of growth compares favorably with our long-term target range of low-to mid-teens rate of growth. While we saw strong growth in core deposits, we also recognized the challenge of growing deposits in a rising interest rate environment along with increased market competition for low-cost deposits. That said, with our various deposit gathering initiatives underway, we continue to see opportunities…

Thank you, Doug. During the third quarter, we further our efforts to remix the balance sheet toward more traditional core assets and liabilities with the overall size of the balance sheet remained relatively flat at 10.3 billion. On the asset side, the securities portfolio declined by nearly 237 million and the securities portfolio as a percentage of total assets declined to 20% from 22% last quarter and just for the first time within our long-term target range from 15% to 20% of assets. During the quarter, 258 million of CLO securities were called and 62.5 million of CLOs were purchased. Additionally, 25 million CMBS were sold. As loan growth continues over the next two quarters, we plan to continue shrinking the mix of CLO securities accordingly further easing us into our long-term targeted securities mix. The asset remix was supported by continued growth of core held for investment loan balances, which increased by 217 million for the quarter. While only a small amount of loans were sold this past quarter, we may selectively sell varying portions of the loan portfolio that necessary to manage interest rate risk, reduce concentrations in selective borrowers, or manage overall loan portfolio growth. Through the first three quarters of this year the annualized loan growth rate is 12%; and as Doug mentioned, we remain confident that the 2018 full-year growth rate will meet or exceed the long-run target of mid teens annual loan growth rate. Gross loan production totaled 907 million for the third quarter and new production yields on average were 5.22%, substantially above the blended portfolio loan yield of 4.70%. The higher loan production yields we saw in the third quarter were largely reflective of a higher macro rate environment, but also aided by a stronger mix of C&I loans. Net held for…

Thank you, John. As mentioned in my opening remarks, we continue to see the considerable potential for Banc of California, while our near-term performance might jot around a bit relative to our long-term mentors we continue to execute on our three-year plan and expect ultimately to achieve or exceed our targeted metrics. The progress for building a more efficient operating platform is clearly evident in our expense results and we believe will lead to our highly scalable and efficient platform. Each of business unit leaders remained confident that they will achieve our annual goals, and we are well underway with setting new annual targets for 2019. Banc of California has a talented group of employees that I'm proud to partner with and represent. That concludes my prepared remarks. Operator, now let’s open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jackie Bohlen of KBW. Please go ahead.

I wanted to start about with the comment about remix and if I heard it right in the prepared remarks, it sounded like you said you wanted to work on moving CLOs into loans over the next two quarters. Does that imply that we could see the net balance sheet growth in 2Q '19?

Well, there we've a couple of things. So in general, we have said we want to remix the securities portfolio, continue to move the overall securities mix down which now at 20%, which is considerable progress from where we started it nearly 30%. And a portion of that represents CLOs which we also intend to move down. So our target for securities is in the mid teens, which we're working toward and may well get there in the next quarter or two, a portion of that which will be CLOs. And indeed, we intend to replace all that with loans given obviously the higher margin content, that's contained there.

Jackie, maybe another way to think about that is, as we experienced loan growth, you'll see the securities portfolio come down. And so as we drive the securities mix down as a percent of assets down to our targeted range then you start to see loan growth that drives balance sheet growth.

Understood, so it sounds like with that 15% to 20% target it's not a factor of just achieving the 20% it's more getting much more towards the middle of that range. Is that fair?

That’s the fair way to look at it yes.

And I think I would add to that, that we want to continue to work the CLOs down to a more normalized portion as we go.

And once we get to net balance sheet growth even as you continue to remix the CLO, would you potentially be adding to the portfolio with more traditional securities to keep that mix where you wanted?

We will so you'll see that securities book of business begin to change as we get down to that targeted level to be much more traditional, and so we still want to hold a lower level of CLO balances in terms of the entire portfolio, and so you see the CLO balances continue to move down and will move into more traditional securities.

And then just one more for me and I then I will step back. You mentioned that growth was rather balanced in terms of origination volume in the quarter but we saw the contraction in the C&I book. What droves that?

We had an opportunity with some indirect leverage loans that were up for renewal and we chose not to renew into those that loan product and so just to eliminating risk from loan portfolio.

And I would like to add to that risk and complexity, our intent is to have and we're well on our way. Our intent is to have a more balanced traditional C&I portfolio and we have the team fielded largely and underway.

And when you look at that remaining portfolio, are there more loans or structures in there that are similar to what you eliminated in the quarter might we see more of this going forward?

There is little bit left in and as we have the opportunities to exit out of those positions we will.

Okay but it sounds like it's perhaps a smaller portion of the portfolio now.

It is, yes, it is.

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

Just on the deposits, you talked about migrating to lower cost deposits overtime and you also mentioned that you're assessing certain deposit accounts, as it relates to BSA that might be higher risk. Can you just quantify how much of that there is on the balance sheet? And what the cost of deposits is in total on weighted average basis?

Yes, let's do a couple of things. With respect to the higher risk accounts, we've had some of that that we have been working on throughout the year, but more will be evidenced in the fourth quarter. The numbers are relatively modest, but we wanted to call it out to like many banks working through that issue. We can't put a precise finger on it but I would put it out relatively modest.

And then when you think about just the pace of deposit re-pricing up 24 basis points linked quarter here, obviously, you had a fed rate hike recently too. I mean do you think with the pipeline of new business coming in, do you think you can slow the rate of change? Or you can [indiscernible] until the feds stop raising rates?

Well, look a couple things, I'm really happy with the progress we have made to-date in terms of the process we been through, right. So, we eliminated the institutional deposit base, which we thought was too volatile and certainly significantly higher price, and then we went into Phase 2 which has been also executed on very well. But that is higher price and that's that where you saw much of not all, but much of the core base increase. The third phase we had beginning success with we were happy with the $57 million in non-interest-bearing, but that piece of it is going to take longer.

And then on the tax rate going forward and the losses on alternative investments, and we expect that line item to get a lot closure to zero here and the tax rate maybe to get into that 20% to 25% range maybe the midpoint. I guess just wanted to get the sense for the two items?

Yes, so on both of those. So with respect to the programs that we’re invested in, we'll get some potentially some final true up numbers that will flow through in the fourth quarter. We don’t expect those to be significant either direction, but then as we go forward, I would expect that effective tax rate to be within our range of 20% to 25%.

And then one more if I can sneak one in. I think you mentioned on the loan growth outlook, but you expect to meet or exceed the mid teens guidance that would suggest a step up here, a meaningful step up here in the fourth quarter. You just speak to the pipeline and whether by size or.

Well, I’m not going to give a precise number on the pipeline, but I can tell you that we're still experiencing very much a robust economy, plenty of inquiry and more feet on the street. So when you put the combination together, the momentum is growing from a loan perspective. So, yes, we're pretty optimistic.

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

Can you follow up on the question on loan growth outlook? I appreciate that your pipeline is strong and you think you'll fit the numbering and I think you expect strong growth next year as well. As we're going through earnings season and really over the last few months, a lot of banks in your footprint generally have kind of talked down their expected pace of loan growth among other reasons because of pricing in their credit box, now I'm just curious what given that the pace of growth that you expect to continue work. Where do you think you're getting incremental growth from that still fit your credit box with good pricing?

Well, first of all, we have a very, very good history from a credit performance perspective overall. So charge-offs were less than $400,000, non-performers that 25 basis points barely up. So with that track record and then as we have continued to evaluate the markets across our footprint. Look, it's in the world is ever more competitive. So we're being as sharp on all of that as we think makes sense, but we continue to see Gary plenty of opportunity here.

And then just secondly, as you think about the margin I know you talked about similar pressure potentially here in the fourth quarter. There was a lag LIBOR that you pointed out that maybe should little bit in the fourth quarter. So as you think of the ingredients that stabilizing margin, you know, it seems to me it's mix, it's deposit shift and it's some higher rates. So which of those do you think is the best opportunity to stabilize margin in call it for the first quarter?

Well, I think in terms of the margins a little bit on each side, as we continue to gain traction again on implementing various positive gathering strategies and again we had some success here in the third quarter with 57 million of non-interest-bearing deposits. To the extent we continue to have success in that arena that will begin to slow the pace of overall cost of funds increasing. And then certainly with the LIBOR with nearly 40% of our assets tied to LIBOR in the short end points of it in one fashion and another, and to extent that increases, we will see some benefits there. So, at least at this point, I would say here in the fourth quarter, I wouldn’t expect any sort of the same degree of compression that we saw in the third and hopefully little bit more of balanced results as we get to the end of fourth quarter.

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

Just wanted to dig little further maybe on the deposit pricing here in particular in the CD portfolio, just wondering how much will re-price this quarter and kind of do you know what the rate is on that bucket?

Yes, the reasonable sized bucket might put at probably less than 400 million that will re-price across the entire CD portfolio and that increase is going to be on average probably around 35 to 40 basis points.

What is the weighted average cost of the CD you're putting on these days?

It really depends upon the duration, but as you said weighted average, so we're probably somewhere in 225 to 240 range.

And on the expense just wondering about compensation expense here down quite a bit. I know you had to the reduction in force in second quarter. Wondering, if there is any reversal occurred or any other noise that impact the number?

There was. There was a little bit of a bonus reversal that occurred in the third quarter that pushed that down a little bit lower. At the end of the second quarter, we indicated that approximately two thirds of the expense phase which start to be realized in the third quarter with the remaining one third of those expense savings realized in the fourth quarter. So, we would expect to continue to see some expense savings from the reduction in force plus the reduction in the level of contractors that were being utilized.

Excluding the alternative energy and litigation probably 52 million or so is a reasonable expense run for the fourth quarter?

Yes, I am not going to a necessary put exact number on it, but I would expect a little bit of tick up from here.

The next question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Just some more questions around the expenses here just with the planned hires or the hopeful hires. Doug, what's the pace of conversation you have with the perspective bankers coming over? And then, what sort of timeframe do you think would take to get to the team fully ramped up to where you like it?

Well, we're in a very good place in our suite of real estate capabilities. So, the amount of ads on that arena which is of course a big part of our lending book will be relatively modest, very modest. So, where we are looking at ads comes in the private bank to an extent, although it to is well built out, so that will be incremental. The rest is on the commercial banking side. Most of that commercial banking side C&I has been brought on board here in the beginning of the fourth quarter or late third quarter. So, you'll see that more fully in the fourth quarter a lot. As we look out, we will continue to add incrementally most importantly again to the private bank on into the C&I world, we're in a good leverage point with all the rest of our capabilities.

And then just from back office technology standpoint, how you are you guys there? Any investments that you need to make or are you in a pretty good place?

We'll continue to invest and you will see that in some of the expense base. But it is -- the market we're looking at our depository platform and improving that and we're looking at other key areas. But again, that's relatively modest.

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

Most of my questions have been answered, but I do want to follow up on some mentioned in the prepared comments about balance sheet management and potential loan sales. And I’m wondering, what types of products would you be looking to potentially move off the balance sheet and at the loan sale?

In our single-family book of business, we would have all doc so we just try to just manage the concentration of all doc within the single-family book. And in the multifamily, it's primarily around where we have concentrations in a single borrower where we continue to see opportunities to build a relationship with the borrower. We would look to off load some of those positions in order to create additional capacity.

And the fact that you mentioned that during the call is that something we should be looking for this next quarter?

No, we just talked in general about that we intend to continue to build out the loan portfolio and I just want to call out that that we will have sales in time to time. We did sell approximate 200 million in the second quarter. We sold about 20 million here in the third quarter. So I’m just pointing out that we may continue to have loan sales in time to time.

The next question comes from Timur Braziler of Wells Fargo. Please go ahead.

Wanted to follow up on Jackie's question regarding the leverage loan runoff this quarter, can you provide a number in the reduction of the portfolio just to get a sense of what kind of core C&I growth rate look like?

We had about -- I think it was up 55 million in that indirect leverage lending book.

And then as we start thinking about what should be an accelerating level of loan growth from here. Can you talk through with that compensation should look like as they are going to be fairly consistent across all the different this client of C&I kind of single-family, multi-family? Or is there any particular class do you think is going be really driving the growth?

Look, I think it will -- the C&I will ramp, but may move around a little bit, but our real estate businesses across CRE single-family are very well developed. So I think it will move around a little, but no significant shifts at the state of the game.

And just last one for me, looking at the DDA growth this quarter fairly encouraging, any one group driving the majority of that growth? And then as you look at kind of inflows and outflows, any major chunk inflows there or was it fairly granular?

Fairly granular the Community Bank, our retail bank had considerable success. Private bank had good success. We saw continued upticks in success out of our suite of real estate businesses, so in terms of overwhelmingly chunky, no, so.

One think I would add to that is, our focus of latest has been much more on relationship based and much less on transactional. So, the growth that we are seeing is primarily classified as tenant relationship based and avoiding the transactional growth.

And I guess to that point just looking at the growth and time deposits. Are you able to get relationship from some of those balances as well?

Sure, yes, we see that underway, and as we said that is the third phase that’s the harder part. And we're underway with it and seen good early success, but we got a ways to go.

This concludes our question and answer session. I would like to turn the conference back over to Doug Bowers, President and CEO of Banc of California for closing remarks.

Alright, thank you Drew, and thank you everybody. Our loan growth plus 12% for the first nine months, deposit growth plus 14% for the first nine months and our securities mix now down to 20%. So lots of progress made across the franchise and certainly work to do. We appreciate everybody’s participation. Thank you very much.

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