Hello, and welcome to Banc of California's Fourth 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'd 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 you joining us for today's fourth 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 fourth quarter financial performance produced mixed progress against our three year roadmap. That said, the full-year results demonstrated the core fundamentals are trending toward our long-term targets. To remind everyone, that roadmap, which was released in Q1 of last year, included four primary points of focus that we expected 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 the progress and work to date on these strategic goals. The four focus points of the bank BANC roadmap are; 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 declined by $6 million, but for the year, core deposits have grown by $579 million or 10%. The 10% annual rate of growth came in below our long-term target range of low-to-mid teens rate of growth. As we transitioned from being known as a high rate payer in the market to a relationship-based approach to gathering deposits, we expect some deposit outflow as we pull back on competing on rate and begin to compete on service. The fourth quarter deposit performance tells us we have work to do. While core deposit grow did not meet expectations in the fourth quarter, we continue to see progress in hiring talented frontline personnel and see…

Thank you, Doug. During the fourth quarter, we had modest success in remixing the balance sheet toward more traditional core assets and liabilities with the overall size of the balance sheet increasing to $10.6 billion. The $369 million of asset growth for the quarter exceeded our expectations and we expect to reduce the overall size of our assets in the first quarter of 2019 back to a similar level we saw at the start of the fourth quarter. On the asset side, the securities portfolio declined by approximately $67 million and the securities portfolio as a percentage of total assets declined to 19%. Subsequent to the fourth quarter, we sold the entire CMBS portfolio, totaling $132 million with a loss on the sale effectively recognized in the fourth quarter via an other than temporary impairment charge of $3.3 million. The CMBS portfolio was measured at a six-year duration. Most recently yielded 3.75% and was generally of a bullet structure. The CLO portfolio declined at a moderate pace during the quarter and we expect the portfolio to continue to shrink over the next several quarters. Late in the fourth quarter, there was market chatter around a pending economic slowdown and how it would impact the credit performance of leverage loans and thereby impacting the market value and credit spreads for CLOs. Included on Page 15 of the Investor Presentation, we've provided the composition of our CLO portfolio and information on the historical performance of similarly rated securities within the CLO market. Our view is that the CLO portfolio has low risk of credit loss, given that the entire portfolio is AA rated or higher and that CLO trust with these ratings historically have had low default rates. That said, we do recognize that historical results do not guarantee future results and…

Thank you, John. 2018 was a productive and active year for Banc of California. We welcome some very talented people on to our team during the year and reenergized our business units to focus on the vision of being California's Bank. Enduring banking franchises are never built overnight, so while we made some excellent progress this year, there is still more work to be done. Fortunately for us, we're entering 2019 with momentum in many aspects of our business and look forward to continuing our work towards generating traction in others. As with any strategic endeavor, things rarely move in a straight line in the short term. However, I'm encouraged by the direction and progress we've made since last year and I am pleased by our organization's ability to adapt to evolving macroeconomic conditions and business challenges. Our expenses are decreasing as a result of streamlining our operating platform. Investments into our customer-facing employees have showed promising results and even more potential. The California banking market remains unmatched and sized depth up in breath. We are building a scalable business upon a strong foundation and moving closer to becoming the California focused commercial banking franchise that I envision we could be when I arrived in spring of 2017. I'd like to conclude my remarks today by talking a bit about our employees and their genuine excitement for serving as banking partners for our customers. Whether it's finding creative banking solutions, our California [indiscernible] for being a trusted advisor among a high net worth clients team of professionals, enthusiasm for what we do on a daily basis has always been a hallmark of the great people that work at this company. I can't express enough my thanks for their work and their dedication to our customers they have shown this past year. I am proud to work with these folks each and every day and anticipate achieving more and better things in 2019 together. That concludes my prepared remarks. Operator, now let's open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Timur Braziler with Wells Fargo Security. Please go ahead.

Hi. Good morning, gentlemen. First question centers around loan growth, you were loud and clear though. Loan growth is likely going to slow here and be more so commensurate with growth in core deposits. Looking at the strategic targeting tracker, it looks like mid teens is kind of the loan growth number that you guys have been talking to. Is the expectation that loan growth should kind of go down closer to 10% like the core deposit growth we saw in '18 or is the expectation that core deposits are going to exceed the 10% that we saw this year results and maybe some higher loan growth?

Well, there's a couple pieces to that. First of all with respect to the loan growth, we did have a big push in a very positive way in the fourth quarter from across a number of divisions in the bank, which surprised us to the upside. We do expect to reduce the balance sheet as we commented on a go-forward basis here in the first quarter mostly through degrees of sales and there would be some -- there would be an expectation and that would balance off against the deposit growth.

Okay. And then maybe looking at the deposit growth in the quarter, though the broker deposits that were brought on I guess what's the plan for those? Are those going to stick around for a little bit or with some of the expectation for these transactional outflows to come back on balance sheet is the expectation to repay those broker funds fairly quickly?

Well, of course our goal is to reduce of that kind of wholesale funding inclusive of brokerage CDs and as transactional and/or other organic deposits come along, of course we will make a series of decisions to decrease on the brokerage side. So that is certainly the goal.

Okay. And then and I guess last for me just looking at the securities book and in conjunction with the expectation for the smaller balance sheet, I appreciate the CMBS sale, I guess just looking at the CLOs, are we still expecting there to be continual step downs and we get closer to that kind of 15% security staff that ratios by midyear or are those balances going to stay roughly unchanged at this kind of $1.4 billion balance in an effort to help support the balance sheet?

The short answer to your question is yes, we continue to anticipate step downs. So as a reminder we sold off the CMBS book, the MLP debt securities, the bank subordinated debt and we've had the CLO book go down 22% in the last 12 months and we have said that we want to continue to work that securities portfolio down to a more normalized mid teens are below percentage and we very much intend to be on that pace.

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

Just a follow-up on the balance sheet for the upcoming quarter shrinking back to the beginning of the fourth quarter level, I guess how should we think about the balance sheet beyond the first quarter. Should we expect modest growth or to resume as you as you remix and generate stronger core deposit growth?

Yeah, that's a reasonable assumption. We will continue to remix certainly on the asset side. As Doug just mentioned, we will continue to bring down the balance in the investment securities book, down towards that targeted level and that will help to fund some of the loan growth and in beyond that it's more of a product of our success within the core deposits, our ability to generate core deposits. We'll do some remixing on the liability side as well, but there's -- it's a readable something that we could look to see a little bit of balance sheet growth as we progress through the year.

Okay. And then shifting gears to the expense run rate, I guess how should we think about expense growth this year? What type of hiring needs do you need new products?

We will continue to look at our back office expenses and as well as the technology deployments, which will ultimately drive some efficiency in the back office. As we said, we will continue to look to reposition expenses from back office to front office, which means that we'll look for additional hires on the frontline units. The fourth quarter expenses I would say, the first quarter expenses, there is little bit of seasonality that naturally occurs within compensation. So there could be a little bit of an uptick in the first quarter.

And then just on the -- on credit, I know it's still very benign, but just curious what drove the deterioration in that C&I and SBA those two credits?

Well first of all it was $2.2 million. So indeed relatively modest, both are SBA credits with C&I content, that whole portfolio is very small and we don't see anything overwhelmingly systemic in all of that. So those were actions related to those isolated credits. The rest of the provision of course was related to the growth.

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

I just wanted to quickly clarify one of the comments in the prepared remarks really the two taxes, if I heard correctly there was $1.6 million of the tax expense in the quarter was related to a true-up.

Yeah, it's part of our filing of the 2017 tax returns. So it's bit of return to provision true up.

Okay. And then it sounds like you expected a tax rate to return to a more normalized level probably around 20% in 1Q '19?

That's correct. It'll bounce around a little bit, but we would expect it to always be somewhere in the neighborhood of 20% to 25%.

And then thinking about some of the portfolio pruning that you may be doing, do you have any specific loan categories in mind or would it be generally across the whole portfolio?

No predominantly focused in single-family and multifamily, the same categories where we had executed some sales during 2018. So as we think about reducing the balance sheet size to what we saw at the beginning of the fourth quarter, I would expect that to occur in three categories. One, will be the investment securities and we've already reduced via the CMBS sale, but there will be some additional reduction in the CLO portfolio and then I would also expect some reduction in the single-family and the multifamily portfolios.

Okay. And will that potentially pick up a little temporarily a little bit of loan income from sale in 1Q?

It should, it should result in some additional sale activity in the first quarter.

Okay. And you expect to largely be done with that within the quarter?

Yes. yes.

Okay. Great. Thank you.

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

Good morning. A lot of my questions have been answered, just on the topic of credit there is no lot of discussion this quarter about leverage loans. Can you just talk about kind of how much exposure you have there and what you think in terms of the outlook and your appetite in the C&I Space for those kind of loans?

From a leverage loan perspective that is immaterial number for our company, very modest -- was modest frankly when I got here and has been reduced ever since and our appetite there is exceedingly low. So we do not do a lot in that arena. Obviously where we do have that activity is in the CLO book, but then that comes in the form of the structures and DD, AAA nature of those securities.

And then just in terms of the loan production this quarter, Doug you ran through the categories, I think you mentioned C&I, CRE and single-family, but that doesn't total to the better than $1 billion of originations is the delta there it's multifamily?

The delta is largely in commitment. So when we report there for the $1 billion as commitments, not necessarily the funded amount.

Okay. So as you went through the segments, that was the funded amount.

Yes.

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

Just going back to the loan production here, is the plan still to try to do about $1 billion of originations a quarter or are you going to be slowing that production pace?

Well look I think we always put the framework of we will do every good loan that is out there. There is a degree of softness in the real estate worlds across both single-family and multifamily CRE. So we would expect there would be a degree of lightning smaller loan growth, loan volumes in those two arenas and that will impact the overall number. Yeah I was pleased to see us get to that $1 billion number and the push that our teams did. We talked about that capability, but we all know that the market is there for it and we're certainly not going to press either from a pricing or a credit perspective.

And then I guess if the loan growth is not going to as strong and production is not going to be as strong, not looking at the charge-offs this quarter, like how should we think of provisioning? Should that be closer to something that you saw in the middle of last year or should it just be like holding the reserve ratio steady? What are you guys thoughts on that?

Yeah, I would expect to A, as we said in the past, roughly a 1%, the net loan growth will be the rate of provisioning and so just kind of what we've been talking here about here for the first quarter to the extent that the overall loan portfolio declines there will obviously be an impact on the provision for the quarter as well.

Okay. Thanks. You covered all my other questions.

Our next question comes from Ebrahim Poonawala with Bank of America, Merrill Lynch. Please go ahead.

Just had a couple of follow-up question. One to make sure we're getting your message clearly, when we look at balance sheet growth outlook average earning assets about $9.7 billion plus or minus that's kind of being where they bounced around from last year, should we expected that $9.72 billion to more or less remain that way in '19 or do you expect that to go lower or materially higher from that level?

Well we're not going to overly comment on outlook in that regard, but we have said that we would have a degree of reduction in the balance sheet here in the first quarter through asset sales.

And beyond the first quarter, do you expect the level of balance sheet to grow or the remixing continues to impact net balance sheet growth?

We will continue to remix and so as we've said, we want to drive the securities asset mix down to the lower end of our targeted range. So that will certainly fund some of the loan growth that we would expect to see in 2019. And then beyond that, we'll continue to evaluate what the opportunities are.

And just shifting to the margins, so I get to your long-term strategic goal of getting it about 3%, as we think about where it resets in 1Q given the fed hike in December and some of the LIBOR impact reflect in 4Q asset yields. Do we expect another leg loan in the margin in 1Q before it begins to stabilize, or do you think this kind of the low point and it should be stable to higher from here?

Yeah we look for some stabilization here in the first quarter. As you suggested, we've had a pretty reasonable movement up in the LIBOR curve and with approximately 40% of our assets linked to the shorter portion of the LIBOR curve, we would expect to see some benefit emerge and then that will largely be offset by activities within the liability book of business. As we go through the first quarter and as we shrink some of the assets and the associated liabilities, those are naturally going to be of a lower margin because we're giving it to the higher costing liabilities and that should also add some benefit to the net interest margin.

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

I was wondering on the C&I growth here, it was really strong. Wonder where it's coming from by business type, business segments and perhaps what's the mix between fixed versus variable?

Well we don't break out the detail, it came from a lot of different areas, degrees of it coming from the expanded capability that we put on board with our expanded commercial banking team. And then in terms of kind of the variable versus fixed, it's almost all exclusively variable.

And then on the CD growth resellers quarter, just wondering, what's the rate in term of both the brokerage CDs and non-brokered CDs that were added this quarter?

The brokered CDs are going to be in the three and six month duration and they were added at somewhere between 240 and 255. Retail CDs are also going to be of a similar pricing.

Okay. And then in terms of I guess one little more type question, but just wondering the project expenses that you guys highlighted $1.1 million, what does that consist of -- would it be ongoing?

It will not be ongoing. It was just a unique item that we undertook from kind of a strategic operational perspective and so it will be a one-time nonrecurring charge.

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

Well, I'll just thank everybody for their attendance and appreciate the questions and we'll close it out right there. Thank you very much.

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