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Edited Transcript of BANC earnings conference call or presentation 25-Oct-18 2:00pm GMT

Q3 2018 Banc of California Inc Earnings Call

CHULA VISTA Oct 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Banc of California Inc earnings conference call or presentation Thursday, October 25, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas H. Bowers

Banc of California, Inc. - President, CEO & Director

* John A. Bogler

Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

* Timothy Norton Coffey

FIG Partners, LLC, Research Division - VP & Research Analyst

* Timur Felixovich Braziler

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Hello, and welcome to Banc of California's Third Quarter Earnings Conference Call. (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.

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [2]

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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 3-year strategic road map, with year-to-date core fundamentals trending towards our long-term targets. To remind everyone, that road map included 4 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 3-year strategic plan. That said, we recognize the path may be bumpy along the way from quarter-to-quarter.

As a reminder, the 4 focus points on the BANC, B-A-N-C, road map are B, build core deposit; 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 to remix the portfolio away from wholesale funding and into core deposits and then, ultimately, into lower-costing core deposits.

As we've noted in the past, we envisioned our overall funding transformation occurring in 3 phases: the initial phase of exiting high-rate, high-volatile institutional bank deposits was completed in the first quarter of this year; the second phase of transitioning out of wholesale funding and into core deposits is well underway; somewhat concurrent with the second phase and extending further out, the third phase is to convert the higher costing core deposits into lower-cost relationship-based deposits.

During the past quarter, we were pleased to see non-interest-bearing deposits grew by $57 million, reversing a downward trend that had been experienced for the past several quarters and providing another proof point of our ability to execute the strategic plan. Across our various channels, community banking turned in a strong performance for the quarter. Under Leticia Aguilar's leadership, the community bank channel continues its transformation toward a model increasingly focused on serving small business.

The private banking division also turned in yet another strong quarter of gathering low-cost deposits. We continue to add talented members to the private banking team, which will further contribute to the success of that division. The real estate banking division, while a relatively modest contributor, continues to add low-cost deposits as well. A year ago, the real estate banking division was not focused on gathering deposits. And today, we are seeking the depository relationship along with every credit extended.

The commercial banking division is in the early innings of relaunching middle market and business banking and has a promising pipeline of deposit opportunities. Rounding out the deposit-gathering efforts, the specialty markets division continue to grow and supplement our core deposit-gathering efforts.

Our second strategic initiative is to amplify lending. Third quarter loan production met our expectations and continues a steady march towards our target of originating more than $1 billion of new commitments each quarter. The bulk of the production volume for the quarter was evenly distributed across our main product categories of single-family, commercial real estate and C&I, with each of these production groups generating loan commitments in excess of $240 million. Additional volume for the quarter was sourced from our construction group and the private banking division.

The construction loans are largely focused on individual single-family projects, while the private banking loans are primarily commercial loans. We continue to see opportunities to add talent to each of our C&I banking units: middle market banking, business banking and small business banking as well as our private banking group, all of which will further contribute to production and shift more of our loan production to C&I.

Additionally, we believe the growth in our suite of commercial business products enhances our ability to deepen client relationships by providing treasury management depository services. Through 3 quarters of the year, our loan portfolio has grown at an annualized rate of 12%. We remain optimistic that the momentum from the third quarter will continue to build in the fourth quarter, and we fully expect to achieve our mid-teens target rate for the full year.

Third, normalized expenses. In the second quarter, we announced a reduction in force resulting from the simplification of our operating structure and in response to the process improvements being implemented throughout the bank. Some of the expense savings associated with the staff reduction started to be realized in the third quarter and will be fully realized during the fourth quarter.

We previously communicated that the expense savings would be redeployed to frontline units, and that remains our intent. That said, our adjusted operating expenses for the quarter, once again, came in below our expectations at $50.4 million, which equates to a 1.99% operating expense ratio versus our long-term target of 2% or lower. While we have initially hit our target, we do caution that expenses are likely to increase in the near term as we further build out our production units.

Fourth, creating stockholder value. The third quarter reported ROAA and ROATCE were 43 basis points and 2.49%, respectively and were significantly impacted by certain nonrecurring items, which John will describe more fully. We recognized that achieving our long-term targets of 1% plus for ROAA and 12% plus for ROATCE will be a journey, but we are confident the building blocks are in place in order to achieve those targets.

In short, we're optimistic about our plan and initiatives to grow core deposits, to accelerate core lending and to leverage our expense base, all of which, when achieved, will help us drive toward the targeted metric loans or better.

Lastly, during the third quarter, we announced the appointment of a new Director, Barbara Fallon-Walsh. Fallon is an accomplished executive, having run various units within Bank of America and more recently, The Vanguard Group. Fallon also possesses considerable boardroom experience, currently serving on the boards of AllianceBernstein, MONY America and Betterment for Business advisory board. Your Board of Directors remains committed to engaging members that are experienced business leaders, providing strategic guidance and operating with the highest ethical and governance standards.

With those opening remarks, I would now like to turn it over to John to provide more detail around our third quarter financial results. John?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [3]

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Thank you, Doug. During the third quarter, we furthered our efforts to remix the balance sheet toward more traditional core assets and liabilities with the overall size of the balance sheet remaining 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 is, for the first time, within our long-term targeted range of 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 of CMBS were sold. As loan growth continues over the next 2 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, if necessary, to manage interest rate risk, reduce concentrations in selected borrowers or manage overall loan portfolio growth. Through the first 3 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 core C&I loans.

Net held-for-investment loan growth during the quarter was primarily driven by multi-family growth of $152 million and $126 million of growth in the single-family portfolio. The commercial real estate portfolio grew by $29 million, while the C&I portfolio declined by $70 million. Total commercial loan balances collectively increased by $95 million or 2% from the prior quarter and are up $691 million or 17% from a year ago. At quarter end, commercial loan balances totaled $4.9 billion and represented 67% of the loan book.

Over the past year, the gross loan portfolio has increased by over $1 billion or 16%, further supporting our belief that attaining our loan growth target is achievable. On the deposit side, we saw a strong core deposit growth of $171 million, which was used to reduce FHLB advances by $165 million. The core deposit growth was largely centered on CDs, which increased by $158 million over the prior quarter and savings accounts, which increased by $94 million.

Of particular importance, non-interest-bearing checking account balances increased by $57 million for the quarter, reversing a declining trend over the past several quarters. As we continue to gain traction in various deposit-gathering business units, we expect to migrate the core deposit portfolio towards a lower-cost basis relative to where we currently stand.

Core deposits, or non-brokered deposits now account for 84% of total deposits, up from 80% at the end of the fourth quarter. On a more cautionary note, as we evaluate opportunities to operate more efficiently, we are in the process of assessing some of our depository relationships where the cost to monitor those accounts from a BSA perspective starts to outweigh the benefits of holding the deposits.

During the fourth quarter, we expect to migrate away from a number of these higher risk accounts which may depress the rate of growth for core deposits in the quarter but will eventually allow us to be more efficient as we monitor our remaining and forthcoming depository relationships.

Transitioning to the income statement. Net income available to common stockholders for the third quarter was $3.8 million or $0.07 per diluted common share. For continuing operations, earnings per diluted common share were $0.06. These results included a number of items that we want to call to your attention.

The company's third quarter reported financial results included $8 million of net nonrecurring expenses. This included $7.6 million of legal and indemnification expenses, a $1.5 million write-off of software and $553,000 of severance-related costs closely associated with the prior quarter's reduction in force. These costs were offset by a $1.7 million insurance recovery related to ongoing legal and indemnification expenses.

The legal expense associated with indemnification of past and current directors and officers is eligible for insurance reimbursement, and the reimbursement is recorded as a contra expense as it is received. We expect to continue to incur legal and indemnification expenses for the next several quarters, with the insurance reimbursement naturally lagging. Eventually, in future quarters, we expect the level of insurance reimbursements to exceed the legal and indemnification expenses.

After adjusting for these nonrecurring items, along with the amortization expense associated with our solid tax equity program, our operating expenses for the third quarter were $50.4 million, for which we have provided a reconciliation on Page 8 of our slide deck. As Doug noted, we expect to continue investing our frontline business units, which will offset some of the current and expected expense savings associated with the previously announced reduction in force.

On September 17, the company redeemed a $40 million Series C preferred equity, which carried an 8% dividend. The carrying value of the Series C preferred equity was net of the original issuance cost for the preferred or approximately $2.3 million less than the liquidation amount of the preferred equity. When the preferred was redeemed, this issuance cost was effectively treated as an additional preferred dividend by reducing net income available to common stockholders and amounted to $0.04 per diluted common share.

The result of excluding the nonrecurring items for the third quarter, normalizing our tax rate to 20% and removing the impact of preferred equity redemption puts us closer to an adjusted operating earnings figure for continuing operations of $0.27 per diluted common share, which we have detailed on Page 9 of today's deck. This compares to the prior quarter adjusted operating earnings of $0.23 per diluted common share computed on a consistent basis and shown in the prior quarter's earnings release presentation.

Average interest-earning assets for the quarter were relatively unchanged from the prior quarter at $9.7 billion. Both the mix of assets from securities into loans and the growth of earning assets are key to our plan to drive revenues higher over time.

The net interest margin decreased by 8 basis points for the quarter to 2.93%, which was slightly below our expectations but not surprising, given the increasing competition for deposits that we're seeing in our markets. The average yield on interest-earning assets increased 8 basis points for the quarter, driven by a 7 basis point increase in average loan yields to 4.70%. The securities portfolio average yield was unchanged at 3.78%, with a flat portfolio reflective of the static 3-month LIBOR index during the quarter. As a reminder, the CLO investments reset quarterly and are indexed to the 3-month LIBOR.

The cost of interest-bearing liabilities increased 21 basis points to 1.81%, primarily due to a 24 basis point increase in interest-bearing deposit costs and a 24 basis point increase in FHLB borrowing costs. The increased FHLB borrowing costs are driven by higher short-term rates and overnight advances, which totaled $735 million at the end of third quarter.

Approximately 40% of our assets are variable rate, with a rate reset occurring at least quarterly, with nearly all of the variable rate assets linked to LIBOR and the short end of the LIBOR curve holding flat for the quarter, the asset yield likewise remained relatively flat. Conversely, the cost of funds continue to increase during the quarter due to renewing CDs and the increased cost of overnight FHLB advances, with the latter largely reflective of the June fed funds rate increase.

As we communicated last quarter, we expect the NIM to be under pressure through the end of the year and until we deepen our traction gathering lower costing deposits. Looking forward, if we maintain loan production yields at higher levels in our average portfolio yields and continue executing our lower cost deposit strategy, the NIM should subsequently begin to trend towards and then above 3%.

Net interest income decreased by $1.6 million from the prior quarter to $71.2 million. For the third quarter, loan interest income increased by $3.5 million due to a $111 million increase in average balances and a 7 basis point increase in the average yield. This was partially offset by a decline of $856,000 in interest income on securities as these average balances declined by $116 million, with the average yield holding steady.

On the liability side, interest expense on deposits increased by $4.8 million as the average balance increased by $227 million, and the average rate increased by 24 basis points. Interest expense on FHLB advances decreased by $543,000 due to $299 million lower average balances, partially offset by 24 basis points of average higher rate.

The composition of interest income continues to improve as commercial loan interest income now represents 56% of total interest income compared to 50% a year ago. Loan interest income now comprises 79% of total interest income, up from 73% a year ago.

For the quarter, we recorded a $1.4 million provision for loan losses, which is mostly reflective of growth in the loan portfolio. The ALLL balance coverage ratio of nonperforming loans is 226%, while the overall ALLL ratio is 80 basis points. Loan growth for the quarter was primarily in multifamily and single-family categories, both of which are historically low loss products.

Total noninterest expenses for the quarter were $61 million and included $8 million of onetime expenses and $2.5 million expense from solar investments. Our current solar tax investment commitment is completed, but we may see some volatility in both the HLBV depreciation expense and the tax credit line until we receive the final equity fund details from the program sponsor.

As noted, noninterest expenses included a number of items that we do not consider to be core operating expenses. These items totaled $8 million, and adjusted for these items and the depreciation of solar investments, core operating expenses came in at $50.4 million. Our efforts to simplify the business model and implement a more efficient operating structure has proven to be more beneficial than our original expectations.

We continue to see opportunities to make our back office more efficient and plan to translate those cost savings into growth via further investment into building out our client-facing teams, our adjusted efficiency ratio came in at 78% for the quarter and continues to reflect more of a revenue opportunity for us to the extent that we can improve our net interest margin, grow the earning asset base and begin to generate fee income from our expanded deposit and treasury management initiatives.

Noninterest expenses to average assets came in at 1.99% from continuing operations for the third quarter after adjusting for the nonrecurring expense items. Our capital position remained strong as the common equity Tier 1 capital ratio was 9.80% and Tier 1 risk-based capital totaled 13.15%. The quarter-over-quarter decline in the risk-based and leveraged capital ratios is primarily due to the $40 million preferred equity redemption executed during the third quarter.

Moving on to credit and asset quality metrics for the third quarter. Our nonperforming asset ratio for the quarter was 25 basis points, up 3 basis points from the prior quarter. This absolute low level of nonperformers reflects the disciplined credit culture of the bank and remains very strong compared to peers and the industry broadly. Nonperforming assets to equity continued to remain strong at 2.7%.

Delinquent loan metrics are strong despite the ratio of delinquent loans to total loans increasing to 49 basis points compared to 38 basis points at the end of the prior quarter. The prior quarter ratio represented an unusually low level, and the current quarter is more reflective of the level experienced in the fourth quarter of 2017 and the first quarter of 2018. Net charge-offs for the quarter were $306,000 or 2 basis points.

With that summary of our third quarter financials, I would now like to turn the call back over to Doug.

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [4]

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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 metrics, we continue to execute on our 3-year plan and expect to ultimately achieve or exceed our targeted metrics.

The progress from building a more efficient operating platform is clearly evident in our expense results, and we believe lead to a highly scalable and efficient platform. Each of our business unit leaders remain confident that they will achieve their 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 am proud to partner with and represent.

That concludes my prepared remarks, operator. Now let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jackie Bohlen of KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [2]

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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 2 quarters. Does that imply that we could see net balance sheet growth in 2Q '19?

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [3]

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Well, there -- list of 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, it's now at 20%, which is considerable progress from where we started at 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 2, a portion of that which will be CLOs. And indeed, we intend to replace all of that with loans, given, obviously, the higher margin content that's contained there.

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [4]

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Jackie, another way to think about that is as we experience 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.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [5]

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Yes. No, understood. So it -- and 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?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [6]

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That's a fair way to look at it, yes.

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [7]

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

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [8]

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

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [9]

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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'll see the CLO balances continue to move down and will move into more traditional securities.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [10]

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Okay. That's helpful. And then just one more for me, and then I'll step back. So 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 drove that?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [11]

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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 it's just eliminating further risk from loan portfolio.

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [12]

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And I would only 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.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [13]

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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?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [14]

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

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [15]

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Okay. But it sounds like it's perhaps a smaller proportion of the portfolio now?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [16]

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It is. Yes, it is.

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [17]

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Yes.

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Operator [18]

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The next question comes from Matthew Clark of Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [19]

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Just on the deposits, you talked about migrating to lower cost deposits over time, 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 kind of what the cost of those deposits is in total on weighted average basis?

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [20]

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Yes. Well, let's do a couple 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 of it 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 at relatively modest.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [21]

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Okay. And then when you think about just the pace of deposit repricing up 24 basis points link 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 kind of the rate of change? Or you think that's going to be difficult until the fed stops raising rate?

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [22]

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Well, look, a couple things. I'm really happy with the progress we have made to date in terms of the process we've been through, right? So we eliminated the institutional deposit base, which we thought was too volatile and certainly significantly higher priced. And then we went into Phase 2, which has been also executed on very well, but that is higher priced. And that's 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 of non-interest bearing, but that piece of it is going to take longer.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [23]

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Yes. Understood. Okay. And then on the tax rate going forward and the losses on alternative investments, I mean, can we expect that line item to get a lot closer to 0 here and the tax rate maybe to get into that 20% to 25% range, maybe the midpoint? I guess just wanted to get a sense for those 2 items.

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [24]

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Yes 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 the 20% to 25%.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [25]

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Okay. Great. And then one more if I can, sneak one in. I think you mentioned on the loan growth outlook that 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. Can you just speak to the pipeline and -- whether by size or...

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [26]

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Yes. Well, I'm not going to give a precise number on a 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 that combination together, the momentum is growing from a loan perspective. So yes, we're pretty optimistic.

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Operator [27]

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The next question comes from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [28]

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Just to follow-up on that question on loan growth outlook. I appreciate that your pipeline is strong, and you think you'll hit the number, and I think you expect strong growth next year as well. As we've gone 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 and their credit box. Now I'm just curious what -- given the pace of growth that you expect to continue, where do you think you're getting incremental growth from that still fits your credit box with good pricing?

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [29]

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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, nonperformers at 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 -- 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.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [30]

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Okay. And then just, secondly, as you think about the margin, I know you talked about some more pressure potential here in the fourth quarter. There was a lag of LIBOR that you pointed out that maybe should help a little bit in the fourth quarter. So as you think of the ingredients to stabilizing the margin, 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 the margin and thought for the first quarter?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [31]

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Well, I think in the -- in terms of the margins, a little bit on each side as we continue to gain traction again on implementing the various deposit-gathering strategies. And again, we had some success here in the third quarter with $57 million of non-interest-bearing deposits. So to the extent that 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, the short-end portion of it in one fashion or another, and to the extent that it increases, we will see some benefits there. So I -- at least, at this point, I would say here in the fourth quarter, I wouldn't expect any sort of same degree of compression that we saw in the third. And hopefully, it'll be a little bit more of a balanced result as we get to the end of the fourth quarter.

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Operator [32]

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

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [33]

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

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [34]

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Yes. It's a reasonable-sized bucket. I'd put it at probably less than $400 million that we'll reprice across the entire CD portfolio. And that increase is going to be, on average, probably around 35 to 40 basis points.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [35]

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Okay. And kind of what is the weighted average cost of a CD you're putting on these days?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [36]

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

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [37]

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Okay. And on the expense side, just wondering about compensation expense here, down quite a bit. I know you had the reduction in force in the second quarter but wondering if there was any reversal of accrued comp or any other noise that impacted the number.

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [38]

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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 2/3 of the expense savings would start to be realized in the third quarter, with the remaining 1/3 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.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [39]

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Okay. So excluding the alternative energy and litigation, probably like $52 million or so is a reasonable expense run rate for the fourth quarter?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [40]

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Yes. I'm not going to necessarily put an exact number on it, but I would expect a little bit of a tick up from here.

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Operator [41]

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

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [42]

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

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [43]

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Well, we're in a very good place in our suite of real estate capabilities. So the amount of adds 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 adds comes in the private bank, to an extent. Although it too 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, late third quarter. So you'll see that more fully in the fourth quarter. Not a lot. As we look at the -- as we look out, we'll continue to add incrementally, most importantly, again, to the private bank and to the C&I world. We're in a good leverage point with all the rest of our capabilities.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [44]

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

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [45]

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Well, we'll continue to invest and that would -- and you'll see that in some of the expense base, but it is -- it's not market. We're looking at our depository platform and improving it, and we're looking at other key areas. But again, that's relatively modest.

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Operator [46]

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The next question comes from Tim Coffey of FIG Partners.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [47]

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Most of my questions have been answered, but I do want to follow up on something you 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 to a loan sale?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [48]

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In our single family book of business, we would have all doc, so we try to just manage the concentration of all doc within the single-family book. And then 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 offload some of those positions in order to create additional capacity.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [49]

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Okay. And would -- the fact that you mentioned that in the call, is that something we should be looking for this next quarter?

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [50]

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No. We just talked in general about that. We intend to continue build the loan portfolio, and I just wanted to call out that we will have sales from time to time. We did sell approximately $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 from time to time.

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Operator [51]

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The next question comes from Timur Braziler of Wells Fargo.

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [52]

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

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [53]

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

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [54]

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Okay. And then as we start thinking about what should be an accelerating level of loan growth from here, can you talk through what that composition should look like? Is it going to be fairly consistent across all the different business lines, the C&I kind of single-family, multifamily? Or is there any particular class that you think is going to be really driving that growth?

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [55]

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

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [56]

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

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [57]

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Fairly granular. The community bank, our retail bank had considerable success. Private bank had good success. We saw continued upticks and success out of our suite of real estate businesses. So in terms of overwhelmingly chunky, no. So...

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John A. Bogler, Banc of California, Inc. - Executive VP, CFO & Interim Principal Accounting Officer [58]

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One thing I'd add to that is our focus of late has been much more on relationship based and much less on transactional. So the growth that we are seeing is primarily -- or we would classify it as kind of relationship based and avoiding the transactional growth.

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [59]

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Okay. And I guess, to that point, just looking at the growth and time deposits, are you able to kind of get relationships from some of those balances as well?

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [60]

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

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Operator [61]

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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 any closing remarks.

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Douglas H. Bowers, Banc of California, Inc. - President, CEO & Director [62]

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All right. Thank you, Drew, and thank you, everybody. Loan growth plus 12% for the first 9 months. Deposit growth plus 14% for the first 9 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.

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Operator [63]

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