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Edited Transcript of FCB earnings conference call or presentation 20-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 FCB Financial Holdings Inc Earnings Call

WESTON Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of FCB Financial Holdings Inc earnings conference call or presentation Thursday, April 20, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Paluch

FCB Financial Holdings, Inc. - IR

* Kent Ellert

FCB Financial Holdings, Inc. - President & CEO

* Jen Simons

FCB Financial Holdings, Inc. - CFO & CAO

* Jim Baiter

FCB Financial Holdings, Inc. - Chief Credit Officer

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Conference Call Participants

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* Stephen Scouten

Sandler O'Neill - Analyst

* Steven Alexopoulos

JPMorgan - Analyst

* Dave Rochester

Deutsche Bank - Analyst

* David Feaster

Raymond James - Analyst

* David Eads

UBS - Analyst

* Brady Gailey

KBW - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the FCB Financial Holdings, Inc. first-quarter 2017 earnings conference call. All participants will be in listen only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Matthew Paluch. Please go ahead.

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Matthew Paluch, FCB Financial Holdings, Inc. - IR [2]

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Good afternoon, ladies and gentlemen, and thank you for joining us today. Today we have Kent Ellert, our President and CEO; Jen Simons, our CFO; and Jim Baiter, our Chief Credit Officer, here with me to review our first-quarter results. Today's call is being recorded and the slide deck we will refer to during the call can be found on the Investor Relations page of our website, www.FloridaCommunityBank.com.

This call may contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, strategies, predictions, forecasts, objectives or assumptions of future events or performance are not historical facts and may be forward-looking.

We caution that forward-looking statements may be affected by risk factors including those set forth in FCB Financial Holdings' SEC filings and actual operations and results may differ materially. The Company undertakes no obligation to publicly update any forward-looking statements.

Please remember to refer to our forward-looking statement disclosure at the beginning of the presentation and the reconciliation of certain non-GAAP measures displayed in the appendices. And now I would like to turn the call over to our CEO, Kent Ellert.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [3]

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Thank you, Matt. Good afternoon and thank you all for joining our call to review the first-quarter results. The first quarter was another record quarter for FCB, marking the 17th consecutive quarter FCB demonstrated improving core operating results based upon the momentum of our organic growth engine.

The headlines for the quarter would include: record first-quarter new loan fundings of $492 million highlighted by balanced C&I and CRE fundings totaling $369 million or 75% of the production of the quarter; core deposit growth continued to gain momentum with growth of $552 million led by demand deposit growth of $217 million; and as always, this was all accomplished with continued strong credit quality and stable operating efficiency.

Exploring the numbers more closely, the first quarter was the most profitable quarter to date for our Company with core net income of $29.1 million or $0.64 a share on a fully diluted basis. On an annualized basis core net income rose 29% sequentially and 28% year-over-year.

FCB's continued growth in core net income was a result of core revenue of $81.1 million, primarily driven by new loan interest income of $58.7 million, up 37% year-over-year. As a result of revenue growth and prudent expense management, the team delivered a core efficiency ratio of 42.9% and a core ROA of 128 basis points.

As we begin our discussion of key priorities I want to briefly touch upon the scale of the Company as we are now approaching $10 billion. As we continue to grow and execute on our business plan we expect to cross $10 billion in either the second or third quarter of this year. In preparation we have ongoing discussions with the OCC to build a roadmap and readiness timeline as we approach this milestone.

We continue to estimate DFAS modeling costs at approximately $1 million to $1.5 million per year and, importantly, these costs are already contained in our current expense guidance. We do not anticipate this preparation will impact the organic growth or net income trajectory of the bank.

With that, let's take a look at FCB's first-quarter performance aligned to our four key priorities, which, again, include disciplined organic loan growth, disciplined core deposit growth, net interest margin maintenance and maximizing operational efficiency.

First, we continue to generate sustainable quality organic loan growth resulting from $492 million of organic fundings on $659 million of commitments in the quarter. The production mix was balanced led by new CRE fundings of $209 million, C&I of $159 million and residential fundings of $124 million. As a result, and consistent with our guidance, the new loan portfolio grew by $413 million during the quarter before syndicated loan portfolio activity.

Taking into account $120 million of planned reductions in the syndicated book, new loans grew $293 million for the quarter. To add context around this performance and the rhythm of our organic engine, we have averaged $500 million of organic new loan fundings over the last four quarters. This consistent production is led by average C&I fundings of $184 million, average CRE fundings of $179 million, and average residential fundings of $134 million.

We do not want to lose sight of how important this metric is as we believe this makes us a unique brand and positions us as the leading independent bank in Florida.

Now for some additional specifics for the quarter around loan production. The team produced record quarterly new loan yields of 4.26% as compared to 3.79% in the prior quarter balanced across all product types. Compared to the same product a year ago fixed-rate yields improved 110 basis points and variable rate yields improved 76 basis points as we continue to maintain and expand spreads in an increasing rate environment.

Also 52% of the overall commercial production was priced on a variable rate basis consistent with prior quarters. Top-line new interest income grew to $58.7 million, up 35% annualized from the prior quarter. And the yield on the total new loan portfolio increased 17 basis points to 3.7%.

As of quarter end our utilization rate on the new loan portfolio remained consistent at 86% with unfunded commitments of $1.1 billion that are well diversified and in line with our balanced origination activity. Finally, the team generated $2.3 million in swap and residential mortgage fee income, an increase of 38% from the same quarter last year.

As you know, our annual guidance does not contemplate rate hikes. Considering though the Fed's recent move in March, we would like to provide an update to our loan yield guidance for 2017. First, we continue to expect net new loan growth of between $375 million and $475 million per quarter and we are increasing the expectation for new loan volume rates by 25 basis points to between 3.95% and 4.25%.

Additionally during the quarter, from a balance sheet management perspective, we reduced the syndicated loan portfolio by $120 million and it currently stands at $315 million. We may decrease this portfolio by another $80 million in the second quarter for a total decline of approximately $200 million from the prior year. This action reflects our core belief that the best growth is our direct banker to client business as this creates the highest quality credit and the best risk-adjusted return.

Now let's take a look at the credit book starting with C&I. Overall the C&I book remains balanced representing 32% of the bank's total new loan portfolio with a yield of 3.71%. Within C&I the portfolio is diversified with respect to industry and customer concentration as no industry represents over 15% of the book and the top customer exposure is 4% of that portfolio.

Top C&I industries include distribution, finance, aviation, marine services and manufacturing and the portfolio is centered on middle-market businesses with average revenues of between $25 million and $200 million.

Next let's take a look at the commercial real estate book. The CRE portfolio comprises just over a third of the total portfolio and has a yield of 3.96%. Within CRE we have avoided significant concentration levels in any asset class with office, retail and multi-family each representing approximately 20% of this portfolio. Importantly, commercial construction is only 7% of total loans and 50% of consolidated total capital and total CRE is 235% of consolidated total capital.

From a credit perspective the portfolio is collateralized with an average LTV of 55%. The overall real estate book consists of well-known, top quartile developers and ultrahigh net worth individuals throughout the state and remains very well-balanced as we focus on infill opportunities staying away from speculative growth corridor markets.

Moving to our residential platform, the residential loan portfolio represents 33% of our new loan book with a yield of 3.5%. The organic residential portfolio is over 70% purchase financing with an average LTV of under 70% and an average FICA of over 750. We primarily originate 5-, 7- and 10-year arm products and all of our production is QM compliant, with the exception of the construction phase of our C2P product. As you know, upon completion of the construction this product becomes QM compliant.

Finally, with respect to credit quality, all of our key metrics remain healthy. The new loan portfolio continues to perform as agreed with nonperforming new loan ratio of only 2 basis points and our key policy exception levels continue to decline year-over-year and remain at acceptable levels.

To underline this point I would like to discuss this quarter's production as it relates to key policies regarding sponsorship, cash flow coverage and loan to value. And here is a good measure of what quality production looks like. For our quarter over 95% of our production carried personal guarantees. Over 98% of our originations were within FCB's debt service coverage and loan to value policy limits. And there were no originations with policy exceptions for length of term.

In the final analysis our team continues to leverage deep market knowledge, disciplined risk selection and underwriting as a reflection that lending money in the commercial segment is very much a local business.

Secondly and equally important is our focus on core deposit growth. This quarter marks the seventh consecutive quarter where deposits grew at or above the same rate as our loan portfolio as deposit growth totaled $369 million or 20% annualized.

A few additional overall deposit metrics for the quarter. Core deposits were the primary focus of the quarter as non-time deposits grew $552 million while we strategically ran off $183 million in high-priced time deposits. Demand deposits grew by $217 million coupled with treasury fee income growth of 8% from Q4 to $555,000.

Over the last four quarters demand deposits have grown by $742 million or 54%, improving the demand deposit mix from 23% to 28% and our cost of deposits increased modestly to 75 basis points during the quarter primarily due to the full impact of the December and partial impact of the March rate hikes.

On the deposit front from a line of business perspective the commercial growth was highlighted by $115 million of non-interest-bearing DDA growth and $239 million of overall deposit growth. Overall retail demand deposit growth was $93 million and was highlighted by 100% of our branch network contributing to DDA growth. As a result of this solid growth our loan to deposit ratio remained very comfortable at 90%.

From a deposit guidance perspective we would like to provide an update to our deposit cost guidance for 2017 to account for the Fed's recent move. First, we continue to expect overall funding growth of $325 million to $425 million per quarter with core deposits accounting for $200 million to $300 million of this growth.

From a cost of deposits perspective we are increasing our cost of deposit guidance by 5 basis points to between 76 and 81 basis points in the current rate environment as we continue to manage and work to improve our overall funding profile.

Our third priority is net interest margin maintenance and expansion. This quarter we are pleased to report the bank's overall adjusted net interest margin increased 14 basis points to 3.14%.

Breaking down the components of the increase for the quarter, approximately 9 basis points was due to the asset sensitive nature of our balance sheet with over $3 billion of LIBOR based loans and securities re-pricing throughout the quarter. 2 basis points was a result of pricing on loan and deposit production inclusive of the reduction in the syndicated loan portfolio and the runoff of high cost time deposits.

And finally, 3 basis points were attributable to the reduced quarterly day count and the corresponding impact on our mortgage portfolio yields. We would not expect to receive this 3 basis point benefit for the remainder of the year.

During the quarter we continued to make progress on our overall loan pricing discipline as commercial yields on new C&I and CRE fundings improved 58 basis points to 4.38% with mix consistent at over 50% variable rate production.

From a residential mortgage perspective yields improved 14 basis points to 3.88% while volume remained stable as historically less than 30% of our mortgage production is refinanced business. And we continue to maintain an asset sensitive balance sheet that will respond to a 100 basis point yield curve increase with a projected increase in net interest income of 5.6%.

As a result we are increasing our adjusted net interest margin guidance by 5 basis points for 2017 to a range of 3.05% to 3.2% in the current interest rate environment. From a go-forward perspective we will not have the benefit of the 3 basis points related to the day count we saw in this quarter, but we are comfortable that over the intermediate term the NIM will be stabilizing near the midpoint of the range absent other increases in rates or a decision to extend the tenure of our funding profile.

Our fourth and final priority is a focus on operational efficiency centered on disciplined expense containment. Core noninterest expenses were $35 million for the quarter. Savings in REO and acquired loan resolutions expenses were offset by a seasonal increase in marketing and payroll taxes. As a result of the stable expense base and revenue growth our core efficiency ratio declined to 42.9% as compared to 45.4% in the first quarter of last year.

Throughout 2017 we do expect noninterest expenses to range between $33.5 million and $35.5 million on a quarterly basis. This low-single-digits percentage increase to our 2016 expense base primarily reflects sales force growth and maintains our core efficiency ratio well below 45%.

With yet another very strong quarter behind us our continued success remains rooted in our strong human capital and operational discipline as we remain committed to delivering consistent quality and sustainable growth. With that, I would like to turn it over to Jen.

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [4]

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Thank you, Kent. As Kent just discussed, we had a very strong quarter to kick off 2017. First, in the quarter we incurred non-core expenses of $68,000 consisting of $56,000 of severance expense and $12,000 of other operating expense. Additionally, non-core income totaled $777,000 stemming from the gain on sale of investment securities.

From a tax perspective the Company expects its 2017 annual GAAP and core tax rates to be between 30% and 32% due to the accounting impact of option and warrant exercises in accordance with ASU 2016-09, which was effective January 1, 2017.

Slide 2 of the presentation provides core financial highlights over the last 5 quarters. Core net income of $29.1 million reflects sequential growth of $2 million from $27.2 million as reported in Q4 and is 28% higher than the $22.7 million reported in the same quarter of last year.

The primary driver of our core net income increase was the growth in total revenue to $81.1 million. Revenue growth was primarily driven by new loan interest income of $58.7 million, up $4.7 million or 35% annualized from the prior quarter.

Core noninterest expense was $35 million for the quarter reflecting the seasonal increase in first-quarter payroll taxes and is in line with guidance. Continued revenue growth and cost containment led to record core net income of $29.1 million or $0.64 per share on a fully diluted basis and a core ROA of 128 basis points.

Slide 3 displays new loan portfolio growth of approximately $293 million for the quarter driven by total organic fundings of $492 million and reflects the $120 million planned reduction of our syndicated loan portfolio. New loans have increased by $1.4 billion or 28% over the last 12 months with new loans representing 95% of our total loan portfolio at quarter end.

For the quarter we produced $369 million in C&I and CRE new loan fundings with weighted average production yields of 4.38%. Our portfolio remains equally weighted across core product lines with each segment representing approximately one-third of the new loan portfolio.

Moving to slide 4, the credit quality of our new loan portfolio remains strong with a nonperforming new loan ratio of 2 basis points as of quarter end. The provision for loan losses of $1.6 million recorded for the first quarter of 2017 include the $2 million provision for new loans and net recruitment of valuation allowance of $0.4 million for the acquired loan portfolio.

The provision for new loans served to increase the related allowance to $35.4 million or 54 basis points of the $6.6 billion in new loans outstanding. From an overall balance sheet perspective, with the continued strong performance of the loan portfolio, overall nonperforming assets continue to decline and represent 37 basis points of total assets.

You can see on slide 5 the robust core deposit growth during the quarter stemming from balanced commercial and retail production. Overall, deposits grew by $369 million or 20% annualized linked quarter to $7.7 billion while at the same time non-time deposits grew $552 million or 44% annualized linked quarter due to the strength of demand and money market deposit growth.

Over the last 12 months demand deposits have grown by $742 million, or 54%, and demand deposits have increased from 23% to 28% of total deposits. As of quarter end our loan to deposit ratio declined to 90%.

As slide 6 exhibits, we continue to enhance operating leverage through new loan revenue growth and disciplined expense management. The core efficiency ratio was 42.9%, down from 45.4% in the same quarter last year. This improvement was primary driven by new loan interest income of $58.7 million, up $4.7 million or 35% annualized from the prior quarter.

From an expense perspective, core noninterest expense was $35 million for the quarter as the reduction in loan and REO expenses was offset by a seasonal increase in marketing and payroll taxes.

Slides 7 and 8 provide detail on the drivers of our net interest margin. The adjusted net interest margin, which removes the accretable yield which exceeds the contractual acquired loan rates, increased 14 basis points from last quarter to 3.14% while reported net interest margin decreased 17 basis points to 3.24%.

The increase in adjusted net interest margin was primarily driven by improved new loan yields. The overall new loan yield increased 17 basis points to 3.7% with average balances for new loans up $360 million during the quarter. From an acquired loan perspective the excess accretable yield over contractual interest rates totaled $3.4 million during the quarter.

We are maintaining an asset sensitive balance sheet that will respond to a 100 basis point yield curve increase with a projected increase in net interest income of 5.6%. Net interest income will continue to benefit when interest rates increase as over $3 billion of our C&I and CRE loans and investments are tied to LIBOR.

Page 9 reflects our strong capital position that is well in excess of regulatory requirements with TCE and total risk-based ratios of 10.3% and 12.8% respectively. Tangible book value per common share increased $1.07 to $22.85 as of March 31, 2017. During the quarter the Company did not repurchase any shares of common stock. For the quarter our fully diluted share count is 45.6 million including the effect of 3.8 million dilutive shares.

And now I would like to turn the presentation back over to Kent for concluding remarks.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [5]

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Thank you, Jen. In summary, we continue to build on our momentum generating consistent production and improving yields with a goal of continuing to improve our operating leverage. We are pleased with the rhythm of our organic growth as we approach $10 billion in assets and we look to continue to realize our strategic potential as Florida's leading pure play in the independent banking space. Thank you. Now let's open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Stephen Scouten, Sandler O'Neill.

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Stephen Scouten, Sandler O'Neill - Analyst [2]

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So a couple questions for you. I guess first, just on the move in equity and the move in AOCI, what drove that large quarter-over-quarter change? Was that something on your variable rate securities? Or what is driving that move in the quarter?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [3]

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That is really the impact of the new accounting that we have to do for equity.

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Matthew Paluch, FCB Financial Holdings, Inc. - IR [4]

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And then from the securities portfolio yield, yes, that would be a decrease in the longer end of the curve as it relates to December 31, as compared to year end or as compared to Q1 end on March 31, from an AOCI perspective.

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Stephen Scouten, Sandler O'Neill - Analyst [5]

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Okay, fair enough. Fair enough. And then the other thing that I wasn't totally sure on is just the jump in other fees that was seen in the quarter. Was there any specific driver of that? I guess it was up maybe $2.5 million if I look at it correctly.

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [6]

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So, there are a number of things that go into that line item. It is merchant fees, it is ATM fees, both of which increased slightly this quarter. It is REO rental income and then it is insurance settlements. So overall, I look at noninterest income sort of holistically. We are running about 7% of revenue and we are intending to work to increase that over time.

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Stephen Scouten, Sandler O'Neill - Analyst [7]

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Okay. So nothing necessarily one time in nature that you would expect to drop off precipitously next quarter or anything like that?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [8]

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No, I think you can kind of count on that 7%.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [9]

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Well, that was 5% a year ago. So I think the trajectory of that should be moving up in a disciplined manner over time.

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [10]

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Right, right.

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Stephen Scouten, Sandler O'Neill - Analyst [11]

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Okay, great. And then obviously the move you are seeing in the new loan yields is really impressive. And I know you gave some detail on the breakdown in the increases between the fixed-rate and the variable rate. But I guess it is just a hard thing for me to understand I guess seeing what I am seeing from other banks.

So I'm trying to maybe just get a feel for how do you feel like you guys are achieving that in spite of competitive pressures and maybe most competitors that aren't seeing that sort of upside in loan yields?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [12]

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Well, first of all I want to thank you for the compliment on what you are seeing in our bank versus our competitors. I will ask Jim to take a stab at your question, give you a little insight into how we are getting it done.

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [13]

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Thanks, Kent. I think when you look at what we have done it is really being consistent and being disciplined. Kent and I have been doing this for 26 years in the market together and it is really about being in the market. We probably spend two or three days a week in the market calling on clients and prospects. It is really getting out in front of them, understanding what they want, not being an order taker but more being a value add consultant to get additional pricing. We also get it from our execution, our speed to market and it is really our branding that we have done.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [14]

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Stephen, I would just add to what Jim said by underlining we are really not approaching the business any differently today than we were four years ago. Very consistent team on the Street with decades of experience in their marketplace. But what is changing is a couple of things.

In the competitive landscape some of the banks are distracted; it's either a regulatory issue or they are going through M&A or something like that. And with that consistency and our speed to market delivery system we are able to be there when that opportunity arises.

But alongside of that is FCB is now -- as we get close to $10 billion we get a lot of organic press around what we are doing and the word of mouth is starting to take effect. So, we are getting more looks because our brand is now standing out given our size relative to the pure plays, again, giving you more looks.

And then the last part of it is a year ago we started worrying about margin and cost of funds in sort of a pronounced way. And pricing has become a much bigger part of the approval calculus. And while Jim Baiter is Chief Credit Officer, he could be Chief Commercial Pricing Officer because we just really are managing the pipe much more closely.

And call it what you will, everybody can do better and this is an area we have been working on. And you can see that also showing up in demand deposit growth. So very proud of the team for the way we are executing on the Street.

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Stephen Scouten, Sandler O'Neill - Analyst [15]

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That is fantastic. And maybe one last NIM follow-up question. With the decline in the acquired loan accretion here this quarter, are you still thinking the $4 million to $8 million range is about right for the subsequent quarters? Or do you think that could jump around a little bit? And I guess in tandem, could it extend further into 2018 where we see more material contributions there?

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Matthew Paluch, FCB Financial Holdings, Inc. - IR [16]

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So, from our perspective we are comfortable with the $3.5 million where it was today. That number will come in without really any actions on our side. So we are comfortable, given the organic trajectory of the bank, not pushing it from an acquired loan perspective. So while it may jump in between that $4 million to $8 million range, we think it would be closer to the $3.5 million level that you saw in Q1.

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Stephen Scouten, Sandler O'Neill - Analyst [17]

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Okay, thanks for the color, guys. Congrats on a great quarter.

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Operator [18]

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Steven Alexopoulos, JPMorgan.

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Steven Alexopoulos, JPMorgan - Analyst [19]

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Hello, everybody. I wanted to start, why did you guys see such a sharp drop in the interest income from acquired loans this quarter? It was down to $7.9 million.

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Matthew Paluch, FCB Financial Holdings, Inc. - IR [20]

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So that is really a combination of payoffs and historical quarters. We really did not see any large payoffs as it relates to the acquired loan portfolio within that book. So the way that was working historically or has worked historically is a lot of that excess accretion income will be driven by resolution activity. And that resolution activity significantly waned in Q1 whereas what you are seeing now is just the accretable coming in through excess cash collected on a normal P&I perspective.

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Steven Alexopoulos, JPMorgan - Analyst [21]

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So, when we think about that yield on the acquired loans, which fell considerably quarter over quarter, is this a run rate we should be thinking?

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Matthew Paluch, FCB Financial Holdings, Inc. - IR [22]

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So assuming, again, no elevated payoffs within that book -- and I think we only saw $9 million of attrition on the $360 million portfolio -- yes, that would be the levels of accretion income.

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Steven Alexopoulos, JPMorgan - Analyst [23]

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Okay, that is helpful. And shifting to the loan side, you guys had really strong growth in commercial real estate this quarter. Was that a function of competitors just less aggressive in the market or are you guys getting more bullish on Florida real estate?

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [24]

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I think it is really a function of a little bit of our competitors are kind of out of the market and our phones have been ringing quite a bit. But again, it really goes to being more disciplined about what we have done and continue to do.

We are consistent with our approach. We look at the sponsorship in terms of the transactions we are doing. I don't think our position has changed with regards to the Florida real estate market. It is still very important and we continue to look for a balance between the C&I and the commercial real estate as well as the residential side.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [25]

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Steve, I honestly would tell you that I don't think much production in the current quarter is reflective of the current quarter's prospecting and deal cultivation. I think the pipeline takes four to five months, sometimes a little longer to work its way through. And I think if it is anything at all, again, I think we have got very good reach into the marketplace due to the stability of the platform.

I do think also when you go back to last year, the end of last year in Q4, there was a lot of noise about what banks were having to do because of their capital exposure to construction, what banks had to do because of their overall capacity. And then all this noise about Miami Beach and Brickell.

And I think some of the banks that maybe are less confident about the Florida or what they do in Florida and where they play caused a little bit of interruption of how they message to the Street. And in our case we just haven't changed our approach at all.

And as I sit here today, our pipelines across both C&I and CRE -- I almost hesitate to say it -- we are in a better position today for Q2 than we have ever been at this point in time within a quarter. So, we are not changing our credit appetites; I think we are just getting better share opportunities.

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Steven Alexopoulos, JPMorgan - Analyst [26]

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When we think about what you just said about the pipeline for C&I, what is the setup this quarter in terms of that mix? Should we expect to see stronger contribution from C&I here near-term?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [27]

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I really want to under commit and over deliver. But the answer to your question is, yes. It is shaping up, it looks like it might be our best C&I quarter ever.

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Steven Alexopoulos, JPMorgan - Analyst [28]

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Terrific. Then if I could squeeze one more in, just on that accounting change this quarter around share-based compensation, what was the dollar impact from that?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [29]

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The dollar impact was about a $9 million benefit to tax expense.

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Steven Alexopoulos, JPMorgan - Analyst [30]

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Okay, perfect.

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [31]

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Keep in mind that the offset to that is the dilution to the EPS, so from an EPS perspective there's a --.

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Steven Alexopoulos, JPMorgan - Analyst [32]

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Okay, got you. Thanks for the color.

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Operator [33]

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Dave Rochester, Deutsche Bank.

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Dave Rochester, Deutsche Bank - Analyst [34]

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Good evening, guys. On the NIM guide it looks like you are pretty much there already in the middle of your guidance range. But you should be, I would think, benefiting from the March rate hike. So is this just a function of you guys being conservative? It just seems like you are looking at the [positive cost] range, it's not too much higher than where you are right now. You should see another nice lift from variable rate loans and securities re-pricing. Just any thoughts there?

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Matthew Paluch, FCB Financial Holdings, Inc. - IR [35]

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Sure, a couple things. Sorry, Jen, to interrupt, if I may begin -- our asset sensitivity, as you know, in a 100 basis point scenario is 5.6%, so at 25 the move is roughly a 5 basis point increase in guidance that we pass across.

As it relates to loan re-pricing, as you know, we are not inhibited from an interest rate benefit with any floors in the loan book as a number of people are. That being said, as you well know, LIBOR started creeping in February and March leading up to the rate hike. So we have all of that priced in for roughly half of the quarter as it relates to the March hike.

And from a deposit perspective we are seeing, we saw moves towards the end of the quarter and are comfortable with the guidance that we are giving. But what that leads to is consistent with our modeling internally as it relates to asset sensitivity is that 5 basis point increase to the range.

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Dave Rochester, Deutsche Bank - Analyst [36]

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Okay. I appreciate the color there. And then just switching to expenses real quick, you are somewhat near the upper end of that guidance range and I know you had some seasonal expenses in there. But do you think that that guidance range can effectively hold through the end of this year?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [37]

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Yes, we would expect that to be good through the end of the year.

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Dave Rochester, Deutsche Bank - Analyst [38]

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And then how much in the way of DFAS expenses do you have in the run rate right now? I know it is in your guidance, I was just curious what is in the run rate now?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [39]

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Yes, it is definitely in the run rate. It is roughly in the range of about $1 million per year.

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Dave Rochester, Deutsche Bank - Analyst [40]

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So you have got $1 million in the run rate annualized right now?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [41]

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Right.

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Dave Rochester, Deutsche Bank - Analyst [42]

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And when do you guys think you will be completely finished with your preparations for that?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [43]

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For DFAS? So, as you know, we will be officially submitting a couple of years from now. So we are in the process of going through our preparations, our systems valuations, our staffing needs, etc. I would expect that we would be prepared to do a dry run next year, which we will conduct in accordance with the OCC. And so, I think once that's final and we have that feedback, that will be probably the latter half of next year, we will be prepared to go.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [44]

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I would underline that Jennifer has a nice committee put together that is working on this. Six months ago I was probably heard saying let's go through this sooner rather than later so we can demonstrate to the Street the strength of our safety and soundness platform. At this point though I feel a little bit different about it given the regulatory reform that may be coming our way.

So the OCC has a very collaborative process where they will come and do preparation reviews with you. They will spend several weeks in the bank and walk through it with you. And then they will come back six months later and do a dry run with you to make sure that you are sort of pre-clearing yourself ahead of doing your submissions.

We are going to do all that with them and we are working with their DFAS team. So I think we are not going to slow walk it, but we are going to sort of do it just by the guidebook so that we can be as agile as necessary based on how the landscape may change from a regulatory standpoint.

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Dave Rochester, Deutsche Bank - Analyst [45]

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Great. Appreciate that. And then just one last one. I know we have had a little bit of M&A activity in your markets recently here in the last few months. I was just curious in terms of activity and chatter and whatnot in the market; it seems like there is more action going on. So anything you guys can talk about in terms of what you are hearing and seeing out there?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [46]

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There is no doubt that there is more conversation that is going on in the market. We certainly had a number of informal conversations this calendar year both I would say regarding potential acquisitions on our part and also with respect to strategic partners. The best I could tell you from a takeaway standpoint, I don't think our view has changed as a company.

As it relates to Florida, the acquisition landscape in our opinion remains limited considering the price quality relationship when you compare it to our very healthy organic growth rates. Most of the deals that are out there look like you're buying a bank who bought a bank who bought a bank. And every time you get removed from the client experience one time it creates, in my judgment, more credit risk and certainly more revenue risk in terms of retaining those accounts.

With respect to the inbound interest in our Company, we have concluded that it is our best opportunity to continue to build the franchise. We think we can capitalize on the value associated with the scarcity we represent as the largest pure play and we will continue to do that until something signals us that we ought to change that point of view.

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Dave Rochester, Deutsche Bank - Analyst [47]

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Sounds great. Thanks, guys. Appreciate it.

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Operator [48]

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David Feaster, Raymond James.

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David Feaster, Raymond James - Analyst [49]

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Good afternoon, guys. So you have been able to keep deposit costs pretty low and grow deposits materially and especially in your core deposits, which is pretty impressive. Could you just talk about the competitive environment for deposits, how deposit betas have trended? Any specials that you have had to run to get this growth? And also what kind of deposit betas are you modeling for the March hike that is baked into your NIM assumption as well as your asset sensitivity?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [50]

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Great question. I will take a stab at it and then we will have the accounting finance staff sort of button up the facts for you. First of all, I want to thank you for acknowledging our deposit performance. We are not at all satisfied however with our cost of funds performance and it is really a reflection of the high growth.

Having said that, there is some very positive evidence in the most recent quarter that I would point to around our progress in developing the healthiness of our organic deposit engine. First, everybody knows about the core growing $553 million. So it is another big quarter for us relative to the non-time deposit growth and the deposit share that we have.

Alongside of that, treasury management fee income grew 8% quarter over quarter, so we are starting to see traction around truly getting the operational business of our clients as we do the credit business.

Underneath that, what also feels very good to me is from a demand standpoint this was the best quarter for our commercial team in the history of the bank. So we are getting everybody in the game. It is becoming culturally relevant on how we originate business to get the demand piece of it, so it feels very good.

The last thing I would tell you is a positive spot on the horizon for us, in the retail segment every branch in our system, all 47 offices grew demand deposits. And that is the first time that has happened in our Company's history. So normally we will have between five and eight of these offices that something will happen and they will have some money move out and they won't grow demand.

But again, culturally the leadership of our retail bank has been very focused on daily management around how we make sure we have feet on the street, how we are deepening relationships and how we are focusing on demand is the right product to lead with in these client relationships. And when 100% of your offices deliver that is a sign of success.

Now where are the areas that we've got to get better at? Well first of all, with a loan deposit ratio of 90% we had been signaling we were going to get a little more aggressive around that. And so, we sort of I think over performed on the core growth and part of that was promoing early in the quarter on the money market side. And quite frankly, early in the quarter I wasn't quite sure where our confidence level was on the deposit front. And so, we went into the market and we captured a few more dollars.

And so -- and then the other thing I would tell you from a competitive standpoint, because you asked about that, in the pub funds market we have seen a lot of regional competitors show up and look like they have just discovered that market and have very aggressively priced into that market.

And so, we did not grow the pub funds segment this quarter by design. We continue to migrate those balances away from money market deposits into demand. But against that you are seeing competitive influences. And so, with that sort of backdrop of I think a lot of good things happening, still a lot of work to be done to tamp down on cost of funds. I will let Jen and Matt walk you through the betas.

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [51]

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Sure. So, betas can range -- we initiate betas based on product type and customer type and then look at some lags in certain circumstances. So, pretty hard to take those sort of at a very high level, but they can range anywhere from say 20% to 60%.

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Dave Rochester, Deutsche Bank - Analyst [52]

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Okay, terrific. Thank you, that was great color. Following up on your CRE driving the new loan growth, could you just give us some insight into what kind of deals and projects that you are seeing driving this? Is there a specific region that you are seeing the most strength and -- as well --?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [53]

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I would be happy to do that. First of all we want to keep focused, if you look at the last four quarters the new loan fundings in each quarter, that $500 million average we have been doing, has been led by C&I, and so CRE has actually been second. I feel certain that we are the only bank in Florida who could make that statement.

And then when you think about commercial real estate for us, I want to be really clear. Our appetites haven't changed and our approach to the market hasn't changed. We have much more inbound traffic, again, going back to what I said to Steve, was that if you go into Q4 you had a number of banks sort of raise the flag and say we have got a CRE to capital exposure issue, we are out of the market.

And so those clients, if they are large developers, they look at their stable of banks and they say, oh, take that bank off the list. FCB has never changed our demeanor to the Street and part of that magic comes from we have this balanced credit book, it is a third resi, a third C&I and a third CRE. And that is why our CRE to capital is 250%; that is why our construction book is 50% of capital. And therefore we are never in that box where we can't go out and do deals.

Now having said that, we are not interested in loading up on construction right now. We are not believers that the risk-return of a whole lot of that business on a risk-adjusted basis is as good as doing cash flowing transactions. What do cash flowing transactions look like? I will just profile for you the largest CRE deal we did this quarter and then I will let Baiter talk because he is the credit officer and he should be answering this too.

The largest deal we did was for a prominent developer investor, ultrahigh net worth individual who has been in the business a long time, semi retired if you will, has a portfolio of cash flowing properties -- retail, office, a small portion of hospitality. All owned for probably on average I am guessing 10 years or longer. And so he was trying to rationalize those assets for a hold of five to seven years.

So we did an approximately $50 million extension of credit that was secured by seven different properties and probably had cash flow coverage of north of 1.5 -- Jim, you can button this up for me. But that is the kind of opportunity. And if you think about it, just to belabor the point, here we are at over $9.5 billion in footings.

So from a distance you say, well, who do these guys compete against. We don't compete against the $1 billion and $2 billion and $3 billion bank. Those banks don't sit at this table because these developers and these investors need somebody who can lend $20 million or $30 million or $40 million.

And the gift you get from sitting at this table is you get people with significant net worth, significant history and experience and significant staying power. You are not gambling on the part-time developer.

So who do we compete against? We are competing against the big guys. Well, the big guys come and go in the market when they choose and the big guys don't hold the hands of the clients like we do and provide the service level that we provide.

So does this guy have other banks? Yes, he does. Did he choose to do an important transaction for his family and his estate with us? Yes, he did. Why? Because Jim Baiter and Pete Lapham, who runs our CRE book, sits in front of them and help structure the deal in a manner that works for them over the five-year period that they want it. You want to comment on loan to value and cash flow coverage on that, Jim?

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [54]

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Yes, Kent. I think the other side is that while the fundings were high in commercial real estate, that does signify that it is more in place cash flowing properties and not the construction. And so, our viewpoint hasn't changed. If you look at the loan to value that we have across the portfolio it is less than 55% and the debt service coverage ratio is north of 1.6%. And so we really haven't changed.

A couple things that we have seen in the market is that the cost of land and the cost of construction has gone up and that you really need to rely on the feasibility and the rental rates, which we have seen come down in those markets that we have been concerned about, if it is the Brickells, the downtown Miami and the Edgewater and all those areas.

But what we have always been very disciplined and consistent on is the amount of cash equity for any transaction. And we look at really what the cost is in a project to make sure that we are aligned with the (technical difficulty).

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [55]

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Talk about the diversification [within] the CRE book.

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [56]

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If you look across the commercial real estate book, the top exposure that we have is multi-family at 23%, and then it comes down to retail I think at 21%, and then office at about 20%. If you look at the AD&C portfolio it is less than 10% of our portfolio and land is less than 4%.

So, we really like the balance that we have across the book and within our commercial real estate portfolio, both from a product standpoint as well as from a geographic diversification.

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David Feaster, Raymond James - Analyst [57]

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Thank you. That is terrific color. Last question from me. Your ability to push price is staggering, especially when, like we talked about, hearing some of your competitors talk. Is there a specific part of the portfolio, whether it be CRE, C&I, where you are having more pricing power? Or is it really across the whole book where you have got the ability to push price like that?

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [58]

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Again, thank you for the comment. It is a tough market out there, but we take great pride in both selecting the right clients that we do business with and ultimately getting paid for it. It is really a function of -- that is part of our culture. We talk about pricing, we want to understand the market. We want to understand the project. We want to understand the sponsor and the relationship.

A lot of what the pricing comes down to is our historical execution, the brand that we have, the speed to market and really understanding what the client wants. And that is not just being an order taker, it is being out in front of the client and being able to provide value and ultimately getting paid for that.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [59]

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Almost all banks run a RAROC where the bankers are originating the deals will load in the loans and deposits and fees and they will give it a credit grade and it will sort of give you a return on equity. And those models are not very transparent. And more often than not you run them and nobody pays attention to them.

And about six months ago, maybe a year ago we took a different tact. We stratified every asset class we have by margin, yield, deposit share and the net contribution and we have it on a spreadsheet and we went to the median of each one of those. And now every deal we look at at our DCM and our pipeline process we have something we call a green sheet that -- it is not the RAROC, they still do the RAROC, I don't even look at the RAROC.

But we load in all that information on what this perspective transaction is going to look like. And then we take the median contribution for that asset class in our portfolio and we've sort of said to ourselves as a team every deal we do going forward is going to be above that midpoint. We are going to be accretive from a value creation standpoint for the next dollar we lend no matter what we do.

And while the team is not perfect, what has happened is by putting that conversation way early in the process we have been able to command a much better price from the client. And what that signals to you is that we may have been leaving something on the table two years ago, but two years ago we were a $5 billion bank trying to tell a story.

Today we have this brand recognition Jim was talking about. And if we run the process the way it should be run -- it is just like running a play on the field -- we are likely to get more of what we should and that is really what you are seeing happening with our pricing.

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David Feaster, Raymond James - Analyst [60]

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Terrific. Thank you for the color.

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Operator [61]

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David Eads, UBS.

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David Eads, UBS - Analyst [62]

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Maybe following up on -- you talked a lot about CRE here a second ago. Obviously retail in shopping centers has been a really hot topic recently. I wonder if you could just comment on if you are seeing anything interesting in your markets -- your portfolio and then if you are seeing anything interesting in the market?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [63]

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I will make a couple comments then flip it to Jim. First of all, we don't have any mega center exposure, we don't do any big shopping malls that -- if you are referencing the news of what is going on with retail sales over the Internet. So we are away from that. We do like Publix centers, that is the big grocery chain in the Southeast that does so well.

I did read a white paper on the retail center market for Florida and if you look at the numbers and you look at the cap rates and the transactions, it still looks like that there is real demand for that product in the investment community that is outstripping what is coming to market either through sale or new construction.

So the metrics for the plain-vanilla infill public center with 40,000 feet with another 25,000 feet of retail still feels very healthy and we like that, especially when that product is up and running in a tight market. And you want to talk about our retail book?

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [64]

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Yes, thanks, Kent. I think when you look at our retail book, as Kent said, we really don't have too many that are dominated by big boxes. We like Publix, we like the neighborhood centers. We will do some construction when you have an anchor tenant like that.

We are seeing some repositioning of some of the centers, some of the Kmarts and whatnot being purchased and re-tenanted. But we are not going to go after the big boxes because that seems to be part of the market that is not going away. And so we feel very good about the portfolio that we have right now in retail.

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David Eads, UBS - Analyst [65]

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Great, thanks. And then on the tax adjustment, I realize that it is sort of impacted by the stock price. But holding that constant, should we expect the tax adjustment to be of similar size in 1Q next year, or was there sort of onetime factors related to the IPO or just the run-up in the stock that led it to be this big this quarter?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [66]

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No, I think that our previous guidance on tax rates we have adjusted down just a slight bit, 30% to 32%. So that really reflects the activity to date and it reflects what we expect to be sort of a typical normal stock activity going forward.

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David Eads, UBS - Analyst [67]

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So that assumes a higher tax rate for the last three quarters to get up to the weighted average of 30% to 32%?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [68]

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Yes, that is where we expect to be.

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David Eads, UBS - Analyst [69]

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All right, great. Thank you.

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Operator [70]

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Brady Gailey, KBW.

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Brady Gailey, KBW - Analyst [71]

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Good afternoon, guys. Healthcare has been a big topic that people have been focusing on this quarter. I think we have seen a couple of companies kind of blow up on some healthcare credits. How much exposure, if any, do you all have to the healthcare industry?

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [72]

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I believe our healthcare exposure is less than $25 million. That is an area that we just have really not focused in on primarily due to a lot of the changing -- the challenges in the environment, the changes in reimbursement. And so that has not been a focus area for us at all.

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [73]

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[Fair amount of fraud] (multiple speakers).

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Jim Baiter, FCB Financial Holdings, Inc. - Chief Credit Officer [74]

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Yes, absolutely.

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Brady Gailey, KBW - Analyst [75]

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Then just to close the loop on the tax rate, I mean you are guiding to 30% to 32%. You just printed a 9% this quarter. So you can kind of back in to what the tax rate will be for the last three quarters of this year, so that should be around 38%. Does that seem right?

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [76]

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I guess I haven't looked at the math that way. I think as we have said, our core tax rate, the 30% to 32%, that is where we expect to be for the full-year by the end of the year.

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Brady Gailey, KBW - Analyst [77]

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Okay, so that is not the next three quarters, that is the full-year including that abnormally low rate that we just saw in 1Q?

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Kent Ellert, FCB Financial Holdings, Inc. - President & CEO [78]

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Correct.

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Jen Simons, FCB Financial Holdings, Inc. - CFO & CAO [79]

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Correct.

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Brady Gailey, KBW - Analyst [80]

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Okay. Great. Thanks, guys.

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Operator [81]

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This does conclude our question-and-answer session and the conference has also concluded. Thank you for attending today's presentation. You may now disconnect.