Banc of California Inc (BANC) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Banc of California fourth-quarter earnings conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Tim Sedabres, Director of Investor Relations. Please, go ahead.

Thank you, Gary, and good morning, everyone. Thank you for joining us for today's fourth-quarter 2014 earnings conference call. With me today, Banc of California's President and Chief Executive Officer, Steven Sugarman; Chief Financial Officer, Ronald Nicolas; and Chief Risk Officer, Hugh Boyle.

I'd like to remind everyone that today's conference call is being recorded, and a copy of the recording will be available later on the Company's Investor Relations website. We have also furnished a presentation that management will reference on today's call, and that presentation is also available on our website under the Investor Relations section.

Before I turn it over to Steve, I'd like to remind everyone that, as always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. The forward-looking statements are outlined on slide 1 of today's presentation, which apply to our comments today. We will provide an opportunity for Q&A at the end of the presentation.

And with that, I'll turn it over to our President and CEO, Steven Sugarman.

Thank you, Tim. I'd like to welcome everyone to today's Banc of California fourth-quarter 2014 earnings call. 2014 marked a significant year for the Company as Banc of California has emerged as California's bank. We're now a $6-billion financial institution with 40 branches across Southern California, serving California's diverse private businesses, entrepreneurs, and homeowners. Looking to 2015, we believe Banc of California is positioned to deliver shareholder returns that will meet or exceed existing consensus earnings estimates for 2015.

I would now like to turn to our fourth-quarter presentation as outlined on slide 2. Our results demonstrate steady progress towards achieving our stated financial targets. Let me begin by providing a few highlights. The Company earned $0.91 a share on a fully-diluted basis for the full-year 2014, and $0.25 a share on a fully-diluted basis for the fourth quarter.

These earnings equated to a 0.7% return on average assets and a 10% annualized return on tangible common equity for the full year. This compares to a net loss to common shareholders during 2013. These results include over $8 million of non-core expenses that related, in large part, to the Popular Community Bank acquisition, approximately $5.9 million of which were incurred during the fourth quarter.

Also notable, we reversed the valuation allowance on our deferred tax asset during the fourth quarter, based on the Company's earnings profile and management's projections for future earnings. During the fourth quarter, we closed on the transaction for the California branches of Popular Community Bank, which added approximately $1.1 billion of loans and $1.1 billion of deposits to our balance sheet.

We continue to believe this transaction is not only financially compelling, but is also a key piece of our strategy to be California's bank. These branches helped to strengthen our footprint in Los Angeles and Orange Counties and enhance our ability to serve the fastest growing and, we believe, most attractive market segment in our region -- the Latino segment.

The transaction is immediately accretive to earnings, and we expect to realize a full quarter of financial returns from the deal, beginning the first quarter of 2015. Deposit retention has been strong as of year end, as the acquired branches have retained approximately 97% of their deposit balances from the close.

Additionally, the number of deposit and loan accounts added to our books from the transaction has enabled us to quickly achieve efficiencies in our support and operations departments due to increased scale. For example, prior to the Popular transaction, our deposit operations teams averaged 500 accounts serviced per FTE. And now, we are averaging over 1,000 accounts per FTE, post-closing of transaction.

Banc of California originated over $1.3 billion of loans in the fourth quarter and exceeded our targets for the full year by originating over $5 billion of loans. We have grown and diversified the portfolio over the past year, with total assets of $6 billion, total loans of $5 billion, and a loan mix focused primarily on commercial loans making up 66% of total loans held for investment compared to 43% a year ago. Additionally, during the fourth quarter we raised $50 million of capital through a direct placement transaction with Oaktree and Patriot to support the acquisition of the assets from Popular.

Now, I will turn it over to Ron Nicolas, our CFO, to discuss the fourth-quarter financials in more detail.

Thanks, Steve. And good morning, everyone. I will be directing my comments to the supplemental presentation that accompanied our release starting with the highlights for the fourth quarter on slide 3.

Today we reported net income of $10.2 million, compared with $11.2 million in the prior quarter. Net income available to common shareholders totalled $9.3 million, or $0.25 per diluted share, with a return on average tangible common equity of 11.2%. The shares used in our EPS calculation include the minimum amount issuable under the purchase contracts related to the tangible equity units, approximately 3.2 million shares.

During the quarter, we saw approximately 200,000 TEUs convert to approximately 1 million shares. Also, during fourth quarter, we reversed $8.3 million of our valuation allowance related to the deferred tax asset, which resulted in a net tax benefit of $5.5 million for the fourth quarter and $4.5 million for the full year.

As a result, going forward the Company will have a more normalized tax rate in the 42% range on a combined state and federal basis. Fourth-quarter revenues totalled $87.2 million before loan-loss provision, approximately $5 million higher compared to the $82.3 million for the third quarter.

Higher net interest income was driven by the Popular acquisition, which contributed $7 million to net interest income during the quarter. The acquisition closed on November 7, meaning we had the loans and deposits on our books for roughly 1.75 months. Non-interest income declined slightly due to the lower net gain on the sale of loans, excluding our Mortgage Banking operation, as the prior quarter included a $7.7-million gain from the sale of approximately $50 million of our seasoned SFR portfolio.

This quarter also included slightly lower Mortgage Banking revenues offset by higher advisory fees from the Palisades group. Non-interest expense increased to $78.4 million, primarily driven by one-time costs of $5.9 million. Also worth noting is the $1.4-million increase in our loan-loss provision expense that was primarily due to loan growth during the fourth quarter. Hugh will discuss this more in detail in a few minutes.

As previously noted, the average shares outstanding for the basic earnings per share calculation was $35.2 million for the fourth quarter. This is comprised of 32 million average shares outstanding for the quarter, plus the additional 3.2 million of potential common shares related to the TEUs.

From an earnings-per-share perspective, both are included in the share count utilized for both basic and diluted calculations. As of December 31, the period-ending shares outstanding totaled 38 million when including potential shares to be issued under the TEUs, as noted on the last page of the earnings press release financial tables.

Slide 4 summarizes the full-year income statement. For the full year, the Company earned net income available to common shareholders of $26.7 million, or $0.91 per diluted share, on revenues of approximately $300 million. Despite higher operating expenses resulting from acquisition and new businesses, revenue outpaced expense increases, growing 55% year over year. For the full year, return on average assets was 0.7%, and return on tangible common equity was 10.1%.

Net interest income, net interest margin, and key components are highlighted on slide 5. Net interest income grew to $46.3 million during the fourth quarter from $38.2 million for the third quarter. The increase in net interest income, again, was largely a result of the Popular acquisition, which added $7 million to net interest income during the quarter, as previously mentioned. Our consolidated net interest margin finished at 3.65%, up 7 basis points from the 3.58% for the third quarter, largely as a result of lower deposit costs.

Loan yields reflect the prior quarter as a result of our Popular acquisition, while our deposit costs declined by 10 basis points from the third quarter to 60 basis points on a consolidated basis, and down 17 basis points from a year ago. Both the acquisition of the Popular deposit balances and the Company's continued efforts to lower deposit costs contributed favorably to the lower cost of funds. As stated previously, the Company's targeted cost of funds is 50 basis points by year-end 2015.

Turning to slide 6, highlighting non-interest income for the quarter of $41 million, a decrease of approximately $3 million compared to the prior quarter. The primary driver in the decrease of non-interest income was a $6.3-million decrease in the net gain on sale of loans, excluding Mortgage Banking, as the third quarter, again, included a $7.7-million net gain on the sale of [50] million of our seasoned single-family resident mortgage loans.

Mortgage Banking decreased by $1.9 million compared to the prior quarter, as our net gain on sale fell by approximately 25 basis points for the quarter, as credit spreads widened on certain loans and pull-through rates dipped as a result of falling interest rates. Despite that, our SFR mortgage originations for the quarter were $1.1 billion, flat from the third quarter, with our agency and conforming business banking operations originating $800 million and selling $769 million.

Roughly 59% of our fourth-quarter mortgage originations were purchase related -- down slightly from 65% in the third quarter -- as refinance volumes were stronger, driven by the aforementioned dip in interest rates during the quarter. Fourth-quarter production of non-conforming jumbo originations totalled $300 million, with sales of just under $200 million, compared to the third quarter of $200 million in sales, while our gain on sale expanded by almost 0.5 point due to the falling rates during the quarter.

Of the $300 million originated, approximately $256 million was originated for sale and $40 million held for investment. We intend to continue to originate and sell jumbo mortgage loans to manage both portfolio risk and economic returns.

In addition, we also benefited from higher advisory service fees from TPG during the quarter as a result of a monetization of a client portfolio which added $5 million of fee income. The prior quarter included $2 million related to a monetization of a different client portfolio. These types of advisory fees are core to the TPG business, although episodic in nature. The TPG advisory fee is broken out in the financial tables accompanying the press release. For the fourth quarter, this totalled $6.7 million. I would also note that performance-based fees for TPG are accompanied by a link performance-based compensation expense that typically approximates a 50% marginal efficiency ratio.

We continue to be focused on managing our non-interest expense while expanding and growing our business, as outlined on slide 7. Fourth-quarter non-interest expense totalled $78.4 million, up $10.8 million from the third quarter. While the fourth-quarter volume-related expenses were relatively flat from the prior quarter, we incurred $5.9 million of one-time non-recurring charges, in part related to the conversion and integration of the Popular transaction.

Along with one-time expenses, we also incurred an additional $2 million during the quarter, directly attributable to those acquired branches and offices, as well as $2 million in incentive compensation related to the episodic advisory revenue mentioned earlier. Both of these expenses, as well as additional staffing in support of the Popular acquisition, are included in the $59-million base-expense number highlighted here.

We would also expect our non-interest expenses to normalize during the first half of 2015. We continue to be focused on driving the consolidated efficiency to our run-rate targets of 70% to 75% during 2015. Overall Company headcount increased by 183, to 1,475 compared to the prior quarter.

The majority of additions to the headcount were a result of the staffing acquired from Popular, which represented 149 of the additions; also, 30 new hires in operations, servicing, and shared services to support the larger entity across the business and banking operation.

As Steve mentioned earlier, our marginal economics and profitability with Popular acquisition and growing scale improved dramatically during the fourth quarter. As illustrated with slide 8, prior to Popular, we began to ramp up support staff in our deposit operations unit, which negatively impacted our per-unit operating expense and productivity. However, as anticipated, upon closing of the transaction, our per-unit productivity increased, thereby reducing our cost per account. This is an excellent example of how the Bank prudently manages its growth while achieving strong operating leverage with increasing scale.

Turning to slide 9, the balance sheet, the Company finished the quarter at $6 billion in assets, compared to -- with just over $4.5 billion in assets at the end of the third quarter. As previously mentioned, this increase came primarily as a result of the acquired loans and deposits from Banco Popular, as well as continued organic loan growth and, to a lesser extent, increases in our cash and securities balances.

Excluding Popular, the Bank continued to experience attractive organic loan growth, with loans held for investment increasing approximately $180 million in commercial loans and residential shrinking by almost $20 million. Loans held for sale, primarily as a result of jumbo originations, increased slightly as originations outpaced sales during the quarter, as well as our December fundings of our agency and conforming loans were slightly higher than our September numbers. We finished with a held for sale of Mortgage Banking agency and conforming loans of $280 million in December versus $250 million in September.

The securities portfolio increased by $35 million and cash by $46 million during the quarter, as we increased liquidity to support overall growth of the balance sheet. Security purchases during the fourth quarter were comprised of shorter-duration, agency CMOs with a weighted-average life of 3.6 years and an average yield of 2.3%.

Deposits were flat, excluding the Popular acquisition, reflecting in large measure our repricing initiative of our Preferred and One account money-market savings. FHLB advances helped fund the marginal growth in loans and securities, excluding Popular. As previously disclosed, the Company closed its direct common equity offering during the quarter, raising approximately $50 million.

Highlighted on slide 10 is our current portfolio loan mix with the $1.3 billion of loan balances added during the quarter. The 5.1 current portfolio is now comprised of just over 50% commercial loans. Overall, Popular added significantly to our multi-family and CRE portfolios, as illustrated, adding almost $500 million to each category. As previously mentioned, the remaining $200-million increase came largely from organic growth. Loans held for sale were approximately $280 million of agency, and the remaining $900 million consisted of jumbo mortgages.

Turning to slide 11, Popular added just under $1.1 billion in deposits for the quarter with money market accounts, interest-bearing checking, and demand deposits primarily contributing to the net deposit increase, as highlighted. Excluding Popular, deposits were flat with money-market savings lower and non-interest-bearing and interest-bearing demand deposits up from the prior quarter.

The average loan deposit ratio was 79% for the fourth quarter, excluding the loans held for sale. Also, during the fourth quarter, we opened up two new retail branch locations in Santa Barbara, and Rancho Santa Fe, which are part of our continued effort to grow core retail deposits.

Lastly, on slide 12 highlights our capital position as total equity increased to just over $500 million during the quarter. The Company's tangible book value decreased at $10.54 per share from the $11.34 at September 30, as shares outstanding grew faster than the equity as a result of the direct offering issue in November.

Overall, the Company's capital ratios finished 2014 at levels at or above our capital levels prior to the announcement of the Popular acquisition. This was management's guidance at the time of the Popular acquisition. At the Bank level, our tier 1 leverage ratio finished the quarter above 9% at 9.2%. The Bank and the Company both remain well capitalized at the end of the quarter for each of their key risk-based and leverage ratios.

With that, I will now turn it over to Hugh Boyle to highlight credit quality.

Thank you, Ron, and good morning, everyone. In November of 2014, Banc of California closed and began integrating approximately $1.1 billion in former Popular Community Bank California-based loans and deposits. With regard to the newly acquired loans, Banc of California immediately began a full credit and risk-rating review of the portfolio.

While still early in the process, our initial findings are consistent with our due diligence efforts. Namely, that we have acquired a granular loan portfolio of performing loans in business and product sectors and geographic locations that we know well, with most loans generally having very conservative loan to values. We remain pleased to have a loss-share agreement in place with Popular to protect the Bank in the event credit losses exceed 50 basis points on the acquired portfolio.

As we have communicated over the last two quarters, the integration of Popular Community Bank expedited, by a full year or two, our strategic plan of diversifying and repositioning the lending platform of the Bank. Today, Banc of California stands with several strong business legs to our core operating platform, which represents an important expansion to our historical and ongoing expertise in the mortgage sector. And this diversification has the effect of reducing the Bank's historical reliance on Mortgage Banking revenue.

As of year-end 2014, Banc of California stands with approximately $5 billion in loans, which is comprised of roughly $4 billion in held-for-investment loans and approximately $1 billion in held-for-sale loans. Of the $4 billion in HFI loans, we have approximately $1 billion in loan balances in each of the three following business lines: commercial real estate mortgages; one-to-family residential first mortgages; and multi-family loans.

In addition, with the integration of the Popular loans, our commercial and industrial loan balances are now approximately $500 million as of year end. The remaining loan balances are comprised of leasing and equipment finance, SBA, construction, and other consumer or HELOC loans. Consistent with one of the central themes of our strategic plan, which was to diversify our loan portfolio and business platform, as of December 31, single-family residential mortgages have fallen to 29.7% of HFI loans, down from 44% in September.

Correspondingly, total commercial loans registered at 66% of total loans at year end, compared to 51% as of 9/30/14. As I indicated earlier, our initial experience with the new book of business has been positive. Recall that Banc of California only acquired performing loans; all loans with delinquencies greater than 90 days were excluded from the purchase, and we excluded loans that were high risk from a BSA/AML standpoint. As a result, nearly all of our bank-wide credit metrics and ratios materially improved as a result of the denominator representing a larger portfolio of clean acquired loans.

It is worthy of noting that our classified assets increased from approximately $50 million to $101 million quarter over quarter. These classified loan balances represent former modified or restructured Popular loans that have been consistently meeting their debt service requirements subsequently. We would expect a large portion of these loans to transition back to past category loans with the next round of full financial year-end performance supporting the clean payment history.

Also, remember that Banc of California negotiated credit protection rights with Banco Popular for a term of two years. Any losses above 50 basis points will be covered by Banco Popular, up to 2% of the portfolio balances. To ensure that we properly preserve this credit protection, the Bank has created a tight and consistent process that requires review from accounting, credit, and legal for all modifications, extensions, or changes to the loans that we initially acquired. We believe that this process will ensure high collectability under our loss-sharing agreement with Banco Popular, should losses occur.

As Ron indicated earlier, our legacy businesses continued to show robust internal growth, with our legacy portfolio growing by approximately $200 million for the quarter.

Slide 13 outlines our asset quality metrics. As stated earlier, our credit metrics have improved significantly quarter over quarter with the addition of the Popular performing loan portfolio. Total loans outstanding -- total outstanding non-performing loan balances remain flat, quarter over quarter, at $38 million. REO balances reduced from $605,000 to $423,000 during the quarter. For both the fourth quarter and full year of 2014, the Bank experienced a net recovery position after charge-offs.

Our allowance for loan and lease losses grew during the quarter from $25.3 million to $29.5 million. The ALLL increase was primarily attributable to three key drivers: first, the net $200 million increase in HFI loan balances; a higher impairment reserve for two FAS114 relationships; and an ALLL methodology enhancement in the quarter. As a result of the above, our ALLL-to-non-performing-loan ratio strengthened from 66% to 76% quarter over quarter, and the ALLL to ALLL-attributable loans coverage ratio also increased, from 1.21% in Q3 to 1.29% in Q4.

With that, I'll turn it back over to our CEO, Steven Sugarman.

Thanks, Hugh, and thanks, Ron. Turning to slide 14, you can see the Bank's steady progress towards our publicly disclosed financial targets. We continue to make very good progress towards achieving these targets, even with acquisition and integration costs incurred during this quarter. Management's goal is to reach or exceed these targets by year end.

Looking into 2015, we believe the marginal efficiency ratio for our incremental loan growth is attractive and, until we reach the $10 billion threshold, we'll remain under 50%. These marginal economics are being utilized and managed to throughout the Company, as we think about our business unit plans for full-year 2015. We are committed to growing our many businesses with a focus on increasing marginal profitability with each new loan or transaction.

That completes our prepared remarks for this morning. I will now turn it over to the operator for questions.

(Operator Instructions)

Andrew Liesch, Sandler O'Neill.

Hello.

Hey, Andrew.

So you mentioned earlier on that you'd expect expenses to normalize in the first half of this year. I'm just curious if you can go into a little more detail on that. What does that mean as far as a dollar amount?

I recognize there can be variable costs in there, especially related to TPG. But just beyond that, is there a dollar amount that you think they could normalize at?

Yes. Based on the situation as of year end, we'd expect the noise from these transactions to subside by the second quarter. And other things being equal, expenses normalize around $73 million to $75 million.

Okay, great. Thank you. And then, just looking at the provision methodology and maybe some adjustments there, is $4 million the right number for providing a quarter? That had been higher than I was looking for just based on historical loss rates and what not. Is that where we should be now?

No. Andrew, it's Hugh Boyle. Of that $4.2 million, approximately, a little less than $3 million was associated with the incremental loan growth quarter over quarter. Approximately $800,000 was associated with the accounting methodology enhancement, which we would deem to be more one-off. And then the remaining was associated with just a few problem loans.

Got you. All right. Thanks. I'll step back.

Thanks, Andrew.

Jackie Chimera, KBW.

Hi. Good morning, everyone.

Hi, Jackie.

Looking at the line item of advisory service fees, is that all TPG? Or does that include some of the other businesses that you have, as well?

Hi, Jackie. It's Ron. That's 100% TPG fees.

Okay. So as we look at that, understanding that it will be volatile just based on the nature of their business, is it fair to assume that some of the -- let's see, what was it, the monetization of client portfolios -- is it fair to assume that there will be a component of that in every quarter, even though the amount of it will fluctuate?

I wouldn't assume that it would be every quarter. I think that what you'll find is that there is a balance between the income they receive on their management fees and the monetization of portfolios, where it accelerates some of that income from time to time.

So that will be episodic but core. And as we move forward with that business, continued assets under custody and growth will be the primary driver for continued quarter-over-quarter recurring revenue.

Okay. So if I look at it and I take out the $2 million from 3Q and I take out the $5 million from this quarter, it goes from $1.3 million up to $1.7 million. So you have a good trajectory of growth. Is it a fair assumption that that's the core amount that will continue to grow without the fluctuation of the episodic monetizations?

I think that your reading of the historical is consistent with ours. But I just remind you, the Palisades group is a business that we launched in conjunction with the management team, Steve Kirch and Jack McDowell, just a little bit over two years ago. So it's a growing business.

They've really exceeded expectations from an asset under custody ramp, where I believe they were the fastest growing, or one of the fastest growing, RIAs in the country over this period of time, reaching levels equal to approximately $5 billion of assets under advisory. So I'm not sure that I would be able to have the seasoning and track record in that business to be able to project for you exactly how that growth trajectory goes into the future. But I think that your reading of the past few quarters is consistent with ours.

Okay. Great. And then, just one other one. You had mentioned $10 billion in the prepared remarks. I realize that you're only around $6 billion now. But are you taking a look at any infrastructure build-out that would be necessary for potentially crossing that threshold?

No. My remarks were intended to focus, as we're focusing, on the marginal efficiency ratios of our continued growth. And we believe it's compelling in the industry-leading category of the marginal efficiencies we could obtain. That said, as you approach different regulatory hurdles the marginal efficiency calculation would change.

So that's purely as a guide to the past -- the runway we believe we have where our marginal efficiency continues to be very attractive. So that when we focus on adding a unit of additional loan or deposit production, we feel that we have good visibility into what our marginal economics should deliver.

Okay. Great. Thank you. That's very helpful. And I'll step back now. Thank you for answering my questions.

Thanks, Jackie.

(Operator Instructions)

Don Worthington, Raymond James.

Good morning, everyone.

Good morning, Don.

In terms of the -- you may have mentioned it; I may have missed it -- the composition of the gain on sale other than the Mortgage Banking income, was that just additional sales of the single-family loans? Jumbos?

Yes. Don, you'll probably recall, first of all, every quarter we're selling jumbo loans. We sold about the same amount last quarter, roughly $200 million, as we did this quarter. We achieved a little bit better gain on sale, largely because with the drop in falling rates, some of the economics opened up a little bit.

So we did achieve a little bit wider gain to the tune of about 0.5 point here in the fourth quarter. But the biggest differential between last quarter's $10 million and this quarter's $3.5 million, $4 million number is the almost, just under, $8 million of gain that we realized in the third quarter related to that $50 million sale of our seasoned SFR portfolio.

And we have sold that periodically throughout the year. And since we've acquired that portfolio, mainly to prune, if you will, some of the portfolio profile and economics. But for the most part, that was the primary driver of the decrease.

Okay. Good. And then in terms of merger costs, would you expect more in the first quarter related to Popular?

No. We're substantially complete with the direct merger-related expenses. We've converted the technology infrastructure. We've converted the signage, things of that nature. So that's in the fourth quarter.

That being said, there are certain operating enhancements that, over the first quarter, could hit our expense line, such as the addition of some new capitalized expenses and freshening up some branches. And our experience with these transactions is that you'll have a little bit of additional expense as you start operating the franchise for about a quarter or so that are unrelated to the actual acquisition, but related to the new business that comes on board and getting it up to our standards.

So by the second quarter, I think that you'll see a pretty normalized run rate. The fourth quarter shouldn't see any material big-ticket items as far as the integration. But there will still be a few FF&E and other items that may come through.

Okay, all right. Thank you.

Gary Tenner with D.A. Davidson.

Thanks. Good morning, everybody.

Good morning, Gary.

I have a question about the loan production. I think, Ron, you'd mentioned of the approximately $200 million of growth beyond the Banco Popular loans, it was predominantly originated. But it sounds to me as though there were some purchase loans in that. So I wonder if you could differentiate the two numbers.

No. The non-popular loans were entirely originated by the Banc.

Okay, so no purchases in that number. And then just a small number on just the headcount increase beyond, ex the home loan business and ex Banco Popular, the 30 headcount. How much of that is building any back office support, regulatory-related personnel versus on the production side?

No, that's virtually the entirety of it. The 30 headcount that Ron referenced is really -- and we showed how it worked with operations. But we ramped up our headcount in anticipation of the closing. Some of that headcount ramped into the first month of the fourth quarter.

This included increases in our loan-servicing staff, increases in central operations, and increases in functions such as BSA and risk. So that's the preponderance of the headcount increase. It's something that we guided to and expected, so that we'd be in a position pre-closing with the staffing we needed. We think that we're now staffed appropriately for the Popular transaction, and so we feel pretty comfortable with that.

Thank you.

Nathan Race with Sterne Agee.

Hey, good morning.

Good morning.

Was wondering if you could just provide an update on the outlook for the margin going forward and just an update on the loan pipeline?

Sure. I think you asked about the net-interest margin going forward in the loan pipeline. Is that right?

Yes.

So our net interest margin, we saw some positive trends within our net interest margin as it widened a little bit in the fourth quarter. We're optimistic and really working to defend our net-interest margin and keep the bank-level net-interest margin consistent with the targets as we outlined on page 14 of the presentation. It now sits at about 3.82%.

We're seeing and believe there is continuing opportunity with our cost of funds, and we're hoping to have that continue to move lower, which would be consistent with last year's progress. On that front, over the last year we increased our non-interest bearing deposits by about 50%, which is a trend that we're happy about and hope to continue to increase moving forward.

And on the loan side we're seeing improving yields on our loans as we start 2015 compared to where we were in the fourth quarter. We're hopeful that those trends will continue. Our net interest margin is dragged a little bit by the HFS portfolio, where those loans held for sale tend to have tighter margins than the portfolio we're originating for our book.

So for that period of time, until the sale, that's a little bit of a drag on our net-interest margin. But we're optimistic to be able to keep the net-interest margin at the bank level between 3.75% and 4%.

Okay. Thanks. And I was just wondering if you had the pre-tax income contribution from home lending this quarter?

Did we provide the BHL pre-tax contribution margin?

We talked about the revenues were down about $2 million in the Mortgage Banking business, which has actually ended up being a pretty good quarter for what is typically a seasonally much slower quarter, the fourth quarter.

What I can tell you is we continue to model and budget our contribution margin for bank home loans at approximately 75 basis points of originations. And while we saw some compression in the fourth quarter around the gain-on-sale margins, we still anticipate, as we move forward into 2015, that's a reasonable target for contribution margin.

Okay, yes. I guess I was just trying to get a sense of the breakdown between the core commercial bank and then bank home loans just from a total dollar amount of pre-tax income.

I'm not sure that we've provided that in the release. Let us kind of take a look and come back to you. To the extent, we expect that over the next week or so we'll be filing the 10-K as well, which may shed some additional light, because we anticipate that the 10-K will reflect operating segment reporting, which will break out the BHL Mortgage Banking contributions specifically.

So that'll be an enhancement in the 10-K. But given the release we have out there right now, I'd feel more comfortable getting that out more broadly to the market all at once.

Got it. Thanks for the color, Steve.

Thanks.

(Operator Instructions)

Andrew Liesch, Sandler O'Neill.

Hello. Thanks for taking my last question. Just curious if you can comment on the asset sensitivity of the balance sheet now that Popular is closed?

Sure. Andrew, this is Ron.

Actually, Popular, I think, added a little bit more stabilizing and lowered our interest-rate sensitivity, albeit, slightly. It was a pretty nicely matched book, but it did lower our interest-rate risk and sensitivity overall. I would also add that during the quarter, or just after the fourth quarter, we added to our swap position. We put on another $25 million of swaps, which also further protected our interest-rate risk.

And lastly, Andrew, this is Steve, I'd just mention during the fourth quarter, we also initiated some laddering into our FHLB advances to extend the duration of what was overnight advances.

That's right.

Got you. Thank you.

You're welcome.

Tim Coffey, FIG Partners.

Thank you. Good morning, everybody.

Good morning, Tim.

Hi, Tim.

Does the Bank have a specific plan to reprice deposits in, say, the next two quarters?

The Bank has been taking a focused effort on our deposit costs. We have meaningfully repriced a decent percentage of our deposits. In particular, those deposits that we have under what we call our One account.

We believe there are still opportunities with regard to deposit pricing and believe that with the strategies we have, we'll bring our deposits under a blended average rate of 50 basis points in the not too distant future. We've set out a target to do it by year end.

Okay. So no expectation in that, we'd see a big drop or meaningful drop in, say, the next two quarters? It's more going to be spread out over the course of the year?

We have a couple factors there. I think that we have certain deposits, including some deposits we acquired in the Popular portfolio that were subject to longer-term CD rates, that we'd affirmatively look to reduce, as it's uneconomic for us for a period until we roll those over. We also have certain other deposits that we think we could reprice lower and we'd be comfortable with some runoff.

That being said, from the business units we've developed and built over the last couple years, including the private bank, the financial institutions bank, and the commercial banking business, we're seeing positive momentum in higher-quality, lower-cost deposits coming in that we believe can replace some of that runoff. So there is a matching function here to make sure that we do it prudently and appropriately. And the success of our deposit gathering efforts along those growing, low-cost deposits business will help set the pace for the repricing of some of our higher cost of deposits.

Okay. Great. Thanks. That's real helpful, the color. And then, my other question had to do with the outlook on multi-family production. Do you expect that to be a strong driver going forward like it was for the last, say, three quarters?

Yes. We've been very pleased with our progress and success on the multi-family business. It resulted in meaningful asset growth and high-quality asset growth in 2014. That said, we've reset our budgets and expectations for the core multi-family business in 2015 to be much lower because the pricing in that market has tightened to a point where we believe we have a better use of our capital, given that levels of production aren't a gating item for us at this point.

So we'd expect a more traditional CRE production. That there are opportunities there that we can pursue. And additionally, some of growth in our C&I production and specialties should help replace. But we're constantly looking at the return we can achieve on a risk-adjusted basis for each of our loan products.

Multi-family is one that, as of year end, there were other areas for return that we thought on a risk-adjusted basis were more attractive. That being said, as the markets fluctuate, we have a great capability there, and we continue to see a lot of demand there. And as that demand meets our return hurdles, it could increase our production again as market conditions fluctuate.

Okay. Great. Thank you. Those are my questions.

Thanks.

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

Well, thanks for everyone who called in today. Appreciate your attention to Banc of California. Hopefully, you found this call helpful, and we look forward to telling you about the continued progress we've made in the fourth quarter in a couple months. So thank you.

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