Banc of California Inc (BANC) 2016 Q4 法說會逐字稿

Good day and welcome to the Banc of California, Incorporated, fourth-quarter 2016 earnings call and webcast.

(Operator Instructions)

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

Thank you and good morning, everyone. Thank you for joining us for today's fourth quarter 2016 earnings conference call. Joining me on the call today to discuss fourth quarter results are Banc of California's Interim Chief Executive Officer and Chief Risk Officer, Hugh Boyle, and Interim President and Chief Financial Officer and Chief Strategy Officer, Fran Turner.

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 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.

I want to remind everyone that, as always, certain 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.

Cautionary comments regarding forward-looking statements are outlined on slide 1 of today's presentation, which apply to our comments today. Please allow me to now turn the call over to John Grosvenor, General Counsel for Banc of California, who will make a few introductory remarks.

Thank you, Tim. Good morning, ladies and gentlemen. Before the management team begins its prepared remarks regarding the quarter, let me begin with a few introductory comments. I want to first summarize our recent announcements.

Last Monday, we announced that Steve Sugarman resigned from his role as Chief Executive and Chairman of the Board of Directors. The Board has formed a search committee and retained Korn Ferry to identify candidates who can lead efforts to capitalize on growth opportunities and enhance stockholder value.

In addition, we announced that the Board is considering measures to enhance corporate governance and has already announced changes that include separating the roles of Board Chair and Chief Executive Officer, approving a separation of the compensation nominating and corporate governance functions into two separate Board committees and conducting a comprehensive review of bank governance, including policies to further restrict related party transactions in the future.

Additional changes will be announced as the review continues. In that regard, I want to affirm that the Board of Directors is fully engaged and unequivocally dedicated to discharging its duties and obligations to the Company and its stockholders as well as committed to engaging in meaningful dialogue with interested stakeholders toward that end.

Finally, let me reiterate that in October, a special committee of the board engaged WilmerHale, a law firm which has not previously worked for the Company or its affiliates, to conduct an independent investigation into several allegations against the Company and the Banc.

As we noted in our prior press release, and I quote -- while certain work needs to be completed, to date, WilmerHale's inquiry has not found any violation of law or evidence that Jason Galanis has any direct or indirect control or undue influence over the Company or evidence establishing that any loan, related party transaction, or any other circumstance has impaired the independence of any director.

Now the matters that were the subject of the special committee's investigations do not bear upon the Company's operating results or financial condition. These matters are the purview of the Board of Directors and involve ongoing litigation.

Therefore, management will have no additional comments on these matters and will not be taking questions on these subjects during today's call. Now with those remarks concluded, let me turn the call over to Hugh and Fran to discuss our quarterly results.

Thank you, John. As Banc of California moves forward under new leadership, we remain steadfast to our mission and vision of being California's bank, which truly differentiates our bank from its peers. I remain optimistic and excited about the opportunities that we have in front of us and deeply appreciate the dedication, talents, and entrepreneurial spirit of my colleagues who serve our great clients and communities of California every day.

On behalf of our Board and executive team, I want to thank the employee shareholders of Banc of California for their contributions in 2016. Without them, we would be unable to fulfill our mission as California's bank. While we cannot control for some external variables creating uncertainty in the markets for our bank, we are addressing many of the issues that have been recently raised.

It is the intent of the management team to focus, now in particular, on maintaining a sound and responsible strategy and day-to-day operations of the bank. The bank today is well-positioned to deliver financial solutions for California's diverse communities and I believe that our franchise continues to generate great value to our clients, shareholders, employees, and communities.

Now let me take the opportunity to briefly summarize our high-level returns and then speak to asset quality before turning the presentation over to Fran, who will discuss our business in more detail. First, let me recap our successful 2016 results.

As you can see on slide 2, our strong 2016 financial performance demonstrates the sound execution and tangible results of our mission of being California's bank. Fully diluted earnings per share were $0.54 for the fourth quarter and $1.94 for the full year, validating the capability of Banc of California's strategy and the commitment to our vision.

California's diverse population of entrepreneurs and communities desire a financial relationship that reflects their own values and culture. Banc of California embodies the resourcefulness and creativity that drives the California economy and our performance in 2016 is a testament to that.

The communities that we serve are dynamic, constantly innovating engines of prosperity. We aim to be a banking partner that shares our clients' values and has the same passion about our work as they have about theirs.

Our commitment to California has delivered strong returns over the past few years. In 2016, we crossed a significant milestone of $10 billion in total assets and became a mid-sized bank which has the people, products, and balance sheet to provide full-service solutions for our clients. We now stand as the only full-service, mid-sized bank focused exclusively on California.

Turning to page 3. In the fourth quarter, we generated a 1.1% return on total assets and over 17% return on tangible common equity. For the quarter, as well as for the full year, we exceeded the commitments we made during the year for a 1% plus return on assets and a 15% return on tangible common equity. Earnings per share and pre-tax net income continue to show steady increases.

On slide 4, we highlight strategic actions undertaken in Q4 directed at focusing, optimizing and derisking our balance sheet. We completed the divestiture of our Commercial Equipment Finance division, which included $243 million of loan balances. This move reduced the business with higher overall charge-off levels and a national footprint and allows the bank to redeploy and refocus our capital in support of California and its communities.

We sold $604 million of seasoned mortgage loans at a premium to our book or carry value. This transaction substantially reduces our exposure to the mortgage sector and winds down an opportunistic lending strategy that was undertaken in the aftermath and recovery of the great recession.

This historical seasoned loan strategy, with this attractive interest spread, helped the bank to diversify and build its commercial banking book of business. This sales transaction was completed at a price above our book value and represented a new gain on sale to the bank; thus, reflecting our conservative internal marks and disciplined market approach.

Finally, we made significant progress derisking our loan portfolio. We were able to reduce our nonperforming assets by 51%, reduce our delinquent loans by 42%, and reduce our TDR portfolio by 59% during the quarter through a combination of active asset managements and loan sales.

As a result of the above, our credit quality is now among the best it has been at our bank and compares very favorably to peers. Increasing contingent liquidity continues to be an ongoing focal point as we reduced our FHLB borrowings by 36% to 4% of total assets during the fourth quarter.

On to slide 5. In the fourth-quarter, we continued to make substantial progress reducing our credit risk profile by reducing nonperforming assets by 51% sequentially. Nonperforming assets to total assets are down from 0.56% from the prior year's quarter to just 0.16% today.

The strength of our credit portfolio has not been this robust since our recapitalization in 2010. Our ALLL to nonperforming loans coverage ratio increased by 137% and now stands at 271%. Our nonperforming assets to equity continued its quarterly decline to 1.8%, a decrease of 75% from the fourth quarter last year. And we saw our total delinquent loans decline to just 1% of total loans. Additionally, our ALLL to total loans ratio increased 6 basis points over the quarter.

If you turn to Slide 6, you will see a side-by-side comparison of how our NPA to total assets ratio stacks up against our peers. We are pleased about the progress we have made in reducing that amount of risk in our portfolio. And when thinking about this particular metric, look forward to maintaining our place among the best of our peers. I would now like to turn it over to our Interim President and Chief Financial Officer, Fran Turner, who will talk in more detail about our performance.

Thank you, Hugh. Let me begin on slide 7. Before entering into our financial metrics, I would like to take this opportunity to briefly discuss how we successfully empower California's diverse businesses, entrepreneurs and communities.

Over the past five years, we have assembled a platform of businesses with the breadth and depth of products tailored to serve the uniqueness of California's economy. Significant investments were made in the lending and baking platforms you see illustrated in 2013, 2014, and 2015 to build our franchise with the vision of being California's bank.

As we stand today in 2017, these once J-curved businesses have mostly reached their inflection points and are increasingly profitable contributors to our business model. These businesses are led by experienced bankers and more importantly, entrepreneurs who joined our platform for the opportunity to release their passion and drive to build and grow successful businesses.

I would like to thank our managing directors, Tom Senske of CRE Multifamily; Steven Canup of Institutional Banking and Trust, Gaylin Anderson of Retail Banking; Zoila Price of Warehouse Lending; Julie Duong of Portfolio Lending; Heather Endresen of SBA; David Park of Business Banking; Jim Fraser of Construction Lending; Jay Sanders of Private Banking; Ben Kessler of Payment Solutions; and Ted Ray of Mortgage Banking for their continued efforts and dedication to California's entrepreneurs, businesses, and communities.

We continue to believe that hiring the best talent is one of the keys to building a lasting franchise and we will continue to work to attract additional top banking performers. For example, we recently invested in additional talent for our Private Banking division and we hired approximately a dozen experienced and incredibly talented private banker relationship managers and client support staff to continue building the business.

Additionally, we recently added a San Diego-based business banking team that has deep ties to the local community and has been in the area for over 20 years. We have high expectations in 2017 for all our teams and look forward to helping them prosper and grow in a responsible and disciplined fashion.

Looking forward with the same deep and broad product and solutions set that we have built over the past five years to serve our clients, we believe there's an opportunity to optimize this approach while still providing high-touch service to our clients. Most of our businesses have reached operational scale and can continue to grow and expand client relationships with a refined focus on efficiency and scalability.

Slide 8 reviews the upward trend of growing deposit balances on a quarterly basis throughout 2016 and annually since 2012. Deposit balances increased by 45% for the full year and increased by $64 million from the prior quarter. Our ability to source and gather deposits over the past few years has been a defining trait of Banc of California.

Specifically, our Retail Banking, Commercial Banking, Private Banking and Institutional Banking have created great connectivity with our clientele and developed tailored products to suit the needs of the California entrepreneur, business owner and communities.

Slide 9 showcases that by growing core deposits, we are able to fund strong loan growth and remix the loan book towards an increasing percentage of commercial credits. Commercial loans now represent 63% of total held-for-investment loan balances, up from 54% one year ago. Through this deposit and loan growth, we were able to grow spread-based revenue, which increased by over $100 million, or 45% on a full-year basis and has grown at a rate of 63% annually since 2012.

Turning to slide 10, we highlight a walk-through of the change in the total loan balance during the quarter. While our total loan originations for the fourth quarter remained strong at $2.3 billion, including $1 billion of commercial banking segment loan production, our overall loan balances declined during Q4 due to targeted sales in accordance with our balance sheet optimization strategy.

Our net loan balance grew $331 million, or 5% in Q4 before accounting for the sales of $604 million of seasoned, residential mortgage pools; the sale of our Commercial Equipment Finance division and a sale of a pool of nonperforming loans that did not fit into our targeted portfolio risk profile. As a result of the loan sales completed during the fourth quarter, we reinvested cash proceeds and purchased $650 million of agency securities and $200 million of CLOs.

These purchases drove the $440 million increase in the available-for-sales securities during the quarter. Our CLO book is diversified across multiple issues and managers and totals $1.7 billion as of year end, with $1.4 billion in the available-for-sale portfolio and $338 million in the held-to-maturity portfolio.

100% of our CLOs are rated AA or AAA. You can see that our loan originations for the fourth quarter were well-balanced among three Commercial Banking segments: Total Commercial Banking loan production was $1 billion for the quarter; C&I loans totaled $330 million in Q4 and $354 million that was produced by the CRE and Multifamily segment, which was the highest quarterly amounts to date for Banc of California.

For the full year, we produced $9.5 billion in loans, including $4.3 billion of Commercial Banking loan production during the year, which was up 11% from 2015. Our Mortgage Banking originations totaled $1.3 billion for the quarter, driven by strong year-end production.

On slide 11, our adjusted efficiency ratio rose slightly during Q4 to 67%, up from 62% in the third quarter and down from 75% for the full year 2015. If we break out the Banking segments that go into that, the adjusted efficiency ratio for the Commercial segment was 61% for the quarter, excluding the above-the-line tax equity expense.

The efficiency ratio for the Mortgage Banking segment was 78% for the fourth quarter. The Commercial Banking segments' efficiency ratio was negatively impacted during the quarter due to elevated legal expenses. The Mortgage Banking segment delivered solid results while benefiting from a positive $5 million fair value adjustment on the MSR asset during the quarter.

The MSR mark hit the income statement on the loan servicing income line item. We are driving down the consolidated efficiency ratio by continuing to invest in and grow the Commercial Banking segment. By further scaling our Commercial Banking business, we expect to drive the consolidated ratio lower over time.

Salaries and benefits increased by $3.6 million compared to the prior quarter; the uptick was primarily driven by investments in our banking teams. Professional fees increased by $4.9 million in the fourth quarter, including $4.2 million of legal, professional and audit fees associated with the special committee investigation. Our assets to FTE continued to improve in 2016 to end up at $6.1 million, or a 27% increase year over year.

Slide 12 takes a look at our capital position. As you can see, our Common Equity Tier 1 capital ratio hit its 15-month peak in the fourth quarter at 9.4% and total Tier 1 Q4 matched Q1 of last year at 13.2%. Our capital ratios exceeded Basel III fully phased-in guidelines. The strong capital level positions us well, heading into 2017 to continue to support the organic growth of our business.

Given the state of the capital markets today for us, we are focused on controlling what we can control in regards to best managing the current capital we have today and utilizing our own internal capital generation to fund our asset growth. Our mission and vision are the foundation of what makes Banc of California successful.

On slide 13 you can clearly see these results. Both sides of our balance sheet have seen strong growth, with assets having grown at an annual rate of 60% since 2012 and similarly, our deposits have grown at an annual rate of 63% over the same time period. Net income has grown annually to 110% and our earnings per share have grown at a clip, just under 50% per year.

This performance demonstrates the potential that we have tapped into by focusing on California and its communities and its entrepreneurs. This is what we mean when we say California strong. Now, I'd like to hand it back to Hugh to discuss more about our business and guidance.

Thank you, Fran. As we move forward in 2017, I'd like to share our guiding principles that will remain fixed and steady. We believe these guiding principles will bring a fresh perspective to the bank that reinforces and builds upon the foundation that we already have in place.

Let me now direct your attention to slide 14. The [immutable] foundation of Banc of California is our mission and vision. We are California's bank. Our lending activities are focused on California, with 90 offices throughout the states, including all of our retail banking locations. We lend to customers that we know and share our community with, which has resulted in historically strong asset quality. Our guiding principles are represented by the four pillars shown: responsible and disciplined growth.

I continue to be very optimistic about our growth prospects. The growth will be disciplined to ensure earnings continuity. The California market is diverse, dynamic, and large. We believe California's community has remained underserved as our larger states and regional competition increasingly redirects their focus outside of the state.

Strong and stable asset quality. Strong and stable asset quality and effective risk management allows the bank to continue growing assertively while remaining prudent in the management of risk. Focus and optimization of our business. We will continue to identify opportunities to focus and optimize our business in an effort to ensure that our resources are efficiently deployed to best meet our mission and vision.

Strong corporate governance. The Board has taken decisive actions on this front, as described by John in our opening remarks by separating the roles of Board Chair and Chief Executive Officer. Approving a separation of the compensation, nominating, and corporate governance functions into two separate Board committees and conducting a comprehensive review of bank governance, including policies to further restrict related party transactions in the future.

The four pillars I just discussed support our continued key drivers of growth and profitability: growing spread-based revenue, demonstrating expense management and efficiency, and investing in scalable products and services. We believe this fresh perspective on our business will enhance value to our shareholders, clients, employees, and communities.

Moving on to slide 15. In 2016, we exceeded the year-end guidance that we updated in our last earnings call. Our ROAA for the year was 1.1% versus guidance of 1%-plus and our ROATCE finished at 17.3% versus a target of 15%. Our earnings per share came in $0.09 above expectations.

If you turn to slide 16, you will see that we remain optimistic about our 2017 prospects. While our first quarter core operations may be impacted somewhat by elevated legal costs, we believe that our full-year 2017 returns will achieve an ROA of 1%-plus and an ROATCE of 15%. We are comfortable guiding earnings per share for 2017 to meet or exceed current analyst consensus expectations.

Thank you for your time today. We're excited about our 2017 opportunities and believe that by using our guiding principles and staying true to our mission and vision of being California's bank, we will build an enduring banking institution. That will conclude our formal comments today. And I'd now like to open the line and take your questions.

(Operator Instructions)

[Jacqui Boland], KBW.

Just looking at the loan portfolio pools. Obviously, significant sales in the quarter-end declines. I wondered if you could talk about -- I know the balances are in the press release but just, where you see those balances trending over the next couple of quarters and then also if you wouldn't mind breaking out the composition of the gain on sale income from the quarter? What came from those versus NPLs versus the lease sale?

Sure. So I will start on the latter, Jacqui. So, the gain on sale was represented by $604 million in the SFR pool, which yielded approximately $19 million in revenue. On the SBA, that gain on sale -- the SBA was $1.5 million and about $700,000 came from our jumbo sales. With that portfolio, we have approximately $155 million of carrying value and again, we will look at that optimistically for sale of that portfolio, as it aligns with our strategic plan.

If you take a look at the Commercial Equipment transaction, that is actually allocated in the other income category and that represents $2.6 million as a business sale, and the transaction also released approximately $3 million in provisions, and just as a note, that business historically represented almost three-quarters of our charge-offs.

And more broadly going forward, we remain optimistic about loan growth. We continue to attract high-quality teams. The California market and the economy are strong and stable and we expect the growth story that you've seen before while potentially a bit more disciplined to continue.

And as you look forward, given the events over the last several months, how have they, if at all, impacted the business model just in terms of how you're thinking about potential asset sales? Any deleveraging or securities sales that might come going forward, target capital ratios you're looking at and how you're thinking about the dividend as we move forward?

Yes. Great question. We -- fundamentally, the bank is well-capitalized and we have strong and deep and multiple sources of liquidity. We have sufficient capital to grow throughout 2017 without having to access the capital markets.

Frankly, with the external events that have occurred, management is taking a lot of time to communicate actively and directly with all of our employees, to have good and constant updates with our customers and we are quite pleased at the support our customers have shown and the commitment they have to the organization.

And is there a possibility for lower security balances going forward? I know on the last quarter, you had talked about perhaps some security sales. Do you see any of that or are you pretty happy with the composition of the balance sheet as it stands today?

Let me take that question a little more broadly and then we can drill down if you follow-up questions. At a high level, we believe there is a proper place and a role for the securities portfolio on the bank's balance sheets. And the securities portfolio provides a reliable source of liquidity and it has a cost in capital efficient assets.

Strategically, we are using the securities portfolio to reposition and remix the accredited exposure of the organization, particularly in the CLOs which represents C&I exposure. We are also using the longer duration of pass-through agencies to help offset some of the MSR volatility. The CLO portfolio is very high-quality but it also has an important aspect from an asset liability standpoint in that it's -- it [resets] from a pricing standpoint every 90 days and it helps the bank from an asset liability perspective.

Having said all that, Jacqui, what you'll see over the next couple of quarters is that we are probably in the upper range for a securities portfolio relative to our overall assets. You'll see that securities portfolio redeployed as we enhance and grow our loan production throughout 2017.

Okay. That is helpful. Thank you. I will step back and hop back into the queue.

Thanks, Jacqui.

Andrew Liesch, Sandler O'Neill.

Just some questions on the EPS guidance for this year. How much of that do you think is going to result from better spread income or is there going to be another high-level of gain on sale of portfolio loans and then presumably mortgage banking, you're going to decline this year. Just trying to get some trajectory of what the composition of your guidance for EPS for 2017?

Sure. Now we are the process of still building our annual operating plan and working with the Board to finalize that. But you're going to see the continued focus specifically around the business units. We are in a [fortunate] situation whereby our business units can generate significant production and the we take strategic decisions with regards to what we decide to sell post our production.

Of course, you'll see a focus around the Commercial Lending, the CRE, the multifamily, the asset backed and also the institutional. With that being said, we are focused on ensuring that going forward, that we can actually release certain elements almost to the capital markets to -- regarding to our portfolio of products.

And then Mortgage Banking, we do also agree that we anticipate that to be in line with the market which is likely somewhat down, but again, the capital markets sales are part of our recurring businesses based on selling the excess production that we have in our business.

Okay. And now shifting just towards the margin, as it looks like the remixing of it causes a pressure this quarter and if we -- to the high level where the securities might be. Is this kind of where a floor is in the margin of 3.13% or do you think it might go down a little bit before building?

So specifically around the NIM, the NIM was down due to the sales of the Commercial Equipment portfolio, which had a yield of 5.8% and the SFR pools, which had a yield of approximately 5.23%. So excluding the Commercial Equipment and the SFR sales, the NIM actually would have been 3.27%, so again, 5 basis points of that off. So we see the standard compression that the rest of the industry is seeing but everything still should remain in line from a NIM perspective.

Okay. Great. Thanks for taking my questions.

Gary Tenner, D.A. Davidson.

Just to ask again on the single-family -- on the seasoned pools, a few hundred million left, I think at the end of the quarter. And now that remaining portfolio has a yield that is closer to the full loan portfolio yield. How do you think about just getting rid of the rest of that or is that something you hold on to for a little while?

We are going to -- we're in the process of looking strategically at that portfolio now. It would be a bit premature to provide definitive guidance on that. But we are looking at not only the portfolio but the outlook for rates and other things.

We're in the process, as Fran indicated, of reviewing the annual plan and we'll be working closely with the Board as we move forward shortly. But a little premature, I think, to be specific on that front.

Okay. And then you mentioned a couple times, I think it was in the press release, kind of a fresh perspective. Can you point to one or two things specifically that would change with Steve Sugarman's departure under your watch or on a more permanent basis -- once a permanent CEO is named?

Yes. All I can do is speak from my role over the last five days of moving forward on an interim basis. My personal view is very consistent with the guiding principles that we laid out in the presentation deck. I've had significant experience working with banks through my investment banking days in many capacities.

We will remain a growth organization, and I fully believe that the California market is a strong and a deep market and we continue to attract great bankers, even through these challenging times. So our prospects are optimistic, from my standpoint, with regards to growth. But we are going to be disciplined in our focus.

And growth for growth purposes per se is something that we are going to refine and make sure that we're also keeping an eye on returning to shareholder value. The other guiding principles, I'll just touch on briefly. But as you've seen with the asset quality, to remain a growth organization, one needs to have great controls of both enterprise risks and asset quality and our goal is not to ever have that compromised or jeopardize our strategy.

And then you will also see that we are going to start looking more like a traditional bank and focusing on expense initiatives, really focusing on California and prioritizing our business opportunities in a way that we think will create value. And then finally, you're going to see governance become a tenet of this organization.

The Board has acted very decisively over the last five days and has -- we have released information to that effect. You should and can expect additional governance measures to come out over the near term.

Okay. And just one last question for me. I wonder if, from a companywide perspective, if you could kind of talk about what the profile would be of a new permanent CEO. What is the background? What is the experience?

Yes. That would probably be inappropriate for me to indicate. The -- as we said earlier in our opening comments, the Board has retained a well-known search firm. The Board will make that decision when it is appropriate. Having said that, the Board has also provided clear guidance that they expect this interim team to lead and to manage the Company.

And that's exactly what we expect to do. So I want to communicate clearly that you should expect to see Banc of California moving forward and we will continue to lead and move that forward until notified to the contrary.

Okay. Thanks for taking my questions.

Bob Ramsey, FBR.

First question, given that security is, it sounds like you're at the high end of where you guys kind of target them and idea is to get commercial exposure there. Is it fair to assume that overall growth and earning assets is more muted this year, as you shift some of that exposure from CLOs to commercial loans that's made?

So actually, I would indicate that the Commercial Loan portfolio is growing. If we look at the production and how our business teams are doing, if you think of all of the J-curve businesses that we started in 2012, 2013, 2014, again, they are hitting inflection points and they are continuing to grow. So actually, we expect that our earning -- our Commercial lending businesses will to continue to actually grow a year-over-year by comparison to where they are.

I think for Q1, we saw over $1 billion in commercial loan growth, very consistent with Q3. As we said before, as we continue to attract [teams] to the organization, we think that our prospects are strong for continued solid growth in 2017.

Okay. I guess I can appreciate that. What I meant was do you shift some of the securities -- do you use securities balances and replace them with those Commercial loans that you are growing and so the securities balances come down as you remix -- as you reshift the mix? Or do you sort of leave them at this level and just grow them into a smaller percentage of the overall book?

Understood. I think you should expect that the securities portfolio will come down through 2017 and in fact, we will remix, consistent with your point. Yes.

Okay. And then thinking about average balances -- your average earning assets were up about $600 million despite the drop in end-of-period assets. I'm sure some of that is timing. As we going into the first quarter with the full quarter impact of those asset sales coming out, should we still expect earning assets to be up -- average earning assets is what I mean, or is there sort of a reflection of the sales that lingers into the first quarter?

So there again, just finalize the annual operating plans, so let us come back to you on that topic, if you don't mind.

Okay. So similar question on margin. I know you all were asked earlier if the 3.13% is a trough. I'm guessing that still had some of the partial quarter benefit from the sold assets. So can you give us any sort of guidance on the first quarter and where we start out or maybe where you were in the month of December?

I think right now, we're comfortable saying is, things at this moment appear in alignment as they were ending Q4.

Okay. And end of Q4 is not materially different than on 3.13%?

Again, if you strip out the Single-Family and the Commercial Equipment that is in line with what it would have been without those.

Okay. Could you give an update on interest rates sensitivity, I guess particularly given the additional longer duration agency pass-throughs this quarter?

We have historically been liability sensitive over the last few years. We have moved that back to more of a neutral position. We are very focused on that. That is part of our strategic planning, as we move forward.

Okay. So you're relatively neutral today.

Yes.

Great. And then maybe in terms of expenses, I know you all highlighted the higher legal costs this quarter, which I think is to be expected but could you just maybe quantify how much was the legal cost this quarter? How much was the increase in comp for Sugarman's exit? And what we should expect in the first quarter in those unusual items.

Sure. So the specialty investigation between legal professional audit and other items was approximately $4.2 million for Q4. I think it is fair to say that it will be an amount thereabouts or somewhat higher.

Obviously, we do have other measures with regards to insurance, et cetera, that we have that may minimize that effect but at this point in time, we are currently modeling expenses to be in alignment or somewhat up with regards to those special committee costs.

Okay. And then the comp line?

So there again, I will direct you to specifically the separation agreement, again in 2013, the -- a good portion was accrued already, both from a cash perspective and equity and there still will be a Q1 effect based on the payment.

Okay. Thank you. And I know it is in the separation agreement. I just don't know which quarters they fall in to. Can you, I guess, pinpoint it a little more?

Hi, this is Al Wang, our Chief Accounting Officer. As Fran has said, most of the expenses, a lot of the expenses were already accrued for in 2016. There will be incremental expenses in connection with the separation agreement in Q1. We had issued 8-K with the separation agreement with the terms, so I'd refer you to that.

Okay. All right. And then can you remind me -- does the review you all are doing, does it encompass the factually inaccurate press release or is it more focused on corporate governance-related party transactions?

Yes. I would -- we are not going to respond to that at this point. We have made our public comments around that [issue].

Okay. Not even to clarify the scope of what is being reviewed?

It is not really within our purview. I think it's more of a Board item, I'll defer to legal on this one.

All right. Thank you very much for taking the questions.

Thank you.

Tim Coffey, FIG Partners.

Fran, do you have the -- did the Company receive a special dividend from the FHLB in the quarter? And if so, how much?

That is correct. The amount was $1.8 million received.

Okay. Was there any -- did the holding company downstream any capital to sub-bank this quarter?

There was a combination of factors. There was a $50 million upstream in November and there was a $5 million downstream in December and currently, we sit on $150 million of cash at holdco as of 12/31.

Okay. The -- I know I understand a lot of the go-forward operations are under review right now. But do you have any comments on whether or not the company will continue to downstream to sub-bank?

Again, as we continue to grow and as appropriate, the answer is yes, we would view, at certain points in time, we would be downstreaming capital from [holdco to bank in it].

Okay. And given that you are three-quarters over $10 billion, do you have any estimates on what the ultimate cost of being over $10 billion will be to the Company?

Yes. I won't be specific but as you know, crossing that hurdle does require considerable additional expenditures, not only on classic issues like DFAST, but really ramping up across the board systems, the quality of people, controls, et cetera. Frankly, the bank has, in its growth over the last three or four years, has realized that it is imperative that we invest in that infrastructure well in advance of crossing the $10 billion.

So frankly, you've seen our efficiency ratios be a little on the higher end of industry peers. One of the reasons for that, as we've historically invested prior to being required to from a regulatory standpoint. We fully believe that we want to operate well within regulatory guidelines and believe that prudent additional costs has been helpful in guiding the bank appropriately.

So I can't give you a number but we've invested considerably over the last three to four years, and frankly, as we crossed $10 billion, we still have additional infrastructure and analytics that we're working on, but it's not the cliff that other banks potentially have faced and we started earlier to invest.

The total kind of investment that you're thinking about for this crossing $10 billion, have you made half of it or more?

Yes. Over the last couple of years, I think we've easily made half of that investment. There's incremental expenditures. We continue particularly around the beefing up our DFAST capabilities but yes, I would say we are well into the deployment of those expenses, and really, as we continue to grow, we will continue to invest. We believe fundamentally that absolutely strong reporting and analytics are a hallmark and differentiator for the bank and how we compete in the industry.

Okay. And then as kind of a follow-up on the expense question related to legal and audit, so it was $4.2 million in the quarter. You said it would be somewhat in line, if not higher going forward. Is that on a quarterly basis you're talking about or annualized basis?

That be directly related to the first quarter of 2017.

Okay. Okay. I understand.

All right. Those are my questions. Thank you very much.

Thanks, Tim.

Timur Braziler, Wells Fargo Securities.

Maybe we can start on the mortgage banking business, maybe provide an outlook on what you expect within that line item, given the spike in rates and how that overall strategy fits into expectations for 2017?

So if we see some of the statistics in regards from the SBA indicating a 17% down, what I would say is we are optimistic still about that business but have [called] in such a fashion where we do believe there will be some type of increase. We are fortunate whereby if we look at the infrastructure of mortgages actually built out, we're in a position where we can still continue to fill specific seats around that to ensure that we are taking advantage of all of the corresponding costs there.

And then finally again, it has been a strong mover in 2017. It's a well-run organization so again, at this point in time, it is part of our strategy.

Okay. And then maybe shifting gears to the sale of the nonperforming assets during the quarter. Nonperforming metrics were fairly strong when compared to the group. Was this just an opportunistic sale that presented itself during the quarter or kind of as you're looking through the whole balance sheet, or you thought you would just purge everything and start with a clean slate here?

No, I would say it's exactly your point. The credit that's been in the market is strong today. As we continue to move forward, we want to maintain that strong asset quality position. We looked at our portfolio internally and from a risk-adjusted and from a cost-adjusted standpoint, felt that exiting through a discrete loan sale would bring closure to the portfolio and allow the bank to redeploy those special assets -- resources to be more efficient. So really, just a simple exercise of looking at the strong credit bids versus the continued workouts and feel that we had a unique point in time where we wanted to take advantage of that.

Okay. And looking at the existing loan book, are there any other asset classes that might not fall in line with the broader strategy or is the current mix something that we should see continuing going forward?

A little premature to answer that definitively as we are still finalizing and really reviewing our strategic plan for 2017. But what you will see is that we will continue to refocus and deploy additional growth elements towards our C&I business and our core platforms, Commercial, Real Estate, Multifamily and others.

Okay. And then lastly, maybe just asking Jacqui's question a little differently. Over the last three months, how has that affected or impacted both internal and external competitive landscape within the bank? Are you seeing any added pressure from competitors trying to go after talent? What has been the success rate of maintaining your current workforce?

We are very pleased and happy with where we are and as we have said before, we are recruiting and onboarding additional teams and listing out teams from competitors. Obviously, the external market and the dynamics that we face create additional challenges and as I said before, we're doing everything within our control to focus on our core business, to have great communication within our teams and staff. And we are confident that we have a strong bank, a focused bank and a commitment to continue working together to fulfill our mission and vision.

Okay, actually just one more from me, if I can. Just looking at the expectation of switching some of the securities balances and the cash flow into loans during the year, what does that mean for deposit growth for 2017? Are you going to pull that back a little bit or is that going to remain as strong as we're seeing it this year?

Again, I think we need to finish out our annual operating plan. We've had phenomenal success over the past three years. It's a focal point collectively for our organization and we've got the appropriate incentives aligned to do so but still building out that plan but again, deposit aggregation is a focus and frankly, one of the finest trademarks historically that we have at Banc of California.

You'll see deposits keep up with loan growth as we move forward so you will see very strong continuity in the historical perspectives that we have seen where deposits fund our loan growth.

Great. Thank you for taking my questions.

Ebrahim Poonawala, Bank of America.

So I just wanted to follow up. I think you just mentioned you expect loan growth to be funded by deposit growth and obviously, I think everything that was going on, we saw very little deposit growth. I think it was the slowest quarter in two years. As you think about the outlook for deposit growth, are you running any special promotions to bring in deposits or what is your expectations in terms of deposit growth for the full year relative to where you were at the end of the year?

We're -- thank you for that question. We are focused on all elements of our core funding strategy on a go-forward. As we communicated in our -- in some of our public filings, we anticipate releasing our 10-Q and 10-K by March 1, if not sooner. We do think that, that will be a material aspect in allowing us to really re-energize our deposit franchise, particularly with our more sophisticated customers.

We continue to have great communication with all of our parties. The delay in our financials is a situation that, right now, is a little bit out of our control. But as we move forward and release those financials, we would expect to see business return to normal and would fully expect that the deposit side of our franchise will re-energize.

And -- that is helpful, actually. And would you say that you would need to raise capital if the deposit growth were to reaccelerate and [evolve] from here or do you think that internally, your earnings will fund any incremental balance sheet growth?

So at this point in time, again, we don't see the need for any incremental external capital. As I mentioned, we're generating over $100 million of net interest income so with that and how we look at our plan, it will be sufficient to fund both the lending and deposit growth at this point in time.

Understood. And then just going back to two other things on the corporate issue. One, in terms of the -- you mentioned the CEO search is ongoing. Is there a timeline by when we should expect the search has concluded?

Because it seems like you're trying to figure out what the go forward strategy is and if you are bringing in a new CEO, that person may also want to play a role in that. So I'm just wondering if there is a timeline by when you think the search will be concluded or how far along are you are already in that process?

Yes. Thanks for that question. I really want to be clear on that point as well. The Board has given full control and delegation and is expecting the interim team to lead the bank forward. There is no delay in the execution of our business, and there is no delay in the execution of our current plans.

What we are doing is taking the opportunity to review the longer term 2017, a multi-year plan and that is what we are referring to. So no hesitation. There is no impact on the organization as a result of the search and obviously, the results of the search will be released at the appropriate time.

And this is John Grosvenor. In connection with the governance initiatives that have been launched, the Board established a search committee since the announcement last week with Steve Sugarman's resignation. The search committee has engaged Korn Ferry. Korn Ferry will be looking at both external and internal candidates to ensure that the outcome of that process will result in the best overall choice for the Company and the bank.

I think the committee intends to complete that process as quickly as it can be done well.

Got it. And sorry if I missed this in some of the disclosures you put up but are we still looking for a new CFO, or is Fran going to be the permanent CFO?

I think as part of the search committee's search for a new CEO, that, that issue is probably going to be driven by the outcome of that process.

Got it. And one last question, if I may, to the extent you can answer that, John. Around the scope of the SEC investigation, if I recall correctly, I guess the SEC is looking into the findings of the search committee around the corporate governance issues as well as the inaccurate statements made on October 18; is that correct?

What I can tell you, Ebrahim, is that we have released as much information as we can in coordination with the SEC and their activities. So I can't really comment too much more on that at this point. I can tell you, however, that as we've mentioned before, and both Fran and Hugh commented upon, since last Monday's announcement, the Board has been working with outside counsel.

It's restructured its own governance to separate the roles of Chairman and CEO. And as a result, it no longer needs either an independent chairman or lead -- pardon me, an appointed independent chairman and no longer needs a lead independent director.

It's separated the compensation and governance functions into two separate committees under different leadership. It has adopted a related party transaction policy, reflecting the Board's intention to restrict such transactions in the future. It is poised to adopt policies governing outside business activities to ensure that appropriate activities are being undertaken and monitored.

It's been working with outside counsel to review all critical policies to determine if enhancements are appropriate and will make further announcements as that occurs. All of this is in the context of the same good governance process to make sure that the search for the CEO and the decisions regarding the appointments of permanent and independent -- permanent positions for leadership and management will be done with, I think, equal care.

And one last question, just to clarify. Has the Board held any one accountable for the October statements? And should we expect any other changes in terms of management or leadership going forward because from the findings of that or is that issue addressed? And is there any link between Steve's resignation and the findings of that October 18 statement or no?

We're not going to comment on anything further than what we have announced about resignations and as appropriate, if additional information and when it becomes available regarding actions by the Board in connection with the investigation, we will be announcing that. As we have said, even though the work of the committee is not done, the conclusions that we announced are final conclusions.

And they, I think, relate to the things that have been the principal concern of others in connection with the blogger and the investigation so we wanted to make sure that, that information was communicated. As the committee continues its work, other announcements may result.

Understood. Thanks for taking my questions.

Don Worthington, Raymond James.

In the past, you have given guidance on the efficiency ratio as part of your forward guidance. Do you have any for 2017?

So again, as part of the annual operating plan, we are determining that. I think what I can comfortably say is in the not-too-distant future, we'll be able to come back with a perspective in regards to the ongoing efficiency ratio. So we will just need a few weeks on that topic.

Okay, thanks. And then a small item. It looked like REO was up a couple million in the quarter. Any color on what drove that?

Sure. Originally, they were four properties that were in there as of 9/30. It increased slightly to 11 properties but no more than that.

Okay. Thank you.

Thank you.

This concludes our question-and-answer session. I would now like to turn the call conference back over to Tim Sedabres for any closing remarks.

Well, thank you everyone for joining our call today. As always, we always make ourselves available here. If you have any follow-ups, please feel free to reach out. Thank you.

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