Banc of California Inc (BANC) 2017 Q1 法說會逐字稿

Good day, and welcome to the Banc of California First Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Timothy Sedabres, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining us for today's First Quarter 2017 Earnings Conference Call. Today's 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'd like 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. Last week, we announced that Doug Bowers will be joining Banc of California as President and Chief Executive Officer, effective on Monday, May 8. Doug would like to begin the call with a few brief introductory remarks and then our interim Chief Executive Officer and Chief Risk Officer, Hugh Boyle; and interim President and Chief Financial Officer and Chief Strategy Officer, Fran Turner will detail first quarter results.

With that, I will now turn the call over to Doug to make a few opening remarks before we turn to the discussion of first quarter results.

Thank you, Tim, and thank you to everyone for joining the call today. I'm delighted to be joining Banc of California starting May 8 as it's President and CEO. I'll make a few remarks and then turn the call back over to Hugh and Fran. I have had the opportunity to lead many businesses in my career. Banc of California stood out to me as a premier opportunity. I want to share with you just a few of the items that attracted me to the Banc of California. Firstly, it's of course well known for many things, including the depth and breadth of products to relentless mission serving California and it's focus on entrepreneurs and business owners. Operating in one of the premier markets in the world, California, provides tremendous prospects. Banc of California has many of the same values as the entrepreneurs it serves. Additionally, I just got to say I love the brand name, Banc of California. It was these attributes and some others that attracted me to the bank. With the people, the products and the balance sheet to serve the world's 6th largest economy, I could not be more proud to join a company with such opportunity. The company has a broad product set and numerous business verticals to serve our diversed client base throughout California. While at the same time, many companies are distracted with M&A, strategy changes or credit issues. Our own credit performance is a source of strength with a disciplined credit culture, which is well established and has produced a non-performing asset level near the best of peers at just 18 basis points. I've had the opportunity in my career that spans large banking institutions like Bank of America, and small entrepreneurial environments like Square One. I have run several divisions with presences throughout California, San Diego, L.A, Orange County and San Francisco. I have managed middle market banking, large corporate banking, leasing, foreign exchange and other treasury and payment groups. I cannot imagine a better franchise that fits my background and experience than Banc of California. Over the coming weeks and months, as you can imagine, I'm going to spend significant time with our senior leaders and our clients across all organizations to gain a full understanding of the opportunities in front of us. As with any firm, I expect here to be both opportunities to leverage our demonstrated expertise, while at the same time I expect there to be areas and opportunities where we can certainly improve and do better, and we will. Overall, my initial take is the Banc of California is very well positioned to deliver on its vision and mission centered on this great state. Finally, I'd like to thank Hugh and Fran for their leadership and dedication during this interim period. I'm excited to continue working with both of them as we move this company forward.

With that, thank you. And I'll turn the call over to Hugh and Fran to discuss the first quarter results.

Thank you, Doug. Earlier this year, we shared our guiding principles, which are outlined on Slide 2, which would be the guidepost for Banc of California as we move forward in 2017 with a fresh perspective of the business. These guiding principles sit atop our mutable foundation as California's bank. Our mission and vision is to serve California, it's entrepreneurs, businesses and communities. No matter what we do, this mission and vision will remain our foundation. The business is supported by 4 key pillars: responsible and disciplined growth, strong and stable asset quality, focus on optimization on our business and strong corporate governance. These pillars support our business focus of growing spread-based revenue, demonstrating expense management and efficiency and investing in our commercial businesses. We believe that this framework will continue to well-position Banc of California 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.

Starting on Slide 3. We summarize the company's ongoing transition to a commercial banking business model over the past 2.5 years. The acquisition of Popular Community Bank's California operations lead in 2014 was a strategic transaction for us that cemented and accelerated our transformation toward a commercial banking business model. The transaction allowed us to acquire in scale over $1 billion of commercial banking assets, which were fully funded by a low-cost deposit base. With the increase footings from Popular, we were able to maintain the necessary base to invest and grow our commercial banking offerings. Over the course of 2015, you saw us do just that, by investing and growing businesses, such as commercial real estate, institutional banking, SBA lending, warehouse lending and others. Later in 2015, we were able to hire a few good leaders and teams from select competitors which further supported the build outs of the commercial bank. Throughout the first half of 2016, we continued to add talents across the commercial banking businesses and saw strong loan production from many of these teams as a result. We added key commercial banking products and services in order to build out a full suite of offerings, including expanded payments, foreign exchange and swaps, trust services and enhanced treasury management products. Additionally, we launched a specialty healthcare, municipal and nonprofit banking team to serve these segments across our markets. The second half of 2016 was focused on continuing to grow our commercial footings, while at the same time, optimizing and de-risking our businesses and loan portfolio. We sold our commercial equipment finance business to Hanmi Bank, along with $243 million of associated loans and sold over $700 million of residential mortgage loan pools, of which nearly $560 million were purchased credit impaired or PCI residential mortgage loan pools. Both of these actions were designed to strengthen our balance sheet and allow us to better focus on California client relationships, particularly in our growing commercial lending activities.

Moving into the first quarter of 2017, we are emerging as a solid commercial banking franchise. We announced the sale of our Banc Home Loans mortgage banking business to Caliber Home Loans and the sale of $38 million of mortgage servicing rights, with total unpaid balances of underlying loans of $3.9 billion. Like our previous sales, the 2 mortgage-related sales were designed to de-risk and allow us to focus on our primary commercial business franchises serving California. The mortgage-related sales should reduce the level of earnings volatility caused by MSR asset valuation swings and reduce or eliminate mortgage banking gain on sale swings. Additionally, we undertook an efficiency and expense program to reduce headcounts and other expenses, in order to bring our expense base in line with our new revenue profile. The second half of 2017 will be challenging as we build core floating rates, recurring spread-based revenue streams from our commercial lending platforms to replace the revenue associated with the sold mortgage operations. As we grow our commercial loan portfolio, we will take the opportunity to reduce our securities portfolio and remix the left side of our balance sheet. This remix and focus on loans held for investment should strengthen our net interest income through the remainder of 2017. We are also laser focused on building core relationship-based deposits. As we grow this sticky, cost-effective funding base, we will use a portion of these proceeds to bring down our brokered or wholesale funding levels. The FTE reductions and cost efficiency measures that we instituted in Q1 should support a stronger earnings build into the second half of 2017 and full year 2018.

Turning to Slide 4. You can see the progress in building our commercial loan balances over the past 3 years. In early 2014, of our total $2.4 billion of loans, only 16% were C&I, while 42% were residential mortgage loans. Today, we stand with $6.1 billion of loans held for investment, of which 27% are C&I and residential mortgage loans have been reduced to 32% of loans. As you can see on Page 5, these results were not by accident. Rather, they were the results of investment hiring across the commercial business units, where we have added over 100 employees to business unit teams over the past 3 years, including within commercial banking, private banking, institutional banking, SBA lending, warehouse lending and CRE and multi-family lending. In addition, we've built out our payment solutions group and the launch of the health care, muni and nonprofit banking teams. During this time of hiring talented banking professionals, we have launched numerous products to serve California's entrepreneurs and business owners, some of which we have outlined on the slide. The result of these activities shown on Slide 6 is the transformation of Banc of California's revenue and earnings profile. The increased focus on growing core, recurring spread-based revenue in place of the previous concentration on gain on sale revenue is a significant transformation for the company, which has occurred in a relatively short time frame. From the full year of 2016, where only 54% of consolidated revenue were from spread-based net interest income to the first quarter of 2017, where 84% of revenue from continuing operations came from net interest income. This shift is demonstrated by the increasing trend of net interest income, which stands at $84 million quarterly, up by over 2x from the level 3 years prior.

During the first quarter, we successfully enacted numerous strategic actions, aligned with our guiding principle of focusing and optimizing our business. These optimization efforts were necessary for 3 primary reasons: first, realigning the support model post the sale of BHL, which reduced nearly 50% of our employee base from 1,800 people to less than 1,000. This means less need for operations, IT, marketing, HR and other support for these colleagues. Second, realigning the support model for a bank targeting $12 billion in total assets at year-end. Banc previously had grown assets annually in excess of 35%. However, with a fresh perspective, and more disciplined and responsible growth and our go-forward outlook of approximately 10% to 15% asset growth, we do not have to over-invest resources as quickly to support the organization. Historically, being one of America's faster-growing banks place pressure on support hires, infrastructure, consultants and contractors and resulted in overall higher expenses. And finally, third, realigning the expense base overall to match the expected revenue profile for the company going forward, eliminating gain on sale revenue from Banc Home Loans and lowering other loan gain on sale revenue in order to achieve our less than 60% efficiency ratio target, we needed to rationalize the expense base to match the core, recurring spread-based revenue we are building. Our efficiency and cost control plan includes reviewing all expenses across the organization and we have identified savings on compensation, occupancy, equipments, professional fees, marketing, benefit programs, software and numerous other areas. One of the items this included was the reduction of 153 FTE in early March. Additionally, just yesterday, we conducted a second round of reductions of approximately 55 FTE to bring our expenses down and more in alignment with the revenue and needs of the go-forward business. These reductions were 85% and greater focused in our shared service or support areas and included very limited reductions to client facing production roles. The reductions were broad and included groups, such as operations, servicing, marketing, IT supports and other areas. While these decisions are never taken lightly, given their impact on our people, the actions were necessary to position the company for continued growth and success in 2017 and beyond. As a result of the above, you will see in the bottom right corner of Slide 6, that our assets to FTE metric improves materially.

Now let me summarize a few highlights from the first quarter on Slide 7. We continued our focus on our guiding principles, demonstrating responsible and disciplined growth as net held for investment loans increased by 1% during the quarter. Excluding selective sales or residential mortgage loans during the quarter, loan growth came in at 5% for the quarter, driven by continued strength in our commercial businesses. More importantly, commercial loan balances increased by 5% from the prior quarter to $4 billion and now represent 66% of our loans, up from 56% a year ago. Asset quality remains strong with nonperforming assets to total assets of just 18 basis points. Delinquency is declining to now just 0.9%, down 59% year-over-year. I've already mentioned the efficiency initiatives associated with the sale of BHL and our MSRs, so I will skip this section.

Finally, let me transition to Slide 8, where we have highlighted the significant improvements in corporate governance. The board has continued to improve our governance program, announcing the addition of 4 new independent directors, who bring greater shareholder representation, governance and risk management expertise to the board. Doug Bowers was recently appointed as President and Chief Executive Officer. The CEO and Chairman roles were split. Enhanced related party policies and procedures were adopted. Changes in corporate bylaws were made to properly balance protection of the company with enhanced stockholder access and participation in the company's affairs. And enhancements were made to board member and management compensation, including the implementation of Pay for Performance metrics for the executive management team. The company remains well positioned to deliver on our mission and vision of being California's bank. Doug's addition to the team is another positive catalyst for the company and our businesses. While 2017 is a transition year for the bank, and will present a challenge, we have a dedicated and great team that is up to the task. I would like to thank all of our employees for their continued hard work and dedication to building California's bank. I could not be more proud of our accomplishments and look forward to the opportunity to continue to drive increased value to our clients, stockholders, employees and communities.

I'd now like to turn it over to our interim President, Chief Financial Officer and Chief Strategy Officer, Fran Turner, who will talk in more detail about our performance.

Thank you, Hugh. First, let me begin on Slide 9. First quarter interest income totaled $102.1 million, down $1.7 million from the prior quarter. As a reminder, during the fourth quarter, we strategically repositioned the balance sheet through the sale of $558 million of PCI mortgage loan pools, which carried an average yield of 5.17% and the sale of our commercial equipment finance business to Hanmi Bank, which represented $243 million of balances at an average yield of 5.8%. Both of these transactions were directly aligned with our increasing focus on core commercial banking activities as they represented the reduction of purchased residential mortgage loan pool balances and the exit of a nationally-based small ticket equipment leasing platform that no longer fit into our targeted portfolio risk profile or footprint. The combination of both of these sales created trailing effects for interest income going into the first quarter as the first quarter average interest-earning assets were lower by $414 million compared to the prior quarter. As a result of loan production and higher loan yields, we were able to offset the majority of this during the first quarter. Going forward over time, we would expect further loan growth and production yield to support increased interest income from these levels throughout the course of 2017. The first quarter's loan production yields marked a significant event as new loan production yields exceeded portfolios for the first time in numerous quarters as new loan production yields came in at 4.47%.

The next slide, Slide 10, highlights our expectation for net interest income trends over 2017. For the first quarter, total net interest income totaled $84 million. I would note that this figure is on a consolidated basis and includes the $3 million of net interest income resulting from 400 -- held-for-sale loan balances associated with bank home loans as of March 31. Although, we are in the process of finalizing the sale of this business to Caliber, the loans currently on balance sheet and held-for-sale are expected to be sold over the course of this second quarter with associated economic returns were teamed by Banc of California. As these loans are sold, and the Banc Home Loans held-for-sale balances are reduced towards 0, we expect to replace these earning assets on our balance sheet with either new commercial loan production or securities to temporarily maintain the associate interest income from this portfolio. With that in mind, we expect net interest income to increase over 2017 and by the fourth quarter, growth in net interest income is a core component of our plan to grow recurring, spread-based revenues and we expect it to be the primary contributor to replacing the reduced gain on sale income we would have otherwise seen in 2017. We expect 3 primary drivers to support net interest income growth: first, continued on-balance sheet loan growth throughout the year; second, expanded net interest margin. As mentioned previously, we've already seen an uptick in portfolio yields in first quarter. And thirdly, toward the back half of 2017, we expect to begin remixing security balances into held-for-investment loans, which have the current portfolio yields of 3.27% and 4.35% respectively. Net interest margin for the first quarter was 3.19%, a 6 basis point increase from 3.13% in the fourth quarter. This was primarily driven by a 17 basis point increase to loan yields and a 30 basis point increase to securities yields, partially offset by a 9 basis point increase in average cost of deposits.

On Slide 11, we recap the revenue transformation ongoing at the company today post the sale of the Banc Home Loans mortgage banking business. In the fourth quarter, gain on sale revenues accounted for 34% of total revenue, with 54% of revenue coming from net interest income. Exclude BHL from the fourth quarter and net interest income would have represented 77% of total revenues. In the first quarter, for continued operations, net interest income accounted for 84% of total revenue. This stability of core, recurring spread-based revenue represents the baseline for our revenue trends in 2017. Our plan is to work towards growing absolute revenue dollars while simultaneously growing the contribution of spread-based income within our total revenue mix.

Slide 12. Banc of California has assembled a platform of commercial businesses with breadth and depth of product, tailored to serve the uniqueness of California's economy. When combined to focus on the needs of California's entrepreneurs and business owners, our products and expertise provides an integrated solution. We often measure the performance of these business investments on a J-curve, which gives us insight into their current position in their investment and maturation cycle. At the forefront of our businesses, our 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 spend a few minutes walking you through our various businesses and sharing our thoughts on market opportunity for each of them going forward. First, CRE and multi-family lending, one of our more mature businesses, is focused on granular, California-based real estate loans to individuals and managers. This business is an important part of California lending and as it stands today, can originate $1 billion of gross production volume. Many of our private banking clients and business owners hold real estate investments and commercial and multi-family properties. These properties tend to be Class B properties with renters by need and affluent west side in coastal locations. Portfolio residential lending is a business we intend to maintain post the sale of Banc Home Loans. This group originates primarily jumbo hybrid arms 3 1, 5 1s and 7 1s. And this product is key to many of our private clients, wealth management partners and commercial clients. There are only select few competitors who are able to serve all the needs of entrepreneurs and business owners including their residential lending needs. Being able to offer the full suite of products to our client is a differentiator for us in both the private, commercial and institutional banking spaces. Because of ROAs, warehouse lending primarily service financial institutions and mortgage bankers by providing competitive mortgage warehouse lines. This business allows clients to leverage our lending platform and deep product knowledge to bring a sophisticated level of expertise into the financing of their underlying business operations. We use business as important both on the commercial side but also on the institutional side of the business. Institutional banking offers wide products that are designed to serve the depository needs of ROAs, broker dealers, retirement plan participant and other financial institutions. Products include trusts, 1031 Escrow, EB-5 Escrow, Master Deposit Accounts and Segregated Commodity Deposits. Additionally, with a broad set of lending products, institutional banking can serve as the bank-behind-the-scenes lender and depositor for various financial institutions, ROAs, broker dealers and wealth managers, offering white label solutions for securities back lines of credit and insurance back lines of credit and other depository products. The trust team, specifically, is building very good relationships and seeing solid traction and scaling their platform. Private banking added a new head and select teams from other well-regarded bank institutions to continue to grow and expand the business. This group serves high network clients across Southern California, specifically niche business manager relationships, where we have developed a customized deposit software solution in order to help them manage their relationships. We see opportunity in this space as being an institution without a wealth management or asset management function. We can serve and partner with other investment advisors without potential conflict on asset management. Our SBA lending is a bit different than many other SBA programs as we are nearly exclusively focused on the 7(a) business for acquisition finance program. This program aligns near perfectly with our mission to serve entrepreneurs, especially when they're looking to acquire an existing business. We generally sell 75% of the balance from originated loan, the government guaranteed portion, and we retain the remaining 25% of the loan balance on our balance sheet.

Our retail banking team is focused on transitioning a part of their business this year. This team, which is primarily a small business focused team, is expanding an outside calling relationship manager model where they replace relationship managers and select branches throughout the footprint and they are tasked to source and develop small business deposit and lending opportunities while allowing the branch team to focus on inbound sales and customer service opportunities. This also supports a relatively efficient branch staffing model and footprint with our newer offices being around 1,500 square feet or less and they are staffed by 3 to 4 employees including the new relationship managers. The commercial banking team is focused on continuing to grow and acquire relationships with the teams hired during 2016 and early '17. We have heavily invested in this business and are seeing this business progress effectively from recent teams who have joined. We intend to continue to add talented bankers and teams across this footprint. Construction and rehab lending came to us through our acquisition of RenovationReady. The team here is focused on primarily residential infill renovation lending in areas such as Pacific Palisades, Santa Monica or Newport Beach, often lending at approximately 50% loan to value. The target customers for this business are affluent clients that are looking for reliable and trusted partner to provide $3 million to $5 million of renovation financing for their existing or newly purchased homes. Payment solutions is poised for an exciting year. We’ve already become a principal member of Mastercard and have started issuing our own debit cards. Additionally, our merchant processing business is off to a strong start after going live. Through the LAFC partnership, we expect to see substantial expansion of the payments pace here as we launch our LAFC debit card and in 2018 began our merchant processing relationship with the team and stadium for products, tickets and concessions in the food court and museum area. We intend to launch a credit card program, which we'll be sharing additional details throughout '17. Our health care municipal nonprofit group is one of our younger businesses. We've on boarded teams in San Diego, Orange County and Los Angeles, and just over 1 month ago, the division won their first RFP for a municipal banking relationship.

Slide 13 illustrates our loan growth and remix the loan book towards a greater percentage of commercial credits. On the left chart, you can see the building concentration of C&I loans balances since the end of 2015 where they have grown from 22% of loans to 27%. At the same time, our residential mortgage concentration has fallen from 44% to 32%. Total commercial loans now total $4 billion and represent 66% of total held-for-investment loan balances, up from 56% a year ago.

Slide 14 provides a walk of net held-for-investment loan growth during the first quarter. Although net held-for-investment loans increased by $71 million or 1% from the prior quarter, during the quarter we sold $235 million of residential mortgage loans, which drove the decline of $132 million of residential mortgage loan balances during the quarter. Excluding the decline of mortgage, loan growth would have been $202 million, a 3.3% quarterly growth rate or a 13.4% annualized growth rate. Commercial loan balances increased by $187 million or 5% during the quarter as we saw good growth across all of our commercial portfolios. Digging a little deeper, our C&I loans balances grew 4% during the quarter while our construction loan balances grew at a pace of 14% over the same period. Our multi-family lending business continue to see demand from its loan products with balances increasing 6% over the quarter. Further in the asset side of the balance sheet, total securities increased by $32 million during the quarter. As held-for-maturity balances decreased by $21 million, driven by a payoffs and available-for-sale securities increased by $53 million. We expect that these balances should have less of an influence on our net interest margin moving forward as we realign our loan and securities mix toward holding more high-quality, high-yielding loans on our balance sheet.

Our loan/deposit ratio for held-for-investment loans totaled 71% at the end of the first quarter, up slightly from 66% at year-end and down from 80% a year ago. Our deposit base is well positioned to support continuing loan growth and even as period and first quarter deposits were $544 million lower from year-end, they are up $1.8 billion from year-ago. Average deposit declined by $206 million from the prior quarter. Broker deposits declined during the first quarter by $236 million, primarily driven by CD runoff. The remaining $307 million of depositor clients were driven by a handful of variables. However, they are mostly from specific financial institutions and fiduciaries that requires a timely filing of financials, which we remedied on March 1 with the filing of our 2016 10-K and September 30 10-Q.

Slide 15 summarizes a few of the efficiency and optimization initiatives we've undertaken to reduce expenses and drive the adjusted efficiency ratio lower over the course of the year. As previously mentioned, with reduced gain on sale revenue, we are focused on rightsizing the expense base to support the revenue profile of a go-forward business. We are consolidated (inaudible) offices to reduce the amount of noninterest expenses associated with renting these properties, and also we are exiting duplicative executive offices and centralizing those employees all within our headquarters in Orange County. In areas where we have excess capacity, we intend to lease this square footage out for additional income. We are streamlining our operations to realizing savings related to data processing licensing by rethinking how we use these platforms and pursuing options that made more financial sense. We are also going to do away with our company car program and other fringe benefits that are not directly related to enhancing how we service clients or conduct business. We have planned reductions in the professional services area that we will use as a cost-savings factor within our contracts, sponsorships and the amount that we spend on contract labor. In addition to taking a hard look at some of the assets, activities and benefits that we have, we have also been rethinking how we can be more efficient inside of our offices. Over the past quarter, we have been restructuring our businesses through organizational consolidation by rightsizing the shared services that support our business units through eliminating extemporaneous roles and also by merging analytical groups such as our business intelligence, business transformation and operational excellence teams. This realignment of our supporting departments will not only result in cost savings in the short run, but will also stimulate the collaborative and entrepreneurial culture that we have built over the past years at Banc of California and also better align our goals and internal performance targets over the mid- to long run. In March, we reduced our headcount by 153 employees as part of the sale of Banc Home Loans. And just yesterday, we announced an additional reduction of 55 employees. Though these actions are never easy on individuals and organizations. They are, however, needed at times to ensure that we are properly positioned to support the company in the future while providing the necessary staffing and value creation for our businesses. With this latest action announced yesterday, we have completed the entirety of our planned employee reduction initiative as required to achieve our internal staffing plan. During the first quarter, we completed a good deal of expense actions and although there are a few remaining in the second quarter, for the most part, the vast majority of the costs have been pulled forward as part of our quarterly results.

Slide 16 walks through our first quarter expenses for continuing operations. This continuing operations breakup is the best view of our businesses on a go-forward basis. All of the direct BHL and MSR revenue and expenses which were sold to Caliber are reflected as discontinued operations in the earnings release table. Our reported expenses for the first quarter continuing operations were $89.9 million and excluding the loss on solar investment totaled $81.2 million. However, it is important to note that this $81.2 million of first quarter expenses included numerous nonrecurring items related to the restructuring efforts as well as special committee, legal and audit fees. We have detailed a net $11.1 million of nonrecurring items within the bucket for the first quarter. Now let me provide some detail on each of these lines. First, salary and benefits of $32.4 million benefited by $5.1 million net during the quarter as actual 2016 bonus payments were less than accrued and resulted in a release of accrual in the first quarter. Given the quality of earnings and onetime items in 2016, management along with the compensation committee reduce many bonus payouts to align compensation with performance. As you saw a recently in the final proxy, for 2017, we have in place a quantitative compensation pay-for-performance plan for senior executives and we expect to push a similar methodology and structure down through the organization for 2017 compensation. And this is expected to align employee and management compensation with targeted financial metrics the compensation committee believes will align investors and management. The $5.1 million net benefit to salaries in the first quarter was net after the additional $2.75 million of severance expense associated with the departure of our prior CEO. Second, of the $15.1 million of professional fees, $7.5 million were associated with nonrecurring special committee, legal and audit activities. We believe the majority of these expenses have been incurred to date, however the second quarter may have some lingering expenses associated with these items. Third, the first quarter results include a restructuring expense of $5.3 million, which includes the severance expense associated with employee reduction efforts and active through yesterday. All other expenses included $3.4 million of nonrecurring items, including expenses related to the acceleration of equity rewards for (inaudible) director, goodwill impairment on the renovation-ready trade name, increased sub-servicing fees and costs related to MSR sold to Caliber and finally, fraud loss on ATM activities. Net of nonrecurring items and losses associated with investments in alternative energy partnerships, first quarter operating expense for continued operations totaled $70.1 million. We apprise this detail to share additional insight on the expense trajectory for the business toward the back half of the year. Starting from the $70 million quarterly run rate, we have a series of additional expense reduction actions to execute, including lower data processing expenses, lower occupancy expenses, and other expense reductions which we expect that should be reflected in the expense run rate throughout the remainder of 2017 and supporting our targeted adjusted efficiency ratio less than 60% by the fourth quarter. Our adjusted efficiency ratio for the first quarter was 79% on a consolidated basis. The adjusted efficiency ratio for the first quarter continuing operations was 71% when adjusted for the $11.1 million of nonrecurring items this quarter.

With that, I'd like to hand it back to Hugh to discuss our asset quality, capital and outlook.

Thank you, Fran. On to Slide 17, in the first quarter, our asset quality continued to remain strong and stable. Nonperforming assets to total assets are down from 46 basis points from the prior year's quarter to just 18 basis points today. Our ALLL to nonperforming loans covered ratio has increased from 81% a year ago to 263% at the end of the first quarter. Our nonperforming assets to equity continue to remain strong at just 2%, a decrease of 61% from the first quarter last year and we saw our total delinquent loans decline below 1% of our total loans. Additionally, our ALLL to total loans ratio increased 3 basis points over the quarter.

Slide 18 highlights our nonperforming assets to total assets compared to peers, where we continue to rank near the top of our peer group.

Slide 19 takes a look at our capital position. As you can see, our common equity Tier 1 capital ratio remained near to 18-month peak in the first quarter at 9.4% and total Tier 1 risk-based capital in Q1 totaled 13.1%. Our capital ratios exceed Basel III fully phased-in guidelines. This strong capital level allows us to continue to support the organic growth of our business throughout the year. With our projected earnings generation and balance sheet growth, we do not need to access the capital markets to execute our plan for 2017 and intend to continue utilizing our own internal capital generation to fund asset growth.

If you turn to Slide 20, we remind you of the outlook we've provided for 2017 and fourth quarter 2017 run rate targets for ROAA, efficiency ratio and total assets. With the numerous strategic actions we have completed in the first quarter, and our plan for the coming quarters, we believe the fourth quarter run rate targets we have provided are achievable. Thank you for your time today. That will conclude our formal comments.

We would now like to open up the line and take your questions.

(Operator Instructions) And the first question will come from Jackie Bohlen of KBW.

I was wondering if we can start on deposits. If you could just provide a little bit of color on some of the fluctuations that took place during the quarter on both on end and the period on an average basis? And then talk to where wholesale deposits stood at quarter end and where you could see those trending? And then also just what impact that had on the change in deposit costs during the quarter and what impacts you're seeing from the March rate increase?

Sure. As mentioned earlier the deposit decreased $544 million, but overall we were up $1.8 billion from year-ago. So broker deposits went down $236 million and I was conscientiously permitted base the run down of some of the broker deposits from the CDs. If you think of the remaining $300 million approximately $100 million was EB-5 related, again when there are successful projects those funds are dispersed into projects and then correspondingly you can think of the remaining $200 million, they were primarily financial institutions or fiduciaries that had timely filing of financial requirements. So basically, during the period of time, when we remedied or until we remedied the filing of the (inaudible). That being said, many of those funds have come back. In regards to the evolution of the broker deposits, because we mentioned in some of our visits over the past couple of weeks, you'll see that continue to go down over the quarter. We’re continuing to build our core deposits and specifically, if we look at the wholesale function, again, I think over the period of time, we believe that with our businesses and the individuals that we have added we will be able to continue to grow our core deposits over the course of 2017.

And then -- that's helpful. And so would you expect that from this point in time and given the non-timely, now that all the reports are out and everything, you mentioned some of those would come back. Would we see net deposit growth in 2Q do you think or is that something where some of the concentration on what do you think broker and wholesale might still cause a net reduction?

Sure. So yes were focus on the sale in Q2. But again the duration of the [collectively] 2017 and growing into '18, with that being said, we do view broker deposits going down over time and based on the efforts and the incentives that we're providing internally, the core deposits will go up.

Okay, fair enough. And then looking at deposit costs in the quarter, how much of the increase was mixed driven within the different accounts and how much of it was related to the December rate increase?

I think you're going to see a little combination of both. I'd say on our side there were some of the relationships that had some peg towards or percentage of the peg towards the rate increases. So you saw some of that. There was a capital fluctuation in the non-interest-bearing deposits, although minimal associated with, again, some of the added 1031s that converted or EB-5s, which went away and therefore allocated to a portion of that increase. But overall, I'd say, probably 50-50 regards to the allocation between both.

And how was the -- how does the March rate increase look for you in terms of deposit pricing?

Again, it's somewhat influenced, but it was primarily influence on our larger financial institutions, not in the smaller, more granular core deposits.

And would you expect a similar magnitude increase in the second quarter? Or with the flow in of those deposits back from the timely filing with the uptick be less?

Again, over -- even with the incremental increases, we do believe that our business model, mid flat to down, again, over the consecutive quarters.

The next question will come from Timur Braziler of Wells Fargo.

Maybe starting on the expense days, looking at the stripped out number of $70.1 million for the continuing ops on the run rate. I guess, what portion of the cost saves are included in that number relative to where you're going to be at year-end and then the remaining component of that cost saves, how fast are you going to be able to realize that, is that all going to be realized in the second quarter or is that actually going to take the remainder of the year to fully realize the remaining cost saves?

Sure. So if you were -- if you think it, that really, $70.1 million is at starting base to give you an example, if we think of the risk -- the risk for the reduction forced the employees, that those costs were able to be brought forward into Q1. So again, it's one of those things -- this is the starting point and we'll see it decrease over the following quarters. If you think of data processing, the real estate efforts that we're doing in the other expense reduction, those will also come in gradually over the 2017 period. Again, primarily into Q2, Q3 and a tad bit in Q4. But again, if we look at, we've indicated that we believe the efficiency ratio on a Q4 run rate basis will be under 60%. You'll be able to see how that flows throughout the year to get that Q4 number.

Okay. So there is just kind of looking at what percentage has already been captured, that's not really the way we should be looking at. We should be looking at it more from an efficiency ratio perspective at year-end?

That is correct, yes.

Okay. And then maybe circling back to one of Jackie's questions on deposits. Looking at the remaining brokered book, how fast is that runoff and is the expectation that the growth in core deposits is going to be able to offset that runoff, or are we going to see some additional increases in wholesale funding?

I do believe the wholesale funding, you'll see that flat to down over the next consecutive quarters and we do believe that right now, that our core funding, again, over the next Q2, Q3, Q4 will be able to offset in over a period of time increase over those corresponding deposits.

Okay. That's good color. And then Fran, if I could, just one more, you had mentioned that securities deposits -- securities balances are likely to remain elevated to some extent as you look to offset the runoff of the held-for-sale business with that sale. I guess, just looking forward, how should we look at that securities line item and revenue in general, I guess, what's the revenue assumption in kind of driving that 60% efficiency ratio?

Yes, it's Hugh. I think the higher level response to that is the securities portfolio is providing a nice revenue generation component as we transition over the next period of time. As we succeed in grow our C&I loan portfolio, we will remix the left side of the balance sheet and have those securities come down. So we're not going to provide specifics with regard to how quickly but by year-end our expectation would be that the securities book would start running down, probably flat for the next quarter or so and then run down. And frankly, depending on the success of our C&I growth and our traditional engines of growth in the C&I business, if our C&I growth is more fulsome, we'll take the opportunity to remix and bring that securities book down more quickly.

Our next question will come from Andrew Liesch of Sandler O'Neill.

Just some follow-up questions, there's some clarification questions. The loans that are currently in the held-for-sale bucket, that $228 million, is that all tied to Banc Home Loans and expected to go to 0 to this quarter?

Actually that's the portion associated to [jumbo].

Okay. So the assets have discontinued operations are the ones that are to Banc Home Loans, correct?

Correct. That is correct. That's the approximately $400 million.

Okay, got you. And then on the expense base, we've heard $170 million of cost saves. If I look at last year, not including the expenses from the tax credit partnerships from $411 million. So is the $170 million of expenses off that $411 million number?

So, yes, the answer is you can allocate it that way. But I think, really, the best way, if you think of the modeling going forward, is really to look at Slide 16 and start with that Q1 $70.1 million going forward.

Okay. And then looking into next year, just on the tax rate, obviously, the tax credit partnerships this year, I would imagine that continues throughout the year. But what's the outlook for 2018, are you going to go back to normalized tax rate, are those expenses for the partnerships going to go away, how should we be looking at the 2018 tax rate?

So I think we're (inaudible) for 2018, you'll see us gradually migrate to a more normalized rate that are in alignment with our peers. I think that right now, we can indicate somewhere between the 25% to 30% range as the normalized tax rate for Banc of California in the 2018 period.

The next question will come from Bob Ramsey of FBR.

Just sort of following the 2018 tax question. When you guys said you're on track to achieve a sustainable ROA of 90 basis points by the fourth quarter, are you in that same sort of tax rate range by the fourth quarter of this year as you are next?

So we're not, actually. If you look at the investments that we made in the solar investments, you'll see that probably we'll have a minimal tax rate throughout the 2017 year. So therefore, I'll start to apply to the ROA and factor in that 90 basis points.

Okay. But is it fair that as you go into '18, maybe the minimal tax rate does have the higher operating expense in 2018, as your tax rate normalizes, the operating expense eases and that there's an offset there?

Not sure if I understand the question. Sorry about that, Bob.

I guess, I'm saying you have the low tax rate, but the cost of it runs through your operating expenses, right? So as the tax rate normalizes, that expense should move lower, right?

That is correct. Yes, Bob.

Okay. So it's not -- when you talk a sustainable ROA of 90 basis points in the fourth quarter, that's not sort of how -- that doesn't have tax benefits in there that are likely to be a big headwind as we go into '18, it is sustainable, right?

So what I'd say is, it does have some of the tax benefited during the '17 period. But based on the growth of business, again, the elements are -- we think are the earning power of the franchise, it offsets itself gradually through the 2018 period, to get to that normalized 25% to 30% tax rate.

Okay. I know you guys have been asked a couple of different ways about expenses. Of the $170 million, how much of the $170 million is already in the first quarter $70 million number, and how much more is yet to be extracted?

So I think the vast majority of that is you're seeing it in that first quarter. What you're going to see, as I mentioned before, the personnel cost, which would be significant or most primary element is in that Q1 number and you'll see a gradual decrease, again, with the data processing, the real estate, other expense reductions, through Q4. But, again, that's starting basis at $70.1 million on Page 16.

Okay. I guess, personnel, though, you should still get some lift, if you all just had layoffs yesterday, right? That wouldn't be in the first quarter number.

So, it's actually been pulled forward into the first quarter. You'll be able to specifically identify those costs and correspondingly, you'll see that the vast majority of the personnel savings have been brought forward into Q1.

Okay. So, of the $170 million, you're just saying the vast majority is already in the run rate, you can't quantify a little closer on what's yet to be achieved?

Not at this point in time, but you're heading in the right direction.

Okay. I guess, also -- I don't know if this is better for you or for Hugh, but last quarter, I think, Hugh, you had guided for $2 of EPS in 2017, doesn't look like that is the part of the guidance now. So I can appreciate the mortgage sale will have an impact. I'm just kind of curious, though, if you can comment about what has changed between now and January around that $2 EPS target, how much maybe the mortgage sale pulls out of it and what else has changed?

Yes, I can start and Fran may have some additional comments. But, obviously, we had a very significant change in strategy with the disposition of our Banc Home Loans business. The guidance that we issued needed to be amended to reflect that change in strategy. We've issued an outlook, which we reiterated and we issued a Q4 run rate. This is really a transition period of time for the bank. And some exciting time, and a time that we're highly excited about the opportunities that we have to really demonstrate the core growth aspects of California and our franchise. The 2 key elements that we're going to continue focusing on is really increasing spread based, strong spread based commercial and industrial loans and really continuing to focus on expense management and efficiency and we're confident that as we go through this transition period, we'll be back to the levels that we had earlier estimated, but give us some time to get there and allow us to execute on the plan on the short-term.

Okay. Last question and I'll hop out. But I know you all had reference in the release, new pay-for-performance measures for executive management. Just wonder if you could elaborate a little bit on what are the key targets for executive management's variable comp?

Yes. I appreciate that question. To really bring the executive compensation more in line with better and best practices, the board and management instituted a pay-for-performance regimen. It was combined with a number of governance enhancements across the organization, including realignment of board compensation. The details are all listed in our proxy, but effectively, there's a concept of gaining items including capital levels that are consistent with the plan. And then core aspects that we believe and the board believes, drives value. So core deposit generation and growth, return metrics, asset quality metrics, those types of factors that would be very consistent with the running of an effective and efficient bank.

The next question will be from Ebrahim Poonawala of Bank of America Merrill Lynch.

Just wanted to clarify the 90 basis points ROA. Does that include the tax loss on the tax credit or excludes that, when you think about the 90 basis point ROA?

Sure. View it as a net number that does include those tax advantages.

So the tax advantages include and it assumes a near 0% tax rate, correct?

It assumes a minimal tax rate.

Perfect. Understood. And on the margin, I'm just looking at it just because of tons of moving pieces, when you look at the earning asset yield about $390, cost of the interbank deposits about 88 basis points. Is the core margin, as you think about maybe coming into 2Q, is it somewhere around 305?

So I think, more so, we're about to drive that conversation just what we're seeing on the loan production yields. So specifically, if you think of the fact that we're not growing for growth's sake, it's very, very specific. Anything we're originating, we primarily want to maintain on balance sheet. And so by doing so, we're able to maintain the same type credit boxes but be selective and disciplined around pricing. So what you're seeing there is that point of inflects that you see on Page 9 for the first time, frankly, in many, many quarters, you're seeing loan production yields above the portfolio yields in Q1. So at this point in time, over gradual a transition period, we believe that trend will likely increase. So that's corresponding kind of what you're seeing and what's contributing to the NIM collective company. As Hugh mentioned earlier, there is a concerted effort to make sure that we can appropriately price deposits that, again, our intent is to maintain over a period of time, flat to down, of our depository costs.

Understood and just going back in terms of on deposits, when you think about the runoff in CDs for the rest of the year, can you sort of quantify in terms of the schedule of what's the expected maturity in the second quarter and for the rest of the year?

So at this point in time, we haven't shared that. But, again, as we mentioned, we do believe that the growth of deposits over a period of time, should be able to offset, in a proportional fashion, that CD runoff.

Okay. So there could be another quarter where we could see overall deposits go down, but over a period of 4 to 6 quarters it sort of evens out, is that the way to think about it?

I think the way that we're looking at it is how we're progressing collective through '17 and into '18, so we won't specify any particular quarter at this point in time.

The next question will be from Gary Tenner of D.A. Davidson.

Couple questions, first, I guess, again, on the energy investments. What is the expected quarterly run rate for the loss through the expense line? Is it similar to this quarter or should it be trending down quarter by quarter?

So you should see it trend upwards during the period of a year, but that being said, you'll see it be in alignment again, with what we're indicating of the minimal tax rate. But again, you will see it going upward somewhat throughout the year.

It will go up from 8.7 this current quarter.

That's correct, yes.

And then on the expense outlook and efficiency ratio, just looking at your outlook for the fourth quarter run rate, you highlighted efficiency ratio below 60% and the footnote says that it includes the pre-tax effect, so is that -- if I was going to look at this quarter, would that be the adjusted efficiency ratio of below 60%, if that was going to be equivalent to this quarter $70.1 million or the $78.8 million, including the cost on the energy investments?

The $70.1 million.

It would be the $70.1 million. So that efficiency ratio, it says includes it, but just wanted to confirm the outlook there. And then last for me, again on sale outlook, once you get through kind of whatever's in the pipeline on the held-for-sale piece now, there was some discussion in the past, I think, that would maybe be some ongoing nonmortgage gain on sale, as you manage the balance sheet and funding, et cetera. Is that still part of your outlook as you get through the fourth quarter and you model out and budget your revenue and efficiency ratio? Or does that assume gain on sale?

So again, there's a concerted effort to shift away from the gain on sale model that was historically associated with institution. So what you will see is, for example, SBA is a gain on sale outlook, but that being said, it's core commercial C&I business, so you typically see that being cyclical, being kind of a Q1 and a Q4 event, so that's an example. On occasion, there will be a necessity to remix some of the residential portfolio sales, so that may be sold and then one of the elements is that there is a small portion of an earnout which I'll -- of no cost to us, occurs through the next 3 years, associated with the [Caliber] home loans. But again, what you're going to see is a significantly lower going forward gain on sale.

And what I would just add to that is, that from time to time, for risk management purposes to manage to our concentration limits, we will selectively look at opportunities within various sectors and take that opportunity to sell those loans to maintain appropriate internal concentration limits.

And the next question will come from Tim Coffey of FIG Partners.

First, I just want to thank you for all the color you provided today. This is really good insight into what you're doing and the changes you're making. On one of the slides, it might have been the last one, there was discussion about keeping the single family residential mortgage loans held for investment below 35%. They're currently there right now? Are you meant to maintain that percentage or are you planning to maintain current balances, rather, or are you considering doing some kind of big sales?

I will take it and hand it over to Fran for additional detail. Really, what I guess we'd say is, we still, in focusing on entrepreneurs businesses in our communities, the residential mortgage product is still and will remain a component of our product offering to serve our California communities. The better way to think of it, I believe is, that the mortgage business will stay reasonably flat in size and the commercial bank will continue to grow around it. So as you see the overall concentration of mortgages, as we move forward through the next couple of quarters and year, the business will still remain one of our core portfolio businesses, but the commercial industrial loans will outpace and therefore, on a percentage basis will result in a lower percentage.

And then looking at the fiduciary deposits, do you have a number for the balance of the fiduciary deposits?

It's not something that we share at this point in time.

Okay. In the 10-K, you discussed the amount of, I think they were fiduciary deposits, they were balances were $100 million or more. Can you give me an idea of how many accounts those are and what the dollar value of those are?

Sure, so at this point in time, not something we've disclosed. Look, it's a portion of our business that has grown over a period of time. But again, we haven't disclosed numbers around that.

Sure. I understand. I was trying to get a better idea of that business. The EB-5 deposits that came down this quarter, you described it as just a natural runoff as projects were completed and funds allocated to new projects. Is EB-5 something you plan on maintaining, growing or shrinking?

I would say it's a business that, as we've indicated before, between the escrow and operational accounts, hovers around the $300 million level. It really hasn't changed for the past couple of years. So I think you'll see it probably flat going forward. So, again, as we continue to grow the institution, it will likely become smaller proportion or probably maybe some -- maybe pro rata going forward.

Okay. And then more of a conceptual overview question here. You made a lot of changes in 1Q to the business model and to the company and you're continuing to make them. What are some of the challenges you're experiencing in terms of making these changes and making sure you're not making -- are not doing more changes more quickly?

Yes, it's a great question, actually. As we go through, the most difficult portion was the reduction in FTE. Obviously, we have great employees who have worked very hard and have helped build a fantastic bank focusing on our core communities. It's one of the hardest and most challenging things we've needed to do, but it was necessary. And as a part of that process, we've had continued and we have had great communication with our constituents, our employees and others to ensure that even though that's a difficult process, everyone understands the need and the repositioning and scaling of our efficiency to match the commercial business profile that we have going forward. So I'd say, one of the challenges, one of the greatest challenges we’ve had is being extremely thoughtful about the amounts and where we took those FTE reductions to ensure that we had a very viable and strong and robust internal control framework and the necessary people that we would need to continue to grow the organization.

The next question will come from Don Worthington of Raymond James.

In terms of the shift to a greater focus on commercial lending, I guess, maybe this question is for Hugh. Do you see any change in, say, provisioning or reserve levels, as the portfolio mix changes?

Yes, it's a great question, Don. So this quarter, we took the opportunity to enhance our ALLL methodology. Historically, we had a 28 rolling quarter time horizon and we moved and enhanced to a [peg] concept, which extended that look back period if you will and really put a peg in and captured more of a complete and full economic cycle. So number one, that enhanced methodology led to a slightly increased ALLL this quarter as it represented our best estimate of the necessary and appropriate reserves. As we remix the balance sheet, and move to C&I loans, as you know, the ALLL provision is typically higher C&I loan, commercial real estate loan than a residential mortgage. So as we continue to remix the balance sheet and add C&I loans, you'll see the ALLL numbers go up on an absolute basis and you'll see the ALLL coverage go up almost hopefully largely attributable to the mix shift. We don't see significant changes in the strength of our markets, unemployed real estate, all of that is benign, stable or continuing to improve. So the change holding all things aside from a macro standpoint, would really be attributable to that mix shift in the portfolio.

Okay, great. And then the increase in FHLB advances during the quarter, was that basically to fund the deposit outflow on a temporary basis? And I assume those are probably short-term borrowings that would be paid down if they haven't been already.

Yes, another good question. We took the opportunity, as we said last quarter. We're starting to move the bank more towards an asset neutral to slightly asset positive position. We're not there yet. But one of the initiatives we took in Q1, was to layer in approximately $100 million of 10-year Federal Home Loan Bank funding to increase duration on the right side of our balance sheet to bring the bank closer towards that asset neutral position. We will also continue to use the Home Loan Bank funding, which is an attractive not only source of funding from a cost standpoint with the dividend brought in, we'll use that Federal Home Loan Bank financing to match fund longer duration commercial real estate and residential mortgages as we move forward. So the bank will manage its asset/liability more actively in a rising rate environment and part of that asset/liability management will be match funding to the use of Home Loan Bank funding.

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back to Hugh Boyle for his closing remarks.

All right. Well, thank you all. We're very excited to have Doug Bowers join us as President and CEO, and look forward to working with them to continue moving Banc of California forward. We're also very excited to continue demonstrating the strength of our organization as we remix and become more of a traditional bank. As always, thank you for your support and we look forward to speaking with you again next quarter.

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.