Banc of California Inc (BANC) 2017 Q3 法說會逐字稿

Good day and welcome to the Banc of California Incorporated Third 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 Mr. Timothy Sedabres, Director of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us for today's third quarter 2017 earnings conference call. Joining me on the call today are Banc of California's President and Chief Executive Officer, Doug Bowers; Chief Financial Officer, John Bogler; and Chief Risk Officer, Hugh Boyle.

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.

And now I will turn the call over to our President and Chief Executive Officer, Doug Bowers.

Thank you, Tim. And thank you, everyone, for joining our call today.

Before I get started, I would like to take a moment to introduce John Bogler, who joined us last month as Chief Financial Officer and just passed his 50-day mark with the company. John brings 30 years of experience in the broader financial services sector including extensive CFO experience and deep knowledge of the Southern California market. We are delighted to have John onboard and I will turn the call over to him in a few minutes to talk in more detail about our financial results for the third quarter.

On last quarter's call, I shared some comments on the beginnings of some significant business transformations we are undertaking and that we are in the early days of those efforts. During the third quarter, we completed numerous actions designed to further remix the balance sheet and focus our efforts on new business generation.

As we move forward, we have multiple levers to pull while we reposition including remixing the balance sheet increasingly towards core assets, reducing our reliance on high cost of funding, accelerating our organic loan production activities and remaining diligent in our expense management. The combination of these efforts could result in a few bumpy quarters as we continue to move towards a balance sheet that is more traditional on the asset side and more core-funded and less volatile on the liability side.

We are working hard on these efforts (technical difficulty).

Please hold on for one second. We are having an audio difficulty.

Well, welcome to live television. Let me pick this back up. Good morning, everybody. So I'm going to return back to our commentary and turn it over to John, then we'll come back for Q&A just as we said.

Held-for-investment loans increased by $271 million, or 5%, from the prior quarter. Originated loan balances are up $328 million from the prior quarter and have increased by $677 million, or 14%, year-over-year. Our teams are hard at work at generating high-quality loans that fit well within our risk appetite. However, we still have more work to do in this regard in order to continue to grow loan balances to supplant non-traditional investment securities and to drive growth of higher-quality earning assets.

We have been diligently managing our expenses, which, for the third quarter, excluding a loss on solar investments and non-recurring items, came in at $59.1 million, which was below the target at $60 million which we shared last quarter. The quarter did include $8.2 million of non-recurring expenses. These non-recurring expenses continue to come in much higher than we would like, which John will detail later in the call. We intend to be laser-focused on expense management where we can be and we are well on our way to evolving toward an expense-minded culture. As we continue to gain efficiencies, I would expect a good deal of these savings to be reinvested into additional relationship managers and front-line sales producers to continue to grow originations and drive deposits and revenue growth.

Credit continues to be quite good here at Banc of California with non-performing assets to total assets of 0.16%, down 50% from a year ago. Capital strengthened again this quarter with our common equity Tier 1 ratio at 9.9% now, the highest level in over 3 years.

One of the highlights I'm most proud of has been our exceptional ability to recruit talent and build a strong leadership team. Since I've joined, we have added John Bogler as our CFO, which, let me remind you, the company has not had a permanent CFO in place for nearly a year. We added Jason Pendergist to head up our bank-wide real estate banking activities. And earlier this week, we announced the addition of Rita Dailey as EVP, Head of Deposits and Treasury Management Services.

Jason brings with him both deep knowledge of the Southern California real estate markets and understands the unique deposit opportunities across the real estate space. He knows these markets very well, has a great credit mind and brings full engagement in the deposit-gathering activities.

The addition of Rita has very similar rationale. She knows these markets very well, having operated them for over 20 years, and represents the first time this bank has had a dedicated executive focused exclusively on deposit-gathering activities. She checks all the boxes you would want: traditional commercial banking deposits, treasury management and payments, in addition to a unique background focused on select specialty deposit arenas such as title and escrow, which are uniquely suited to our core markets here in California.

These recent hires exemplify the phenomenal talent that is and continues to be attracted to Banc of California. Through all of this bank's challenges, we have come through with a great brand and a wonderful opportunity to recruit. Just consider for a moment where else top bankers in Southern California market might go. With a balance sheet sized to be relevant, with the opportunity to join where we are in our transformation, where we can be part of something great and play a substantial leadership role in the future of this bank, whether it's establishing a deposit vertical, scaling and accelerating a loan portfolio or building a full suite of product capabilities.

I have been recruiting a lot and we surely get many, many more resumes than we could ever take on. We are a top prospect for many potential hires and I stay tuned in that regard -- and I would say, please stay tuned in that regard as we have much more banking talent in our pipeline and you should expect to see continued key additions.

With all that being said, I can assure you it is my distinct pleasure now to turn this call over to CFO, John Bogler, to cover our financial results in greater detail. John?

Thank you, Doug. I am pleased to be joining the call today as part of Banc of California. Before I talk about the third quarter results, let me take a minute to share a few points on the opportunity that attracted me to Banc of California.

I've been in this market for nearly 20 years as a CFO managing institutions focused on the local real estate market as well as institutions operating diverse nationwide platforms that included specialty lending niches and traditional bank products, all of which has shaped my view on the strength and breadth of the opportunities in the Southern California market. Over the years, I was able to see from a distance the product set and asset size Banc of California had assembled. I believe there is a great opportunity for the bank to capitalize on our strong brand name and with size to compete.

As Doug mentioned, the strong credit culture was also positive for me; not having to undertake a credit cleanup story, but rather one that was about improving operations and building a profitable platform. With the refreshed board and having Doug at the helm, it helped to solidify that this was the right time to join Banc of California in the early days of its transformation.

Now, I will discuss our third quarter financials. Starting with the balance sheet, the third quarter continued to be focused on numerous actions designed to remix and reorient toward a more core and traditional asset base.

First, we reduced our securities portfolio by $159 million, selling $119 million of securities. Included in the sale were $87 million of MLPs, or 46% of that portfolio, at a gain of $5.7 million. Additionally, $32 million of bank debt was sold, or 58% of that portfolio, at a gain of $2 million. These sales were aligned with our strategy to reduce the higher-risk portions of the securities portfolio. At quarter end, we held approximately $100 million of MLPs and $23 million of bank debt, and we expect to fully exit these remaining positions over the next few quarters.

Second, held-for-sale loan balances declined by $229 million driven primarily by the completed sale of $144 million of seasoned SFR mortgage loans, which resulted in a $4.7 million gain. As of September 30th, we have no remaining PCI loans. Additionally, during the quarter we sold $6.5 million of SBA loans at a gain of $600,000, and $58 million of residential jumbo mortgage loans at a gain of $200,000. Going forward, we expect to portfolio the vast majority of our SFR production with selective sales in the ordinary course.

Third, assets from discontinued operations declined by $105 million, tied to the wind-down of assets related to the previously sold Banc Home Loans platform.

On the liability side, we are beginning to take action to reduce our reliance on non-core funding sources. But admittedly, the remix in funding sources will be more challenging than the remix of assets.

First, broker deposits climbed by $182 million during the quarter and we expect to generally see a decline in the balance of broker deposits over the coming quarters.

Second, we saw a decline of $515 million of what we have commonly called institutional banking deposits. These deposits were viewed as high-rate or high-volatility deposits and do not fit within our strategy of building core deposits. I would also like note that following the end of the quarter, an additional $500 million of institutional banking deposits were run off, leaving us with approximately $50 million to $100 million of remaining high-rate or high-volatility deposits that will run off over the next several quarters.

Our overarching goal is grow incremental core, low-cost deposit funding, but we recognize this will take time. In the interim, we will continue to utilize FHLB borrowings and broker deposits to supplement our funding needs.

It is important to highlight that even as we have had runoff of select deposits, our commercial banking, community banking and private banking units all increased deposit balances during the third quarter. Although modest and not to the level to overcome the runoff of institutional banking deposits, we are seeing early signs of traction for focused deposit-generation. With the addition of Rita and the deep attention by all of our bankers, we expect to see continued progress in growing core deposits.

Moving to core balance sheet activities, total held-for-investment loans increased by $271 million, or 5%, from the prior quarter, or an 18% annualized growth rate. During the quarter, we transferred $88 million of residential jumbo mortgage loans from held-for-sale into held-for-investment and we sold $46 million of residential jumbo mortgage loans. The net of these two resulted in $42 million of loans added to held-for-investment during the quarter. Of the remaining held-for-investment loan growth, $229 million was the result of new origination and production, which represented a 4% quarterly growth rate, or 15% annualized.

Over the past year, we have continued to remix the loan portfolio toward more core and lower-risk loans. The divestiture of the commercial equipment finance and the sale of the acquired seasoned SFR mortgage loans focused the company on more traditional core and lower-risk assets as acquired loans have declined by $1 billion from a year ago. Originated loans have increased by $900 thous -- excuse me -- $900 million, or 14% over the past year, and make up an increasing portion of the loan portfolio.

Perhaps more importantly, as the company divested these loans which carried higher coupons, the average loan yield initially came down into the fourth quarter of last year. However, increasing originated loan balances have now driven loan yield improvements to a level higher than a year ago. That leaves us with a de-risked loan portfolio with equal or higher expected returns that is comprised increasingly of core originated loans. Our focus going forward is to continue to grow this originated portfolio and grow loan balances to replace remixed securities.

Reflecting on the transition of the loan portfolio, over the past three years, the $3.9 billion loan portfolio has increased to $6.2 billion. The C and I portfolio, which had comprised 16% of the loans, has increased to 27% today, while residential mortgage loans peaked at 44% of the loan portfolio and have declined to 31% today. The result of this growth and remix is a much more diversified loan book focused on commercial lending businesses.

Total commercial loan balances, including C and I, CRE and multifamily, have grown to 67% of the loan book today, up from 59% a year ago. Commercial loan balances increased to $132 million, or 3%, during the quarter. Within the commercial loan category, multifamily loans increase by $72 million, C and I loans increased by $42 million and construction increased by $20 million. Continued growth of the loan portfolio remains a key focus of the management team, and although we are working to accelerate loan production efforts, we are pleased with the diversification of the loan book today.

Transitioning to the income statement, net income available to common stockholders was $11.8 million, or $0.23 per share. For continuing operations, earnings per common diluted share were $0.25. The results included a number of items that we want to call to your attention.

Non-interest income includes gains from the previously mentioned sales of MLP and bank debt securities along with the sale of certain loans also previously mentioned. As we continue to transition out of the MLP and bank debt portfolios, additional gains are expected to be realized.

In the expense section, $3.8 million of loss was recorded on certain CRA-related equity investments accounted for under the equity method of accounting. We also recorded approximately $3.9 million of severance-related costs during the quarter, which are shown in the All Other expense line item of the income statement. Additionally, the third quarter included $500,000 of non-recurring professional fees.

Lastly, I wanted to note a couple of tax items that affected the current quarter. First, in conjunction with the previously announced wind-down of the director advisory boards, certain options were exercised and resulted in a tax benefit of $500,000 with the associated expense recognized through equity. Secondly, as part of our normal tax return to provision true-up process, we recorded approximately $2.1 million of research and development tax credits related to activities from 2011 through the third quarter of 2017.

The net interest margin increased 6 basis points for the quarter to 3.15%. The yield on interest-earning assets increased 12 basis points for the quarter primarily driven by a 12 basis point increase in both loan yields and security yields. The cost of interest-bearing liabilities increased 10 basis points to 1.12% primarily due to an 8 basis point increase in interest-bearing deposit costs and 26 basis point increase in FHLB borrowing costs.

The composition of interest income continues to improve on commercial loan interest -- as commercial loan interest income now represents 50% of total interest income, up from 42% a year ago. Interest income from residential loans declined to 23%, down from 37% a year ago. Interest income from securities was 27% for the third quarter. However, we would expect this percentage to come down over time as we reduce our securities and continue to exit select components of the book such as the remaining MLPs and bank debt.

Total non-interest expenses for the third quarter were $75.7 million and included a number of items that we do not consider to be core operating expenses. In addition to the severance and equity method losses noted earlier, the depreciation expense related to the solar tax credit program is excluded to arrive at expenses from continuing operations, which totals $59.1 million. This expense level is below our near-term target level of $60 million.

We continued to experience a number of one-time expenses as we work through legacy items and move past prior legal and contractual settlements. We are hopeful to put these past us in the relatively near future. We still have a number of cost-saving items to action, which will not be focused as much on headcount reductions as was the case with the reduction in force efforts completed earlier this year, but focused on real estate rationalization, compensation programs, as well as reductions in contractors, consultants, legal and professional fees.

As we continue to bring down some of these expenses, we expect to reinvest a substantial portion of savings achieved into additional bankers, deposit gatherers, product specialists and other sales and front office personnel in order to support our initiatives and drive revenue growth. As we finalize our strategic planning efforts, we will share more around these items and our view on teams, people and products we are seeking to grow.

Looking at our adjusted expenses on an adjusted expense to asset basis, non-interest expenses to assets were 2.32% for the third quarter and are down from the prior two quarters. We recognize these are not industry-leading levels. However, they are in a range we think is appropriate for our balance sheet size and business mix today. Our adjusted efficiency ratio came in at 72% for the quarter. However, we think expense to assets is a better way to think about expenses currently as we acknowledge we have a revenue opportunity in front of us to improve upon and the efficiency ratio is affected by both expenses and revenue.

Our non-performing asset ratio for the quarter was just 16 basis points, down from 32 basis points a year ago. As asset quality metrics have been stellar for the bank, we would expect them to bounce around within a range, given the absolute low levels we are seeing today. I do want to note that we did have a $29 million C and I credit downgraded to criticized during the quarter. This credit is current and accruing. The borrower maintains strong financial resources and we believe we have more than adequate collateral. Non-performing assets to equity continued to remain strong at just 1.6%, a decrease of 57% from 3.7% in the third quarter of last year.

Delinquent loan metrics remain strong and delinquent loans to total loans ratio declined from 1.6% a year ago to just 50 basis points in the third quarter, which is where it also stood at the end of the previous quarter. Net charge-offs for the quarter were $874,000, or 6 basis points annualized as a percentage of loans. The allowance for loans and lease losses increased to $45.1 million and the ALLL to total loans and leases ratio ended the quarter up 1 basis point to 72 basis points and covered 367% of non-performing loans.

Our capital position continues to strengthen. Common equity Tier 1 capital ratio was 9.9%, which is the highest it has been in 3 years. Tier 1 risk-based capital totaled 13.8%, which is also at a 3-year high. All capital ratios exceed Basel III fully phased-in guidelines.

Given the company's current capital structure, including both common equity and a good portion of preferred equity, we hear questions from certain equity investors regarding our tangible common equity or TCE capital ratios. Both tangible common equity and tangible equity capital ratios have increased substantially over the prior 5 quarters. As compared to select peers, our TCE ratio was low. I would like to highlight a few items here.

First, our capital structure is admittedly weighted toward more preferred equity than peers given the company's history of funding growth with preferred equity when market multiples for common equity were weak. This has resulted in a capital structure that is: one, more expensive given preferred equity dividends, and two, more complex than other similarly-situated regional community banks. Our total common and preferred equity, or tangible equity, to peers is right in line and consistent with the peer median.

Given these strong capital levels, we feel very good about our ability to continue to execute our planned growth initiatives. While we do not require capital, as we finalize our plan later this year, we expect to be able to update you all with additional thoughts around our capital outlook and strategy.

That wraps up my commentary for the third quarter results, and I will hand it back over to Doug.

All right. Thank you, John.

We have talked about the transformation that is in process here at Banc of California. Several key items have been accomplished or are in-flight. These actions are centered on de-risking and remixing the balance sheet and very important management changes.

To review, in the fourth quarter of last year, the company sold over $600 million of acquired SFR mortgage loans and divested its commercial equipment finance business. In the first quarter of this year, the mortgage banking business, Banc Home Loans, was sold and was a significant transaction on the journey toward a core, sustainable revenue profile and one that was focused on commercial banking activities.

That same quarter, the former CEO of the bank departed. In the second quarter, I had the pleasure of joining Banc of California. Five new board members, including myself, joined in the last 9 months. Add to that continued remixing of the balance sheet where we sold over $400 million of securities including longer-dated MBS securities and a portion of bank debt.

This quarter, we sold another $119 million of non-core higher-risk securities including $87 million of MLPs and $32 million of bank debt. We completed the sale of the last of the seasoned SFR mortgage loans. We hired a CFO, a head of real estate banking and a head of deposits and treasury management services. We are continuing to look for opportunities to further bolster the management team and add to the bench strength of teams across the company. There surely are more balance sheet actions ahead of us, more hiring and bolstering of talent, but we are well on our way.

So what's next after all of this? Let me share a few thoughts. Over the next 90 days, we have five key priorities.

Number one: continue to remix the balance sheet. This includes pruning of high-risk securities such as the MLPs, CLOs and bank debt.

Number 2: organic loan growth. Earnings are driven by average earning assets -- interest-earning assets. We need to continue to grow loan balances and reenergize loan production efforts. Loans with a 4% handle are surely better than securities at a 2% or 3% handle.

Number 3: refresh our compensation philosophy. Know that we will realign all of our activities, objectives and compensation programs to ensure we are focused on growing deposits, core and low-cost, and making loans within our risk appetite and well-priced.

Number 4: deposits, deposits, deposits. This priority is critical, but it will take longer. Core, low-cost deposits are our mission and you can bet we have chosen to accept that mission. The addition of Rita is an early step in this regard to get the leadership expertise and focus in place to drive the deposit-gathering activities. As I have said before, building a premier deposit franchise does take time.

Number 5: deliver a strategic roadmap, Perhaps what many of you are most interested in; where do we go from here? How do we get there? We hear you and, to date, we have not delivered any meaningful guidance or outlook and that continues for just a bit longer. We are in the final throes of finalizing a 3-year strategic plan that will answer many of those questions. It may not be specific income statement level guidance or targets, but we do expect to share a series of thoughts and guideposts for our journey along the way in order to track our progress and success against. Look for that in the next 90 days as we dial in the pieces of our go-forward strategy.

Finally, let me remind you of what brought me here and why I come to work every day. We have a great brand operating in, perhaps, the best market in the United States, with substantial size to compete and strong credit and improved governance. Those factors attracted me here initially and are truer today than ever.

As I near my 6-moth mark, I have to tell you the opportunity in front of us is tremendous. Yes, there is substantial work to do and work that takes time that is measured in quarters not days. I firmly believe we can attain our goals by driving disciplined growth with a more core balance sheet, lowering our funding costs and managing expenses. My colleagues and I are surely up for this challenge and we are hard at working building California's bank every day.

That concludes my prepared remarks. Now, let's open it up to your questions.

{Operator Instructions). The first question comes from Jacquie Bohlen with KBW.

I just want to make sure that I understand the $8.2 million in restructuring. So there was the $3.9 million in severance costs and then the $500,000 in professional fees. Was the balance of what adds up to $8.2 million, was that in the tax items you missed or was there something else -- or that you mentioned or was there something else I may have missed in the prepared remarks?

It was related to certain equity investments that are CRA-related. Those were previously accounted for under kind of the cost basis and now we switched that over to an equity method of accounting. So as a result, the underlying losses from those partnerships, we recorded our portion of those losses. So you can consider that a catch-up that occurred in the third quarter.

Okay. So looking forward to non-recurring expenses, would you expect the same magnitude for the next, call it, quarter or 2? Or are those on a declining trend?

Certainly the catch-up in the CRA-related equity investments was a catch-up so I wouldn't expect any sort of kind of recurrence of that. But kind of going forward, as I've kind of been sitting in this chair for the 50 days, we're working through kind of the annual budgeting and strategic planning process. And as we go through that process and dig through individual expenses and take a look at our operations, we may conclude that certain charges should be recorded now, but you should view those as improving the go-forward expense base. So near term, I expect to see some one-off items emerge, but again, I would expect that those items would largely result in an improved go-forward expense base.

Okay. And is there the possibility for any additional severance going forward outside of any additional staff reductions you might decide upon throughout your planning?

Look, there may be. That's always an arena that gets a degree of attention. So I would expect that there would be a degree of additional severance costs along the way, at least near term.

Okay. So outside of these one-time, non-recurring items that could occur over the next couple of quarters and looking to the $59 million run rate, just based on your comments, is it fair to say that that's a good solid core run rate? That you'll achieve additional cost savings, but that we won't necessarily see those because they'll be redeployed into growth in personnel and infrastructure?

That's correct. What we have said is, is our core expense base, roughly $60 million per quarter. This is the second quarter in a row we hit that number. We do believe there are cost saves out there for us in all the arenas that John mentioned, but we also look to reinvest a lot of that back into the franchise.

Okay. And then just one last and then I'll step back. If you wouldn't mind just providing and update on your outlook for the alternative energy just in terms of how we should think about that expense going forward and the ramp-up in the tax rate as that kind of winds down.

Yes. There were a couple different underlying parties that were associated with this tax credit opportunity. And we've largely filled the bucket with one of the providers and that bucket was filled relatively quick. The second provider is a little bit longer-dated and slower to fill the bucket so we would expect that we we'll make investments over the next several quarters, which is longer than what the initial party took to fill their bucket. So I'd expect that from a tax credit perspective, it will start to slow down a little bit.

And maybe a bit of build on that. We know that these security -- or these credits are complex. We also anticipate not going forward with that strategy and that we will be on the road to being a more full taxpayer, in line with our peers, over the next few years. So there will be -- we will be a bit of a taxpayer in '18 and certainly much more in '19 and '20.

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

So just following up on the tax credit amortization. So from what it sounds like, it should be declining over the next several quarters and then the tax rate should be increasing. Is there a certain tax rate you think you'll be able to booking next year?

I don't -- well, we're not in a spot right now to provide that kind of guidance. And it's -- look, it's a number that does jump around a little bit. I think the key here is that we do not intend to invest in that tax construct going forward and that we intend -- as it runs down, you will see us participate in more traditional tax-related activities that you've seen in banks like us out there in the world, and that all of that will result in our tax profile increasing and looking more peer-like over the next several, several quarters.

Okay. And then just on the margin, just curious. What's the yield that you had on the MLPs? And as those wind down and get sold, is the yield pickup on loans going to be significantly greater?

So if you look on the earnings presentation deck, on Page 18, we detail the securities portfolio. And so the book yield for the third quarter on the MLPs was 5.29% and the bank debt was 5.16%. So as we transition out of those and into loans -- and our loan yield, at least for the third quarter, was 4.5% on new production -- so we'd expect to see a little bit of compression that results via that transition. And then the other component as we go forward is the CLO book, which has a yield, at least as of the end of third quarter, of 3.25%. So relative to our expected loan production yields, you should see some margin expansion as we transition out of the CLOs and into our core loan products.

Is the yield pickup going to be enough to offset higher funding costs?

I would say that as we make that transition, it's hard to kind of predict that here in the near term. There will be some selective pruning in both the MLPs and bank debt. Those will be kind of the first categories that will go out. So that will put some downward pressure. And then, to the extent that we see strong loan growth, we'll get some relief through margin expansion as we transition out of the CLOs. On the liability side, I don't see a whole lot of change in the cost of funds, absent kind of Fed funds rate changes, as we go forward, at least here in the near term.

Yes. The other thing I would add to that is, is keep in mind, broadly speaking, the goal here was to reduce, in a relatively short period of time, these more volatile, non-bank-like securities. And while today we enjoy a higher rate on those securities, the MLPs in particular, that can be a pretty volatile investment. So I appreciate the question around NIM and we're very, very focused on that, but we're also ensuring that the balance sheet is well-positioned.

The next question comes from Timur Braziler with Wells Fargo.

My first question is around the loan growth. Pretty strong rebound this quarter. I'm just wondering, given some of the commentary surrounding future loan sales, should it be expected that residential is going to continue driving future loan growth? Or was there something that happened this quarter that drove that result?

No, I think we'll continue to see growth across all categories. During the quarter, we had growth in every category with the exception of commercial real estate. And I would expect as we go into the coming quarters, we'll see growth across all of those categories. I would also expect that now that we have sold off most of the single-family loans, the seasoned single-family loans, there is just a small piece of that that may result in future sales, but for the most part, there will just be selective sales out of our single-family production.

Okay. That's helpful. And then just looking at the planned sales of additional both securities and loans, I see the $124 million within the non-strategic portfolio. You mentioned some trimming around the CLO book as well. Can you maybe quantify what the total number of remaining assets you plan of disposing over the next couple quarters, what that number might be?

The pace of the disposition of those categories, the CLOs, the MLPs and the bank debt, will largely be dependent upon the pace of our loan growth. So the faster we have loan growth then the faster these will be pruned down. Given that the MLPs and the bank debt carry a little bit more price volatility than the CLOs, those would be the first two categories that we'll look to work off the balance sheet as loan growth materializes.

Yes. Maybe to add to that. Step one, as we have said, is the MLPs and the bank debt. We've got a bit more to go around -- to get through all of that. And again, that's over the next few quarters. The CLOs is, over time, a bigger number to whittle down. And to be clear, those CLOs are well-rated, well-bid, floating rate. And while we do want to work the gross number down, it is -- it's not a bad security, if you will, or a security that contains the higher-risk elements vis a vis the MLPs and the bank debt. So we'll work all of it down as we get the loan engines more and more picked up.

Okay. That's good color. And one last one for me on the capital front. It looks like there's some higher-costing preferred that's coming due towards the back end of '18. Is the plan to replace that with common? And looking at the stock price where it sits today and the run it's had in recent months here, could we see that maybe front-run a little bit? Or just would love to hear your general thoughts around potential for additional capital here.

We continue to look at our kind of capital structure and our capital requirements. And certainly, as we're putting together the early stages of our strategic plan, we believe we have sufficient capital and we'll generate sufficient capital to support our operations on a go-forward basis. But nonetheless, we do recognize also that we have that preferred that becomes callable in September of next year and we're currently evaluating what our options are with respect to that. So we will continue to assess and see what makes sense, but we do recognize there's an opportunity to potentially lower our costs with respect to that instrument when it becomes callable.

The next question comes from Steve Moss with SBR.

On the -- just thinking about overall earning assets here as you remix to loans from securities. Should we think about total earning assets being relatively stable over the next year or so? If that's a fair assumption.

Well first of all, yes, there should be an important degree of growth, yes. Although, we have more work that we're doing so in terms of the planning process and our outlook on what the shifts will result in, in terms of an increased balance sheet.

Okay. And then with regard to the FHLB borrowings, are those overnight or are they fixed longer term?

They are overnight advances. As we continue to look at our overall interest rate risk profile and we make these changes on the asset side with the sale of the MLPS and the bank debt and depending upon the duration of the loans that are being added to replace those instruments, we may look to add some duration to the liability side. And we'll do that via FHLB advances by taking some of the overnights and laddering those out into longer durations.

Okay. And if I heard you correctly, judging by the runoff of deposits at the beginning of this quarter, the advances are around $2 billion at this point.

The FHLB advances were about $1.5 billion. And we'll look to make some changes in our broker deposits as well. But yes, that's a reasonable number.

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

I just wanted to ask kind of what the thoughts are around the cost of deposits. With the reduction in the third quarter of the broker deposits and some of what you guys term the higher-rate, higher-volatility deposits, I would have thought perhaps there would have been some moderation of the sequential increase in deposit costs in the quarter. But obviously on the money market side particularly, pretty significant increase. So can you talk about kind of what the relative rates were of deposits that left in the third quarter and early in the fourth quarter versus kind of your market rate right now?

Well, I'll give you just kind of a high level and then I would like John to get more into specifics. These deposits that we've described are indeed just that: high-vol, high-rate. And a way to think about it is that while we don't like the change in geography, you won't see an overwhelming difference in the NIM, neither up nor down necessarily. So again, kind of giving you a sense for the cost of some of those more volatile deposits. But that's kind of the highlight level.

Yes. And just to add a little bit more to that. The way we think about those institutional banking deposits, to use that term, is those deposits can be callable by the depositor. And so part of our objective here was to make sure that we had a little bit more control over our funding liabilities. And so by moving into FHLB advances, that gives us a little bit more control. So that's kind of our first phase. And then, the second phase, longer term, will be, again, to start to transition out of those wholesale-type liabilities and more into the core deposits. But that's certainly going to take a long period of time.

Okay. And as you think about your deposit betas on a go-forward basis, it looks like based on the June hike, it was around 40% or so. Do you suspect that if we get a December hike the reaction of your deposit costs will be similar in the first quarter?

Yes. I would expect to see a similar type of reaction. Thinking back to the prior comment, though, we are liability-sensitive. And so to that extent and to the extent that we extend out duration on FHLB advances, we won't see kind of that same kind of bump every time there's a Fed rate increase. It will be, I guess, softened a little bit because we'll have the longer-duration advances.

And look, all of that speaks to the organic deposit growth pursuit that we have underway here and why we're so focused on all of that, because we're susceptible to the rate side in a pretty important way.

Okay, great. And just one last question, if I can. Can you tell us what the commercial loan originations were this quarter versus the second quarter?

I don't have that off the top of my head here. $840 million.

And do you know offhand what that was in the second quarter?

$719 million in the second quarter.

(Operator Instructions). The next question comes from Tim Coffey with FIG Partners.

So did I hear right that since June 30, the institutional banking deposits have dropped by $1 billion?

Yes, that's close.

Okay. Does that kind of decline in the liability side of the balance sheet cause you to accelerate some of the repositioning on the asset side? Or is that just that side of the balance sheet just moving as you go through it and remix it?

Well, Tim, it causes us to do a couple of things. One, it causes us to obviously focus on our institutional funding sources and ensure that that is all in a good place, as we've described. And it also causes us to focus more on organic deposits through the baseline franchise that we have.

Okay. Sticking on the liability side, what are the total balances of broker deposits right now?

About $1.2 billion.

With some of the other changes on the deposit side right now, could those balances go higher in the next couple quarters?

It's potential. Certainly as we start to see growth in our kind of organic deposit base, we would expect to see some of that run off. Our overall long-term objective is to continue to drive that balance down.

And then one more question on institutional banking deposits. How are those categorized within the deposit portfolio?

They are in the interest-bearing deposits.

And then on the loan yields that you saw in the quarter, was there anything non-recurring in nature in there that potentially we won't see next quarter?

No, nothing that I would call non-recurring.

(Operator Instructions). The next question comes from Adam Hurwich with Ulysses.

Quick question regarding Slide 18. You measure common equity against tangible assets and I'm curious how your loan to tangible asset ratio measures against the peers that you have in that slide and whether or not that ratio is relevant to your capital ratio.

I'm trying to catch up with you here. So you said Slide 18. That's our securities.

Oh, it's 13. I'm sorry. 13.

All right. If you wouldn't mind just re-asking that question.

Okay. You've got tangible equity to tangible assets and then you have peers on that measure. Your ratio of loans to tangible assets I think is lower than those peers. So the question is whether or not because it's different, it's lower, whether or not there is some adjustment that should be made given that there's a risk component to the capital ratio.

I'm not sure I fully follow the question, but if you're questioning --

Let's step back for a second, okay? I'm not being clear. Your -- one would argue that in addition to your underlying loans, there's a liquidity component to your balance sheet. With just over $6 billion in loans and over $10 billion in assets, the question is, is in that, between the total loans and total assets, how much of that liquidity is necessary? And in addition to which, risk-weighted assets are measured more heavily against loans than they are against the liquidity. So the question becomes one of on a regulatory capital basis, which is what we're all trying to understand, whether or not you're understating the strength of your capital position because the ratio of loans to tangible assets is lower than it is for your peers?

Right. Yes, so as we look at our asset base and focusing on the assets there, we acknowledge that we have the MLPs and the bank debt and an outsized CLO portfolio. And so as we generate loan growth, we'll be able to transition out of those asset categories. So if you think of it in that sense, if we didn't have those kind of the grossing-up of the balance sheet, if you want to call it that, the capital ratios would improve because right now we're, I think it's 27% of our balance is in securities. And if you look at kind of a peer group, that ratio drops something closer to 15% to 17%. So we do have a grossing-up and if you removed that, that would improve the capital ratio that you're referencing. So as we move forward and we are able to transition out of those lower-risk-rated assets and into traditional commercial loans, which will be higher-risk-weighted, we should see a little bit of a downward pressure as we make that transition, which will be offset by organic growth in our equity base through income.

And should we keep that in mind when you can call back the preferreds on whether or not you actually have to replace those?

That will certainly be a consideration as we go forward. Yes, I'll leave it at that. That certainly will be a consideration.

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

Thank you very much. We appreciate the questions and the time this morning.

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