Banc of California, Inc.
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good day, and welcome to the Banc of California First Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [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.

[Tim Sedabres:]

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.

[Doug Bowers:]

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 its 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 its 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.

[Hugh Boyle:]

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

[Fran Turner:]

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 three primary drivers to support net interest income growth

[Hugh Boyle:]

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 three 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:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] And the first question will come from Jackie Bohlen of KBW.

[Jackie Bohlen:]

Hi. Good morning, everyone.

[Hugh Boyle:]

Hey Jackie, how are you?

[Jackie Bohlen:]

Doing well. How are you Fran?

[Fran Turner:]

Good thanks.

[Jackie Bohlen:]

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?

[Fran Turner:]

Sure. So 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 rundown 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 Q and K, those funds temporary lapped. And 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.

[Jackie Bohlen:]

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?

[Fran Turner:]

Sure. So, Sure. So again, 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.

[Jackie Bohlen:]

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?

[Fran Turner:]

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.

[Jackie Bohlen:]

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

[Fran Turner:]

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

[Jackie Bohlen:]

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?

[Fran Turner:]

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

[Jackie Bohlen:]

Okay. That's helpful. I'll get back in queue.

[Fran Turner:]

Thank you, Jackie.

[Operator:]

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

[Timur Braziler:]

Hi. Good morning, gentlemen. 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?

[Fran Turner:]

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.

[Timur Braziler:]

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?

[Fran Turner:]

That is correct, yes.

[Timur Braziler:]

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?

[Fran Turner:]

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.

[Timur Braziler:]

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?

[Hugh Boyle:]

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.

[Timur Braziler:]

Okay. Thank you for that.

[Operator:]

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

[Andrew Liesch:]

Hey guys. 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?

[Fran Turner:]

Actually, that's the portion associated to jumbo.

[Andrew Liesch:]

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

[Fran Turner:]

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

[Andrew Liesch:]

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?

[Fran Turner:]

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.

[Andrew Liesch:]

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?

[Fran Turner:]

So, in regard to 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.

[Andrew Liesch:]

All right. Thank you. Those were my questions.

[Fran Turner:]

Thanks Andrew

[Operator:]

The next question will come from Bob Ramsey of FBR.

[Bob Ramsey:]

Hey. Good morning, guys. Thanks for taking the question. 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?

[Fran Turner:]

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.

[Bob Ramsey:]

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?

[Fran Turner:]

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

[Bob Ramsey:]

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?

[Fran Turner:]

That is correct. Yes, Bob.

[Bob Ramsey:]

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?

[Fran Turner:]

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.

[Bob Ramsey:]

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?

[Fran Turner:]

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.

[Bob Ramsey:]

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.

[Fran Turner:]

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.

[Bob Ramsey:]

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?

[Fran Turner:]

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

[Bob Ramsey:]

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?

[Hugh Boyle:]

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 two 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.

[Bob Ramsey:]

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?

[Hugh Boyle:]

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.

[Bob Ramsey:]

Okay. Thank you.

[Operator:]

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

[Ebrahim Poonawala:]

Good morning, guys.

[Hugh Boyle:]

Good morning, Ebrahim. How are you?

[Ebrahim Poonawala:]

Good. 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?

[Fran Turner:]

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

[Ebrahim Poonawala:]

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

[Fran Turner:]

It assumes a minimal tax rate.

[Ebrahim Poonawala:]

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?

[Fran Turner:]

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.

[Ebrahim Poonawala:]

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?

[Fran Turner:]

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.

[Ebrahim Poonawala:]

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

[Fran Turner:]

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.

[Ebrahim Poonawala:]

Understood. Thanks for taking my questions.

[Fran Turner:]

Thank you very much.

[Operator:]

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

[Gary Tenner:]

Thank you. Good morning.

[Fran Turner:]

Hi Gary.

[Gary Tenner:]

A 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?

[Fran Turner:]

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.

[Gary Tenner:]

It will go up from 8.7 this current quarter.

[Fran Turner:]

That's correct, yes.

[Gary Tenner:]

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?

[Fran Turner:]

The $70.1 million.

[Gary Tenner:]

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, etcetera. Is that still part of your outlook as you get though the fourth quarter and you model out and budget your revenue and efficiency ratio? Or does that assume gain on sale?

[Fran Turner:]

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, its 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 three years, associated with the Caliber home loans. But again, what you're going to see is a significantly lower going forward gain on sale.

[Hugh Boyle:]

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.

[Gary Tenner:]

Okay. Thanks guys.

[Operator:]

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

[Tim Coffey:]

Thank you. Good morning, gentlemen.

[Hugh Boyle:]

Hey Tim.

[Tim Coffey:]

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?

[Hugh Boyle:]

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.

[Tim Coffey:]

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

[Fran Turner:]

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

[Tim Coffey:]

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?

[Fran Turner:]

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.

[Tim Coffey:]

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?

[Fran Turner:]

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.

[Tim Coffey:]

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?

[Hugh Boyle:]

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.

[Tim Coffey:]

Okay. Well great. Thank you for that color and those are my questions.

[Operator:]

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

[Don Worthington:]

Good morning, everyone.

[Hugh Boyle:]

Good morning, Don.

[Don Worthington:]

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?

[Hugh Boyle:]

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.

[Don Worthington:]

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.

[Hugh Boyle:]

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.

[Don Worthington:]

Okay, great. Thank you. That's all I've got.

[Operator:]

And 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.

[Hugh Boyle:]

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 him 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.

[Operator:]

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