Banc of California, Inc. (BANC) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Banc of California Quarterly Earnings Call hosted by John Grosvenor, General Counsel, Banc of California. My name is Tracy, and I'm your event manager. [Operator Instructions] I would like to advise all parties, this conference is being recorded for replay purposes. And now, I would like to turn the call over to John, please proceed, sir.

Thank you, Tracy. Good morning, everyone, I'm John Grosvenor, and let me be the first to welcome you to this morning's conference call to discuss the announcement that we filed earlier today regarding the results of operations for the third quarter of 2013. With me on the call this morning will be our Chief Executive Officer, Steven Sugarman; and our Chief Financial Officer, Ronald Nicolas. As Tracy mentioned, this presentation will be recorded and a copy of the recording will be available later today on the company's Investor Relations website. Now before I turn it over to Steven, I want to take a moment to remind everyone that our presentation may contain forward-looking statements which reflect our best view of the world and our businesses as we see them today. Those views can change as the world changes, so please interpret those statements in that light. Further information regarding reliance on our forward-looking statement is included in today's 8-K filing and applies as well to our comments during today's call. Our 8-K covering the third quarter earnings announcement is also available on the company's Investor Relations website. Finally, we've reserved time at the end of the presentation to address questions concerning our announcement. So with those formalities, it's my pleasure to introduce Steven Sugarman, and turn the call over to him.

Good morning. The past several months have been transformational for the company. Since the end of the second quarter, we've executed on several previously announced strategic initiatives and transactions. Among the key operational achievements were the following: first, we closed the acquisition of the Private Bank of California and we integrated the Private Bank of California into our Beach Business Bank subsidiary. Second, we closed the acquisition of The Palisades group and we integrated The Palisades Group into the company systems. Third, we closed the sale of 8 legacy thrift-type branches and approximately $450 million of deposits to AmericanWest Bank, and this included the deconversion of over 30,000 accounts and a reduction of over 50 employees. Fourth, the integration of our 2 banking subsidiaries, Pacific Trust Bank and The Private Bank of California, was completed into a single national banking charter, including the conversion of PacTrust Bank's core operating systems. Fifth, we launched our new brand and new name for our holding company and our bank as Banc of California. Additionally, we renamed our mortgage group from Mission Hills Mortgage Bankers to Banc Home Loans. And more recently, we announced the closing of the acquisition of CS Financial as a wholly-owned subsidiary of our bank. While these activities are not necessarily new as each of them has previously been announced, execution against our plan was critical in the third quarter. To have made so much progress in a short period of time is really a testament to the dedication, experience and hard work of our team. Amongst the team that's overseen many of these achievements was Bob Franko, who, following their successful completion, has decided to move on to the next chapter of his career. While we are well-prepared for Bob's transition as a business matter, we thank him for contributions he has made to the company and believe he leaves our bank well-positioned for the future. As of today, Banc of California boasts a single consolidated, full-service national bank subsidiary, with over $3.5 billion in assets. Our bank provides residential, business and commercial real estate loans to small businesses, entrepreneurs, family offices and homeowners throughout Southern California and the West. We now have approximately 15 full-service branches in attractive markets in San Diego, Orange and Los Angeles Counties. Additionally, we have about approximately 60 loan production offices concentrated throughout California and across 6 other states, including Oregon, Washington, Arizona, Montana, Maryland and Virginia. As we previously discussed, the consolidation of our banking franchise and the investments we have and continue to make in our banking platform were expected to result in approximately $10 million to $12 million in expenses during -- occurring predominantly during the back half of 2013 with the majority of those expenses focused on the third quarter. We expect these expenses will be offset and paid for by the gain on sale from our recent branch sale that closed in October 4. We continue to expect these transaction and platform-related expenses to come in in line with prior guidance. During the third quarter, these expenses exceeded $6 million and included items such as the write-off of the goodwill associated with our name change, a reduction in force plan that results in the reduction of approximately 15 FTEs during the fourth quarter and combined with the deconversion, we've reduced over 65 FTEs within our banks during the fourth quarter, saving over $6 million pro forma annually. We continue to believe that our investments are associated with attractive returns over time. For the first time in quite some time, we do not have any pending acquisitions, integrations or transactions. We expect to take the next few months to ensure our platform is sound, fully integrated and scalable. This will include the completion of many of the items we have previously discussed as part of our platform initiatives, a review of our policies and procedures and improvements in our risk and business analytical systems. In addition to these investments in the bank's infrastructure and costs associated with the transactions that have occurred over the past several months, third quarter earnings were negatively impacted by poor gain on sale margins in the mortgage business. While our residential lending division set a new high watermark for overall production with over $750 million in originations during the third quarter, our earnings were negatively impacted by gain on sale margins for our held-for-sale mortgage banking portfolio that were less than half of our target in historical margins. This was largely responsible for a revenue shortfall within our mortgage banking group of approximately $3 million to $4 million during the quarter compared to prior quarter. This was consistent with difficult overall mortgage market conditions and metrics. We continue to be very pleased with the volumes and progress of our retail origination group and our mortgage business, and are very cognizant of the requirement of managing the cost associated with mortgage banking business during times of volatility. Lastly, during the quarter, we closed on 2 over-allotments from our 2 prior capital raises in June, which brought in another $9 million in capital early in July. This provides additional liquidity to the holding company and is a source of capital strength for our banking subsidiary. Today, our consolidated Banc of California remains well-capitalized by regulatory standards. With that, I'll now turn it over to Ron Nicolas, our CFO, to review our third quarter financial performance.

Thanks, Steve, and good morning, everyone. As customary, I will be directing my comments to the financial statements included in the release provided earlier this morning, focusing primarily on the comparison to the second quarter of 2013, starting with the income statement. The foregoing figures, through September 30, of course, include the full quarter impact of the July 1 PBOC acquisition. Although we completed the deposit branch sale subsequent to September 30, I will provide some insight as to the impact of that transaction to our deposits and balance sheet where applicable. During the third quarter of 2013, the company reported a net loss of $9.5 million or $0.53 per share on just over 18 million average shares outstanding, compared to net income of $4.4 million for the second quarter of 2013 and net income of $9.2 million for the second quarter of 2012, as highlighted in our release. Of course, the third quarter of 2012 included a bargain purchase gain of $12.1 million related to the Gateway Business Bank acquisition. As Steve mentioned a few years -- few minutes ago, the quarter's results were greatly influenced by one-time expenses the company incurred related to the acquisition and merger activity and the divestitures, as well as the margin squeeze in the mortgage business. I will highlight those particular areas as we review the financial results. Total revenues before loan loss provision were $45.1 million compared to $47.7 million for the second quarter. Excluding the second quarter gain of $3.3 million on the sale of $100 million of seasoned SFR mortgage loans purchased earlier in the year, total revenues were up $700,000. Net interest income of $26.9 million was higher by $5.3 million, driven principally by the larger balance sheet from our acquisitions and organic loan growth. Our NIM fell to 3.25%, reflecting the PBOC acquisition, the buildup of excess liquidity in anticipation of our deposit branch sale and the effect of our $100 million seasoned SFR sale in June. We anticipate the net interest margin improving in the fourth quarter due to the release of the excess liquidity, as well as from the growth in our earning assets. Offsetting the growth in NII was lower mortgage banking revenues which came in at $16.2 million versus $20.3 million in the second quarter. The company experienced softer margins by roughly 50 to 75 basis points, similar to what the rest of the industry experienced contributing to the shortfall. Our total SFR mortgage originations increased to $767 million from $648 million in the second quarter. This breaks down with mortgage banking up [ph] originations, that is our held-for-sale portfolio, were essentially flat for the third quarter at $521 million versus $534 million in the second quarter, while our portfolio originations increased to $246 million from $114 million in the prior quarter. In addition, the company sold $63.7 million in jumbo loans compared to $44.3 million sold at a similar price in the first 6 months of 2013. The company continues to opportunistically acquire and sell mortgage loans to manage both risk and economic returns. For the quarter, the company added $2.1 million in loan loss provision, which included approximately $42,000 in net charge-offs -- excuse me, net recoveries for the quarter, with gross charge-offs of $200,000. The ALLL to loans originated ended at 1.4% compared to 1.5% in the prior quarter. The dilution of the ALLL to originate the loans was in part attributable to the organic loan growth skewed toward SFR mortgages during the quarter, which have a lower lost profile in our ALLL calculations. Additionally, loans originated and acquired attributable to the ALLL, including their discount, were at 1.56% compared to 1.59% in the prior quarter. These are loans fair-valued at the time of acquisition, specific to the Beach, Gateway and Private bank transactions. The company believes that including the discount provides a better measurement of the loss coverage ratio as the discount is in the first loss position. This measurement does include -- does exclude the seasoned SFR loan pools purchased at a substantial discount. As that discount is accretive into income and future loss projection exceeds that discount, the company will add to the allowance through the more traditional loan-loss provisioning. With respect to non-interest expense of $52.3 million reflected the impact of the $6 million of one-time expense for the quarter and the acquisition of PBOC of approximately $5 million for the quarter. Excluding these 2 items, the core run rate expense growth was less than $2 million or 4% for the quarter, reflecting a continued expansion of our mortgage business and, to a lesser extent, the build-out of the company infrastructure. Company headcount grew to 1,318 as of September 30 compared to 1,003 as of June 30, 2013. Of that 315 headcount increase, the expanding residential lending division grew headcount by 203 to 887, the acquisition of PBOC added 74, TPG added 11, with the remaining company, including the legacy bank, growing only 27. Importantly, we've instituted a RIP plan which we will expect -- will have an effective net reduction of 15 FTEs in the fourth quarter. This is in addition to the 50 -- the over 50 sold with the AmericanWest transaction as part of our recent branch sale transaction. The combined savings will be over $6 million pro forma on an annual basis. The increase in staffing added approximately $4 million in our personnel expense with the majority of that attributable to the PBOC acquisition, while commission expense remained flat to prior quarter reflecting the flat originations for the mortgage banking operation. Other notable operating expense items outside of the PBOC acquisition and the one-time cost included higher occupancy and data processing costs associated with the core growth of the company. The company incurred a tax benefit of $700,000 for the quarter, adjusting for the year-to-date tax provision and added to its valuation allowance for both the PBOC acquisition and the current quarter's loss reducing a realizable portion of the deferred tax asset of $5.5 million. Quarter-end year-to-date taxes are impacted by the company's anticipated full year effective tax rate, taking under consideration the company's previously identified tax planning income, as well as the year-to-date operating loss. The company currently does not consider the potential of future core earnings outside of the tax planning income. To the extent the company realizes future core earnings, the effect of the company potentially reversing its $12.3 million deferred tax asset valuation allowance will be realized through a reduction of its effective tax rate. Please keep in mind, however, that this can fluctuate materially based upon the level and timing of several of our key initiatives. Turning to the balance sheet now. As Steve noted, the company finished the quarter at over $3.5 billion in assets and loans at almost $3 billion. The acquisition of PBOC added almost $400 million in loans in September. And in September, the company purchased a pool of seasoned SFR loans totaling $500 million in unpaid principal balance at an attractive discount. The organic loan growth picked up during the quarter, adding approximately $130 million net of payoffs. The bulk of the loan growth was in the SFR portfolio, but we also saw a pickup in growth in their CRE and C&I categories. Our organic loan pipeline is building, which we believe will result in solid growth in the fourth quarter and beyond as the synergies of the acquisitions begin to take hold. Other asset categories of note include premises and equipment which includes the acquisition of our new company headquarters and, of course, the goodwill and intangibles which reflect the impact of the PBOC acquisition. On the liability side, deposits grew by $1.1 billion from the prior quarter, split almost evenly between the PBOC acquisition and organic deposit growth. Pro forma deposits post the deposit branch sale were roughly at $2.8 billion. The company sold over $450 million of deposits on October 4. Excluding loans held for sale, the loan deposit ratio post of sale is a pro forma 93%. Equity was up during the quarter at $302.6 million compared with $268 million in the prior quarter. The acquisition of PBOC added $28 million in new common issued, plus another $10 million in SBLF preferred. In addition, the over-allotments for each of the common and perpetual preferred capital raises in June closed in early -- early in the quarter adding roughly $9 million, offset by the company's quarterly net operating loss. Tangible book value fell to $10.4 per share versus $12.28 at the second quarter, reflecting both the PBOC acquisition and the quarter's loss. Both banks at 9/30 remained well capitalized at the end of each quarter both on a risk-based capital and leverage ratio. Briefly turning to asset quality. During the third quarter, delinquency rates improved across the entire 30-, 60- and 90-day spectrum at just over 3% in total, down from 5% from the prior quarter. During the quarter, the company sold delinquent seasoned SFR mortgage loans for a small gain. In addition, the slight uptick we saw in the delinquency, with respect to these pools related to the transfer of servicing, retraced to more normal levels for these assets as anticipated. As a result of the company's actions, the 90-day delinquency rate for the seasoned SFR portfolio has fallen to 1/3 of the June 30 levels. Meanwhile, our nonaccrual loans increased to $15 million from $9 million as of June 30. This resulted primarily from 6 credits; 4 residential and 2 commercial mortgages. None were larger than $1.4 million, and 3 are currently paying. We anticipate no losses beyond their current marks. With that, I'll turn it back over to Steve.

Thanks, Ron. Before we open it up for questions, let me just mention a couple of the newest addition to our executive management team. We recently welcomed Hugh Boyle as our new Chief Risk Officer and Matthew March as our new Chief Information Officer. We're excited about the talent each of them brings to our team and are already seeing great contributions from them. Looking to the fourth quarter, we continue to believe we remain on track to achieve our goals for 2013, including structural improvement to the organization, such as our target efficiency ratio and our transformation to a full-service commercial bank. Importantly, to this end, we have begun to see a pickup in our commercial lending originations, which results in approximately $45 million in growth to our commercial loan portfolio during the third quarter, net of payoffs during the quarter. With that, operator, we'd like to open up for questions.

[Operator Instructions] And your first question is from Brett Rabatin from Stern Agee.

I wanted to -- I guess first, just ask about expenses and sort of thinking about the fourth quarter and going forward, you mentioned, Steve, $6 million of annual savings that you're pulling out in the fourth quarter, can you talk, maybe, a little bit more about sort of an expense run rate going forward. And then just was there anything else besides, I think you mentioned $6 million of nonrecurring expenses this quarter, can you talk may be about anything else that affected 3Q?

Sure. On the last call that we held on September 18, we discussed kind of the platform initiatives and expenses related to several of these transactions and I think that guidance still generally holds. During that time, we mentioned that there was $10 million to $12 million of expenses for these transactions and the platform initiative that would likely occur -- a vast majority of them occurred over the back half of the year and mostly concentrated on the third quarter. So we do expect to see continued expenses as we complete the platform initiative and the tail end of these integrations, which were completed in October. And so, the Delta between our guidance and what you see in the third quarter, the vast majority of it, we'd expect to see pull through in the fourth quarter. That being said, the rationale for these expenses is pretty simple. It -- they have attractive payback periods. On our last call, we talked about how we believe these expenses we'll have a payback period of less than 2 years, based on the enhanced efficiencies, we'll experience by completing them in 2013. And so, when we look at these expenses, you can see that lots [ph] of friction cost from the excess liquidity and the initiatives and transaction cost with our branch sale, came through in the third quarter, and we'll also have some expense in the fourth quarter. But from the reduction and staffing that's necessary, that will be a more permanent cost save associated with those deposits. And as Ron discussed, that will be a little bit north of $6 million of operating cost savings. Additionally, our platform initiative is so key to be able to really have a robust analytical capability and set of systems that will help with our reporting and risk and analysis, and we believe that, that will enable our business to scale in a way which is much more efficient and requires less overall bodies. And so, we think, as you move into the first quarter of 2014, you'll see the run rate of these expenses and kind of the payback, really start to be realized. But in the fourth quarter, I'd expect that, that'll be offset still by some of the residual investments that we make as we build out our platform and our organization.

Okay. And then the other thing I was just wanted to touch based on, is mortgage banking, and if you gave it I missed it, but just an actual number of gain on sale, pretax margin for the third quarter. And just any thoughts on -- if that improves going forward, and just sort of what your plans are, you mentioned maybe looking at expenses, related to that business, but any thoughts on pretax contribution, relative to 3Q going forward?

Yes, sure. We'll be filing our Q in the next day or so which will have some of the more detailed information on the mortgage banking so I'm going to direct you to that for some of the specifics. However, we did discuss how gain on sale margins were reduced quarter-over-quarter by 50 to 75 basis points depending on the characteristics of the loan of the mortgage banking group. As we move forward here, we've consistently budgeted that business against historical levels of gain on sale and margin. In the first -- over the past year or so, our budget tended to be below the market. In the third quarter, our budget proved to be above the market. We expect that over time, you'll see some normalization of those gain on sales. What we are seeing in the early parts of the fourth quarter is some stabilization and rebound on the gain on sale margins. I don't think that we're at a point where we can provide kind of guidance on where they'll be for the quarter and I don't -- we don't expect that they'll return to the robust levels that they may have been at the beginning of this year. However, the gain on sale margins from what we have been seeing has been positive compared to the third quarter.

Your next question comes on the line of Andrew Liesch of Sandler O'Neill and Partners.

I'm just curious if you can talk a little bit about these -- the loans that you purchased this quarter and what sort of discounts were they at, like location and like any sort of expectation for how this could have support the, I guess, loan yield in the coming quarters?

Sure. Well, as we previously reported, we sold some seasoned single-family loans towards the end of the second quarter, which resulted in a reduction of our interest income towards the beginning of the third quarter. And then that transaction had realized some nice gains in the second quarter. So in the third quarter, as that's part of our business, we've acquired similar characteristic loans at similar cost basis. These loans tend to be loans that we would underwrite, as new loans within our books, based on LTVs, FICOs and kind of an overall analysis of these credits. They tend to come with both accretable and at times, not accretable yield, but are priced in a place where we find them attractive. The portfolio that we purchased was closed during the last month of the third quarter. So there was a partial impact on net interest margin and as you move forward, absent any other changes, you would get kind of a pickup of kind of 2 extra months of interest income without kind of material changes in expenses from that portfolio. When we file the 10-Q, which should probably be Tuesday, there will be a little bit more detail around these pools [ph]. So I'm little bit reluctant to get into the financial characteristics of them. But like with the prior season's pools [ph] that we discussed on our last calls, these are materially consistent with the business we've been in for a couple of years now.

Okay. And then just turning to capital, I mean with the TC [ph] ratio down here, near 5, obviously, it should rebound after the sale, the branch sale and the deposits that go along with it, but the -- I'm just trying to figure out, I mean, are there going to be more portfolio purchases along this level, it certainly it seems like you did deploy the capital that you raised.

Yes, look it's important for us to balance kind of our liquidity. And make sure that our net interest margin strengthens. I think as we deploy our loans to cover for the excess deposits that we had in the third quarter, that will help our NIM and our interest income in the fourth quarter. That being said, much of the excess liquidity was relieved through that branch sale. And as I've discussed, we are seeing increasingly positive trends and origination volumes in our commercial business and our commercial lending. And we are also really focusing on the consolidation and completion of our platform initiative over the next several months. So I think it would be fair to assume that the pace of the deposit growth or the pace of kind of the asset growth that you've seen for a couple of quarters, we'll probably see a little bit of a consolidation period.

Your next question comes from the line of Gary Tenner of D.A. Davidson.

I think my questions have actually been answered. One question I would ask you, I think Ron mentioned the 93% pro forma loan deposit ratio, post the branch deal, how are you looking at managing that kind of ratio as -- on a go-forward basis, are you comfortable in that kind of 90%, 95% range or would you like to work lower over time?

We're comfortable within this range, it will ebb and flow a little bit over time and part of that's just a function of investment decisions. Considering the relative valuation and duration risk around securities versus loans. We manage that in a few ways, including loan sales from time to time, and we expect loan sales, especially on the single-family side, to be an ongoing part of our business. So that will cause some ebbing and flowing. That being said, we're comfortable in the range we are. We feel good about our liquidity especially, given the improving characteristics around the liquidity relating to our deposits, where the Private Bank of California transaction was really complementary and strengthening of our deposit base, including a material amount of DDA and strong deposit accounts. Also, as you know, over the last several quarters, we've -- we've been in a process of a pretty dramatic transition from time deposits and more thrift-like deposits to transactional accounts. And we believe that, that kind of also helps with our liquidity characteristics.

Okay. And then just one more question, kind of to further the conversation previously on the expense of run rate conflict [ph] of the fourth quarter. So you're at $52 million this quarter, $6 million or so of that is viewed as nonrecurring and then a piece came in from PBOC, if you look at the savings on the branch sale, that's should kick in, I guess immediately in the fourth quarter, excluding the ongoing nonrecurring stuff at the branch initiative, or the platform initiative, is a reasonable to look at fourth quarter in say a $42 million to $45 million kind of run rate, ex-the nonrecurring stuff, or is that too low based of the way things play out right now?

I'm not sure that we're prepared to give you a kind of a specific number on kind of the future run rates, but what I can tell you is given the substantial kind of success and completion of these initiatives, we think that the onetime expenses will be less, but still material in the fourth quarter, as we've discussed. Also, we've talked about some of the cost savings and provided you the number with some of the FTE reductions. Those will come through with the partial quarter, in the fourth quarter because they didn't all occur on day 1. And additionally, those also are not the full benefit that we'd expect to see from these investments. Those tend to focus solely on parts of the integration from the PBOC transaction and the branch sale. But as we've discussed previously, a big part of our platform initiative is around enhancements in technologies data [ph] warehouse systems and things that we believe will reduce some of our costs more structurally over time. We also continue to have a decent amount of temporary or kind of consulting-based components in our cost structure, which as we move into 2014, we seek to reduce.

Okay, All right. That's helpful. And if I just could ask just one more on the personnel line on the expense side again, I think you said that mortgage- related commissions were flat sequentially, can you break out what that was relative to the $30 million top line?

Gary, I don't have that number available at this -- right here, but keep -- a good rule of thumb is somewhere in that -- a little over a point as your cost, so you take your originations multiply times a little bit more than a point, that's pretty much your commission-based expenses. And just to put -- to add to that, obviously, as that number ticks up, obviously, our operating cost will tick up accordingly as well.

Your next question is from the line of Jackie Chimera from KBW.

Ron, my first question is for you, I just wanted to clarify something. So you said that the valuation allowance currently held against the DTA was $12.3 million, did I hear that correctly?

Yes, that is correct.

Okay. And then could you clarify, you mentioned a $5.5 million portion of that, that was not realizable, is there is -- as I interpret that comment, that's something that would stay there permanently, am I interpreting that correctly?

No.

Or is there a different way to look at it?

No, that is the realizable portion of the deferred cash [ph] asset. So that's on the balance sheet, recognized as an asset. The $12.3 million valuation allowance is the -- currently -- as we sit here today, unrealizable.

Okay, so your net DTA is $5.5 million and you can add the $12.3 million to it though income once that...

Right. Right. So with future core earnings we'll unwind that valuation allowance and it will bleed through the income statement through a lower effective tax rate. So that's how it works. The gross deferred assets in that would be the $17 million, $18 million range.

Okay. So that bleed through, is that more likely than a future onetime event in a couple of quarters for a reversal?

Yes, the -- though just the way I have -- setting aside the timing, on the balance sheet, it would likely be reversed all at one time, based upon the realizability on a prospective basis. But from an income state standpoint, it will bleed through a lower effective tax rate over time.

Okay. And then Steve, I think it may have been one of your comments that you would talked about more of an internal focus over the next couple of months now that all the acquisitions have been closed and integrations are completed and systems conversions, and things like that, so does that mean that over the next couple of months, you're probably not going to look to the M&A market?

We're in constant dialogue and discussions kind of on our strategic initiatives and plans. But realistically, as we say here today, we haven't announced an M&A deal. And given the time frame of what it would take to close a deal like that, it will be unlikely to have a large kind of whole bank type transaction closed [ph] in the next few months.

Okay, but you remain open to opportunities in the near-term that might close several months down the line?

Oh yes. We're -- we continue to look at opportunities. We think there are opportunities in the market. We are kind of considering how best to approach the market. One of the reasons that we feel -- that we really have the strength to kind of focus on our platform is the success we've been able to realize on the organic growth front. And how that is really in competition from an opportunity cost perspective from some of the acquisitions. So our bar for meaningful acquisitions continues to be real. But that's not to say that there aren't good acquisitions out there. So we continue to have discussions, we'd hope to find something but we feel pretty good that the economics of the organic path are attractive for us now. They oftentimes result in some of the noise and onetime expenses that are associated a strong organic growth plan. But we compare that to the acquisition economics and also the goodwill that could otherwise be generated from growing in a different way where it hits the balance sheet a little bit more than the income statement. And we assess kind of the relevant benefit and things that we have a few different ways to grow over time and will pursue all of them.

Your next question comes from the line of Brett Villaume from FIG Partners.

Can you give me some more detail on the accretable yield from the discount on acquired loans, I think at the last quarter, you listed that $46 million in future recognizable PCE? Do still estimate that amount to be about the same?

We're going to file the Q in the next day or 2 and that will be provided in the table. What I can tell you is that the characteristics of kind of that line of business haven't changed materially over time and so to the extent that the amount of loans subject to that accretable yield function increases, you can probably assume that on a ratably basis, that accretable yield might increase. As -- just for the background, as you know, when we acquire loans, whether it's through the acquisition of a bank or the acquisition of a pool of loans, we'll fair market value that acquisition on our books, that portion of the UPB that we believe and the management believes is likely to be repaid will become accretable yield and will accrete back into our income and on to our balance sheet over time as the loan performs as expected. And that portion of the UPB that we think there isn't an expectation of being repaid will become non-accretable yield and so we'll still legally have the right to pursue and capture it, but from an accounting standpoint, it will be excluded from that accretable yield metric and so this is really an analysis we do on a quarterly basis that takes management's best estimates of what portion of each of these loans will be realized, based on the expectations and the assumptions in the pool and the performance of the pool. And then so that's a number that you'll probably see in kind of our Qs going forward. You can kind of review when we publish the Q, but it's something that we also look to as an important component of the assets of the bank.

Okay. And then I have 2 quick questions that sort of go hand-in-hand about the future organic growth strategy. One is just if you could give us update on the branch plans that you have outside of the sale, in early fourth quarter?

Sure. Within our community banking group that oversees our traditional retail branches, we continue to see very nice success on our ongoing branch portfolio. As we sit here today, all branches that were open to prior to this year have North of $100 million of deposits in them. That's an important metric for us as far as getting to the right efficiency characteristics, that's within our community banking channel. And the one branch that we opened more recently in Pasadena, is North of $90 million of deposits, which we've been very excited about their progress. We continue, as part of our organic growth, to look at new branches. With the success we've had with the Pasadena branch location, we believe that the repayment period for investing in a new branch has shortened, which makes us increasingly interested in finding attractive places to put new branches. We have a branch that's expected to open later this year in Pacific Palisades California, and we'd expect to announce, for the first quarter, some other branches that are also in the Orange County, San Diego County and Los Angeles County area and kind of up the coast. So we continue to look at branches, we're in active discussions on branches and we have our next branch in the Palisades opening later this year.

Okay. That sort of answered my last question too, it's just if you could describe about whether or not core deposit growth is still on track from what you have been anticipating and then also, with the one account product, whether or not there are other products that you're working on?

Sure. Our deposits franchise, both in each of our channels, our community banking channel, our commercial banking channel and our private banking channel, have really seen good traction and I believe that's been a real bright spot over the first 3 quarters of the year. So we continue to see the transition of our deposit base that we're seeking. With regard to our products, the one account product continues to be very well received in the market. We're increasingly seeing the relationships become primary relationships with the bank in converting into our preferred program. And we've been pleased with that. We've also launched, recently, a simplified kind of CD product called our Name the Day CD, which allows people to better manage their cash flows and liquidity characteristics. That's something that will be increasingly rolled out here shortly. And we're just trying to build a suite of simple and fair products that are kind of target depositors are seeking.

Your next question is from Don Worthington of Raymond James.

A couple of follow-ups to other questions, in terms of the office opening question, what about loan production offices, are you still looking to open more of those?

Yes, that's a good question, Don. We have several loan production offices that we've approved and are in the process of opening. And we'll continue to open those. That being said, given the seasonality of the fourth quarter, within kind of the mortgage side of the business, and also our focus on the consolidation of our banking franchise, my expectation is, they'll be a substantial kind of pause for a month of 2 here in kind of the approvals on new LPOs. We believe and are seeing kind of nice returns from LPOs that we're originating. We thinks it's a meaningful part of our plan in the future. However, just over the next couple of months, given the seasonality and the focus on just the consolidating and completing kind of these consolidations and integrations, my guess is you'll see a couple of months slowdown.

Okay, great. And then I wanted to clarify in terms of the nonrecurring expense items in the quarter, there was the $6 million and then was it $5 million related to private bank, is that in addition to the $6 million?

Yes, that is correct, Don.

Okay. All right. And then I guess, last question, in terms of the purchase of the home office, any update in terms of potential timing for consolidation of staff and being able to reduce some costs associated with office buildings?

To just kind of cost savings around office and staff to go along with people?

Yes.

Yes, look, there are associated costs with head count. That's important to note, 51 of the FTEs that left early in the fourth quarter were associated with the branch sale. So if you remember, some of our earlier guidance when we first announced this deal, there are direct costs that we estimated around kind of the maintenance of these branches, so that includes some of the real estate, some of the rent, the systems, PP&E. And also, indirect costs, kind of associated with having that many accounts that we needed to service. So the biggest impact there is really just from the branch sale itself. That being said, on a discrete basis, there's some rationalization that can happen in terms of real estate, but I don't want to overstate that given the growth that we've experienced kind of across the business. On the third quarter, we were probably net adders of real estate. Just given kind of the overall growth in things like the LPOs and the mortgage. So, yes, on a stand-alone basis, there are some cost saves, but that's not absent the branch sale, that's probably not the biggest impact from or place where there are cost saves.

Your next question comes from the line of Andrew Liesch from Sandler O'Neill and Partners.

Just one question, looking longer term, I know your plan's been to get to the $5 billion in assets, but with where the capital position is right now, and you just alluded to earlier, that maybe the pace of asset growth might slow, I'm just curious like what are your -- what do you think is your timing now for $5 billion?

Look, given our timing kind of from Day 1 on the initiatives here, I don't think anything has really changed. In fact, I think that we're well ahead of what our expectations were as far as where we'd be at the end of 2013. Whether those expectations were measured at the end of 2010 or the end of 2012. I don't think that the strong organic deposit growth and kind of the success we've had this year is something that was kind of our baseline plan. So when I talk about consolidating the franchise and really kind of making sure we have a strong foundation, the way we think about it is as you step up into different levels of growth for a bank, in order to accelerate the growth in the future, sometimes you have to take a pause and make some investments to have the right systems, technology and structure to enable that growth. And so, I'd view kind of this consolidation phase as a part of enabling kind of a strong growth in the future, where absent making the investments in the systems, and getting the policies and procedures perfect, growth will start to peter off in any event because you won't have been set up for it. So our aspirations haven't changed, our timing, I don't think has changed. But you know, we want to do it prudently, we want to do it kind of with real kind of grasp with all the risks. We want to do it where we're not tied down in size [ph] and that we can scale the business as necessary to serve our customers.

Your next question comes from the line of Richard Slone of H&R Realty.

Gentlemen, wouldn't it make more sense with regard to future acquisitions to get your earnings, published earnings up and your stock price up, wouldn't you be in a better position to do acquisitions at that time?

Possibly. We're looking at trying to build a real strong franchise here. We think there's an incredible opportunity in the markets we serve to be a real strong and valuable franchise. There's a vacancy of strong banks that serve the local community in Southern California. Southern California, in our view, is probably the most valuable and strongest banking market in the country. There's really no national banks larger than us and under $10 billion, $15 billion, and so there's a real opportunity for us here. And then we're pursuing that opportunity and as part of our belief in the size of that opportunity, we're going to pursue it through a prudent way, which requires some investments, it requires us building a good platform and I think we are doing a very good job executing on the overall plan. That being said, there is a tension between the acquisition strategy and kind of some of the organic growth, oftentimes, folks are used to kind of really big goodwill numbers, they come along with acquisitions that kind of sidestep the income statement and just kind of hit equity. Where when you grow organically, some of that same noise actually goes through the income statement. Fortunately, for us, the size of that noise has been dramatically less than what an M&A only plan would likely, or compared to comparables, would likely result in. So we fell pretty good about our strategy. We think that the progress is going pretty well. We think that our activity on the M&A front speaks for itself, as probably the fastest-growing bank in the country over the last 3 years. So we don't think we're being hamstrung, and we think that we're trying to make a prudent balance between the collection of goodwill and the collection of expenses associated with organic growth. So we feel pretty good about it, but I'd welcome a higher stock price for all of our investors and we'll continue to execute and trying work hard on that so that we can get there.

My question really just concerned the timing effect. I understand what you're looking as far as acquisition is concerned, the market looks very good, but the timing of it. It seems to me that a delay in that might be better served, to serve everybody better just so that you bring to any deal a much better -- a much stronger situation if your earnings are published and they're up and your stock price is higher. That's my only point, it's a question of timing.

I mean, I can look at the market that exists today and plan for and assess kind of IRR that we can drive through our strategy, and I think it will be pretty compelling. It is hard for me to understand what's the market is going to look like in 2 years and delay, what's otherwise a very attractive opportunity on the wish that in 2 years, prices haven't gone up. Because if you did that 2 years ago, you would've seen acquisition premiums increased dramatically and you probably would've lost the opportunity to be where we are today.

Okay, I understand. It looks to me though that I'm not talking 2 years out, I'm talking more like 6 months or 9 months out. In other words if the fourth quarter comes in decent and the first quarter of 2014 is very robust, it seems that would be of more opportune time to be looking to do further acquisitions. That's my own point.

Okay, yes, and like I said most of these acquisitions, if you were to find [ph] them, the calculation date tends to come around closing day. And so you're talking about the same time frame that you're alluding to. Because bank acquisitions tend to take 4 to 12 months to get closed.

I would now like to turn the call over to Steven Sugarman for closing remarks.

Well, thanks, everyone, for taking the time to listen in this morning, appreciate your comments. We'll look forward to visiting with you again after the fourth quarter. And you should also expect in the coming weeks, we'll probably try and set up an Investor Day that we'll invite you all to participate in. So thanks again, and we'll talk to you soon.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thanks for joining, and have a very good day.