Banc of California, Inc. (BANC) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Banc of California Third Quarter Investors Call. 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 that this event is being recorded. I would now like to turn the conference over to Tim Sedabres, Director of Investor Relations. Please go ahead.

Thank you, Ed. Good morning everyone and thank you for joining us today for today's third quarter 2015 investor conference call. With me on the call today to discuss third quarter results are Banc of California's President and Chief Executive Officer, Steven Sugarman; Chief Banking Officer, Jeffrey Seabold; and Chief Risk Officer, Hugh Boyle. I'd like to remind you that today's conference call is being recorded and a copy of the recording will be made available later on our Investor Relations' website. We've also furnished a presentation that management will reference on today's call and that presentation as well is also available on our website under the Investor Relations' section. Before I turn it over to Steve, 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 business as we see them today. Those elements can change as the world changes. Please interpret them in that light. The forward-looking statements are outlined on slide one of today's presentation which apply to our comments today. We also provide an opportunity for Q&A at the end of the presentation. And with that, I'll turn it over to our President and CEO, Steven Sugarman.

Thank you, Tim, and welcome to everyone joining our third quarter conference call. Let me begin on slide two of today's presentation materials. Our mission is to be California's bank, the top bank serving and empowering California's private businesses, entrepreneurs and homeowners. We initiated this mission five years ago by recapitalizing a California-based lending institution in the midst of the financial crisis. Our corporate board, investment group and executive team saw the impact on California's economy of banks pulling out of the state and reducing lending and other critical banking services. This exacerbated the economic challenges faced by Californians during that period. Even today, several of our larger California-based peers have recently been acquired by out-of-state institutions or have moved their headquarters out of state leaving a significant and important opportunity in the market that Banc of California is well positioned to capture. We at Banc of California are proud to have partnered with California, its diverse businesses, entrepreneurs and homeowners to support and benefit the state's bright economic future. Our goal is to serve California, its thriving communities and great customers effectively and consistently throughout the spectrum of market and business cycles. We seek to empower our client streams. We're excited by our prospects and our 1,600 employees work hard every day to exceed our customer and ultimately our investor expectations. Now, let me highlight how we're tangibly demonstrating this commitment. Over the past three years, we have grown the company from less than $1.7 billion of assets to approximately $7.3 billion of assets as of the end of the third quarter. We stand today as the eighth largest public independent bank in California. Since 2012, we have grown the company by over 330% in terms of assets while at the same time; we've grown net income by over 850%. Turning to slide three, we highlight our third quarter performance. I'm proud to report that Banc of California's franchise delivered its sixth straight quarter of strong financial performance with consistent return on assets over 75 basis points and return on common equity over 10% in each of these quarters. The third quarter was marked by record core deposit growth led by growth in non-interest bearing deposits and robust increases in average deposit balance per account. We also had record commercial banking loan originations which have accelerated each of the last three quarters. Additionally, non-interest expenses declined by just over $6 million during the third quarter as compared to the prior quarter. Asset quality remains strong and stable. These strong operating trends are driving increased profitability characterized by improvements in the quality and the mix of our earnings. For the quarter, we reported diluted earnings per share of $0.29. On an adjusted basis, earnings per share was $0.33 for the quarter, when adjusting for negative mark-to-market valuation impacts relating to interest rate sensitive assets such as swaps and mortgage servicing rights which were incurred during the third quarter and totaled $3.9 million. It is a testament to the diversity of our business model and the strength of our franchise to be able to overcome these unexpected headwinds and still generate earnings of $0.29 per share. Core business trends accelerated during the quarter as we posted record quarterly core deposit growth that exceeded $500 million of new deposit originations through our business units. At the same time, average balances per account increased 14% from the prior quarter and non-interest bearing deposits grew by 17% from the prior quarter. On the lending front, our commercial banking segment loan originations also achieved a new record level with originations totaling $729 million for the third quarter. I'm very proud of our team's ability to execute against our strategic plan and deliver these results. As we look forward to 2016, we remain aware that our results will reflect the talents and commitment of our people. To this end, we've been relentlessly pursuing top talent to oversee our business at every level. Moving forward to slide four, you can see the accelerating financial returns we have delivered over the past two years. This performance tracks with the Board's decision to hire the current management team at our bank and to replace our legacy bank Board with our current Board towards the end of 2013. The experience, strength and decisive action by our independent Board has created the conditions for strong and for improving operating returns of the company that shareholders are currently benefiting from. We have achieved these performance metrics while investing in significant growth initiatives. These growth initiatives have required a dedicated investment in our people, processes and infrastructure. We believe these investments are beginning to demonstrate our long-term earnings potential. Our shareholders are now beginning to benefit from an increasingly profitable franchise that is highly scalable and build on a sound foundation. Earnings per share have increased substantially from negative in 2013 to the current $1.24 annualized run rate year-to-date. Similarly, pretax income for 2015 is expected to be nearly 12 times higher than just two years ago in 2013 and the company is on an annualized pace to generate pretax income for 2015 of nearly $100 million. We believe our franchise is being built to achieve industry-leading financial returns as we continue to scale and we are pleased by the pace of improvements towards achieving our goals related to return on assets and return on tangible common equity. Now on slide five, the third quarter marks the sixth consecutive quarter the Banc of California has delivered a return on average assets over 75 basis points and return on tangible common equity above 10%. It also happens to be the sixth straight quarter we've delivered earnings per share above analysts' consensus estimates. The strength and stability of earnings is even more impressive given that over the past six quarters we have continued to invest in and grow the company from $4 billion in assets to $7.3 billion today. These financial returns put us on track to deliver against our run rate targets of 1% return on assets and 15% return on tangible common equity by year-end. We are laser-focused on delivering on these commitments we've made to our stakeholders. We believe one of the most important things we can do is to do what we say we're going to do. This holds true not only for our shareholders, but for our clients, communities and employees as well. A great example of delivering for our stakeholders is our recently announced achievement of an outstanding CRA rating by the OCC. We set out early on to make community reinvestment and community partnership a key piece of what makes Banc of California unique. This recognition by the OCC further validates the hard work and effort our teams have committed to our communities across California to invest in, support and empower the community in which we operate. As California's bank, we feel it is imperative to be at the leading edge of community reinvestment and you can see our commitment through our expanded locations, products and services. This is a core part of our value proposition and is a key factor in our strong deposit growth. California's depositors want a bank that lends deposits back to the communities from which they came, financing the engines of economic and job growth throughout California. They want a bank that strengthens the communities in which they live through volunteerism and investments and they want a bank that it can be proud to partner with. I continue to be surprised that so many banks decided not to pursue an outstanding community development program. As we have demonstrated, it is an achievable goal, complements financial objectives and can go hand in hand with accelerating financial performance. Banc of California will continue to help lead the industry forward in this regard. We make no apologies. It is good business and good for the business of banking to do what is good for the communities we serve. Congratulations go to our head of Community Development, Gary Dunn, on leading us to this outstanding rating. Banc of California is also thrilled to have received recognition for this achievement from the California Reinvestment Coalition and the National Asian American Coalition. It is a strong demonstration that doing the right thing will be recognized by the community, the regulators and the marketplace. Turning to slide six, we outline our returns by business segment. Our commercial banking segment has seen its quarterly pre-tax profits increased by over $20 million since our acquisition of Popular Community Bank's California Franchise in the fourth quarter of last year. This is over $80 million per year of annualized profit growth from the commercial banking segment alone. These results are aligned with our previously stated goal to improve our business mix by increasing the percentage of our pretax earnings coming from our commercial banking segment. By growing the commercial bank, we have diversified the company away from its legacy mortgage banking focus and as you can see on the slide, mortgage banking now accounts for less than a quarter of our total business segment pretax income. This successful transformation was the result of the success of the Popular transaction and the continued success of our business leaders organically growing our business. While Popular has exceeded all of our profitability targets, the majority of this improvement has nonetheless been a result of the organic growth -- and organic profitability improvements we have had over the past year. Management is pleased that we were able to accomplish this transition in advance of the more adverse mortgage market that existed during the third quarter which caused mortgage banks generally to underperform expectations during the quarter. Meanwhile, our diversified business that generates the preponderance of its earnings from its commercial banking segment was able to exceed expectations. Turning to slide seven, our non-interest expenses declined by $6.2 million from the prior quarter. This is a result of the positive impact our investments in building a scalable platform have had on our long-term value proposition. Volume-related expenses declined by $3.1 million as mortgage banking origination volumes were down from the prior quarter. Base expenses as outlined on the slide were down by $1.3 million from the prior quarter. Additionally, the third quarter included $800,000 of non-core expense items. Assets per FTE continued to increase in the third quarter, reflecting a more efficient platform. They increased to $4.4 million of assets per FTE as we continue to see benefits from our investments in a strong, scalable infrastructure and the execution against our strategic plan. Although we expect to continue to invest in the growth of the franchise, we will be disciplined with our resource dollars and focused on improving the company's consolidated efficiency ratios as we continue to grow. In fact, remarkably, our non-interest expense has grown by less than 22% compared to the third quarter of 2014 while our average assets have grown by over 50%. This has resulted in pretax earnings growth of nearly 100% year-over-year. Our efficiency ratio finished at 77% for the quarter. However, adjusting for the impact from certain non-operating losses from interest rate sensitive assets such as swaps and MSRs, our efficiency ratio for the quarter fell to 74% with our adjusted return on assets and return on tangible common equity finishing at 1% and 14%, respectively. Now, I'd like to turn it over to Jeff Seabold, the Company's Chief Banking Officer to highlight deposit and loan trends.

Thank you, Steve. Beginning at slide eight, this slide outlines our continued strength in growing deposit balances. We believe we are winning market share throughout California by driving higher per account core deposit balances. This is a result of our focus on deepening client relationships. We believe that the average core deposit per account, the cost of those deposits and the number of cross-sells to that account holder are the best ways to measure our success at expanding our deposit relationships. Our business units brought in a record $511 million of net new deposits during the quarter. The company was able to reduce treasury and broker deposits by over $200 million during that same period, resulting in net deposits increasing by $317 million with an average cost of 49 basis points compared to 50 basis points in the prior quarter. Our focus on attracting and deepening client relationships has been a core strategy for us since Steve and I joined the bank. Our many great associates across the company have performed exceptionally well in bringing on new clients and developing those relationships. Our diverse deposit growth strategies continue to pay real dividends as non-interest bearing deposits grew by over $140 million during the third quarter alone and pierced the $1 billion threshold overall. This represents an annual growth rate of 121% for non-interest bearing deposits over the last year. Similarly, our private banking business saw its deposits grow by over 8% during the quarter to over $900 million. Our deposit costs have fallen from 77 basis points at their peak just two years ago under the bank's prior management to 49 basis points during the third quarter. Importantly, our growth was driven by winning more of the wallet share of our existing customers as the average account size increased by 14% in the third quarter alone from approximately $73,000 to over $83,000 during the quarter per client. Additionally, core deposit relationships acquired through Popular acquisition also continued to perform well. Popular customer retention is tracking towards 90% notwithstanding our repricing of certain high rate CDs, the closing of the Garden Grove branch and our recent sale of the Commerce and Santa Fe Springs branches. We believe we'll see increased operating efficiency going forward at these three branches ranked among the highest in terms of all-in cost per deposit acquired from Popular. Moving to slide nine, this slide recaps the trend of accelerating loan originations. In the third quarter, commercial banking produced a record $729 million of new loan originations. Originations were balanced across the commercial business lines as we saw continued strength in our core organic loan growth. Yields on these new commercial loan originations were at 4.3% and increased by six basis points from the prior quarter. Meanwhile, mortgage banking saw third quarter originations finish at $1.1 billion, a 13% decline quarter-over-quarter. Inclusive of commercial banking and mortgage banking, the company is on target to originate over $7 billion in loans in 2015. Our scalable lending platforms continue to support above peer group loan growth. This strong organic loan growth continues the significant progress the bank has made, building scalable product and loan fulfillment platforms, enabling the bank to scale its loan portfolio as necessary to support the bank's continued organic balance sheet growth. We believe our existing learning platform is sufficient to enable our bank to grow over to $9 billion in assets by the year end 2016. With that, I'll turn it back to Steve.

Thanks Jeff. I must commend Jeff and his team for their strong performance, achieving record deposit and loan originations during the quarter. Our strong core deposit growth is enabling us to bring our loan to deposit ratio lower and better in line with our most highly valued peers. We expect to lower our loan to deposit ratio to below 90% over the near-term and for this decrease to be driven by accelerating growth in our low cost core deposit businesses. This will result in continued growth of our securities and liquidity portfolio, leading to a reduction in our efficiency ratio and increase in our liquidity and an increase in our profitability from recurring net interest income. Ultimately, this will cause our balance sheet to better reflect those of our highly valued regional banking peers. Now, let me turn it over to Hugh Boyle, our Chief Risk Officer, to discuss our credit and asset quality.

Thanks, Steve. Asset quality at Banc of California remains strong and steady. Slide 10 in our investor presentation deck addresses some of our asset quality metrics and highlights our allowance for loan and lease losses. As of September 30th, 2015, total delinquent loans were $96 million and remained flat from the prior quarter. On a percentage of total loans basis, delinquent loans represented 2.03% of total loans, the lowest percentage of delinquencies experienced in the last five quarters. On a percentage basis, non-performing assets to total assets declined to 62 basis points, the lowest level experienced in the last five quarters. Year-over-year, our NPA to total asset ratio has improved by 28%. NPAs to total equity ratio has also remained at the low end of our five quarter actual experience at 7% this quarter and has improved 20% year-over-year. Based on the continued stability of our asset quality and the relatively benign macroeconomic environment, the bank's allowance for loan and lease losses or ALLL remained flat quarter-over-quarter at $34.8 million. The ratio of the ALLL to total non-performing loans is 77%, an increase of 17% year-over-year. I direct your attention to the bottom half of slide 10 for a deeper dive. Banc of California's held for investment loan portfolio is comprised of originated loans, loans acquired through acquisition, and purchase loan pools. Let's take each of these three loan types and drill down a little deeper. The originated loans represent loans originated in our normal course of business. Once these loans are funded and booked, they become ALLL attributable on day one, meaning that we are required to book the appropriate ALLL reserve as we book the loan. The ALLL is based on both quantitative and qualitative factors and follows all regulatory and accounting guidance. These originated loans do not have a fair value discount. As of Q3 2015, our ALLL coverage was 1.14% to originated loans. Acquired loans represent HFI loans assumed in our acquisitions. These acquired loans fall into two categories, credit impaired and non-credit impaired. The vast majority of our acquired loans are non-credit impaired and non-credit impaired loans are covered under FAS 91 and individually receive a day one fair value mark. This fair value discount is taken and then each quarter we perform our ALLL analysis and compare our ALLL requirements to the fair value discount on a loan-by-loan basis. When our ALLL analysis indicates that a higher level of reserve is required than presently held in the fair value reserve, we are required to add to our ALLL reserves. If our ALLL analysis indicates a lower reserve requirement on loan when compared to the fair value discount, no additional ALLL is required. Credit impaired loans are covered under SOP 03-3 guidance and also require a day one fair value mark on a loan by loan basis. We took the opportunity to break out the BPOP acquired loans because of their materiality. However, the BPOP loans are covered similarly to our other acquired loans under FAS 91 fair value guidance. The fair value discount represents a loss reserve similar to our ALLL reserve. The fair value discount that you see associated next to each one type is accreted into income over the life of the loans. I will also point out that it is not uncommon and actually fully expected that the ALLL reserve would be reasonably modest when compared to the fair value mark on newly acquired loans. On purchase loans represented generally by season single family residential mortgage loans, these are a mix of both FAS 91 and SOP 03-3 loans. They include both credit and non-credit impaired loans. Unique to these purchase loans we evaluate the fair value mark on a pool basis. As you can see, the bank has a substantial or nearly 9% fair value discount associated with these season loans. Our ALLL to total loans ratio fell by four basis points this quarter from 78 basis points to 74 basis points. The current level of ALLL to total loans has remained virtually flat for the last four quarters after falling from 93 basis points to 75 basis points in Q4, 2014 with the inclusion of the BPOP portfolio. When both the ALLL and fair value discounts are combined relative to total HFI loans, the bank has a 2.65% reserve coverage ratio. Management believes that our current ALLL methodology is robust and results in an appropriate level of reserves for our portfolio. We hope that this information is helpful in better understanding both our asset quality and reserve coverage adequacy. More information will be provided in our 10-Q. And with that, I'll turn it back to Steven Sugarman, our CEO.

Thank you. Finally on slide 11, we outline our outlook for the end of the year and provide preliminary guidance towards 2016. We at the management team are focused on delivering against our commitments to shareholders, including all operating and financial guidance we have provided to investors. We're proud to continue to meet our public guidance and deliver against these promises. We believe it is important to track our guidance and provide updates related to our success, delivering results to meet or exceed the guidance. In April of last year, management announced the acquisition of the California banking franchise of Banco Popular and indicated the transaction would be accretive in its first year, inclusive of related capital issuances, would generated over $30 million of net interest income and would generate an IRR over 20%. Today, one year after the close of the transaction, we can confirm that the BPOP acquisition has exceeded each of these targets. We've retained all of the top lending relationships, approximately 90% of the deposit balances and have completed a payback period of less than one year with profitability exceeding expectations. In May of last year, management set financial targets for year end 2015 run rate with respect to return on average assets, return on average tangible common equity, and consolidated efficiency ratio. We also set run rate targets for the overall business mix in terms of pretax profits generated by our three business segments; commercial banking, mortgage banking, and wealth management. We remain firmly on target to meet or exceed each of these targets, notwithstanding the drag from one-time items. Meanwhile, we have successfully transformed our business mix such that the commercial banking segment was responsible for 75% of our business segment pretax profits during the third quarter. This was up from 25% as of the fourth quarter of 2014. This transformation was the result of an increase of over $20 million of additional quarterly pretax profits from the commercial banking segment compared to the period prior to the closing of the Popular acquisition. Importantly, notwithstanding the success of the Popular acquisition, organic growth has contributed more to the growth in the commercial banking segment than the impact from Popular. This is a testament to the strong internal teams we have built. In November of last year, management expressed a comfort that it would meet or exceed consensus 2015 EPS sell-side analyst estimates of $1.15 per share. Today, we reiterate that we now believe we will exceed this target. As noted previously, our annualized run rate through the third quarter exceeds $1.20 per share. Now, turning towards 2016, management and the Board have kicked off our strategic planning process for 2016, and the Board and management can provide certain preliminary guidance with respect to 2016. We target EPS growth for 2016 to exceed 15% year-over-year. We're comfortable that the company is well positioned to meet or exceed existing consensus estimates for 2016 of $1.26 per share. We anticipate that annual estimate will prove to be conservative. We expect with respect to asset growth, we target finishing 2015 with total assets of $8 billion to $8.5 billion and we target 15% plus asset growth in 2016. With respect to our efficiency ratio, we're reducing our target efficiency ratio to 65% to 70% in 2016. This is a 5% reduction from our current guidance. With respect to overall financial metrics, we target reaching our goals of 1% plus ROA and 15% plus ROTCE in 2016. Before I open the call up for questions, I want to recognize Ron Nicolas who'll be leaving the bank during the fourth quarter. I've been honored to serve next to Ron Nicolas over the past three years and wish him the best in the future. Ron joined Banc of California shortly after I was appointed CEO and has been a key player in the success of the company and in helping us achieve much of the positive results we reported today. To Ron, I say, job well done. Thank you. Due in part to Ron's leadership, the bank has a very strong and deep finance team that is well suited to continue to lead our organization going forward. I'm thrilled that the finance organization is in such a strong condition with the talent and experience necessary to allow us to move forward seamlessly. I anticipate that we will formally announce Ron's successor in early November. This concludes our formal comments today. Operator, we're ready to open the call up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Hey guys, good morning.

Good morning Gary.

Sure -- good morning. I just had a couple of questions. I guess, first, I wonder if you could break out on the gain on sale line. How much of that was mortgage versus what looks maybe like some sales in commercial real estate et cetera?

Sure. Our gain on sale from loan sales is characterized in two different places on our income statement. One is mortgage banking activities and the other is loan sales. So, I presume the line that you're looking at includes our loan sales that come from sale of the single family loans, SPA loans, the loans from our sale of our two branches this last quarter and represented approximately $9.7 million of loan sale. This is part of our ongoing business of managing our portfolio and recognizing gain on sale gains within the commercial banking segment. The mortgage banking gain on sale from bank home loans is reflected in a different line.

Okay, so the $9.7 million gain on sale of loans, how much of that was from the loans sold with the branches?

The branch sale, gain on sale was just $1 million.

So was most of that SBA or what was the driver of the increase in that line?

Yes, sure. The branch sale was $600,000 and the rest was a mix of our single family loan sale business that's been kind of ongoing for each of the last several quarters over the last couple of years and SBA loan sales. Additionally, and importantly, during the quarter, we also had our first Freddie Mac portfolio loan sale of multi-family loans, which is a business we're very excited about. We became a Freddie Mac approved seller during the third quarter and it's something that we anticipate will have positive benefits for shareholders on a go-forward basis.

And do you expect that to be a quarterly, current, semiannual, any sense of how often you would do something like that?

The program under Freddie Mac is for low balance multi-family lending, which is generally the business we're in. It becomes a function of our origination capacity to build the adequate size and then market pricing versus holding the loans for investment. Generally, we will sell loans only as we reach close to or above $100 million in size and so the accelerating commercial bank origination number becomes important to the velocity at which loan sales will occur.

Okay. Thanks for that. And then just a question in terms of kind of the balance sheet management, obviously, pretty sizable increase in securities in the quarter on an average basis, and then period end as well. So, would you talk about how you're going to kind of manage that portfolio relative to the size of the overall balance sheet on a go-forward basis?

Sure. It's important to know that we entered the quarter well below our highly valued industry peers with regard to the size of our securities and liquidity portfolio and in some cases, by almost 50% to 100% margin. As we move forward, we would expect our loan-to-deposit ratio to come down. We've provided guidance today that we would target it coming down to 90% or less, to bring us more into line with our highly valued peers. This process will result in a larger relative size of our securities portfolio and also it will be managed to prudently evaluate and protect against interest rate risk and duration risk and also with an eye towards classifying securities acquired and available for sale versus held to maturity. During the quarter, we saw over a 50 basis point decrease in the portfolio duration and we also remixed to our securities to reduce the potential for extension risk in a rising rate environment. So, we believe that as we grow our securities portfolio, in the third quarter, we also reduced duration and reduced extension risk issues.

Okay. Thanks for the color.

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

Hey guys. I guess just following up on the balance sheet here, the big increase in the FHLB advances, was that to support the liquidity of the new securities added and will those eventually be paid down once deposits come in even stronger?

Yeah, I appreciate the question. Now, what you saw on FHLB was primarily just a spot mark period end which was driven by some remixing of deposit balances across the period end. To update kind of guidance to today, we currently stand at approximately $590 million of FHLB borrowings. So, over the last couple of weeks, it's come down about $240 million. And FHLB is primarily used as an interest rate management tool which results for us in approximately $400 million of that $590 million being termed out in the lattered structure to help manage our interest rate risk and EVA [ph].

Okay. So, that's very helpful. And then just maybe if you can provide an update on the mortgage business so far this quarter, what trends are you seeing there as far as gain on sales revenue tenure?

Sure. Gain on sale revenue in the mortgage business as a percent of loans was with actually a bright spot during the third quarter as we saw increases which were really result of the positive management capabilities of remixing the origination channels to the higher value mortgage origination channels. So, gain on sale and even as we track forward to this quarter, we're seeing similar trends as the third quarter on the gain on sale margin. The key thing for us on this because we're having very good results in protecting our gain on sale margins by origination channel and loan type, the key thing that we track is the mix of the loan types and origination channels within our mortgage banking activities. And what we're seeing is an improved mix of more originations coming from our retail channels over our third-party channels. And so our volume reductions have really been in our lower margin businesses, which is a positive.

Got you. That's helpful. And then, just along those lines as well--

And Andy, I'll just add that one of the things that we like about our retail distribution channel is exactly that where we're able to manage our business, we believe a little bit better given that it's a retail channel than certain businesses that focus primarily on third-party originators.

Right. And then just as far as purchase versus refi, I would imagine that refi is falling off a little bit this quarter. Just curious what you've been seeing there?

I think over time, we track the longer term expectation around 60% purchase and we're seeing that as the level of the originations are coming out to over the last couple of months. So historically, we've seen some bundles in refis and we've seen some volatility in that number, but the 60% purchase number is what we're seeing in current market environment.

Okay, very helpful. Thanks.

Our next question comes from Don Worthington of Raymond James. Please go ahead.

Good morning everyone.

Good morning Don.

One question on just the contribution from Palisades in the quarter, was that primarily advisory fees or where there some liquidity event profits in the quarter?

No, it was primarily advisory fees and recurring income streams. The segment financials for Palisades Group will show that their pretax profits were off quarter-over-quarter and that's mostly because the third quarter reflected primarily just advisory fee economics.

Okay. And then probably about a year away from this, but in terms of the $10 billion asset threshold, is the bank kind of prepping for that and incurring any cost related to crossing that threshold? It looks like 2017 event at this point.

Yeah, the implications from crossing the $10 billion threshold is something that's on our minds. However, we'd point out that, at this point, it's almost impossible for the impact to be prior to 2017 and more likely to be 2018 or beyond. So, the things we're doing investing in our platform are being done to build a prudent and scalable platform. The investments we're making in our stress testing is being done to help us to ensure that we have a prudent and analytically driven capital model. And so these are the things that we're doing because we believe that they are the right way to manage the business. That being said, there is a high degree of overlap between those things that we do for our own management purposes and those things that would become more of a regulatory requirement, should we go over $10 billion. So, I wouldn't characterize costs as any cost that we're incurring exclusively to go over $10 billion. We're trying to run our business prudently and safely for the pace of growth that we have, for the diversity of our business function and to ensure that our capital plan and stress testing adequately protects the bank and our shareholders through various market cycles.

Okay, great. Thank you.

Our next question comes from Tim Coffey of FIG Partners. Please go ahead.

Great. Thank you. Question, what was the volume of loans sold out of mortgage unit this quarter?

Within BHL, we sold, I believe, just over $1 billion of mortgages. Just give me one second, and I'll give you an exact number, but we anticipate trying to sell -- we anticipate trying to sell generally an amount equal to our production. Our sales in the quarter is $1.17 billion, so for this quarter, we actually outsold our production marginally.

And you said that 60% of that of the production was purchase?

Yes, 59% to be exact was purchase. It's not always a 100% tied for the same quarter purchases and sales because there is some overlap for about a quarter, I mean, for about a month or so of the quarter, but yes, about 59% was purchases. Also importantly, our retail channel originated between 70% and 75% of our overall originations during the quarter which we view as a very strong metric.

And then in the loan portfolio, the held for investment portfolio, commercial loans, commercial real estate has come down in the last quarter. Is that a function of pay off?

This is a function of a few different factors, but yes, there were payoffs and pay-downs. Additionally, as part of the Popular Community Bank acquisition, there is a one-year post-flows period by which we evaluate the loans that come on in the books before we close off the day one accounting from that acquisition. We have undertaken a pretty material and focused loan level review of our loans and for those loans that are owner-occupied commercial real estate, but underwritten primarily on the financials of the business as opposed to commercial real estate that is non-owner occupied or investor type properties, we -- our analysis sought to standardize the categorization into our policies and our OCC guidance and that resulted in a shift which is part of the day one accounting for Popular where C&I lending primarily increased and it came from, in large part, CRE owner occupied categories.

Okay. Do you anticipate that trend continuing -- that review continuing into the fourth quarter?

No, that review is largely complete. I would be surprised if -- I think it would be appropriate to assume that the categorization today reflects the result of our work as part of this integration process. It's also meaningful to know that our C&I lending is now a bigger portion of our loan balance sheet than either traditional CRE lending or multi-family lending, based on kind of the completed loan level review across our organization.

Okay. And then the single-family residential mortgages on the loan held for investment portfolio, the increase there, was that any kind of inter-balance sheet transfer like last quarter?

No. Given our capital and financial position, we evaluate from time-to-time our originations and determine whether such originations will be made for investment or with intent to sell. It's something that we believe allows us to attract the top quality producers because they know that they will always be able to produce high-quality and financially attractive loans on our platform because they will not be shut off due to balance sheet-type constraints. Given where we are on capital and on our business and on really accelerating deposit growth, our management determined that the originations within that channel, at least the highest quality originations within that channel would deliver our shareholders the highest return if they were placed into our HFI. So, there is no material intercompany transfers. This is all just from new originations during the quarter that went straight to HFI.

Okay, that's helpful. And then my last question is, given your growth, you kind of discuss your view of your capital levels currently and in relation to your expected balance sheet growth going into next year?

Sure. Capital and growth are thing that we give a significant amount of thought and analysis towards. The way that we manage our balance sheet and think about our capital levels is based on a very rigorous capital planning and stress testing regime. We've adopted the principles of DFAST and take our portfolio through stress testing of adverse, severely adverse and some idiosyncratic stresses to ensure that like larger banks, we have a way to analytically test the capital impact from severe or adverse market conditions. What we do is we look to ensure we have adequate capital to withstand any scenario and then we add a buffer to that to ensure that we have adequate capital to have a prudent buffer so that we're not operating too lower levels. A lot of the benefits we're seeing from the diversification of our business mix and also from the expansion of our securities portfolio is to ensure that we have an appropriate level of capital and the benefit of a diverse portfolio and diverse business mix is less significant deterioration in capital on stressed market environment. So, we put our capital structure and our capital levels through this DFAST consistent approach and ensure that we are well-positioned. We've previously given guidance that for our business plan we did not see a common equity raise in the near future. We believe that with our guidance today, we're well-positioned with regard to capital and then we're able to execute against our plan as laid out in the preliminary guidance.

Great. Well, Steve thank you very much. Those are my questions.

[Operator Instructions] Our next question comes from Jacque Chimera of KBW. Please go ahead.

Steve, I wonder if you could provide some color on the increase in the balances per customer, is that from just existing customers continuing to deposit more money, or are you seeing your new customers having a larger balance account like you've got on the portfolio already.

I think that there is a mix. We are actively making -- improving the alignment between our value proposition and our customer base through honing our pricing and deepening our relationships. Some of our new businesses that we have launched have higher average account size metrics than some of the existing businesses. That results in greater operating efficiencies and also a more targeted and aligned customer base. Also some of our activities that you've seen over the last quarter have the positive result of increasing average account size, including the branch sales that we completed and also certain other activities. I think you'll see the benefit from an increased average deposit account size come through in future quarters through better operating leverage that isn't fully realized in the first quarter. But when you think about business and mix, just as an example, our private banking segment has seen really positive growth. Their deposit mix was up, I think close to 8%. And I believe their overall balances are up from a deposit side over 50% since we acquired the franchise. Actions like that, where you have real success and momentum coming from a segment like private banking, which tends to be a higher quality earnings stream and a higher multiple earnings stream, but also tends to remix your portfolio towards an higher average account size.

So, is private banking then a main contributor to the success you've had in growing your non-interest bearing deposits or are there other sort of incentives that you might have like reduced fees for borrowers as they meet certain threshold things like that?

No, it's not a -- we're not selling on the financial. We're looking to lower our cost-to-deposits and improve the earnings. So, during the third quarter, we actually saw very strong deposit growth numbers from every segment within commercial banking. It was a positive quarter within each segment or within each unit. When you think about some of the initiatives we've put in place over the last couple of years, one of them was our C&I bank where we've hired and recast the organization to really have a deposit focus first. They are starting to gain traction and in that process, they built out the platform, reorganized their efforts and they had a very positive third quarter. I mentioned the private bank; our community banking segment also had a positive quarter and continues to see real momentum towards deposit growth within our retail branch network. Also the same for some of our specialty lines of deposits that also saw meaning deposit growth. So, it's not a story of a single person, team or unit. It was strength across the platform.

That's very helpful. Thank you. And the new office space announcements that you recently made, what do you expect that to contribute to your efficiency goal once the move is complete and everything in the phase?

Yeah. I appreciate the question. I'm not -- it will contribute once the move is complete to our efficiency, but I won't expect it to be a material lever in that regard, we have more material ways to contribute to efficiency. The thing that we're most excited about is the operating leverage we can get from consolidating our operations and staffing into a single location, the more effective communication, the more and what we believe will be a better kind of credit and risk culture, but also a better way to serve our customers with greater speed and agility through more streamlined communication and location, so we believe that having a space like that is a strategic benefit to us, but while it may have an impact on efficiency at the margin, that's not the driver of that. It's important to note that this building is near our current location. It also happens to be near the prior building that we considered for our headquarters and it is a more economically efficient use of capital we believe, given the repricing and revaluation we saw with the prior building, the decision just is appropriate to sell that prior building and acquire this one because it is a much more efficient use of our capital and economically makes a lot of sense.

The owner-occupied CREs that you re-evaluated during the quarter, did that have an impact on the change in goodwill or was it something else that drove that?

The changes in goodwill is part of the exact same process. So, looking through the Popular Community Bank acquisition and making sure we're appropriately reserved against loan portfolios, the loan portfolio and then we also think through our credit loss protection from Banco Popular, after kind of conducting very rigorous and deep analysis, we feel comfortable with where we are now as far as our day one accounting. That being said, as Hugh Boyle mentioned, I believe, in his comments, we continue to see very strong credit results from the Popular portfolio. This portfolio continues to have the credit risk that is similar to what it was on day one and as we say here today, we are not a level where we will currently be triggering the loss share provision because the performance of our portfolio has been strong, but this was kind of an accounting day one analysis that resulted in the mark and when you look at the Popular day one accounting with regard to the loan book and consider the mark in terms of both rate and credit, it's coming in at just under 2%. So, we think that's a prudent number, all things considered.

And then just one last one if I could, if you could just provide whatever update you can on how the CFO search is going?

Sure. I think that we have a very thoughtful and positive process. We've seen very strong candidates both externally and internally and have been very happy with our progress. What I think I'm most pleased about is in going through the process, you get to really look at the talent and strength of your team and think through needs and opportunities and what's really kind of emerged is clarity on the real talented, experienced and strong financial team we have that focuses on our capital markets activities, our treasury activities, our accounting and our strategic planning and with that, as I mentioned in my comment, we believe our transition is going to be seamless. We don't see risks and we're proceeding apace and expect to have an announcement for you in the near-term.

Okay, great. Thanks for all the color and answering all my questions. I appreciate it.

Thank you, Jacque.

And thank you, this concludes our question-and-session. I would now like to turn the conference back over to Mr. Steve Sugarman, President and CEO for any closing remarks.

Thank you everyone for joining us today. We look forward to speaking with you again for the year end recap. Thank you.

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