Banc of California, Inc. (BANC) Q4 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Banc of California Incorporated, Fourth Quarter 2016 Earnings Conference Call and Webcast. All participants will be in a 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 Mr. Tim Sedabres, Head of Investor Relations.

Thank you and good morning everyone. Thank you for joining us for today's fourth quarter 2016 earnings conference call. Joining me on the call today to discuss fourth quarter results are Banc of California's Interim Chief Executive Officer & Chief Risk Officer, Hugh Boyle; and Interim President and Chief Financial Officer and Chief Strategy Officer, Fran Turner. Today's conference call is being recorded, and a copy of the recording will be available later on the Company's Investor Relations website. We have furnished a presentation that management will reference on today's call and that presentation is also available on our website under the Investor Relations section. I want to remind everyone that as always, certain elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. Cautionary comments regarding forward-looking statements are outlined on Slide 1 of today's presentation, which apply to our comments today. Please allow me to now turn the call over to John Grosvenor, General Counsel for Banc of California, who will make few introductory remarks.

Thank you, Tim, good morning ladies and gentleman. Before the management team begins its prepared remarks regarding the quarter, let me begin with a few introductory comments. I want to first summarize our recent announcements. Last Monday, we announced that Steven Sugarman, resigned from his role as Chief Executive and Chairman of the Board of Directors. The Board has formed a search committee and retained Korn Ferry to identify candidates who can lead efforts to capitalize on growth opportunities and enhance stockholder value. In addition, we announce that the Board is considering measure to enhance corporate governance and has already announced changes that includes separating the roles of Board Chair and Chief Executive Officer, approving the separation of the compensation nominating and corporate governance functions into two separate Board committees and conducting a comprehensive review of bank governance, including policies to further restrict related party transactions in the future. Additional changes will be announced as the review continues. In that regard, I want to affirm that the Board of Directors is fully engaged and unequivocally dedicated to discharging its duties and obligations to the Company and its stockholders as well as committed to engaging in meaningful dialog with interested stakeholders toward that end. Finally, let me reiterate that in October a special committee of the Board engaged in WilmerHale, a law firm which has not previously worked for the Company or its affiliates to conduct an independent investigation into several allegations against the Company and the bank. As we noted in our prior press release and I quote while certain work needs to be completed, today WilmerHale's inquiry has not found any violation of law or evidence that Jason Galanis has any direct or indirect control or undue influence over the Company or evidence establishing that any loan, related party transaction or any other circumstance has impaired the independence of any director. Now, the matters that were the subject is a special committee's investigation do not bear upon the Company's operating results or financial conditions. These matters are the purview of the Board of Directors and involve ongoing litigation therefore management will have no additional comments on these matters and will not be taking questions on these subjects during today's call. Now, with those remarks concluded, let me turn the call over to Hugh and Fran to discuss our quarterly results.

Thank you, John. As Banc of California moves forward under new leadership, we remain steadfast to our mission and vision of being California's bank which truly differentiates our bank from its peers. I remain optimistic and excited about the opportunities that we have in front of us and deeply appreciate the dedication, talent and entrepreneurial spirit of my colleagues who serve our great clients and communities of California every day. On behalf of our Board and executive team, I want to thank the employee shareholders of Banc of California for their contributions in 2016, without them we would be unable to fulfill our mission as California's bank. While we cannot control for some external variables creating uncertainty in the markets for our bank, we are addressing many of the issues that have been recently raised. It is the intent of the management team to focus, now in particular, on maintaining a sound and responsible strategy in day-to-day operations of the bank. The bank today is well positioned to deliver financial solutions for California's diverse communities and I believe that our franchise continues to generate great value to our clients, shareholders, employees and communities. Now, let me take the opportunity to briefly summarize our high level returns and then speak to asset quality before turning the presentation over to Fran who will discuss our business in more detail. First, let me recap our successful 2016 results. As you can see on Slide 2, our strong 2016 financial performance demonstrates the sound execution and tangible results of our mission of being California's bank. Fully diluted earnings per share were $0.54 for the fourth quarter and a $1.94 for the full year, validating the capability of Banc of California's strategy and the commitment to our vision. California's diverse population of entrepreneurs and communities desire financial relationship that reflects their own values and culture, Banc of California embodies the resourcefulness and creativity that drives the California economy and our performance in 2016 is a testament to that. The communities that we serve are dynamic, constantly innovating engines of prosperity. We aim to be a banking partner that shares our client's values and has the same passion about our work as they have about theirs. Our commitment to California has delivered strong returns over the past few years. In 2016, we crossed a significant milestone of 10 billion in total assets and became a midsized bank which has the people, products, and balance sheet to provide full solutions for our clients. We now stand as the only full service midsized bank focused exclusively on California. Turning to Page 3, in the fourth quarter we generated a 1.1% return on total assets and over 17% return on tangible common equity. For the quarter as well as for the full year, we exceeded the commitments we made during the year for a 1% plus return on assets and a 15% return on tangible common equity. Earnings per share and pre-tax net income continue to show steady increases. On Slide 4, we highlight strategic actions undertaken in Q4 directed at focusing, optimizing and de-risking our balance sheet. We completed this divestiture of our Commercial Equipment Finance division, which included 243 million of loan balances. This move reduced the business with higher overall charge-off levels and our national footprints that allow the bank to redeploy and refocus our capital in supportive California and its communities. We sold 604 million of seasoned mortgage loans at a premium to our book or carried value. This transaction substantially reduces our exposure to the mortgage sector and winds down an opportunistic lending strategy that was undertaken in the aftermath and recovery of the great recession. This historical season loan strategy with its attractive interest spread helped the bank to diversify and build its commercial banking book of business. This sale transaction was completed at a price above our book value and represented a new gain on sales for the bank thus reflecting our conservative, internal marks and disciplined market approach. Finally, we made significant progress de-risking our loan portfolio. We were able to reduce our non-performing assets by 51%, reduced our delinquent loans by 42% and reduced our TDR portfolio by 59% during the quarter through a combination of active asset management's and loan sales. As a result of the above, our credit quality is now among the best it has been at our bank and compares very favorably to peers. Increase in consignment liquidity continues to be an ongoing focal point as we reduced our FHLB borrowings by 36% to 4% of total assets during the fourth quarter. Onto Slide 5, in the fourth quarter we continue to make substantial progress reducing our credit risk profile by reducing non-performing assets by 51% sequentially. Non-performing assets to total assets are down from 0.56% from the prior year's quarter to just 0.16% today. The strength of our credit portfolio has not been this robust since our recapitalization in 2010. Our ALLL and non-performing loans coverage ratio increased by 137% and now stands at 271%. Our non-performing assets to equity continue to its quarterly decline to 1.8%, a decrease of 75% from the fourth quarter last year, and we saw a total delinquent loans decline to just 1% of total loans. Additionally, our ALLL to total loans ratio increased 6 basis points over the quarter. If you turn to Slide 6, you will see a side-by-side comparison of how our NPA to total assets ratio stacks up against our peers. We are pleased about the progress we have made in reducing that amount of risk in our portfolio and when thinking about this particular metrics looks forward to maintaining our place among the best of our peers. I'd now like to turn it over to our Interim President and Chief Financial Officer, Fran Turner, who will talk in more detail about our performance.

Thank you, Hugh. Let me began on Slide 7. Before entering into our financial metrics, I would like to take this opportunity to briefly discuss how we successfully empower California's diverse businesses, entrepreneurs and communities. Over the past five years, we have assembled a platform of businesses with the breadth and depth of products, tailored to serve uniqueness of California's economy. Significant investments were made in a lending and banking platform as you see illustrated in 2013, 2014 and 2015 to build our franchise with the vision of being California's bank. As we stand today in 2017, these once J-curved businesses have mostly reach their inflection points and our increasing profitable contributors to our business model. These businesses are lead by experience bankers and more importantly entrepreneurs, who joined our platform for the opportunity to release their passion and drive to build and grow successful businesses. I'd like to thank our Managing Directors, Thomas Senske of CRE Multifamily; Steven Canup of Institutional Banking and Trust; Gaylin Anderson of Retail Banking; Zoila Price of Warehouse Lending; Julie Duong of Portfolio Lending; Heather Endresen of SBA; David Park, our Business Banking; Jim Fraser of Construction Lending; Jay Sanders of Private Banking; Ben Kessler of Payment Solutions; and Ted Ray of Mortgage Banking for their continued efforts and dedication to California's entrepreneurs, businesses and communities. We continue to believe that hiring the best talent is one of the keys to building a lasting franchise and we will continue to work to attract additional top banking performers. For example, we recently invested an additional talent for our Private Banking Division, and we hired approximately a dozen experienced and incredibly talented Private Banker Relationship Manager and Client Support Staff to continue building the business. Additionally, we recently added a San Diego based business banking team that has deep tie to the local community and has been in the areas for over 20 years. We have high expectations in 2017 for all our teams, and look forward to helping them prosper and grow in a responsible and disciplined fashion. Looking forward with the same deep and broad Product and Solutions that we have built over the past five years to serve our clients, we believe there is an opportunity to optimize this approach while still providing high touch service to our clients. Most of our businesses have reached operational scale and it can continue to grow and expand client relationships with a refined focus on efficiency and scalability. Slide 8 reviews the upward trend of growing deposit balances on a quarterly basis throughout 2016, and annually since 2012. Deposit balances increased by 45% for the full year and increased by $64 million from the prior quarter. Our ability to source and gather deposits of the past few years has been a defining trait of Banc of California specifically our Retail Banking, Commercial Banking, Private Banking and Institutional Banking have created great connectivity with our clientele and developed tailored products to suit the needs of the California Entrepreneur, Business Owner and Communities. Slide 9 showcases that by growing core deposits, we are able to fund strong loan growth and remix the loan book toward an increasing percentage of commercial credits. Commercial loans now represent 63% of total held for investment loan balances up from 54% one year ago. Through this deposit and loan growth, we are able to grow spread-based revenue which increase by over $100 million or 45% on a full year basis and has grown at a rate of 63% annually since 2012. Turning to Slide 10, we highlight a walkthrough of the change in the total loan balance during the quarter, while our total loan originations for the fourth quarter remains strong at $2.3 billion including $1 billion of commercial banking segment loan production. Our overall loan balances declined during Q4 due to targeted sales in accordance with our balance sheet optimization strategy. Our net loan balance grew $331 million or 5% in Q4 before counting for the sales of $604 million of seasoned residential mortgage pools. The sale of our Commercial Equipment Finance division and a sale of a pool of non-performing loans that did not been to our targeted portfolio risk profile. As a result of the loan sales completed during the fourth quarter, we reinvest the cash proceeds and purchased $650 million of agency securities and $200 million of CLOs. These practices drove the $440 million increase in the available for sales securities during the quarter. Our CLO book is diversified across multiple issues and managers, and totals 1.7 billion as of yearend, with $1.4 billion in the available for sale portfolio and $330 million in the health to maturity portfolio, 100% of our CLOs are rated AA or AAA. You can see that our loan originations for the fourth quarter were well balanced among three commercial banking segments. Total commercial banking loan production was $1 billion for the quarter. C&I loans over $330 million in Q4 and $354 million that was produced by the CRE and multifamily segment which was the highest quarterly amount to date for Banc of California. For the full year, we produced $9.5 billion of loan including $4.3 billion of commercial banking loan production during the year which was up 11% from 2015. Our mortgage banking originations totaled $1.3 billion for the quarter driven by strong yearend production. On Slide 11, our adjusted efficiency ratio rose slightly during Q4 to 67%, up from 62% in the third quarter and down from 75% for the full year 2015. IF we breakout the banking segment that go into that, the adjusted efficiency ratio for the commercial segment was 61% for the quarter, excluding the above the line tax equity expense. The efficiency ratio for the mortgage banking segment was 78% for the fourth quarter. The commercial banking segment efficiency ratio was negatively impacted during the quarter due to elevated legal expenses. The mortgage banking segment delivered solid results while benefitting from a positive $5 million fair value adjusted on the MSR asset during the quarter. The MSR marks hit the income statement on the loan servicing income line item. We are driving down the consolidate efficiency ratio by continue to invest in and grow the commercial banking segment. By further scaling our commercial banking business, we expect to drive the consolidated ratio lower overtime. Salaries and benefits increased by $3.6 million compared to the prior quarter. The uptick was primarily driven by investments in our banking teams. Professional fees increased by $4.9 million in the fourth quarter including $4.2 million of legal, professional and audit fees associated with the special committee investigation. Our asset to FTE continues to improve in 2016 to end up at $6.1 million or a 27% increase year-over-year. Slide 12 takes the look at our capital position. As you can see our common equity Tier 1 capital ratio hit its 15 month peak in the fourth quarter at 9.4% and whole Tier 1 Q4 matched Q1 of last year at 13.2%. Our capital ratios exceeded Basel III fully phasing guidelines with strong capital level positions us well heading at the 2017 to continue to support the organic growth of our business. Given the state of the capital market today for us, we're focused on controlling, what we can control in regards to best managing the current capital we have today and utilizing our own internal capital generation to fund our asset growth. Our mission and vision are the foundation of what makes Banc of California successful. On Slide 13, you can clearly see these results. Both sides of our balance sheet have seen strong growth with assets having grown at an annual rate of 60% since 2012. And similarly our deposits have grown at an annual rate of 63% over the same time period. Net income has growth and annually to 110% and our earnings per share have growth adequate just under 50% per year. This performance demonstrates the potential that we've tapped into by focusing on California and its communities and its entrepreneurs. This is what we mean when we say California strong. Now, I'd like to hand it back to Hugh, to discuss more about our business and guidance.

Thank you, Franz. As we move forward in 2017, I would like to share our guiding principles that will remain fixed and steady. We believe these guiding principals will bring a fresh prospective to the bank that reinforces and builds upon the foundation that we already have in place. Let me now direct your attention to Slide 14. The immutable foundation of Banc of California is our mission and vision. We're California's bank. Our lending activities are focused on California with 90 offices throughout the states, including allover retail banking locations. We lend to customers that we know and share our community with, which has resulted in historically strong asset quality. Our guiding principles are represented by the core pillars shown, responsible and discipline growth. I continue to be very optimistic about our growth prospects; the growth will be discipline to ensure earnings continuity. The California market is diverse, dynamic and large. We believe California's communities remained underserved as our largest states and regional competition increasingly redirects their focus outside of the state. Strong and stable asset quality, strong and stable asset quality and effective risk management allows the bank to continue growing assertively, while remaining prudent in the management of risk. Focus and optimization of our business, we will continue to identify opportunities to focus and optimize our business in an effort to ensure that our resources are efficiently deployed to best lead our mission and vision. Strong corporate governance, the Board has taken decisive actions on this front, as described by John in our opening remarks by separating the roles of Board Chair and Chief Executive Officer, approving a separation of the compensation, nominating and corporate governance functions in two separate board committees and conducting a comprehensive review of bank governance, including policies to further restrict related policies to further restrict related party transactions in the future. The four pillars I just discussed support our continued key drivers of growth and profitability. Growing spread based revenue, demonstrating expense management inefficiency and investing in scalable products and services. We believe this fresh perspective on our business will enhance value to our shareholders, clients, employees, and communities. Moving on to Slide 15, in 2016, we exceeded the year end guidance that we updated in our last earnings call. Our ROAA for the year was 1.11% versus guidance of 1% plus and our ROATCE finished at 17.3% versus a target of 15%. Our earnings per share came at $0.09 above expectations. If you turn to Slide 16, you will see that we remain optimistic about our 2017 prospects. While our first quarter core operations may be impacted somewhat by elevated legal cost. We believe that our full year 2017 returns will achieve an ROA of 1% and a ROATCE of 15%. We are comfortable guiding earnings per share for 2017 to meet or exceed current analyst consensus expectations. Thank you for your time today. We're excited about our 2017 opportunity and believe that by using our guiding principles and staying to our mission and vision of being California's bank, we will build an enduring banking institution. That will conclude our formal comments today, and I'd now like to open up the line and take your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jacqui Boland with KBW.

Just looking at the loan portfolio pools. Obviously, significant sales in the quarter-end declines, I wondered if you could talk about -- I know the balances are in the press release but just, where you see those balances trending over the next couple of quarters and then also if you wouldn't mind breaking out the composition of the gain on sale income from the quarter? What came from those versus NPLs versus the lease sale?

Sure. So I'll start with latter Jacqui, so the gain on sales which represented by $604 million in the SFR, which yielded approximately $19 million in revenue. On the SBA, net gain and sale, the SBA was 1.5 and about 700,000 came from our jumbo sales. With that portfolio we have approximately 155 million of carrying value and again we'll look at opportunistically for sale of that portfolio has aligned with our strategic plan. If you look a look at the Commercial Equipment transaction, that's actually allocated in the other income category and that represents $2.6 million as a business sales. And the transaction also released approximately $3 million in provision, and just as a note that business historically represented almost three quarters of our charge-offs. And more brightly going forward, we remain optimistic about loan growth we continue to attract high quality teams. The California market and economy are strong and stable, and we expect the growth story that you have seen before while potentially a bit more disciplined to continue.

And as you look forward, given the events over the last several months, how have they, if at all, impacted the business model just in terms of how you're thinking about potential asset sales? Any deleveraging or securities sales that might come going forward, target capital ratios you're looking at and how you're thinking about the dividend as we move forward?

Great question. We fundamentally the bank is well capitalized, and we have strong and deep and multiple sources of liquidity. We have sufficient capital to grow throughout 2017, without having to access the capital markets. Frankly with the external events that have occurred management is taking a lot of time to communicate actively and directly with all of our employees to have good and constant updates with our customers. And we are quite pleased that the support our customers have shown and the commitment they have to the organization.

And is there a possibility for lower security balances going forward? I know on the last quarter, you had talked about perhaps some security sales. Do you see any of that or are you pretty happy with the composition of the balance sheet as it stands today?

Yes, let me take that question little more broadly and then we can drill that if you have follow-up questions. At a high level, we believe there is proper place and role for the securities portfolio on the banks balance sheet. And the securities portfolio provides a reliable source of liquidity and the cost in capital efficient assets. Strategically, we are using the securities portfolio to repositioning and remake the credit exposure of the organization particularly the CLOs, which represents C&I exposure. We are also using the longer duration pass-through agencies to help offset some of the MSR volatility. The CLO portfolio is very high quality but it also has an important aspect from an asset liability standpoint and that it's --it resets from a pricing standpoint every 90 days, and help the bank from an asset liability perspective. Having said all that Jacqui what you will see over the next couple of quarters is that we are probably in the upper range for securities portfolio relative to overall assets. And you will see that securities portfolio redeployed as we enhancing grow our loan production throughout 2017.

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

Just some questions on the EPS guidance for this year. How much of that do you think is going to result from better spread income or is there going to be another high-level of gain on sale of portfolio loans and then presumably mortgage banking, you're going to decline this year. Just trying to get some trajectory of what the composition of your guidance for EPS for 2017?

Sure. Now we are in the process of skilled building our 2000 Annual operating plan and working with the Board to finalize on that, but you are going to see the things focused specifically around the business units and we're in a important situation whereby our business units can generate significant production and then we take strategic decisions in regards to what we decide to sell post that production. On corresponding you see a focused around the commercial lending, the CRE, the multifamily, the asset backed then also the institutional. With that being said, we're focused on ensuring that going forward that we can actually released certain owners to capital markets to regarding to our portfolio products. And then mortgage banking, we do also believe that we anticipate that to be in a line with the market, which is likely somewhat down. But again the capital market sales are part of our recurring businesses based on selling the excess production that we have in our business.

Okay. And now shifting just towards the margin, as it looks like the remixing of it causes a pressure this quarter and if we -- to the high level where the securities might be. Is this kind of where a floor is in the margin of 3.13%? Or do you think it might go down a little bit before building?

So, specifically around the NIM, the NIM was down due to the sales of the commercial equipment portfolio which had a yield of 5.8% and the asset which had a yield of approximately 5.23% so excluding the commercial equipment and the SFR sales, the NIM actually would have been 3.27%. So, again 5 basis points-off, so we see the standard compression of the rest of the industry receiving but everything is still to remain from a NIM perspective.

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

Just to ask again on the single-family -- on the seasoned pools, a few hundred million left, I think at the end of the quarter. And now that remaining portfolio has a yield that is closer to the full loan portfolio yield. How do you think about just getting rid of the rest of that or is that something you hold on to for a little while?

We're going to win the process of looking strategically at that portfolio now it would be a bit premature to provide definitive guidance on that but we're looking at not only the portfolio but the outlook for raising another thing. We're in the process as Fran indicated of reviewing the annual plan and will be working closely with the Board as we move forward shortly but a little premature I think to be specific on that front.

Okay. And then you mentioned a couple times, I think it was in the press release, kind of a fresh perspective. Can you point to one or two things specifically that would change with Steve Sugarman's departure under your watch or on a more permanent basis -- once a permanent CEO is named?

All I can do is speak for my role over the last five days moving forward on an interim basis. My personal view is very consistent with the guiding principles that we laid out in the presentation deck. I've had significant experience working with banks through my Investment Banking days in the many capacities. We will remain a growth organization and I fully believe that the California market is a strong and deep market and we continue to great bankers even through these challenging times. So our prospects are optimistic from my standpoint with regard to growth, but we are going to be disciplined at our focus. And growth to growth purposes for say is something that we are going to refine and make sure that we are also keeping an eye on returning shareholder value. The other guiding principles are -- I’ll just touch on briefly but -- and you are seeing with the asset quality to remain a growth organization, one these to have great controls, both enterprise risk and asset quality. And our goal is not ever have that compromise or jeopardize our strategy. And then you also see that we are going to start looking more like a traditional bank and focusing on expense initiatives, really focusing on California and prioritizing our business opportunities in a way that we think we will create value. And then finally, you are going to see governance become a tenant of this organization. The Board has acted very decisively over the last five days and has -- and we have released information to that effect. You should and can expect additional governance measures to come out over the near term.

Okay and just one last question from me. I wonder if from a company wise we started, if you could kind of talk about. What a profile would be of a new permits CEO? What's the background was experienced?

Yes, that would probably be in an appropriate for me to indicate. As we said earlier in our opening comments the Board has routine, a well-known search from, the Board will make that decision when it's appropriate. Having said that, the Board has also providing clear guidance that they expect this interim team to lead and to manage the Company and that’s exactly what we expect to do, so I want to communicate clearly that if you expect to see Banc of California moving forward and we will continue to lead and move that forward until notify to the contract.

The next question comes from Bob Ramsey with FBR. Please go ahead.

First question, given that security is, it sounds like you're at the high end of where you guys kind of target them and idea is to get commercial exposure there. Is it fair to assume that overall growth and earning assets is more muted this year, as you shift some of that exposure from CLOs to commercial loans that's made?

So, actually, I would indicate that the commercial with loan portfolio was growing, if we look at the production and with how our business teams are doing, if you think of all the J-curve businesses that we started in 2012, 2013, 2014, again they are hitting inflection points and they are continue to grow. So, actually, we expect that our earning, our commercial lending business has work continue to actually grow our year-over-year by comparison to what they are. I think for Q1, we saw $1 billion in commercial loan growth, very consistent with Q3. As we said before as we continue to attract teams in the organization, we think that our prospects are strong for continued solid growth in 2017.

Okay, I guess I can appreciate that, well -- that was deep shift some of the security, do you use security down to and replace some with these commercial loans that you are growing and sort of the security balances come down as you remix -- as you re-shift the mix? Or do you sort of leave them at this level and just grow them into your smaller percentage of the overall book?

Understood, I think you should expect that the securities portfolio will come down through 2017 and in fact we will remix consistent with your point, yes.

Okay, and then thinking about average balances, I mean your average earnings assets were up about 600 million despite the drop in end period assets, so I'm sure so of that is timing. If we go into the first quarter with the full quarter impact of those assets that is coming out should we, still expect our in assets to be up, the average earning assets is what I mean or is there sort of reflection of the sales that wingers into the first quarter?

So there again, just finalize the annual operating plan, so let us come back on that topic, if you don’t mind.

Okay. So similar question on margin, I know you all were asked earlier to 3.13% is a trough. I'm guessing that still had some of the partial quarter benefit from the sold assets. So can you give you any sort of guidance on the first quarter and where we start out or may be where you are in the month of December?

I think right now, we're comfortable saying is, things at this moment appear in alignment as they were ending Q4.

Okay, and end of Q4 non-materially different then on 3.13%?

Again, if you strip out the single family and the commercial equipment is a line with it would be without those.

Okay, could you give a update on interest rates sensitivity, I guess particularly given the addition of the long adoration agency pass through this quarter?

We have historically been liability sensitive over the last few years, we've moved that back to more the neutral position, very focused on that and that part of our strategic planning as we move forward.

Okay, so you're relatively neutral tot that.

Yes.

Great, and then may be in terms of expense, I know you all highlighted the higher legal cost this quarter, which I think is to be expected, but could you just, may be quantify how much was the legal cost this quarter, how much was the increase in comp for Sugarman exit, what we should expect in the first quarter and those unusual items?

Sure, so the special committee investigation between legal professional on it and other items was approximately $4.2 million to Q4, I think it is fair us to say that it will be an amount thereabouts or somewhat higher. Obviously, we do have other measures with regards to insurance, excreta that we have that, minimize that effect but this point of time, it worked probably modeling expenses to be at alignment or somewhat up regard to those special committee cost.

Okay, and then the comp line?

So, there again -- I will direct you to specifically the separation agreement. Again in 2013, the good portion was approved already both from a cash prospective and an equity and there will be a Q1 effect based on the payment.

Okay. Thank you. And I know it is in the separation agreement. I just don't know which quarters they fall in to. Can you, I guess, pinpoint it a little more?

Hi, this is Al Wang, our Chief Accounting Officer. As Fran has said, most of the expenses, a lot of expenses were already accrued for in 2016. There will be incremental expenses in connection with the separation agreement in Q1. We had issued kind of 8-K with the separation agreement with the terms that refer you to that.

All right. And then can you remind me, does the review you are doing does it encompass the factually inaccurate press release or is it more focused on corporate governance so any party transactions.

I would -- we're not going to respond as of this point. We've made our public conference around that action.

Okay, now you can clarify the scope of what's being reviewed.

It's not nearly within our purview. I think it’s more of a Board item and I'll defer to legal on this one.

The next question comes from Tim Coffey with FIG Partners. Please go ahead.

Fran, do you have the -- did the Company receive a special dividend from the FHLB in the quarter and if so how much?

That is correct, the amount was 1.8 million received.

Okay. Was there any -- did the holding company downstream any capital to sub-bank this quarter?

There were combination of factors, there's a $50 million upstream in November and there was a $5 million downstream in December. And currently, we sit on a $150 million of cash at HoldCo [ph] as of 12/31.

Okay. The -- I know I understand a lot of the go-forward operations are under review right now. But do you have any comments on whether or not the company will continue to downstream to sub-bank?

So, again, as we continue to grow and as appropriate the answer is yes we would view certain points in time we would be down streaming capital from HoldCo to Bank N.A.

And given that you're three-quarters over 10 billion, do you have any estimates on what the ultimate cost is being over 10 billion will be for the Company?

Yes, I won't be specific but as you know crossing that hurdle does require considerable additional expenditure, it's not only on classic issues like DFAST, but really ramping up against board systems, the quality of people controls et cetera. Frankly, the bank has and it's growth over the last three or four years has realized that it's imperative that we invest in that infrastructure well in advance of crossing the 10 billion. So, frankly, you've seen our efficiency ratios being on the higher end of industry peers. One of the reasons for that as we historically invested prior to being required to from a regulatory standpoint. We fully believe that we want to operate well within regulatory guidelines and believe that you know that prudent additional cost as been helpful in guiding the bank appropriately. So can't give you a number, but we've invested considerably over the last three to four years and frankly as we cross 10 billion we'd still have additional infrastructure in analytics that were working on but it’s not the cliff that other banks potentially have faced and we started earlier to invest.

The total common investment that are you thinking about for this crossing 10 billion, have you made half of it or more?

Yes, over the last couple of years, I think we’ve easily made half of that investment. There is incremental expenditures as we continue performance around beefing up our DFAST capabilities, but yes, as I said we are well into the deployment of those expenses. And really as we continue to grow, we will continue to invest. We believe fundamentally that obviously strong reporting in analytics our whole mark and differentiated for the bank and how we compete in the industry.

Okay. And then as kind of a follow-up on the expense question related to legal and audit, so it was 4.2 million in the quarter. You said it would be somewhat in line, if not higher going forward. Is that on a quarterly basis you're talking about or annualized basis?

That would be directly related to the first quarter of 2017.

The next question comes from Timur Braziler with Well Fargo Securities. Please go ahead.

Maybe we can start on the mortgage banking business, maybe provide an outlook on what you expect within that line item, given the spike in rates and how that overall strategy fits into expectations for 2017?

So, if we see some of these statistics in regards from the MBA indicating a 17% down. What I would say is? We are optimistic still about that business but have called in such a fashion where we do believe there will be some type of increase. We are fortunate whereby, if we look at the infrastructure mortgages actually built out, we are in position where we can still continue to fill specific seats around that to ensure that we are taking advantage of all the corresponding cost there. And then finally, again it's been a strong mover in 2017, it’s a well run organization. So again, at this point in time it is a part of our strategy.

Okay. And then maybe shifting gears to the sale of the nonperforming assets during the quarter. Nonperforming metrics were fairly strong when compared to the group. Was this just an opportunistic sale that presented itself during the quarter or kind of as you're looking through the whole balance sheet, or you thought you would just purge everything and start with a clean slate here?

No, it's exactly your point. The credit bid in the market is strong today, and as we continue to move forward, we want to maintain that strong asset quality position. We look that our portfolio internally and from our risk adjusted and from our cost adjusted standpoint, felt that exceeding through a discrete loan sales with when closure to the portfolio, and allow the bank to redeploy those special assets resources to be more efficient. So, really just a simple exercise of looking at the strong credit bid versus the continued workouts and fell that we had a unique point and time when we want to take advantage of that.

Okay. And looking at the existing loan book, are there any other asset classes that might not fall in line with the broader strategy or is the current mix something that we should see continuing going forward?

A little premature to answer that definitively as we are still finalizing and really reviewing our strategic plan for 2017, but what you will see is that we will continue to refocus on deploy additional growth elements toward C&I business and our core platforms commercial real estate multifamily and others.

Okay. And then lastly, maybe just asking Jackie's question a little differently. Over the last three months, how has that affected or impacted both internal and external competitive landscape within the bank. Are you seeing any added pressure from competitors trying to go after talent and what's been the success rate of maintaining your current workforce?

We're very pleased and happy with where we are as we've said before we're recruiting and on boarding additional teams and lifting our teams from competitors. Obviously the external market in the dynamics that we face create additional challenges and as we've said before we're doing everything within our control to focused on our core business to have great communication within our teams and staff and we're confident that we have a strong bank, a focused bank and a commitment to continue working together to fulfill our mission and vision.

Okay, actually just one more from me, if I can. Just looking at the expectation of switching some of the securities balances and the cash flow into loans during the year, what does that mean for deposit growth for 2017? Are you going to pull that back a little bit or is that going to remain as strong as we're seeing it this year?

Again, I think if we need to finish out our annual operating plan, we've had but almost successful over the past three years. It is a focal point question for our relation, and we've got the appropriate senses in line to do so but again still building out that plan. But again deposit aggregation is a focused as frankly when the fine trademarks historically that we had banked out.

And you'll see the positives keep up with loan growth as we move forward so you'll see very strong continuity in the historical perspective that you've seen where deposits fund our loan growth.

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

So, I just wanted to follow up. I think you just mentioned you expect loan growth to be funded by deposit growth and obviously, I think everything that was going on, we saw very little deposit growth. I think it was the slowest quarter in two years. As you think about the outlook for deposit growth. Are you running any special promotions to bring in deposits or what is your expectations in terms of deposit growth for the full year relative to where you were at the end of the year?

We're focused on all elements of our core funding strategy on a go forward. As we communicated in some of our public filings, we anticipate releasing our 10-Q and 10-K by March 1st, if not sooner. We do think if that will be a material aspect and allowing us to really reenergized our deposit franchise particularly with our more sophisticated customers. We continue to have great communication with all of our parties, but delaying our financials is the situation that's right now is a little bit out of our control. But as we move forward and release those financials we would expect to see business returns to normal, and would fully expect that the deposits are re-franchise or reenergized.

And that is helpful, actually. And would you say that you would need to raise capital if the deposit growth were to reaccelerate and reborn from here or do you think that internally, your earnings will fund any incremental balance sheet growth?

Through this point in time again we don’t see the need for any incremental external capital as I mentioned we're getting over a $100 million net interest income. So with that and how we look at our plan, it will be sufficient to fund both the lending and deposit growth at this point in time.

Understood. And then just going back to two other things on the corporate issue. One in terms of that, you mentioned the CEO search is on-going, is that a timeline by when we should expect the search is concluded, because it's seems like you are trying to figure out what the go forward strategy is? And if you are bringing a new CEO that person may also on a peer role in that. I am just wondering like is there a timeline by when you think the search will be concluded, or how far along are you already in that process?

I really want to be clear on that point as well. The Board has given full control and delegation and is expecting the interim team to lead the going forward. There is no delay in the execution of our business and there is no delay in the execution of our current plans. What we are doing is taking the opportunity to review the longer term 2017 in a multiyear plan, and that’s what we are referring to. So, no hesitation, there is no impact on the organization as a result of the search, and obviously, the results of the search will be released at the appropriate time.

And this is John Grosvenor. And in the connection with the governance initiatives that have been launched, the Board established the search committee since the announcement last week as Steve Sugarman's resignation. The search committee has engaged Korn Ferry. Korn Ferry will be looking at both external and internal candidates to ensure that the, the outcome of that process will result in the best overall choice for the Company and the bank. I think the committee continues to complete that process as quickly as it can be done well.

Got it. And sorry if I missed this in some of the disclosures you put up but are we still looking for a new CFO, or is Fran going to be the permanent CFO?

I think as part of the search committee search for a new CEO that that issue is probably going to be driven by the outcome of that process.

Got it. And one last question if I may to the extend you can answer that John, around some of the scope of the SEC investigation, if I recall correctly, I guess the SEC is looking into the findings of the search committee around the sort of the corporate governance issues as well as inaccurate statements made on October 18, is that correct?

What I can tell Ebrahim is that we have release as much information as we can in the coordination with the SEC and their activities. So I can't really comment too much more on that at this point. I can tell you however that as we have mentioned before and both Fran and Hugh commented up on since last Monday's announcement the Board has been working with outside council, it's restructured to telling governance to separate the roles of Chairman and CEO. And as a result no longer need to either an independent Chairman or weak appointed independent Chairman and no longer needs of lead independent Director, it's separated the compensation and governance functions in the two separate committees under different leadership, its adopted a related party transaction policy reflecting the Board's intension t6o restrict such transactions in the future. It's poised to adopt the policy governing outside business activities to ensure that appropriate activities are being undertaken and monitored. It's been working with outside council to review all critical policies to determine enhancements are appropriate, and we'll make further announcements as that occur. All of this is in the context of the same good governance process to make sure that. The search for the CEO and the decisions regarding the appointments of permanent positions for leadership and management will be done with equal care.

And one last question, just to clarify. Has the Board held any one accountable for the October statements? And should we expect any other changes in terms of management or leadership going forward because from the findings of that or is that issue addressed? And is there any link between Steve's resignation and the findings of that October 18 statement or no?

We’re not going to comment on anything further then what we've announced about resignations and as appropriate its additional information and when it becomes available regarding actions by the board in connection with the investigation will be announcing that. As we've said even though the work of its committee is not done, the conclusions that we've announced are final conclusions. I think relate to the things that have been -- the principal concern of others in connection with the blogger and the investigation. So, we wanted to make sure that that information was communicated as the committee continues its work other announcements may result.

The next question comes from Don Worthington with Raymond James. Please go ahead.

In the past you given guidance on the efficiency ratio, as part of your forward guidance, do you have any for 2017?

So again, as part of the annual operating plan, we are determining that. I think what I can comfortably say is not too distributional we'll be able to come back with a perspective in regards to the ongoing efficiency ratio, so we will just need a few weeks on that topic.

Okay, thanks. And then a small item, it looked like REO was up a couple million in the quarter, any color on which of that?

Sure. So, originally there were four properties that were in there as $1.30, it increased slightly to 11 properties, but no more than that.

And this concludes our question-and-answer session. I would like to turn the conference back over to Tim Sedabres for any closing remarks.

Well, thank you everyone for joining our call today as always. We always make ourselves available here, if you have any follow ups, please feel free to reach us. Thank you.

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