Santa Ana, Calif.-based Banc of California Inc. unveiled a three-year plan to pursue stronger core deposits, accelerate loan production and normalize expenses in an effort to improve earnings, which President and CEO Doug Bowers acknowledged as "below industry levels."
"We believe that there is a tremendous opportunity here, with the foundation in place to build something valuable," Bowers said on a conference call Feb. 8.
On the funding side, the company hopes to build cheaper core deposits through an "enhanced" Treasury management program; a retail banking division focused more on small businesses; and new specialty deposit niches covering title, escrow, Homeowners Association, 1031 and bankruptcy products. Banc of California CFO John Bogler said the strategy should shrink the company's reliance on brokered deposits and Federal Home Loan Bank advances from 35% of its total funding mix to less than 25%.
Management also plans on simultaneously boosting loan balances through a larger focus on commercial and industrial lending. Bogler said Banc of California is targeting a C&I portfolio that makes up 30% to 35% of its long-term loan mix, compared to 27% as of year-end 2017. The company will de-emphasize its focus on residential mortgages, shrinking its share of the total loan mix from 31% to somewhere in the range of 25% to 30% in the long term.
Organic loan growth is part of Banc of California's other goal of reducing its reliance on securities, specifically collateralized loan obligations, as yield-bearing assets. Bogler said the company will allow CLOs to roll off the balance sheet without replacement. The company advised analysts to pay attention to loan origination volumes and securities as a ratio of assets while the company attempts to build its lending business at a rate faster than the contraction of its securities book.
Underpinning all these initiatives is the company's goal of reducing expenses. Despite ambitions to expand the balance sheet, Banc of California said it plans on channeling "back and middle office" efficiency savings into front-line sales producers and technology investment. Management wants to reduce its ratio of noninterest expenses to average assets from 2.45% for the fourth quarter of 2017 to less than 2.00%.
Keeping expenses down could prove to be a challenge as the company's ambitions for a larger loan pipeline and new deposit products involve hiring new personnel.
But Bowers assured analysts that the plan should result in improved long-term operating metrics. Banc of California projects net interest margin strengthening from 3.01% in the fourth quarter of 2017 to a target range of 3.00% to 3.20% in the long term, with return on average assets rising from 0.44% in the fourth quarter to over 1% in the long term. Return on average tangible common equity is projected to increase from 3.84% in the fourth quarter of 2017 to more than 12% in the long term.
Bowers reiterated that he does not currently see any issues with bank capital, adding that he has seen "improvement" over the last three quarters.
The "strategic roadmap," which aims to clean a balance sheet weighed down by high-cost deposits and securities, is Bowers' vision for a company trying to emerge from a tumultuous period. In early 2017, Chairman and CEO Steven Sugarman resigned amid an SEC investigation connected with allegations that he had ties with Jason Galanis, who pleaded guilty to fraud and market manipulation charges in 2016. Legal issues still linger for the company, as a new wrongful termination suit alleges a culture of sexual harassment perpetuated by former interim CFO J. Francisco Turner.
Bowers did not discuss the company's legal matters, focusing entirely on the financial turnaround he hopes to effect at the company.
The company's stock rose 4.12% to $20.20 during morning trading Feb. 8.
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