Hello, and welcome to Banc of California's Fourth Quarter Earnings Conference 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] Today's conference call is being recorded and a copy of the recording will be available later today on the Company's Investor Relations website. A presentation that management will reference on today's call is also available on the Company's Investor Relations website. I'd now like to turn the conference over to Mr.

Doug Bowers, Banc of California's President and Chief Executive Officer..

Thank you and good morning, everyone. I appreciate you joining us for today's fourth quarter 2018 earnings conference call. Joining me on the call today is John Bogler, Banc of California's Chief Financial Officer.

Before we begin discussing the quarterly results, I would like to refer you to our Safe Harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. Our fourth quarter financial performance produced mixed progress against our three year roadmap.

That said, the full-year results demonstrated the core fundamentals are trending toward our long-term targets. To remind everyone, that roadmap, which was released in Q1 of last year, included four primary points of focus that we expected to achieve over the ensuing 12 quarters.

Before John speaks to the detailed financial results for the quarter, I want to spend some time updating you on the progress and work to date on these strategic goals. The four focus points of the bank BANC roadmap are; build core deposits; A, amplify lending; N, normalize expenses and C, create stockholder value.

First and most importantly, build core deposits. For the quarter, core deposits declined by $6 million, but for the year, core deposits have grown by $579 million or 10%. The 10% annual rate of growth came in below our long-term target range of low-to-mid teens rate of growth.

As we transitioned from being known as a high rate payer in the market to a relationship-based approach to gathering deposits, we expect some deposit outflow as we pull back on competing on rate and begin to compete on service. The fourth quarter deposit performance tells us we have work to do.

While core deposit grow did not meet expectations in the fourth quarter, we continue to see progress in hiring talented frontline personnel and see positive signs in the early first quarter 2019 deposit pipeline. During the past quarter, we saw a large number of depositors that are transactional in nature withdraw funds.

We expect many of them to return in 2019. Across our various channels, the Community Banking channel continues its transformation towards a model increasingly focused on serving small businesses and beginning the transition away from rate-sensitive depositors.

The private banking division saw transactional deposit outflows light in the quarter, but as a very strong pipeline for the first quarter of 2019. The real estate banking division, while a relatively modest contributor, continues to add low cost deposits as well.

A year ago, the real estate banking division was not focused on gathering deposits and today we are seeking the depository relationship along with every credit extended. The Commercial Banking division is in the early innings of relaunching middle market and business banking and has a promising pipeline of deposit opportunities.

Rounding out the deposit gathering efforts, the Specialty Markets division continues to develop relationships and increasingly will look to transition it's customer base to a lower customer relationship-based client set. Our second strategic initiative is to amplify lending.

Fourth quarter loan production exceeded our expectations and marked the first quarter under the new leadership team in which we originated more than $1 million of new commitments.

For the quarter C&I originations including the Private Banking group, totaled over $445 million, while commercial real estate including the construction group produced $112 million and single-family generated $225 million.

The construction loans are largely focused on individual single-family projects, while the private banking loans are primarily commercial loans.

We continue to see opportunities to add talent in each of our C&I banking units; middle market banking, business banking and small business banking, as well as our private banking group, all of which have further contributed to production and shift a greater percentage of our loan production to C&I.

Additionally, we believe the growth in our suite of commercial business products, enhances our ability to deepen client relationships by providing treasury management and depository services. For the full year our loan portfolio grew 16%.

The fourth quarter production level and the resulting growth in the loan portfolio outpaced the growth in our core deposits. During the first quarter of this year, we plan to take action to mute the rate of growth in the loan portfolio, mostly through loan sales.

Given the macro indications of a slowing economic environment, we also believe it is prudent and reasonable to slow the rate of loan growth generally, while at the same time, continuing to focus on growing low cost core deposits. Third, normalize expenses.

For the fourth quarter, operating expenses met our expectations at $52.2 million, which on an annualized basis equates to a 2.04% of average assets as compared to our long-term target of 2% or lower.

We remain focused on simplifying the operating platform, deploying technology where needed and creating back-office efficiencies, then redeploying those expense savings towards hiring talented frontline personnel.

Fourth, creating stockholder value; ROAA and ROATCE for the fourth quarter came in at 43 basis points and 4.19% respectively and were significantly impacted by certain nonrecurring items, which John will describe more fully.

We recognize that achieving our long-term targets of 1% plus for ROAA and 12% plus for ROATCE will be a journey, but we are confident the building blocks are in place in order to achieve those targets.

In short, we are optimistic about our plan and initiatives to grow core deposits to build core lending and to leverage our expense base, all of which when achieved will help us drive toward the targeted metric levels or better. So you can see, we made more progress toward our long-term strategic goals during the last quarter.

Make no mistake, there are some areas where we can and will do better. As we close out 2018 and give our full attention to the goals we like to accomplish in the new year we will improve on areas of opportunity and we will also build upon the areas where we've done things well.

Our Banc of California team executed quite a few important initiatives this past year, which I'd like to spend just a moment talking about. These accomplishments lay the groundwork for our long-term success and have provided us with momentum heading into the new year.

To start, we expanded our banking service offerings to meet more of our commercial clients needs by relaunching middle-market banking, business banking, treasury management of product and small business banking teams. To lead these important initiatives, we deepen the bench strength of our Executive Leadership team through key hires.

These bankers and specialists have a vision, experience and expertise to thoughtfully build on our capabilities and I'm excited to see what they will accomplish in 2019. We successfully repositioned our balance sheet to continue rightsizing the securities book through the sale of the Ginnie Mae MSRs, NLP debt securities and CMBS portfolios.

We also significantly reduced our CLO position throughout the year. Furthermore, we reduced interest rate risk on the balance sheet through selective pruning within the loan portfolio. Finally, we reduced our wholesale funding ratio to 30% by year-end.

In 2018, the expense line of culture that now runs throughout our organization, led to technology improvements, which resulted in operational efficiencies, advances in lending, risk management and account opening, all of which will make it easier to do more business with our customers faster.

We write-sized our back office operations and redesigned our annual incentive compensation policy to better align with our top-down company goals and metrics. Additionally, we completed a branch rationalization initiative, which resulted in the disposition of two branches at a repositioning of several others.

On the capital side, we improved our capital stack in the third quarter by redeeming a $40 million preferred equity tranche. Separately, we had our inaugural CMPB examination, which was also successfully completed. These accomplishments are reflection of the execution capabilities of the people we have within our organization.

I appreciate your tireless work and commitment to making significant progress during the past year and their efforts are a vital segue into achieving our plans for 2019 and 2020. With those opening remarks, I will turn it over to John to provide more detail around our fourth quarter financial results.

John?.

Thank you, Doug. During the fourth quarter, we had modest success in remixing the balance sheet toward more traditional core assets and liabilities with the overall size of the balance sheet increasing to $10.6 billion.

The $369 million of asset growth for the quarter exceeded our expectations and we expect to reduce the overall size of our assets in the first quarter of 2019 back to a similar level we saw at the start of the fourth quarter.

On the asset side, the securities portfolio declined by approximately $67 million and the securities portfolio as a percentage of total assets declined to 19%.

Subsequent to the fourth quarter, we sold the entire CMBS portfolio, totaling $132 million with a loss on the sale effectively recognized in the fourth quarter via an other than temporary impairment charge of $3.3 million. The CMBS portfolio was measured at a six-year duration. Most recently yielded 3.75% and was generally of a bullet structure.

The CLO portfolio declined at a moderate pace during the quarter and we expect the portfolio to continue to shrink over the next several quarters.

Late in the fourth quarter, there was market chatter around a pending economic slowdown and how it would impact the credit performance of leverage loans and thereby impacting the market value and credit spreads for CLOs.

Included on Page 15 of the Investor Presentation, we've provided the composition of our CLO portfolio and information on the historical performance of similarly rated securities within the CLO market.

Our view is that the CLO portfolio has low risk of credit loss, given that the entire portfolio is AA rated or higher and that CLO trust with these ratings historically have had low default rates.

That said, we do recognize that historical results do not guarantee future results and that the portfolio could exhibit market risk if credit spreads widen, but also believe the CMBS portfolio provides a somewhat natural hedge if investors seek safety, should the credit markets weaken.

As previously noted, we expect to further reduce the size of the CLO portfolio in the coming quarters through a combination of collectivity and sales with any sales occurring at or above the book value per each position sold. As a reminder, the CLO portfolio began the year at $1.7 billion and over the course of 2018 was reduced to $1.4 billion.

The fourth quarter growth in core held for investment loan balances was $448 million and was net of $146 million of loan sales, mainly single-family, but inclusive of $59 million of single-family CRA-related purchases made during the quarter.

As Doug and I have noted, the strong growth in the loan portfolio in the fourth quarter will likely result in some balance sheet pruning during the first quarter of 2019 as we moderate our loan growth to be more in line with core deposit growth.

Gross loan production totaled $1 billion for the fourth quarter and new production yields on average were 5.26%, substantially above the blended portfolio loan yield of 4.74%.

The higher loan production yields we saw in the fourth quarter were largely reflective of a higher macro rate environment and aided by a stronger mix of relatively higher-yielding core C&I loans. Net held for investment loan growth during the quarter was primarily driven by C&I growth of $268 million and multifamily growth of $129 million.

The commercial real estate portfolio grew by $48 million, while the single-family portfolio remained relatively flat reflecting the $146 million of loans sold during the quarter. Total commercial loan balances collectively increased by $445 million or 9% from the prior quarter and are up $828 million or 18% from year ago.

At quarter end, commercial loan balances totaled $5.3 billion and represented 69% of the loan book. Over the past year, the gross loan portfolio has increased by over $1 billion or 16%. On the deposit side, brokerage CDs increased by $555 million during the quarter, which more than offset the previously mentioned transactional core deposit outflows.

Within the core deposit portfolio, CDs increased by $142 million and money market balances increased by $49 million, while interest-bearing checking and savings stayed flat.

Non-interest-bearing checking account balances decreased by $157 million for the quarter and remain an area where we are diligently focused since a major of our success is centered on growing non-interest-bearing deposits.

As Doug described earlier, we believe we are creating many opportunities within our business units to increase our relationship-based deposit balances and keeping our deposit cost in check. We expect to realize the benefits of those efforts over the long run.

Core deposits or non-broker deposits now account for 78% of total deposits, down from 84% at the end of the third quarter, but up from 77% at the end of 2017. Transitioning to the income statement, net income available to common stockholders for the fourth quarter was $6.7 million or $0.13 per diluted common share.

For continuing operations, earnings per diluted common share were $0.12. These results include a number of items that we want to call it to your attention. Company's fourth quarter reported financial results included $3.4 million of net nonrecurring expense benefits.

This included $7.1 million of legal and indemnification expenses and $1.1 million of project-related expenses. These costs were more than offset by $9.8 million of insurance recoveries related to ongoing legal and indemnification expenses and $1.8 million gain on the sale of an owned branch office.

The legal expense associated with the indemnification of past and current directors and officers is generally eligible for insurance reimbursement and the reimbursement is recorded as a contra expense as it is received.

We expect to continue to incur legal and indemnification expenses for the next several quarters with the insurance reimbursement naturally lagging.

After adjusting for these nonrecurring items, along with the amortization expense associated with our solar tax equity program, our operating expenses for the fourth quarter were $52.2 million of which we have provided a reconciliation on Page 8 of our slide deck.

The result of excluding the nonrecurring items for the fourth quarter and normalizing our tax rate to 20% puts us closer to an adjusted operating earnings figure for continuing operations of $0.19 per diluted common share, which we have detailed on Page 9 of today's deck.

This compares to the prior quarter adjusted operating earnings of $0.27 per diluted common share, computed on a consistent basis and shown in the prior quarter's earnings release presentation. Average interest-earning assets for the quarter were up slightly from the prior quarter at $9.7 billion.

Both the mix of assets from securities into loans and growth of earning assets are key to our plan to drive revenues higher over time.

The net interest margin decreased by five basis points during the quarter to 2.88%, which was consistent with our expectations and not surprising given the increasing competition for deposits that we are seeing in our markets.

The average yield on interest-earning assets increased 10 basis points for the quarter, driven by a four basis point increase in average loan yields to 4.74%. The securities portfolio average yield increased 10 basis points to 3.88%. As a reminder, the CLO investments reset quarterly and are indexed to the three month LIBOR.

The cost of interest-bearing liabilities increased 16 basis points to 1.97%, primarily due to a 19 basis point increase in interest-bearing deposit cost and a 16 basis point increase in FHLB borrowing cost.

The increased FHLB borrowing costs were driven by higher short-term rates on overnight advances, which totaled $715 million at the end of the fourth quarter.

Just under 40% of our assets are variable rate with a rate reset occurring at least quarterly, with nearly all of the variable rate assets linked to LIBOR and LIBOR moving up early in the quarter, the yields on both the loan and the securities portfolio benefited.

On the liability side, the cost of funds continue to increase during the quarter, due to renewing CDs and increased cost of overnight FHLB advances, with the latter largely reflective of the September Fed funds rate increase.

As we communicated last quarter, we expected the NIM to be under pressure through the end of the year and will continue to be until we deepen our traction and gathering lower costing deposits.

Looking forward, if we maintain loan production yields at higher levels, than our average portfolio yield and continue executing on our lower cost deposit strategy, the NIM should subsequently begin to trend toward and then above 3%. Net interest income decreased by $510,000 from the prior quarter to $70.7 million.

For the fourth quarter, loan interest income increased by $3.5 million due to a $234 million increase in average balances and a four basis point increase in the average yield.

This was partially offset by a decline of $717,000 in interest income on securities as these average balances declined by $130 million with the average yield increasing 10 basis points.

On the liability side, interest expense on deposits increased by $3.8 million as the average balance increased by $189 million and the average rate increased by 16 basis points. Interest expense on FHLB advances decreased by $72,000 due to an $81 million decline in average balances, partially offset by 16 basis points of average higher rate.

The composition of interest income continues to improve as commercial loan interest income now represents 57% of total interest income in the quarter, compared to 52% in the same quarter a year ago. Loan interest income now comprises 79% of total interest income in the quarter, up from 74% in the same quarter a year ago.

For the quarter, we recorded a $6.7 million provision for loan losses, which is mostly reflective of the strong loan growth and loan portfolio as well as $2.2 million of net charge-offs. The charge-offs for the quarter were due to two SBA credits, including a C&I loan that was also made to one of the borrowers.

The AOOO balance coverage ratio of nonperforming loans is 282% while the overall A000 ratio was 81 basis points. Total noninterest expenses for the quarter were $49.6 million and included $3.4 million of one-time expense benefits and $786,000 and expense from solar investments.

Our current solar tax investment commitment is completing and we expect the annual HLBV depreciation to no longer be material. Income tax expense included $1.6 million of additional tax expense related to the 2017 return to provision true-up.

As noted, noninterest expenses included a number of items that we do not consider to be core operating expenses. These expense benefit items totaled $3.4 million and adjusted for these items in the depreciation of solar investments, core operating expenses came in at $52.2 million.

We continue to see opportunities to make our back office more efficient and plan to translate those cost savings into growth via further investment into building out our client-facing teams.

Our adjusted efficiency ratio came in at 67% for the quarter and continue to reflect more of a revenue opportunity for us to the extent we can improve our net interest margin, grow the earning asset base and begin to generate fee income from our expanded deposit and treasury and management initiatives.

Noninterest expenses to average assets came in at 2.04% from continuing operations for the fourth quarter after adjusting for the nonrecurring expense benefit items. Our capital position remained strong as the common equity Tier 1 capital ratio was 9.53% and Tier 1 risk-based capital totaled 12.77%.

The quarter-over-quarter decline in risk-based and leverage capital ratios is primarily due to the growth in the overall balance sheet and we currently expect these races will improve to the extent we reduce the balance sheet size closer to the levels we've seen in recent quarters.

Moving on to credit and asset quality metrics for the fourth quarter; our nonperforming asset ratio for the quarter was 21 basis points, down four basis points from the prior quarter. This very low level of nonperformers reflects the disciplined credit culture of the bank and remained strong compared to peers and the industry broadly.

Overall, the credit performance of the portfolio continues to meet our expectations and we are not seeing any pockets of weakness or deterioration. Nonperforming assets to equity continue to remain strong at 2.4%.

Delinquent loan metrics are strong despite the ratio of delinquent loans to total loans rising four basis points to 53 basis points compared to the end of the prior quarter.

The prior quarter ratio represented an unusually low level and the current quarter is more reflective of the level experienced in the fourth quarter of 2017 and the first quarter of 2018. As mentioned earlier, net charge-offs for the quarter were $2.2 million or 12 basis point.

With that summary on our fourth quarter financials, I would now like to turn the call back over to Doug..

Thank you, John. 2018 was a productive and active year for Banc of California. We welcome some very talented people on to our team during the year and reenergized our business units to focus on the vision of being California's Bank.

Enduring banking franchises are never built overnight, so while we made some excellent progress this year, there is still more work to be done. Fortunately for us, we're entering 2019 with momentum in many aspects of our business and look forward to continuing our work towards generating traction in others.

As with any strategic endeavor, things rarely move in a straight line in the short term. However, I'm encouraged by the direction and progress we've made since last year and I am pleased by our organization's ability to adapt to evolving macroeconomic conditions and business challenges.

Our expenses are decreasing as a result of streamlining our operating platform. Investments into our customer-facing employees have showed promising results and even more potential. The California banking market remains unmatched and sized depth up in breath.

We are building a scalable business upon a strong foundation and moving closer to becoming the California focused commercial banking franchise that I envision we could be when I arrived in spring of 2017.

I'd like to conclude my remarks today by talking a bit about our employees and their genuine excitement for serving as banking partners for our customers.

Whether it's finding creative banking solutions, our California [indiscernible] for being a trusted advisor among a high net worth clients team of professionals, enthusiasm for what we do on a daily basis has always been a hallmark of the great people that work at this company.

I can't express enough my thanks for their work and their dedication to our customers they have shown this past year. I am proud to work with these folks each and every day and anticipate achieving more and better things in 2019 together. That concludes my prepared remarks. Operator, now let's open it up for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Timur Braziler with Wells Fargo Security. Please go ahead..

Hi. Good morning, gentlemen. First question centers around loan growth, you were loud and clear though. Loan growth is likely going to slow here and be more so commensurate with growth in core deposits. Looking at the strategic targeting tracker, it looks like mid teens is kind of the loan growth number that you guys have been talking to.

Is the expectation that loan growth should kind of go down closer to 10% like the core deposit growth we saw in '18 or is the expectation that core deposits are going to exceed the 10% that we saw this year results and maybe some higher loan growth?.

Well, there's a couple pieces to that. First of all with respect to the loan growth, we did have a big push in a very positive way in the fourth quarter from across a number of divisions in the bank, which surprised us to the upside.

We do expect to reduce the balance sheet as we commented on a go-forward basis here in the first quarter mostly through degrees of sales and there would be some -- there would be an expectation and that would balance off against the deposit growth..

Okay.

And then maybe looking at the deposit growth in the quarter, though the broker deposits that were brought on I guess what's the plan for those? Are those going to stick around for a little bit or with some of the expectation for these transactional outflows to come back on balance sheet is the expectation to repay those broker funds fairly quickly?.

Well, of course our goal is to reduce of that kind of wholesale funding inclusive of brokerage CDs and as transactional and/or other organic deposits come along, of course we will make a series of decisions to decrease on the brokerage side. So that is certainly the goal..

Okay.

And then and I guess last for me just looking at the securities book and in conjunction with the expectation for the smaller balance sheet, I appreciate the CMBS sale, I guess just looking at the CLOs, are we still expecting there to be continual step downs and we get closer to that kind of 15% security staff that ratios by midyear or are those balances going to stay roughly unchanged at this kind of $1.4 billion balance in an effort to help support the balance sheet?.

The short answer to your question is yes, we continue to anticipate step downs.

So as a reminder we sold off the CMBS book, the MLP debt securities, the bank subordinated debt and we've had the CLO book go down 22% in the last 12 months and we have said that we want to continue to work that securities portfolio down to a more normalized mid teens are below percentage and we very much intend to be on that pace..

Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead..

Just a follow-up on the balance sheet for the upcoming quarter shrinking back to the beginning of the fourth quarter level, I guess how should we think about the balance sheet beyond the first quarter.

Should we expect modest growth or to resume as you as you remix and generate stronger core deposit growth?.

Yeah, that's a reasonable assumption. We will continue to remix certainly on the asset side.

As Doug just mentioned, we will continue to bring down the balance in the investment securities book, down towards that targeted level and that will help to fund some of the loan growth and in beyond that it's more of a product of our success within the core deposits, our ability to generate core deposits.

We'll do some remixing on the liability side as well, but there's -- it's a readable something that we could look to see a little bit of balance sheet growth as we progress through the year..

Okay.

And then shifting gears to the expense run rate, I guess how should we think about expense growth this year? What type of hiring needs do you need new products?.

We will continue to look at our back office expenses and as well as the technology deployments, which will ultimately drive some efficiency in the back office. As we said, we will continue to look to reposition expenses from back office to front office, which means that we'll look for additional hires on the frontline units.

The fourth quarter expenses I would say, the first quarter expenses, there is little bit of seasonality that naturally occurs within compensation. So there could be a little bit of an uptick in the first quarter..

And then just on the -- on credit, I know it's still very benign, but just curious what drove the deterioration in that C&I and SBA those two credits?.

Well first of all it was $2.2 million. So indeed relatively modest, both are SBA credits with C&I content, that whole portfolio is very small and we don't see anything overwhelmingly systemic in all of that. So those were actions related to those isolated credits. The rest of the provision of course was related to the growth..

Our next question comes from Jackie Bohlen with KBW. Please go ahead..

I just wanted to quickly clarify one of the comments in the prepared remarks really the two taxes, if I heard correctly there was $1.6 million of the tax expense in the quarter was related to a true-up..

Yeah, it's part of our filing of the 2017 tax returns. So it's bit of return to provision true up..

Okay.

And then it sounds like you expected a tax rate to return to a more normalized level probably around 20% in 1Q '19?.

That's correct. It'll bounce around a little bit, but we would expect it to always be somewhere in the neighborhood of 20% to 25%..

And then thinking about some of the portfolio pruning that you may be doing, do you have any specific loan categories in mind or would it be generally across the whole portfolio?.

No predominantly focused in single-family and multifamily, the same categories where we had executed some sales during 2018. So as we think about reducing the balance sheet size to what we saw at the beginning of the fourth quarter, I would expect that to occur in three categories.

One, will be the investment securities and we've already reduced via the CMBS sale, but there will be some additional reduction in the CLO portfolio and then I would also expect some reduction in the single-family and the multifamily portfolios..

Okay.

And will that potentially pick up a little temporarily a little bit of loan income from sale in 1Q?.

It should, it should result in some additional sale activity in the first quarter..

Okay.

And you expect to largely be done with that within the quarter?.

Yes. yes..

Okay. Great. Thank you..

Our next question comes from Gary Tenner with DA Davidson. Please go ahead..

Good morning. A lot of my questions have been answered, just on the topic of credit there is no lot of discussion this quarter about leverage loans.

Can you just talk about kind of how much exposure you have there and what you think in terms of the outlook and your appetite in the C&I Space for those kind of loans?.

From a leverage loan perspective that is immaterial number for our company, very modest -- was modest frankly when I got here and has been reduced ever since and our appetite there is exceedingly low. So we do not do a lot in that arena.

Obviously where we do have that activity is in the CLO book, but then that comes in the form of the structures and DD, AAA nature of those securities..

And then just in terms of the loan production this quarter, Doug you ran through the categories, I think you mentioned C&I, CRE and single-family, but that doesn't total to the better than $1 billion of originations is the delta there it's multifamily?.

The delta is largely in commitment. So when we report there for the $1 billion as commitments, not necessarily the funded amount..

Okay. So as you went through the segments, that was the funded amount..

Yes..

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

Just going back to the loan production here, is the plan still to try to do about $1 billion of originations a quarter or are you going to be slowing that production pace?.

Well look I think we always put the framework of we will do every good loan that is out there. There is a degree of softness in the real estate worlds across both single-family and multifamily CRE. So we would expect there would be a degree of lightning smaller loan growth, loan volumes in those two arenas and that will impact the overall number.

Yeah I was pleased to see us get to that $1 billion number and the push that our teams did. We talked about that capability, but we all know that the market is there for it and we're certainly not going to press either from a pricing or a credit perspective..

And then I guess if the loan growth is not going to as strong and production is not going to be as strong, not looking at the charge-offs this quarter, like how should we think of provisioning? Should that be closer to something that you saw in the middle of last year or should it just be like holding the reserve ratio steady? What are you guys thoughts on that?.

Yeah, I would expect to A, as we said in the past, roughly a 1%, the net loan growth will be the rate of provisioning and so just kind of what we've been talking here about here for the first quarter to the extent that the overall loan portfolio declines there will obviously be an impact on the provision for the quarter as well..

Okay. Thanks. You covered all my other questions..

Our next question comes from Ebrahim Poonawala with Bank of America, Merrill Lynch. Please go ahead..

Just had a couple of follow-up question.

One to make sure we're getting your message clearly, when we look at balance sheet growth outlook average earning assets about $9.7 billion plus or minus that's kind of being where they bounced around from last year, should we expected that $9.72 billion to more or less remain that way in '19 or do you expect that to go lower or materially higher from that level?.

Well we're not going to overly comment on outlook in that regard, but we have said that we would have a degree of reduction in the balance sheet here in the first quarter through asset sales..

And beyond the first quarter, do you expect the level of balance sheet to grow or the remixing continues to impact net balance sheet growth?.

We will continue to remix and so as we've said, we want to drive the securities asset mix down to the lower end of our targeted range. So that will certainly fund some of the loan growth that we would expect to see in 2019. And then beyond that, we'll continue to evaluate what the opportunities are..

And just shifting to the margins, so I get to your long-term strategic goal of getting it about 3%, as we think about where it resets in 1Q given the fed hike in December and some of the LIBOR impact reflect in 4Q asset yields.

Do we expect another leg loan in the margin in 1Q before it begins to stabilize, or do you think this kind of the low point and it should be stable to higher from here?.

Yeah we look for some stabilization here in the first quarter.

As you suggested, we've had a pretty reasonable movement up in the LIBOR curve and with approximately 40% of our assets linked to the shorter portion of the LIBOR curve, we would expect to see some benefit emerge and then that will largely be offset by activities within the liability book of business.

As we go through the first quarter and as we shrink some of the assets and the associated liabilities, those are naturally going to be of a lower margin because we're giving it to the higher costing liabilities and that should also add some benefit to the net interest margin..

Our next question comes from Steve Moss with B Riley FBR. Please go ahead..

I was wondering on the C&I growth here, it was really strong.

Wonder where it's coming from by business type, business segments and perhaps what's the mix between fixed versus variable?.

Well we don't break out the detail, it came from a lot of different areas, degrees of it coming from the expanded capability that we put on board with our expanded commercial banking team. And then in terms of kind of the variable versus fixed, it's almost all exclusively variable..

And then on the CD growth resellers quarter, just wondering, what's the rate in term of both the brokerage CDs and non-brokered CDs that were added this quarter?.

The brokered CDs are going to be in the three and six month duration and they were added at somewhere between 240 and 255. Retail CDs are also going to be of a similar pricing..

Okay.

And then in terms of I guess one little more type question, but just wondering the project expenses that you guys highlighted $1.1 million, what does that consist of -- would it be ongoing?.

It will not be ongoing. It was just a unique item that we undertook from kind of a strategic operational perspective and so it will be a one-time nonrecurring charge..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Doug Bowers for any closing remarks..

Well, I'll just thank everybody for their attendance and appreciate the questions and we'll close it out right there. Thank you very much..

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