The management team at Banc of California in Santa Ana is done dwelling on the past.
The $10.3 billion-asset company's executives, who spent much of last year rightsizing operations and improving corporate governance, have shifted their focus to a three-year plan intended to reposition the balance sheet and boost investor returns.
The plan, on the surface, seems simple enough: Bring in more core deposits, build a diversified loan portfolio and invest in technology and infrastructure between now and 2020.
“I’m the go-forward guy,” Doug Bowers, who started his tenure as president and CEO in May, said in an interview. “A great market, a great brand, no credit issues, great capital, a good set of business lines to work from. When I put all of that together ... I've been very pleased.”
Still, outsiders who follow the bank said it has a long road ahead to build a more traditional balance sheet.
“From the outside, there was a lot that needed to be fixed,” said Timothy Coffey, an analyst at FIG Partners. “There's not a lot of recurring revenue. To build that back up that takes time. They're going to be trying to do that while also tearing down the old business model.”
Leading the bank’s 2020 agenda is its funding mix. Management has recognized that it is paying more for deposits than its peers; more than a third of its funding comes from brokered deposits and Federal Home Loan Bank loans. The goal is to lower those sources to less than a quarter of all deposits.
Boosting core deposits will be the most challenging effort, Bowers said. Brokered deposits carried an average cost of 1.27% last year, while core deposits averaged 0.72%.
“We think there's a considerable opportunity here to build out all the fundamental characteristics of a great bank,” Bowers said.
“We're very dedicated to this marketplace … and we believe there is a calling for a bank of our nature," he added. "We think it’s an opportunity for a sizable homegrown bank like ourselves to do something very special.”
Banc of California plans to promote its treasury management program, expand in private banking and focus more on small businesses. Total deposits fell by 20% in 2017 from a year earlier, to $7.3 billion, as management shed higher-rate deposits.
The timing could be tricky, given a rising rate environment that will increase competition for lower-cost deposits, said Gary Tenner, an analyst at D.A. Davidson. Success "will be a function of executing, keeping relationship managers focused on that topic and really managing behaviors with incentives and the culture of the firm," he said.
The company's broader strategic road map makes sense to analysts who have been listening to Banc of California executives discuss these themes in recent quarters.
“Their strategic plan, as it stands, is one that by its nature that is a longer-term plan, especially in the environment we're in,” Tenner said. “It is a longer-term project to make over that deposit base. That could take a few years.”
An improved funding mix would benefit Banc of California, and it shareholders, when the time comes to sell, Coffey said. The company noted in a recent presentation that its 140% price to tangible book value is much lower than the 226% average for other banks with $9.5 billion to $13 billion in assets.
A sale will likely be delayed as management looks to improve operates and create more value, Coffey added.
Management also plans to make more commercial and industrial loans, which made up about 27% of total loans at Dec. 31. The goal is to boost that segment to 30% to 35% over time. Residential lending is expected to fall from 31% to somewhere between 25% and 30%.
Bowers said he is pleased with ongoing efforts to reduce its reliance on securities, though more work needs to be done. Loans increased by 10.4% in 2017 from a year earlier, to $6.7 billion.
Banc of California also said it plans to invest $7 million this year in technology and infrastructure improvements. Over the long term, however, management wants to lower the ratio of noninterest expense to total assets from 2.45% at Dec. 31 to less than 2%.
While the strategic plan is challenging, it is a refreshing change from 2017 when the company looked to right the ship after the abrupt resignation of Steven Sugarman. The company subsequently shuffled its management team, added several investors to its board, shed its mortgage business and cut corporate jobs.
The new leadership team has been asking for investors' patience throughout the process, Coffey said.
Bowers, who was president and CEO of Square 1 Financial in Durham, N.C., when it was sold to PacWest Bancorp in 2015, said his team doesn’t spend time thinking about past issues.
“We have professionals that surround those issues — my job and our goal is to build the bank we set about building,” Bowers said. “The rest of the world has grown fatigued of all that. We're focused on the future."