Image source: The Motley Fool.
Banc of California Inc (BANC)
Q3Â 2018 Earnings Conference Call
Oct. 25, 2018, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, and welcome to Banc of California's Third 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 would now like to turn the conference over to Mr. Doug Bowers, Banc of California's President and Chief Executive Officer.
Douglas H. Bowers -- President and Chief Executive Officer
Thank you and good morning everyone. I appreciate your joining us for today's third 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 third quarter performance continues to demonstrate progress against our three year strategic roadmap with year-to-date core fundamentals trending toward our long-term targets. To remind everyone that road map included four primary points of focus that we expect 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 our progress and work to-date on these strategic goals.
In short, we are happy with the early accomplishments and remained confident in our ability to execute on the full three-year strategic plan. That said, we will recognize the path maybe bumpy along the way and from quarter-to-quarter. As a reminder, the four focus points on the Banc B-A-N-C roadmap are B, 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 grew by $171 million; and for the year-to date period, core deposits have grown by $584 million or 14% annualized. The 14% annualized rate of growth compares favorably with our long-term target range of low-to mid-teens rate of growth.
While we saw strong growth in core deposits, we also recognized the challenge of growing deposits in a rising interest rate environment along with increased market competition for low-cost deposits. That said, with our various deposit gathering initiatives under way, we continue to see opportunities to remix the portfolio away from wholesale funding and into core deposits and then ultimately into lower cost in core deposits.
As we noted in the past, we envisioned our overall funding transformation occurring in three phases. The initial phase of exiting high rate, high volatile institutional bank deposits, was completed in the first quarter of this year. The second phase of transitioning out of wholesale funding and into core deposits is well under way. Somewhat concurrent with the second phase and extending further out, the third phase is to convert the higher costing core deposits into lower cost relationship-based deposits.
During the past quarter, we were pleased to see non-interest bearing deposits grew by $57 million, reversing a downward trend that had been experienced for the past several quarters and providing another proof point of our ability to execute strategic plan. Across our various channels, community banking turned as strong performance for the quarter. Under Leticia Aguilar's leadership, the Community Bank channel continues its transformation toward a model increasingly focused on serving small business.
The private banking division also turned in yet another strong quarter of gathering low-cost deposits. We continue to add talented members to the private banking team, which will further contribute to the success of the division. The real estate banking division while 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 as a promising pipeline of deposit opportunities. Rounding out the deposit gathering efforts, the specialty markets division continues to grow and supplement our core deposit gathering efforts.
Our second strategic initiative is to amplify lending third quarter loan production met our expectations and continues a steady march toward our target of originating more than $1 billion of new commitments each quarter. The bulk of the production volume for the quarter was evenly distributed across our main product categories of single-family, commercial real estate and C&I. With each of these production groups generating loan commitments in excess of $240 million.
Additional volume for the quarter was sourced from our construction group and the Private Banking division. 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 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 will further contribute to production and shift more of our loan production to C&I.
Additionally, we believe the growth in our suite of commercial business products and answer our ability to deepen client relationships by providing treasury management depository services. Through three quarters of the year, our loan portfolios grew at an annualized rate of 12%.
We remain optimistic with the momentum from the third quarter, we'll continue to build in the fourth quarter and we fully expect to achieve our mid-teens target rate for the full year. Third, normalize expenses. In the second quarter, we announced a reduction in force, resulting from the simplification of our operating structure and in response to the process improvements being implemented throughout the bank.
Some of the expense savings associated with the staff reduction started to be realized in the third quarter and will be fully realized during the fourth quarter. We previously communicated that the expense savings would be redeployed to front line units and that remains our intent.
That said, our adjusted operating expenses for the quarter once again came in below our expectations at $50.4 million which equates to a 1.99% operating expense ratio versus our long-term target of 2% or lower. While we have initially hit our target, we do caution that expenses are likely to increase in the near term as we further build out our production units.
Fourth, creating stockholder value. The third quarter reported our ROAA and ROATCE were 43 basis points and 2.49% respectively. And were significantly impacted by certain non-recurring 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 accelerate core lending and to leverage our expense base. All of which when achieved will help us drive toward the targeted metric levels or better.
Lastly, during the third quarter we announced the appointment of a new Director, Barbara Fallon-Walsh. Fallon is an accomplished executive, have been run various units within Bank of America and more recently The Vanguard Group. Fallon also possesses considerable boardroom experience, currently serving on the Boards of Alliance Bernstein, MONY America and Betterment for Business Advisory Board.
Newer Board of Directors remains committed to engaging members that are experienced business leaders providing strategic guidance and operating with the highest ethical and governance standards.
With those opening remarks, I would now like to turn it over to John to provide more detail around our third quarter financial results. John?
John A. Bogler -- Chief Financial Officer
Thank you, Doug. During the third quarter, we further our efforts to remix the balance sheet toward more traditional core assets and liabilities, with the overall size of the balance sheet remaining relatively flat at $10.3 billion.
On the asset side, the securities portfolio declined by nearly $237 million and the securities portfolio as a percentage of total assets declined to 20% from 22% last quarter and is for the first time, within our long-term targeted range of 15% to 20% of assets.
During the quarter, $258 million of CLO securities were called and $62.5 million CLOs were purchased. Additionally, $25 million of CMBS were sold. As loan growth continues over the next two quarters, we plan to continue shrinking the mix of CLO securities accordingly, further easing us into our long term targeted securities mix.
The asset remix was supported by continued growth of core held for investment loan balances which increased by $217 million for the quarter, while only a small amount of loans were sold this past quarter. We may selectively sell varying portions of the loan portfolio as necessary to manage interest rate risk, reduced concentrations in selective borrowers or manage overall loan portfolio growth.
Through the first 3 quarters of this year, the annualized loan growth rate is 12%, and as Doug mentioned, we remain confident that the 2018 full year growth rate will meet or exceed the long run target of mid-teens annual loan growth rate.
Gross loan production totaled $907 million for the third quarter and new production yields on average were 5.22% substantially above the blended portfolio loan yield of 4.70%.
The higher loan production yields we saw in the third quarter were largely reflective of a higher macro rate environment, but also aided by a stronger mix of core C&I loans.
Net held-for-investment loan growth during the quarter was primarily driven by multifamily growth of $152 million and $126 million of growth in the single-family portfolio.
The commercial real estate portfolio grew by $29 million while the C&I portfolio declined by $70 million. Total commercial loan balances collectively increased by $95 million or 2% from the prior quarter and are up $691 million or 17% from a year ago.
At quarter end, commercial loan balances totaled $4.9 billion and represented 67% of the loan book. Over the past year, the gross loan portfolio has increased by over $1 billion or 16%, further supporting our belief that attaining our loan growth target is achievable.
On the deposit side, we saw a strong core deposit growth of $171 million which was used to reduce FHLB advances by $165 million. The core deposit growth was largely centered on CDs which increased by $158 million over the prior quarter in savings accounts, which increased by $94 million. Of particular importance, noninterest-bearing checking account balances increased by $57 million for the quarter, reversing a declining trend over the past several quarters.
As we continue to gain traction in various deposit gathering business units, we expect to migrate the core deposit portfolio toward a lower cost basis relative to where we currently stand. Core deposits or non-broker deposits now account for 84% of total deposits, up from 80% at the end of the fourth quarter. On a more cautionary note, as we evaluate opportunities to operate more efficiently, we are in the process of assessing some of our depository relationships with the cost to monitor those accounts from a BSA perspective starts to outweigh the benefits of holding the deposits.
During the fourth quarter, we expect to migrate away from a number of these higher-risk accounts, which may depress the rate of growth for core deposits in the quarter that will eventually allow us to be more efficient as we monitor our remaining and forthcoming depository relationships.
Transitioning to the income statement, net income available to common stockholders for the third quarter was $3.8 million or $0.07 per diluted common share. For continuing operations, earnings per diluted common share were $0.06. These results include a number of items that we want to call to your attention.
The company's third quarter reported financial results included $8 million of net non-recurring expenses. This included $7.6 million of legal and indemnification expenses, a $1.5 million write-off of software and $553,000 of severance-related costs closely associated with the prior quarter's reduction in force.
These costs were offset by a $1.7 million insurance recovery related to ongoing legal and indemnification expenses. The legal expense associated with indemnification of past and current directors and officers, is eligible for insurance reimbursement and the reimbursement is recorded as a counter expense as it is received.
We expect to continue to incur legal and indemnification expenses for the next several quarters with insurance reimbursement naturally lagging. Eventually in future quarters, we expect a level insurance reimbursements to exceed the legal and indemnification expenses.
After adjusting for these non-recurring items along with the amortization expense associated with our solid tax equity program, our operating expenses for the third quarter were $50.4 million for which we have provided a reconciliation on Page 8 of our slide deck.
As Doug noted, we expect to continue investing our front-line business units, which will offset some of the current and expected expense savings associated with the previously announced reduction in force.
On September 17, the company redeemed a $40 million Series C preferred equity which carried an 8% dividend. The carrying value of the Series C preferred equity was net of the original issuance costs for the preferred were approximate $2.3 million less than a liquidation amount of the preferred equity.
When the preferred was redeemed, this issuance cost was effectively treated as an additional preferred dividend by reducing net income available to common stockholders and amounted to $0.04 per diluted common share. The result of excluding the non-recurring items for the third quarter, normalizing our tax rate to 20% and removing the impact of preferred equity redemption puts us closer to an adjusted operating earnings figure for continuing operations of $0.27 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 $0.23 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 relatively unchanged from the prior quarter at $9.7 billion. Both the mix of assets from securities in the loans and the growth of earning assets are key to our plan to drive revenues higher overtime.
The net interest margin decreased by 8 basis points for the quarter to 2.93% which was slightly below our expectation, but not surprising given the increasing competition for deposits that we're seeing in our markets.
The average yield on interest earning assets increased 8 basis points for the quarter, driven by a 7 basis point increase in average loan yields to 4.70%. The securities portfolio average yield was unchanged at 3.78% with the flat portfolio reflective of the static 3-month LIBOR index during the quarter.
As a reminder the CLO investments reset quarterly in our index to the 3-month LIBOR. The cost of interest bearing liabilities increased 21 basis points to 1.81% primarily due to a 24-basis point increase in interest bearing deposit cost and a 24-basis point increase in FHLB borrowing cost.
The increased FHLB borrowing costs were driven by higher short-term rates and overnight advances which totaled $735 million at the end of the third quarter. Approximately 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 the short end of LIBOR curve holding flat for the quarter, the asset yield likewise remained relatively flat.
Conversely, the cost of funds continue to increase during the quarter due to renewing CDs and the increased cost of overnight FHLB advances. With the latter, larger selective of the June Fed funds rate increase.
As we communicated last quarter, we expected NIM to be under pressure through the end of the year and until we deepen our traction gathering lower costing deposits. Looking forward, if we maintain loan production yield at higher levels in our average portfolio yields and continue executing our lower cost deposit strategy, the NIM should subsequently begin to trend toward and then above 3%.
Net interest income decreased by $1.6 million from the prior quarter to $71.2 million. For the third quarter, loan-interest income increased by $3.5 million due to a $111 million increase in average balances and a 7-basis point increase in the average yield. This was partially offset by a decline of $856,000 interest income on securities as these average balances declined by $116 million with the average yield holding steady.
On the liability side, interest expense on deposits increased by $4.8 million as the average balance increased by $227 million and the average rate increased by 24 basis points.
Interest expense on FHLB advances decreased by $543,000 due to $299 million lower average balances, partially offset by 24 basis points of average higher rate.
The composition of interest income continues to improve as commercial loan interest income now represents 56% of total interest income compared to 50% a year ago. Loan interest income now comprises 79% of total interest income, up from 73% a year ago.
For the quarter, we recorded a $1.4 million provision for loan losses which is mostly reflected growth in the loan portfolio. The ALLL balance coverage ratio of nonperforming loans is 226%, while the overall ALLL ratio is 80 basis points.
Loan growth for the quarter was primarily in multi-family and single-family categories, both of which are historically low loss products. Total non-interest expenses for the quarter were $61 million and included $8 million of one-time expenses and $2.5 million expense from solar investments.
Our current solar tax investment commitment is completed, but we may see some volatility in both the HLBV depreciation expense and the tax credit line until we receive the final equity fund details from the program sponsor.
As noted, non-interest expenses included a number of items that we do not consider to be core operating expenses. These items totaling $8 million and adjusted for these items and the depreciation solar investments core operating expenses came in at $50.4 million.
Our efforts to simplify the business model and implement a more efficient operating structure is proven to be more beneficial than our original expectations. 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 78% for the quarter and continues to reflect more of a revenue opportunity for us to the extent that we can improve our net interest margin, grow the earning asset base and begin to generate fee income from our expanded deposit and treasury management initiatives.
Non-interest expenses to average assets came in at 1.99% from continuing operations for the third quarter, after adjusting for the non-recurring expense items.
Our capital position remains strong as the common equity Tier 1 capital ratio was 9.80% and Tier 1 risk-based capital totaled 13.15%. The quarter-over-quarter decline in the risk-based and leverage capital ratios is primarily due to the $40 million preferred equity redemption executed during the third quarter.
Moving on to credit and asset quality metrics for the third quarter, our non-performing asset ratio for the quarter was 25 basis points, up 3 basis points from the prior quarter. This absolute low level of non-performers reflects the disciplined credit culture of the bank and remains very strong compared to peers in the industry broadly.
Non-performing assets to equity continued to remain strong at 2.7%. Delinquent loan metrics are strong, despite the ratio of delinquent loans to total loans increasing to 49 basis points compared to 38 basis points at 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. Net charge-offs for the quarter were $306,000 or 2 basis points.
With that summary of our third quarter financials, I would now like to turn the call back over to Doug.
Douglas H. Bowers -- President and Chief Executive Officer
Thank you, John. As mentioned in my opening remarks, we continue to see the considerable potential for Bank of California. While our near-term performance might jarred around a bit relative to our long term metrics, we continue to execute on our 3-year plan and expect ultimately achieve or exceed our targeted metrics.
The progress from building a more efficient operating platform is clearly evident in our expense results and we believe lead to a highly scalable an efficient platform.
Each our business unit leaders remain confident that they will achieve their annual goals and we are well under way with setting new annual targets for 2019.
Bank of California has a talented group of employees that I am proud to partner with and represent.
That concludes my prepared remarks. Operator, now let's open it up for questions.
Questions and Answers:
Operator
(Operator instructions) The next question comes from Jackie Bohlen with KBW.
Jackie Bohlen -- KBW -- Analyst
I wanted to start about with the comment about remix and if I heard it right in the prepared remarks, it sounded like you said you wanted to work on moving CLOs into loans over the next two quarters. I just identify that we could see net balance sheet growth in 2Q '19?
John A. Bogler -- Chief Financial Officer
Let's do a couple of things. So, in general, we have said we want to remix the securities portfolio continue to move the overall securities mix down, it's now at 20%, which is considerable progress from where we started it nearly 30%. And a portion of that represents CLOs which we also intent move down. So, our target for securities is in the mid-teens which we are working toward and may well get there in the next quarter or two. A portion of that which will be CLOs and indeed, we intend to replace all of that with loans given obviously the higher margin content that's contained there.
Douglas H. Bowers -- President and Chief Executive Officer
Jackie may be another way to think about that is, as we experience loan growth, you will see the securities portfolio come down and so as we drive the securities mix down -- assets down to our targeted range, then you start to see loan growth that drives balance sheet growth.
Jackie Bohlen -- KBW -- Analyst
Understood and it sounds like with that 15% to 20% target, it's not a factor of just achieving the 20%, it's more -- getting much more toward the middle of that range. Is that fair?
Douglas H. Bowers -- President and Chief Executive Officer
That's a fairway to look at it. Yes.
John A. Bogler -- Chief Financial Officer
And then I think I'd add to that, that we want to continue to work the CLOs down to a more normalized portion as we go.
Jackie Bohlen -- KBW -- Analyst
Okay. And once we get to net balance sheet growth, even as you continue to remix the CLOs, would you potentially be adding to the portfolio with more traditional securities, to keep that mix where you want it?
John A. Bogler -- Chief Financial Officer
We will, so you will see that securities book of business begin to change as we get down to that targeted level to be much more traditional, and so we still want to hold a lower level of CLO balances, in terms of the entire portfolio, and so you'll see the CLO balances continue to move down into more traditional securities.
Jackie Bohlen -- KBW -- Analyst
Okay, that's helpful. And then just one more from me and then I'll step back, you mentioned that growth was rather balanced in terms of origination volume in the quarter, but we saw the contraction in the C&I book. What drove that?
John A. Bogler -- Chief Financial Officer
We had an opportunity with some indirect leverage loans, that were up for renewal and we chose not to renew into those -- that loan product, and so just eliminating further risk from the loan portfolio.
Douglas H. Bowers -- President and Chief Executive Officer
And I'll add to that risk and complexity, our intent is to have and we're well on our way, our intent is to have a more balanced traditional C&I portfolio and we have the team fielded largely and under way.
Jackie Bohlen -- KBW -- Analyst
And when you look at that remaining portfolio, are there more loans or structures in there that are similar to what you eliminated in the quarter, might we see more of this going forward?
John A. Bogler -- Chief Financial Officer
There is a little bit left and as we have the opportunity to exit out of those positions, we will.
Jackie Bohlen -- KBW -- Analyst
Okay. But it sounds like it's perhaps a smaller portion of the portfolio, now?
John A. Bogler -- Chief Financial Officer
It is, yes, it is.
Operator
The next question comes from Matthew Clark of Piper Jaffray. Please go ahead.
Matthew Clark -- Piper Jaffray -- Analyst
Just on the deposits, you talked about migrating to lower cost deposits over time. And you also mentioned that you're assessing certain deposit accounts as it relates to BSA that might be higher risk. Can you just quantify, how much of that there is on the balance sheet and what the cost of those deposits is, in total, on weighted average basis?
John A. Bogler -- Chief Financial Officer
Yeah, let's do a couple of things. With respect to the higher risk accounts, we've had some of that, that we have been working on throughout the year, but more of that will be evidenced in the fourth quarter. The numbers are relatively modest, but we wanted to call it out, to like many banks working through that issue. We can't put a precise finger on it, but I would put it at relatively modest.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then when you think about just the pace of deposit repricing up 24 basis points linked quarter here. Obviously you had a Fed rate hike recently too. I mean do you think with the pipeline of new business coming in, do you think you can slow the rate of change or you think that can be difficult until the Fed starts raising rates?
Douglas H. Bowers -- President and Chief Executive Officer
Well, look, a couple things, I am really happy with the progress we have made to-date in terms of the process we've been through, right? So, we eliminated the institutional deposit base, which we thought was too volatile and certainly significantly higher priced and then we went into Phase 2, which has been also executed on very well. But that is higher priced and that's where you saw much of, not all, but much of the core base increase.
The third phase, we had beginning success with, we were happy with the $57 million in non-interest bearing, but that piece of it is going to take longer.
Matthew Clark -- Piper Jaffray -- Analyst
Understood, OK. And then on the tax rate going forward and the losses on alternative investments, I mean can we expect that line item to get a lot closer to zero here and the tax rate maybe get into that 20% to 25% range, maybe the midpoint, I guess, just wanted to get a sense for those two items?
John A. Bogler -- Chief Financial Officer
Yes, on both of those. So with respect to the programs that we're invested in, we'll get some potentially some final true up numbers that will flow through in the fourth quarter. We don't expect those to be significant either direction, but then as we go forward, I would expect that effective tax rate to be within our range of the 20% to 25%.
Matthew Clark -- Piper Jaffray -- Analyst
Okay, great. And then one more if I can, sneak one in. I think you mentioned on the loan growth outlook that you expect to meet or exceed the mid-teens guidance that would suggest a step up here, a meaningful step up here in the fourth quarter, you just speak to the pipeline and with it by size or?
Douglas H. Bowers -- President and Chief Executive Officer
Yeah, well, I'm not going to give a precise number on a pipeline, but I can tell you that we're still experiencing very much, a robust economy, plenty of inquiry and more feet on the street. So when you put that combination together, the momentum is growing from a loan perspective. So yes, we're pretty optimistic.
Operator
The next question comes from Gary Tenner of DA Davidson. Please go ahead.
Gary Tenner -- DA Davidson -- Analyst
Thanks, Good morning. Just to follow up on that question on the loan growth outlook. I appreciate that your pipeline is strong and you think you'll hit the number and I think, expect strong growth next year as well. As we've gone through earnings season and really over the last few months, a lot of banks in your footprint generally as kind of talk down their expected pace of loan growth among other reasons because of pricing and there are credit box now. I'm just curious what given the pace of growth that you expect to continue, where do you think you're getting the incremental growth from that stuff that your credit box with good pricing.
Douglas H. Bowers -- President and Chief Executive Officer
Well, first of all, we have a very, very good history from a credit performance perspective overall. So charge-offs were less than $400,000, non-performers at 25 basis points barely up. So, with that track record and then as we have continue to evaluate the markets across our footprint, look it's the world has ever more competitive. So we're being as sharp on all of that as we think makes sense. But we continue to see Gary, plenty of opportunity here.
Gary Tenner -- DA Davidson -- Analyst
And then just secondly, as you think about the margin, I know you talked about some more pressure potential here in the fourth quarter, there was a lag LIBOR that you pointed out that may be should help a little bit in the fourth quarter. So as you think of the ingredients to stabilize in the margin, it seems to me, it's mix, it's deposit shift and it's some higher rate. So, which of those do you think is the best opportunity to stabilize the margin in third, fourth or first quarter?
John A. Bogler -- Chief Financial Officer
I think in the -- in terms of the margin, it's a little bit on each side, as we continue to gain traction again on implanting the various deposit gathering strategies and again we had some success here in the quarter with $57 million of non-interest bearing deposits. So, through the extent that we continue to have success in that arena that will begin to slow the pace of overall cost of funds increasing and then certainly with the LIBOR with nearly 40% of our asset tied to LIBOR the short end portion of it. In one fashion or another, and to the extent that it increases, we will see some benefits there. So, at least at this point, I would say here in fourth quarter, I wouldn't expect any sort of same degree of compression that we saw in the third and hopefully it will be a little bit more of a balanced result as we get to the end of the fourth quarter.
Operator
The next question comes from Steve Moss of B Riley FBR. Please go ahead.
Steve Moss -- B Riley FBR -- Analyst
Just wanted to dig a little further maybe on the deposit pricing here in particular the CD portfolio, just wondering how much will reprice this quarter and kind of you know what the rate is on that bucket?
John A. Bogler -- Chief Financial Officer
Yeah, it's a reasonable sized bucket, I might put it probably less than $400 million that will reprice across the entire CD portfolio and that increase is going to be on average probably around 35 to 40 basis points.
Gary Tenner -- DA Davidson -- Analyst
Okay. Kind of what is the weighted average cost of a CD you're putting on these days?
John A. Bogler -- Chief Financial Officer
That really kind of depends upon the duration, but as you said weighted average, so we're probably somewhere in the 225 to 240 range.
Steve Moss -- B Riley FBR -- Analyst
Okay. And on the expense side, just wondering about compensation expense here down quite a bit. I know you had the reduction in force in the second quarter. But wondering if there's any reversal of accrued comp or any other noise that impacted the number?
John A. Bogler -- Chief Financial Officer
There was, so there is a little bit of a bonus reversal that occurred near the third quarter that push that down a little bit lower. At the end of the second quarter, we indicated that approximately 2/3 of the expense savings would start to be realized in the third quarter with the remaining 1/3 of those expense savings realized in the fourth quarter. So we would expect to continue to see some expense savings from the reduction in force, plus the reduction in level of contractors that were being utilized.
Steve Moss -- B Riley FBR -- Analyst
Okay. So excluding the alternative energy and litigation probably like $52 million or so is a reasonable expense run rate for the fourth quarter?
John A. Bogler -- Chief Financial Officer
Yeah, I'm not going to necessarily put an exact number on it, but I would expect a little bit of a tick up from here.
Operator
The next question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.
Andrew Liesch -- Sandler O'Neill -- Analyst
Hey everyone. Just some more questions around the expenses here, just with the planned hires or the hopeful hires. Douglas, what's the pace of conversation you have with prospective bankers coming over and then, what sort of timeframe do you think would take to get to the team fully ramped up to where you like it?
Douglas H. Bowers -- President and Chief Executive Officer
Well, we're in a very good place in our suite of real estate capabilities. So the amount of ads on that arena, which is of course a big part of our lending book, will be relatively modest, very modest. So where we are looking at ads, it comes in the private bank to an extent, although it too is well built out. So that will be incremental. The rest is on the commercial banking side. Most of that commercial banking side C&I has been brought on board here in the beginnings of the fourth quarter or late third quarter. So you'll see that more fully in the fourth quarter.
Not a while -- as we look at the-- as we look out, we'll continue to add incrementally most importantly again to the private bank, and to the C&I world. We're in a good leverage point with all the rest of our capabilities.
Andrew Liesch -- Sandler O'Neill -- Analyst
Got you. And then just from a back office technology standpoint, how are you guys there -- any investments that you need to make or are you in a pretty good place?
Douglas H. Bowers -- President and Chief Executive Officer
Well, we'll continue to invest in that and you'll see that in some of the expense base, but it's not market, we're looking at our depository platform and improving it and we're looking at other key areas. But again, that's relatively modest.
Andrew Liesch -- Sandler O'Neill -- Analyst
Okay. You've covered the rest of my questions. Thanks.
Operator
The next question comes from Tim Coffey of FIG Partners. Please go ahead.
Tim Coffey -- FIG Partners -- Analyst
Thank you -- gentlemen, most of my questions have been answered, but I do want to follow up on some mentioned in the prepared comments about balance sheet management and potential loan sales, and I'm wondering what types of products would you be looking to potentially move off the balance sheet to a loan sale?
John A. Bogler -- Chief Financial Officer
In our single-family book of business, we would have all doc. So we tried to just manage the concentration of all doc within a single-family book and then in the multi-family, it's primarily around where we have concentrations in a single borrower, where we continue to see opportunities to build the relationship with the borrower. We would look to offload some of those positions in order to create additional capacity.
Tim Coffey -- FIG Partners -- Analyst
Okay. And -- the fact that you mentioned that during the call that is that something we should be looking for this next quarter?
John A. Bogler -- Chief Financial Officer
No, we just talked in general about that we intend to continue to build the loan portfolio and I just wanted to call out that we will have sales from time to time, we did sell approximately 200 million in the second quarter, we sold about 20 million here in the third quarter. So I'm just pointing out that we may continue to have loan sales from time to time.
Tim Coffey -- FIG Partners -- Analyst
Okay, All right, great. That's one of the follow-up on that. Those are my questions. Thank you very much.
Operator
Next question comes from Timur Braziler of Wells Fargo. Please go ahead.
Timur Braziler -- Wells Fargo -- Analyst
Hi, good morning. Wanted to follow up on Jackie's question regarding the leveraged loan run-off this quarter. Can you provide a number in the reduction of that portfolio just to get a sense of what kind of the core C&I growth rate look like?
John A. Bogler -- Chief Financial Officer
We had about, I think it was about $55 million in that indirect leverage lending book.
Timur Braziler -- Wells Fargo -- Analyst
Okay. And then as we start thinking about what should be an accelerating level of loan growth from here. Can you talk through what that competition should look like, is it going to be fairly consistent across all the different business lines, C&I kind of single-family, multi-family or is there any particular class, do you think is going to be really driving that growth?
John A. Bogler -- Chief Financial Officer
No, look, I think it will, actually will ramp but, so it may move around a little bit, but our real estate businesses across CRE single family are very well developed. So I think it will move around a little bit, but no, no significant shifts at this stage of the game.
Timur Braziler -- Wells Fargo -- Analyst
Okay, and then just one last one for me, looking at the DDA growth this quarter certainly encouraging, any one group driving the majority of that growth and then the -- look a kind of inflows and outflows, any major kind of chunky inflows there or is it fairly granular?
John A. Bogler -- Chief Financial Officer
Fairly granular. The community bank, our retail bank had considerable success. Private bank had good success, that we saw continued upticks and success out of our suite of real estate business, so in terms of overwhelmingly chunky, no. So --
Douglas H. Bowers -- President and Chief Executive Officer
One thing, I'd add to that is now our focus of latest much more on relationship based and much less on transactional, so the growth that we are seeing is primarily where we classified as kind of relationship based and avoiding the transactional growth.
Timur Braziler -- Wells Fargo -- Analyst
And again to that point just looking at the growth and time deposits, are you able to kind of get relationships from some of those balances as well?
Douglas H. Bowers -- President and Chief Executive Officer
Sure, yeah, now we see that under way and as we said that is the third phase, that's the harder part, and we're under way with it. And seeing good early success, but we got ways to go.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Doug Bowers, President and CEO of Bank of California, for any closing remarks.
Douglas H. Bowers -- President and Chief Executive Officer
All right, thank you, Drew and thank you everybody. Loan growth, plus 12% for the first nine months; deposit growth, plus 14% for the first nine months and our securities mix now down to 20%. So lots of progress made across the franchise and certainly work to do. We appreciate everybody's participation. Thank you very much.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 45 minutes
Call participants:
Douglas H. Bowers -- President and Chief Executive Officer
John A. Bogler -- Chief Financial Officer
Jackie Bohlen -- KBW -- Analyst
Matthew Clark -- Piper Jaffray -- Analyst
Gary Tenner -- DA Davidson -- Analyst
Steve Moss -- B Riley FBR -- Analyst
Andrew Liesch -- Sandler O'Neill -- Analyst
Tim Coffey -- FIG Partners -- Analyst
Timur Braziler -- Wells Fargo -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
