Banc of California Inc (BANC) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Banc of California first quarter 2016 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). Please note this event is being recorded.

I would now like to turn the conference over to Tim Sedabres. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for today's 2016 first quarter earnings conference call. Joining me on the call today to discuss first quarter results are Banc of California's Chairman and Chief Executive Office, Steven Sugarman, Chief Financial Officer, Jim McKinnery, Chief Strategy Officer, Fran Turner and Chief Risk Officer, Hugh Boyle.

I would like to remind everyone that today's conference call is being recorded and a copy of the recording will be made available later on the company's Investor Relations website. We have furnished a presentation that management will reference to today's call and that presentation is also available on our website under the Investor Relations section.

Before I turn it over to Steve, I want to remind everyone that, as always, 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.

The forward-looking statements are outlined on slide one of today's presentation which apply to our comments today. We will provide an opportunity for Q&A at the end of our presentation.

And with that, I'll turn it over to Chairman and CEO, Steven Sugarman.

Thank you, Tim. And thanks for joining Banc of California's first quarter earnings call.

Let me begin on slide two of the presentation. Banc of California continues to see accelerating success growing our franchise value. We are continuing to deliver industry-leading asset and earnings growth, including first quarter growth of $1.4 billion and annualized pre-tax income of over $130 million.

Since the end of 2014, we have grown the company organically by $3.6 billion or 60% in just five quarters. This has resulted in another quarter of record earnings, improving operating efficiencies and dramatic success, winning market share and attracting California's top banking talent.

We are finding that winning is resulting in more winning. Banc of California's success is defined by our team's tireless focus on empowering California through its diverse businesses, entrepreneurs, and communities. We have built a product suite that collectively meets the comprehensive needs of our clients. We offer multiple banking channels for California's entrepreneurs and business owners to access our services.

We have built, [bespoke] lending businesses tailored to the needs of our marketplace and we have developed a powerful culture based on local decision-making and an entrepreneurial spirit. We are California's bank.

The credit for the bank's success resides in the talent of our bankers, who serve our clients so well, and of our banking professionals who ensure our operations are sound, our risk is well managed, our credit is strong and our capital is robust. For this reason approximately three years ago the board made the decision to ensure that all of our employees were aligned with our shareholders. And the Board approved our employee stock ownership program that enabled all employees to become shareholders and participate in the value they create for our franchise.

Our employee shareholder culture distinguishes Banc of California as an employer and reflects the passion and dedication that distinguishes our team and their commitment to meeting the needs of our clients. We believe that serving our clients best, we serve the interests of our shareholders best.

Since the end of 2014, this has proven to be the case. Banc of California has boasted the best performing bank stock in the country. Of all banks on Forbes Magazine's list of the 100 Best Banks in the Country. We believe this distinction reflects our goal of being the best of the best.

With a total shareholder return in excess of 76% since the beginning of 2015, we believe we are up holding our commitment to the shareholders to build a franchise for the long-term. We are committed to delivering strong results for all shareholders and all of our stakeholders, including our valued debt and preferred investors. We are proud to have also insured, during this period, the security and stability of those senior securities with a consistent track record of trading liquidity above their par values.

Now, turning to first quarter results, we continued to deliver strong financial returns with an ROA of 0.9%, in an ROTC of 14.5%. Our high core deposit growth continues to drive our increasing franchise value. For instance, non-interest-bearing deposits grew by a record $278 million in the first quarter. This marked a record for us and as a testament to the inflection point our business is hitting and benefiting from.

The first quarter marks the eighth consecutive quarter that the company has exceeded consensus analyst estimates. The scale and profitability of our larger than expected balance sheet, at the end of the first quarter, further strengthens our earnings run rate for the rest of 2016. This impact supported management's decision during the first quarter to increase earnings per share guidance for 2016 from $1.55 to $1.60 per share.

Today I'm pleased to reiterate that we believe we are on track to meet or exceed this guidance. Our growth to $9.6 billion in assets at the end of the first quarter nearly matches Street estimates for asset size for Banc of California at the end of the third quarter. This continues our out performance on growth by approximately two quarters ahead of Street expectations.

We believe the market forces have created a window of opportunity for Banc of California to win market share from dislocations in the market from banks that have been acquired by foreign banks or have moved out of state. This continues to drive our record growth. We are uniquely well suited to benefit from these market dynamics.

Now, turning to slide three, Banc of California has demonstrated a track record of delivering compelling and sustainable financial results by exceeding expectations for eight straight quarters. The accelerating profitability and organic growth from our business plan has become very evident, specifically with respect to first quarter performance, I would like to highlight a few key items.

First, quarter over quarter non-interest-bearing deposit growth was a record $278 million. Second, core deposit growth for the quarter was $741 million. And third, held for investment loans increased by $279 million or 5% in the prior quarter and have grown by 39% year-over-year.

Our continued success in achieving these strong results is directly related to our continued focus on delivering against our value proposition of being California's bank. The existing teams we have in place are delivering strong results in winning market share from competitors.

Additionally, we are attracting the top talent in the market and have established Banc of California as the employer of choice for California's top banking talent. We believe this is putting a brisk wind at our back. The combination of these factors supports the sustainable future growth of both our deposit franchise and our commercial banking business. Slide four highlights some of the trends in the California banking landscape.

The sale of City National Bank to RBC, the sale of One West Bank to CIT, and Union Bank's move of their headquarters and people to New York, have created almost a perfect storm, which has cleared a path for Banc of California to deliver against our mission of being California's bank. Since the beginning of the year, we have expanded our private banking business with new teams and new offices in Century City, Calabasas, and Woodland Hills.

We've added over 20 commercial bankers in Los Angeles and Orange County, including commercial bankers to support the launch of our new healthcare banking, nonprofit banking, and municipal banking teams. We have added Senior Treasury Management and central operations professionals and we have added top talent within the SBA lending division.

We believe we are in the midst of a secular realignment of top banking talent from which Banc of California is uniquely well positioned to take advantage of. The addition of talented individuals and teams such as these further validates that our value proposition is taking hold and driving increasing market share gains.

As California's bank, our value proposition differentiates itself from banks owned or managed out of state or out of country. California's diverse clients and most talented employees appear increasingly clear in their preference for California's bank.

Now, I'd like to turn it over to our CFO, Jim McKinney, to walk you through our financial results.

Thank you, Steve.

Slide five highlights the earnings mix by business segment in growth and net interest income for the first quarter. We continue to be focused on building the contribution of earnings coming from the commercial banking segment with the target of over 80% of earnings coming from the commercial banking segment. This stable and predictable high quality earnings stream supports lower earnings volatility and stronger financial returns that create superior returns for our shareholders, reduce our cost of capital, and expand the base of California businesses, entrepreneurs, and communities, we can reach and empower with our solutions.

For the first quarter, the commercial banking segment accounted for all of the bank's profits. It is responsible for driving net interest income $8 million higher compared to the prior quarter, important to note, commercial banking period end balances were substantially higher than average balances for the quarter. This is expected to support accelerated net interest income growth in future quarters.

Turning to the mortgage banking segment, the segment was negatively impacted during the quarter by $10 million of the $11.3 million negative fair value adjustments on the MSR portfolio and certain interest rate swaps. We expect mortgage banking profits to accelerate into the second and third quarters as the first quarter is typically seasonally slow and we are seeing positive trends in the second quarter, which is generally a much stronger origination window.

With the completion of the previously announced Palisades Group sale, we expect, going forward, to eliminate the financial advisory segment. Importantly, this sale will eliminate all subsidiaries of the holding company except for the bank. We view this as a positive impact on items relating to the holding company risk and regulatory cost.

Lastly, this slide highlights the benefits of our diversified business platform. Our interest rate risk controls and balance sheet management strategies that enable the company to navigate a volatile first quarter rate environment to provide consistent and predictable earnings.

Turning to slide six, our base non-interest expenses increased by $2.5 million from the prior quarter as the company's assets grew significantly. Additionally, the first quarter included $2.2 million of non-core expense items, primarily related to legal fees and severance expenses. Assets per FTE continued to increase in the first quarter to $5.7 million per FTE as we continued to leverage the platform and infrastructure we have built to date.

Our efficiency ratio for the quarter was 73%, down from 77% from the prior year quarter. This includes the impact from seasonality, including the mortgage business and recurring annual trends such as the reset of employee benefit rates for the year including FICA and 401(k) contributions, which increased $1.6 million compared to the prior quarter.

Additionally, professional fees were up $1.4 million from the previous quarter, driven by higher legal and audit fees. We continue to expect the consolidated efficiency ratio for the full year 2016 to be between 65% and 70%.

Slide seven outlines our continued strength in growing franchise value building deposit balances. For the quarter, we grew core deposits by a record $741 million. Non-interest-bearing balances grew by a new record $278 million and have increased by 87% from a year ago.

Total deposits have grown by 41% over the past year. Non-interest-bearing deposit growth was especially strong during the quarter and although we expect continued growth throughout the year, we do not expect this elevated pace of growth to continue on a straight line. We tend to see step benefits during a period after the addition of key talent and surrounding certain events.

We expect to grow well over $100 million in future quarters with some idiosyncratic quarterly volatility which, like the first quarter, can result in positive events. Even with our continued deposit growth we are maintaining a disciplined pricing strategy which has held our cost of deposits at or below 50 basis points over the past four quarters. Disciplined deposit pricing, coupled with stable loan origination yields resulting in maintaining net interest margins flat from the prior quarter at 3.39%.

In fact, the yield on our loan portfolio during the period increased by four basis points from 4.46% to 4.5%. This is in line with our targeted yield. Importantly, it also serves as evidence we are maintaining our pricing discipline and not buying growth or pricing at unattractive levels. This, coupled with strength and credit metrics in our portfolio, which Hugh will discuss later, provides additional support that our growth is due to winning market share and talent and not by taking on increased credit or pricing risk.

Moving to slide eight, this slide highlights our accelerating loan originations. In the first quarter the commercial banking segment produced $823 million of loan originations, an increase of 66% compared to the prior-year period. As you can see, the first quarter is seasonally a softer quarter for originations and we expect further acceleration into the second quarter. Originations continue to be balanced across the commercial business lines, with yields on new commercial originations of 4.2%.

Meanwhile, mortgage banking saw first quarter originations finish at $1 billion, up 8% from the prior quarter. Importantly, while we continue to grow the health for sale portfolio, given our focus on strategic and other market factors, we elected to reduce loan sales during the quarter compared to the prior quarters and our budget. Going forward, we expect gain on sale of loans to average between $6 million and $8 million per quarter.

We continue to believe our held for sale portfolio will achieve at least similar gain on sales in future periods when sales are executed in ordinary course and that our gain on sale revenue from loan sales will return to past levels in future periods. For the full year, we expect total originations to exceed $8 billion, including $2.5 billion from the commercial banking segment.

On slide nine, our capital ratios at the end of the quarter, continue to exceed both current and fully phased in BASEL III requirements. This is true for both the common equity Tier-1 ratio and the Tier-1 risk based capital ratio. Our first quarter capital offerings of both common and preferred stock bolstered both ratios and supported the continued organic growth we are experiencing.

With that, I will now turn it over to Hugh Boyle, our Chief Risk Officer, to discuss our credit and asset quality.

Thank you, Jim. And good morning, everyone.

Asset quality at Banc of California remains strong and stable. Slide ten, in our investor presentation deck, addresses a few asset quality highlights and our allowance for loan and lease losses for ALLL. Overall for the quarter, the bank experienced improving asset quality metrics. On a percentage basis, non-performing assets to total assets declined to 46 basis points, the lowest level experienced in over two years.

Year-over-year our non-performing assets to total assets ratio has improved by 25 basis points or 35%. Non-performing loans to total gross loans also improved to 81 basis points in the quarter, down from 87 basis points at Q4 2015 and down from 109 basis points for the prior year. OREO declined to just $325,000 at quarter end.

Based on the continued stability of our asset quality and the relatively benign macroeconomic environments, the bank's ALLL increased by $300,000 to $35.8 million. Net loan growth was the key driver of provisions and the increased level of reserves.

Banc of California's ALLL to non-performing loans ratio improved during the quarter to end at 81%, when both the ALLL and fair value discounts are combined relative to total HFI loans, the bank has a 2.47% reserve coverage ratio at quarter end.

With that, I'm now happy to pass it over to Fran Turner, our Chief Strategy Officer, who will discuss our $10 billion readiness plan.

Thank you, Hugh.

On slide 11 we summarize key components of the impact of crossing the $10 billion asset threshold. There are five main categories of regulatory changes that come into play related to the $10 billion mark. They include stress testing, FDIC surcharge, Durbin, CFPB and Board Governance enhancements. I'd like to share how Banc of California has assessed each item and why we are well prepared to tackle the additional requirements of a greater than $10 billion institution.

To begin, as related to DFAST stress testing, this requires institutions to annually prepare and submit a comprehensive stress test of its balance sheet and income statement. We expect to become subject to DFAST compliance in 2018, the company has implemented an enterprise-wide comprehensive stress testing program and has conducted stress testing for more than two years.

We already have in place a robust credit risk analytics team with access to granular loan level data and a data warehouse and business intelligence platform to support the data and infrastructure needs to support the teams and their analysis. Additionally, we also have in place a strong ALM platform where asset/liability management and interest rate risk management and have enhanced our Treasury and ALM teams over the past year.

We expect to fully integrate the credit stress testing to the same platform over the course of 2016. As a result of these teams and systems in place today, we expect limited additional expenses related to DFAST compliance. Importantly, the implementation of our DFAST consistent methodology is already positively impacting the management of our business.

The recent example of this is this past week's payoff of senior debt, which will positively affect earnings during the second half of 2016. DFAST related analytics have supported our decisions to take these positive steps and optimize our balance sheet and increase our capital and liquidity. Secondly, FDIC surcharges and a revised assessment framework are applicable for those banks over $10 billion. We expect to be subject to new FDIC fees beginning in 2017.

The results for Banc of California from this revised assessment framework is de minimis, and the large bank special assessment applies only to deposit balances over $10 billion and is expected to sunset in 2018. Thirdly, the Durbin Amendment, which as part of Dodd-Frank Financial Reforms, caps debit card interchange for banks with $10 billion or greater in assets. Given where our debit card business is today, the debit card revenue at risk is quite limited.

The true impact of Durbin for Banc of California is the fact it will have a negative impact on future revenue growth of our debit cards and payments as we continue to expand and build the debit card portfolio and usage in the future periods. Notwithstanding these future revenue caps, we expect to continue to grow our debit card revenue in the future and the number of debit cards in our portfolio. Fourthly, the $10 billion threshold also adds a CFPB as an incremental regularity.

We expect to become subject to the CFPB in 2017. The CFPB is primarily focused on consumer protection and the UDAAP compliance. Our mortgage operations would come under the mandate of the CFPB. We maintain a robust compliance risk assessment program today and we conduct thorough comprehensive compliance testing. Even with this strong program, we expect an increase in budget with compliance for examination and regulatory expenses tied to the CFPB.

Finally, the $10 billion asset level requires enhanced board governance, processes and policies. We expect to be subject to this starting in 2017. We already have in place a separate and dedicated Enterprise Risk Committee of the board and have established an Enterprise Risk Management function under our Chief Risk Officer. Additional enhancements are likely focused on enhanced governance and documentation requirements.

Overall, we've built the foundation of the company over the past five years on a sustainable and scalable platform that has already invested in and put into place many of these requirements for a $10 billion institution. We have implemented many of these items early on as part of building a company with superior analytics to support well-informed decision-making processes.

Leveraging our previous investments into our platform and our infrastructure to fulfill regulatory requirements puts Banc of California in a great spot to cross the $10 billion threshold in total assets without compromising our business prospects and in fact enabling Banc of California to continue to scale our business with compelling and long-term marginal economics.

With that, I'll pass it back to our CEO, Steven Sugarman.

As always, we continue to ensure that our governance, corporate structure, policies, and strategic planning best positions us for success. This process has been a heightened focus, given our approaching $10 billion in assets. To that end, during 2016, we liquidated PTB Property Holdings LLC and announced the sale of the Palisades Group.

This leaves our bank as the only subsidiary of our holding company and simplifies our organizational structure and therefore simplifies regulatory considerations at the holding company level. Also, we have simplified our capital structure and delevered our balance sheet by paying off $42 million of SBLF and $85 million of senior debt.

We have also restructured and expanded our revolving line of credit with Wells Fargo, enhanced and tested our repo relationships, expanded our contingent sources for liquidity and introduced other risk and balance sheet management strategies, including updated concentration limits and capital policies. This improves our overall DFAST results and further enhances the bank's liquidity and capital quality.

Management and the Board are also conducting a robust assessment of our business policies to ensure we continue to have robust liquidity and capital in diverse market conditions. We feel very good about the strength and soundness of our balance sheet and intend to protect the value of the franchise we have built. We are well prepared to meet the obligations that come with $10 billion of assets.

Now, turning to slide 12, we continue to deliver market-leading compound annual growth rates for asset growth, loan growth, and deposit growth, all of which are in excess of 60%. More importantly, earnings per share has grown from $0.39 in 2012 to $1.34 in 2015, and is expected to grow to $1.60 or more in 2016. We continue to remain confident in the team's ability to drive accelerating earnings and EPS growth throughout the year as core earnings increasingly are being driven by net interest income.

Slide 13 reiterates our guidance for 2016. We are focused on continuing to win market share and to grow the franchise and attractive returns for shareholders. This includes our target returns of 15% on tangible common equity and 1% on average assets.

Achieving both of these return metrics while growing the company at the pace we are experiencing will continue to drive the accelerated earnings and profitability of Banc of California. It will also enable us to create even more value for our shareholders. We are proud of our first quarter results, and we look forward to sharing our continued successes with you over the remainder of the year.

That concludes our formal comments today. Operator.

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions). And the first question comes from Andrew Liesch with Sandler O'Neill.

Hi, guys.

Hi, Andrew, good morning.

Good morning. So, a question on the build in the securities portfolio this quarter. You had mentioned growing that, I think to around 25% of assets but now it looks like it's closer to 27%. Just kind of curious your thoughts on that. Are you going to deploy that into loans, move that back down to 25%? Where do you think that's a good level for that to be?

Thanks, around true. You know, during the first quarter we raised just north of $200 million of additional capital, which enabled us to accelerate and execute against our plans to grow the securities portfolio and deploy the capital, especially with robust deposits coming in, so we were successful in increasing the securities portfolio to a level that we feel comfortable. We'd expect that it would continue to grow, more or less, in line with asset growth over the course of the rest of the year.

Okay. That's very helpful. And then just on the yield side here, on the margin, it looked like both loan and securities yields were up. I was curious, were there any benefits from the rate hike in December? What was causing that -- those increases?

Yes. So, you know, we were very proud of the execution of our business units. We took a pretty focused view of pricing during the quarter on our loan portfolio, and that enabled us to hold yields tight. There was some benefit intra-quarter, in the fourth quarter, in the increase of rates. I think that affected just north of $0.5 billion of our loans immediately, and others over time.

But generally speaking, we took the interest rate environment and the opportunities of the last quarter and several quarters to use our capital markets functions to sell some of our lower-yielding loans, to originate at what we believe are attractive and consistent prices and I think it's reflected in both the securities portfolio and the loan portfolio.

Got you. And then just a quick question on deposit costs. It looks like maybe they increased a basis point. I would have expected maybe some improvement just with the great no cost deposits that came in this quarter. Just kind of curious on what's happening on costs there.

Sure. The funding costs were actually a very positive story throughout this quarter. If you look at it by the deposit segments, we saw great progress across the board, including, especially in our non-interest-bearing deposits. However, we brought down materially any brokered deposits that we had.

And oftentimes some of the brokered or wholesale brokered deposits had low but variable cost structures, and so we remixed our deposit franchise in a way where we have much stronger core deposits, much longer durations and reliability, we believe, but although the different segments decreased, the mix kept the deposit overall yield, you know, pretty steady.

Okay. Very helpful. Thank you.

Thank you. And the next question comes from Tim Coffey with FIG Partners.

Thank you, good morning, everybody.

Good morning, Tim.

I wondered if I could get some information on the mortgage production in the quarter, what exactly your mortgage loans sold were and what the margin was.

Sure. You know, within our bank home loans, mortgage banking division, that'll be reflected kind of in the business segment numbers, but our overall margins were down slightly during the quarter, and our originations were also down off of 2015 run rates. Most of that we attribute to the seasonality in the first quarter, which tends to be seasonally lower than other quarters.

We would expect and we continue to expect to see increasing overall originations and we don't see any long-term impact on our margins. Mostly what I think you'll see in the first quarter is consistent with prior periods' seasonality.

Okay. So maybe I can follow up later then on what those numbers were. And then within nonrecurring expenses, what were those non-recurrent expenses related to the offerings this quarter?

In the first quarter expenses relating to the offerings tend to be capitalized within the costs of the offering, so there's not a material number relating to the two capital offerings. You will see in the second quarter $2 million to $3 million of increased expenses relating to the payoff of our senior debt. Those are expenses that were capitalized when we issued the debt that we're still amortizing through but the payoffs get accelerated into the second quarter.

Okay. That's very helpful, Steve. Thank you. And then on the increase in TDRs, I might have missed it in the prepared comments, but can you kind of provide some color on that.

Sure. Within our seasoned loan portfolio, historically we've bought certain loans that we have a path to restructuring and holding. These tend to be lower LTV loans or loans within our strategy. What we saw this quarter is that there were loans within that portfolio that we were successfully able to restructure. All of them continue to be within our purchase strategy and are consistent with our expectations when the loans were acquired.

Okay. Okay.

Jim, would you like to add to that?

And I think you see that, right, as you haven't seen a material change from our provision exception from that front and so essentially while you've seen kind of a change in the categorization driven by kind of the accounting literature, our exceptions, as Steve mentioned, relative to the overall performance yield, cash flows, those points haven't changed.

Right. That would be consistent with what I'm seeing. Okay. And then, obviously you had a big gain on the sale of securities this quarter. Is that something that you plan on -- we could see in forward quarters this year?

No, this isn't -- I can tell you two things on the securities. One is, we finished the quarter with the unrealized gains on our securities book, meaningfully above where they started the quarter. So you saw meaningful unrealized gains within that portfolio during the first quarter.

So we're not looking at pulling forward unrealized gains that existed before the beginning of the quarter. This is all intra-quarter. What you really see here is that, from a portfolio and risk management approach, we're highly cognizant of the impacts of things like MSRs in our swap portfolio on -- the impact that rates can have on those securities.

And so we use and look to our overall balance sheet and balance sheet strategies to be able to offset fluctuations from those portfolios and to opportunistically manage our balance sheet so that instead of providing you adjusted core earnings, we strive to just have consistent core earnings. And so the securities portfolio gains, in large part, were intra-quarter recognized gains that were correlated with the intra-quarter fair value losses you saw in the MSR and other financial instrument portfolios.

Okay. Okay. I think I understand. And then if we -- the comments on new loans, yields on new loans during the quarter being at 4.2% and the yields on the loan portfolio at quarter end being higher than that, is there a reasonable expectation we could see some more NIM compression as we go through the year?

No, there's always the potential for volatility in NIM, but you have to remember, we managed our portfolio with both a held for investment and held for sale component, and we also manage our existing portfolio where we have the capital markets capabilities from time to time, if the market conditions require, to, you know, hold or sell loans or securities, you know, effectively.

So what you see, I think, from the new originations is a combination that a lot of our originations, especially for sale, tend to be asset classes that may have lower coupons than some of our originations that get held.

Okay. Great. Well, those are my questions. Thank you for the time.

Thank you.

(Operator Instructions). And our next question comes from Jacque Chimera with KBW.

Hi, good morning, everyone.

Good morning.

Looking to -asset growth that you have, Steve. So when I -- based on the $8 billion in originations that you're expecting in the quarter and then I look to the large amount of asset growth that you've had over the past several quarters, if I look at the upper end of the $10 billion to $11 billion asset guidance versus growth that you have, it suggests a slower level of asset growth over the coming quarters. So when I look at that and the $8 billion, I would think that loan sales could pick up given that you wanted to keep the securities growth in line with asset growth. Am I thinking about that properly?

Look, we measure the organization regularly from a risk and kind of business standpoint, and a lot of the growth is driven by what we believe we can attract in a core, fundamentally sound way. I remember back to early last year where we slowed our growth a little bit through additional sales, and received some questions about whether our platform could continue to grow at the pace we had historically grown.

I feel really good that we have the optionality to grow the NII through assets or to manage the portfolio and prune it through our capital markets function. We look at that every quarter. I would tell you we provided some guidance earlier that we expect our gain on sale from loan sales to revert back towards what we were seeing last year, and I think we gave a guidance that it is closer to $6 million to $8 million.

Not every quarter but kind of on an average run rate quarter. And this quarter was materially below that. So you also saw some HFF loan build where that number went up, and some of that resulted in the increased assets that we have. So we have a larger inventory available for sale, we have confidence that that inventory would recognize prices above their carry prices, and we look to the market and to our business to determine what the right mix of asset growth versus gain on sale is from time to time.

Okay. So is it fair to say that the $10 billion to $11 billion estimate is where you're thinking based on what the market looks like right now, but if things were to change, you may decide later in the year that you might like to keep some additional loans rather than selling them so asset growth could be beyond that?

I mean, sure, that's a fair summary. We recognize that high quality deposits and loans that generate net interest income are the highest value and best long-term franchise builder for the bank, so if there are opportunities to achieve that without pressuring capital liquidity or operations or other risks, we'd look to achieve that.

So our best estimate that we've provided in the guidance is a balance of those factors, but, you know, we are seeing and, you know, even this week we've been fortunate enough to announce the addition of some really exciting new talent, especially in our commercial banking and FBA lending groups. To the extent that we saw earlier attraction or accelerated traction from some of these folks or from our existing folks, you know, that could change our views.

Okay. That's really great color. Thank you. And then looking to the sale of the TPG group, can you just provide a little bit more color on maybe the promissory note and particularly on the earn-out period that you're expecting and then if you would anticipate any sort of a gain on sale from the transaction.

Sure. You know, the Palisades Group transaction is expected to close in the next few weeks, so we'll be able to provide kind of a day one accounting shortly after that. We do anticipate a gain on sale, although not a materially large number. That being said, we've retained an upside within this agreement where over the next several years, we could receive, you know, up to $20 million or more of payments that are subject to certain performance conditions. We would expect that, you know, the first couple years, the first year or two, that might be more concentrated on whether those earn-outs would be realized.

We haven't filed the complete documents yet so I'm a little bit unable to get into materials that we haven't filed on the call, but, you know, we feel very good about the Palisades group, we think they have a bright future, we're really excited to continue to participate in their upside. And we're equally excited about the simplifying effects of the transaction, the down side risk that's been taken off the table with the transaction, and the effects on our efficiency ratio and the focus of our management team and operations where our team can really focus on scaling and growing those businesses that are right in the our sweet spot without distraction.

Okay. Thank you. Then just one quick little house cleaning one, so in the prepared remarks you had mentioned $11.3 million in fair value marks. I just want to make sure I wrote that down correctly. It was $10 million from the MSR and $1.3 million from the swaps?

Jim mentioned those two numbers, yes, related to the financial instrument fair value marks that we saw as directly related to the interest rate movements in the first quarter.

Okay. Great. Thank you very much. I'll step back now.

Thank you. And the next question comes from Don Worthington with Raymond James.

Good morning, everyone.

Good morning, Don.

Just a couple minor follow-ups. In terms of the DEA growth, non-interest-bearing deposits, would you characterize that as coming mainly from new account relationships or increasing balances with existing customers?

There was clearly a mix, however, a big part of that mix this last quarter was from new accounts. We continue to see progress on existing account relationships and growing our pocket share within those accounts, but we're also really starting to see the benefits of some of the great new talent we've brought in and the relationships we've been starting to build here in California where we're seeing a lot more inward inquiry on relationships, we're seeing a lot better brand presence and exposure, and we believe that as we continue to grow out our teams, we're getting some of the best relationship managers in the region and we're very excited about that. And, you know, are hopeful to continue to see promising returns from those investments.

Okay. Great. And then last question. On the increase in the line of credit with Wells Fargo, is there any specific purpose that you're looking at for that line usage, should you take down borrowings or is it more just a flexibility issue of having that in place?

Yes, it's more a flexibility issue. I talked in my comments about our initiative to review all aspects of our balance sheet, and as we approach the $10 billion mark, including the impacts on DFAST. What we found was having that flexibility capacity was very helpful when we think about our continuing source of liquidity, and it also is very helpful with our decision to call and repay our $85 million of senior debt, where we had been finding that a large amount of that senior debt that was outstanding at a 7.5% yield was sitting at our holding company and not being deployed into assets that earned back the cost of that debt. So the expansion of the facility also enables us to have the confidence that we have the capital we need if we need it without having to take on a 7.5% yield in the meantime.

Great. All right. Thanks, Steve.

Thank you. And the next question comes from Abraham (inaudible) with Bank of America.

Hi, Abraham?

Please go ahead, Abraham, your line is live. All right. Well, apparently Mr. (inaudible) has stepped away from his phone, but as there are no more questions at the present time, I would like to turn the call over to management for any closing comments.

Well, thank you everyone for joining our call this morning. We appreciate your support and interest in Banc of California and we look forward to keeping you updated throughout the rest of the year.

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