Banc of California Inc (BANC) 2017 Q2 法說會逐字稿

Good day, and welcome to the Banc of California, Inc. Second Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Timothy Sedabres, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for today's second quarter 2017 earnings conference call. Joining me on the call today are: Banc of California's President and Chief Executive Officer, Doug Bowers; Principal Financial Officer and Chief Accounting Officer, Al Wang; and Chief Risk Officer, Hugh Boyle. 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 on today's call and that presentation is also available on our website under the Investor Relations section.

I want to remind everyone that, as always, certain 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. Cautionary comments regarding forward-looking statements are outlined on Slide 1 of today's presentation, which apply to our comments today. And now I'll turn it over to our President and CEO, Doug Bowers.

Thank you, Tim, and thank you, everyone, for joining our call today. I am pleased to speak with all of you as this marks my first formal earnings call as President and CEO of Banc of California. Our presentation today will be purposely different from what we have provided in the past. For our time together today, I want to begin by speaking with you about what I have learned in my first 11 weeks on the job; then what I think our challenges are; and finally, what opportunities lie ahead. After my opening remarks, I will turn it over to Al Wang, our Chief Accounting Officer, to discuss the financials in more detail, and then ask Hugh to comment on our credit performance. After that, I'll wrap it up and we'll look forward to your questions.

To begin, and as you can well imagine, lots going on at Banc of California. Very busy start for me, and I have learned a lot. I'll begin by reminding everyone what brought me here in the first place. As for initial impressions, indeed the things that brought me here are very much playing out. Great market, very good brand. Yes, despite it all. Sized enough to compete; very good credit performance; a determined and largely refreshed Board; a set of very strong lending verticals, particularly in the greater real estate spaces, both commercial and residential; and some beginnings of a fundamental set of products and capabilities that position us to be able to compete more broadly. Finally, we do indeed have a highly talented, engaged group of people who are both resilient and ready to get the job done. In short, I'm delighted to be in this seat and be a part of this opportunity.

That all being said, I will recognize that a significant transformation is required here for us to be successful. And it is early days in that effort. When we speak of this transformation, it is related to both the balance sheet and indeed the overall business itself. As most of you know, post the sale of Banc Home Loans, the firm embarked on a journey to transition away from a gain on sale transactional revenue approach and toward a more traditional bank with core, repeatable spread-based revenue. That all comes from fully focusing our energies on more traditional commercial banking. We are pulling multiple levers at the same time. And just to be clear, transformations of this magnitude do not happen overnight. This is hard work, and it will take time.

With all that as background and learnings, here's how I see our challenges. Core deposit growth has not historically kept pace with loan growth. All of this has of course resulted in much higher cost of funding than what we would want. So today, we are now very focused on growing relationship-based deposits and a more cost-efficient funding core. As a part of this exercise, we reduced the balance sheet, taking the opportunity to eliminate some of our higher-priced funding, mostly in the brokered deposit arena. Brokered deposits fell $576 million in the second quarter.

We crossed the $10 billion regulatory threshold, which has, of course, resulted in higher costs without the benefit of additional scale to absorb these costs. We continue to experience a series of onetime expenses. Much of these type expenses should clear away over the next 2 to 3 quarters, but nonetheless, they create an overhang and a drag on earnings.

We elected to further reposition the balance sheet by making some very important de-risking moves in our securities portfolio. In short, why use such high-cost funding to invest in relatively low-yielding securities? As I have said, our goal is to create a more traditional commercial bank and reduce funding costs over time.

So a lot has happened to the securities portfolio that Al will review with you in more detail, but suffice to say, we did the following: moved the entire HTM portfolio to AFS, giving us the opportunity to contemplate selling some or all of these securities as makes sense. Most of these HTM securities are less fitting for the go-forward Banc of California profile. Further, we drove down our securities book by $383 million, again, all as a part of our de-risking strategy, which resulted in reducing various risk elements embedded in those securities: duration, rate and to some extent credit.

Finally, as a part of this repositioning and de-risking of the balance sheet, we are in a contract to sell our remaining $146 million of seasoned SFR mortgage loans. Upon completion of the sale, we will have sold substantially all of our PCI loan portfolio. We completed the BHL sale. While not as profitable a sale as we had planned, we are glad to have it behind us. We also need to more fully reenergize our lending platform. As a result of some of the tumult we have experienced, our lending engines have been less robust in the first half. While we did post a net 3% gain in loans for the quarter, we need to do much better. Overall, gross production was $794 million, which is off our pace of approximately $1 million, which we produced in 3 of the prior 4 quarters in 2016.

I will talk more about the go-forward from here at the close of our remarks. However, suffice to say at this early point in my tenure, I do not think it is prudent to provide meaningful guidance. Frankly, we are still in the throes of reviewing many items. It is more important we get our detailed strategy dialed in correctly, and then come forward with a more thoughtful outlook.

So I'll pause here and turn it over to Al Wang, our Chief Accounting Officer. I'm very pleased to have Al with us in his role and delighted he has stepped in to serve as our PFO. Al has 20 years of accounting and finance experience, including leadership roles at PwC and as Chief Accounting Officer at a large East Coast regional bank. That being said, we are well on our way in our CFO search, and I hope to have an update for you in the weeks to come. Al?

Thank you, Doug. Let me begin on Slide 3, where we summarize the balance sheet moves at a high level for the quarter. Total assets declined by $686 million during the second quarter, which was driven by 3 primary factors. First, as part of our repositioning and de-risking of the balance sheet, we completed the sale of $431 million of securities during the quarter, including sales of $294 million of longer duration agency MBS; sales of $120 million of private label nonagency MBS; and sales of $17 million of corporate bank debt. These sales drove the net decline in securities during the quarter of $383 million. These sales lowered our duration risk and improved our overall asset liability profile. With the moves in the rate environment during the quarter, we were able to exit a portion of our longer duration agency MBS positions at a gain. Additionally, we saw pricing moves during the quarter on private label MBS securities, which again, allowed us to exit these legacy securities and realize a small gain.

As Doug previously mentioned, we also reclassified our entire held-to-maturity securities portfolio to available-for-sale during the second quarter. This action is expected to support our overall balance sheet management strategy. We will continue to review the composition of our securities portfolio and may look to exit additional portfolios over time which are not in line with our more traditional commercial banking go-forward strategy.

Secondly, we sold $285 million of loans during the second quarter, largely comprised of lower yielding jumbo residential mortgage loans with coupons below 3.75%. Given the current pricing on new originations we are seeing in this space, we took the opportunity to sell these lower yielding loans, which lowered our interest rate risk and freed up balance sheet capacity to replace these loans with higher-yielding loans over time.

Third, during the quarter, held for sale loans related to Banc Home Loans declined by $260 million as we continued to sell the remainder of the originations from that runoff business. At June 30, the BHL portfolio totaled $161 million, and we expect to sell most of the remainder of that portfolio in the third quarter.

Partially countering these 3 factors was incremental net loan growth of $187 million, and cash and other asset changes of $55 million. However, this modest loan production in the second quarter was not enough to overcome the balance sheet decline from the repositioning and de-risking activities.

Let me walk you through some more detail on held for investment loans on Page 4. Held for investment, or HFI loan balances, declined by $149 million from the first quarter, largely due to the sale of $156 million of loans, as well as the transfer of $146 million of remaining seasoned SFR mortgage loans from HFI to HFS. Excluding these sales and transfers, held for investment loan balances increased by $153 million or 3% from the first quarter, reflecting a 10% annualized growth rate. From an accounting perspective, the transfer from HFI to HFS of our remaining seasoned SFR pools required us to individually evaluate the portfolio from a lower of cost or fair value, or LOCOM, perspective, where loans in an unrealized loss position compared to book value were written down to market value at the time of transfer. These write-downs drove the majority of our charge-offs for the quarter. Accordingly, since the loans in an unrealized gain position compared to book value are not mark-to-market at the time of transfer, we expect to realize an overall gain on sale on these loans in the third quarter.

Gross loan production for the second quarter totaled $794 million, largely flat from the first quarter and below our peak quarterly production of $1 billion from late 2016. Commercial loan balances increased by $53 million or 1% during the quarter.

Digging a little deeper, our C&I loan balances declined slightly, primarily driven by lower mortgage warehouse balances, while our construction loan balances grew by $14 million or 10% from the first quarter. Our multi-family business continued to produce strong results with balances increasing by $96 million or 7% from the prior quarter.

Turning to Slide 5. You can see the continued progress in building our commercial loan balances over the past 2-plus years. At year-end 2015, of our total $5.2 billion of loans, only 22% were C&I, while 44% were residential mortgage loans. Today we stand with $6 billion of loans held for investment, of which 27% are C&I, and residential mortgage loans have been reduced to 30% of loans. Collectively, as you can see on the chart on the right, commercial loans as a percentage of total loans has increased from 57% a year ago to 68% at the end of the second quarter. Although we have work left to do to accelerate overall loan production, we are very pleased with the remixing and commercial focus within the loan portfolios.

Slide 6 summarizes our deposit balances and changes during the second quarter. Total deposits declined by $553 million from the first quarter, driven by the reduction of brokered deposits, which declined by $576 million during the second quarter. FHLB advances were also reduced in the quarter, declining by $210 million. Core non-brokered deposits increased slightly from the first quarter, increasing by $23 million. Total cost of deposits for the second quarter was 73 basis points, up 9 basis points from the first quarter, as we saw select deposit repricing, primarily in the wholesale funding and treasury group, followed by the institutional banking group and less so in the private banking group.

Moving on to interest income on Slide 7. Second quarter interest income totaled $99.2 million, down $2.9 million from the prior quarter on a consolidated operations basis. As mentioned previously, the numerous repositioning actions and sales completed in the quarter negatively impacted margins and reflected a continuation of that trend of lower interest-earning assets, which began in the fourth quarter, as we had pictured, with average interest-earning assets down $0.9 billion since that quarter. Interest income on securities was down from the first quarter, and we expect average securities balances to be lower in the third quarter based on the sales we completed over the course of the second quarter. Interest income on residential mortgage and consumer loans also declined, primarily as a result of the sale of the previously mentioned mortgage loans. Positively, interest income on commercial loan balances increased by $1.9 million from the first quarter. However, the absolute level of production and the resulting commercial loan balances were not enough to overcome this headwind in the second quarter alone.

We are focused on growing the core loan portfolio over time, which we expect to result in increased loan interest income. We recognize that many of the repositioning and de-risking activities have had a negative earnings consequence over the short term. However, we also recognize the need to rebuild core sustainable asset balances to drive the increased earnings power of the franchise.

Loan yields on new production continued to increase for the second consecutive quarter as second quarter loan production yields averaged 4.70%, up from 4.47% in the first quarter. New loan production yields continue to come in above the portfolio loan yield of 4.38%. However, the absolute level of production only drove a 3 basis point increase to loan yields in the second quarter.

Lower average assets, coupled with the increased deposit expense I had mentioned previously, drove net interest income lower to $78.3 million for the second quarter. We are focused on growing net interest income over time by accelerating origination of high quality commercial loans, growing core low cost relationship-based deposits and shifting asset mix from lower-yielding securities to higher-yielding loans.

Slide 8 provides an update of our planned expense management and optimization activities. As we laid out earlier this year, we undertook a series of actions to lower the overall expense base of the company post the sale of our Banc Home Loans business. Halfway through the year, we have completed a broad number of actions which have helped drive our reported expenses lower. To date, we have completed organizational consolidation and headcount reduction, which leaves us with less than 800 employees. We have also completed the elimination of our corporate auto program, reduced a portion of our spending on outside professional services as well as completed a series of facilities and real estate transactions to reduce unused or unnecessary space. Just recently, we also eliminated our company advisory board, which included paid stipends for participation.

Even with these actions to date, however, we still have more work to do. We expect to continue to work on consolidation of real estate and leasing of underutilized space. We are in the middle of assessing outsourcing opportunities and further reductions to vendors, contractors and other outside provider spend. As we continue to refine our strategy going forward over the back half of this year, we also expect to normalize our compensation plans and better align pay-for-performance across the business units.

Slide 9 walks through our second quarter expenses for continuing operations. As a reminder, the continuing operations breakout excludes all revenue and expense related to the sale of Banc Home Loans and is the best view of our business on a go-forward basis. All of the direct BHL and MSR revenue and expenses which were sold to Caliber are reflected as discontinued operations in the earnings release tables.

Last quarter, we shared a similar view of $70.1 million of recurring operating expenses for continuing operations, and we're completing expense reduction actions to lower this figure over the course of 2017. I am pleased to report favorable progress on this front for the second quarter. Our reported expenses for the second quarter continuing operations was $76.3 million and, excluding the loss on solar investments, totaled $66.6 million. However, it is important to note that this $66.6 million of second quarter expenses included the nonrecurring items Doug mentioned previously. We have detailed a net $6.6 million of nonrecurring expenses within this bucket, which negatively impacted earnings for the quarter. These items included $2.9 million of severance related expenses, $2.6 million of nonrecurring legal and professional fees, as well as $1 million related to termination costs for certain facilities and the elimination of the company's car program. Adjusted for the loss on solar investment and the nonrecurring items, recurring noninterest expenses totaled $60 million, and we believe this is a good starting point for the business going forward.

On Slide 10, we've laid out our reported results for continuing operations, which you saw in the earnings release tables, with earnings per common share of $0.20 for the quarter. Adjusted for nonrecurring expense items we've discussed previously, net of taxes, net income for continuing operations was $19 million or $0.28 earnings per diluted common share.

Now I'd like to hand it over to Hugh to discuss our asset quality and capital.

Thank you, Al, and good morning, everyone. Asset quality at Banc of California remains strong and stable. As you can see on Slide 11, Banc of California's asset quality metrics have improved, both on a percentage basis and on an absolute basis, for the quarter-over-quarter as well as for the year-over-year comparisons. Nonperforming assets to total assets are down from 45 basis points from the prior year's quarter to just 12 basis points today. And on a dollar basis, our nonperforming assets fell from $45.4 million on June 30, 2016, to $12.3 million at the end of Q2 2017. Our nonperforming assets to equity ratio continued to remain strong at just 1.2%, a decrease of 75% from 4.8% in the second quarter of last year.

As a result of the loan sales that were mentioned earlier on this call, during the second quarter, we saw a significant decline in our overall delinquencies. Our delinquent loans to total loans ratio declined from 2.2% a year ago and 0.9% last quarter to just 0.5% in Q2. Total delinquencies on a dollar basis were just $30.9 million at the end of Q2.

Charge-offs increased quarter-over-quarter to $2.9 million from $356,000 from the prior quarter. $2.5 million in charge-offs taken this quarter relate directly to LOCOM charges taken on loan sale transactions. If we exclude loan sale activity, charge-offs were just $393,000 this quarter, a nominal increase from Q1. Recoveries for the quarter were $44,000, resulting in net charge-offs of $2.85 million for the quarter. Our allowance to loan and lease losses, or ALLL, remained essentially flat quarter-over-quarter on a dollar basis at $42.4 million as the result of portfolio remixing and the loan sale programs. The ALLL to total loans ratio also ended the quarter essentially flat to Q1 at 71 basis points. With the reductions in our NPLs, our ALLL to nonperforming loans coverage ratio has increased from 83% a year ago to 468% at the end of the second quarter.

Slide 12 shows that Banc of California's capital position continued to strengthen this past quarter. Our common equity Tier 1 capital ratio is at 9.8%, which is the highest it has been in 11 quarters. Total Tier 1 risk-based capital in Q2 totaled 13.7%, which is also at an 11-quarter high. Our capital ratios exceed Basel III fully phased-in guidelines.

The strength of our capital and credit levels should enable us to support the planned organic growth of our business throughout the remainder of this year and 2018. As we execute our strategy to increase earnings and grow our balance sheet into the $11 billion to $12 billion range, we do not anticipate the need to access the capital markets to achieve our business goals and intend to continue utilizing our own internal capital generation to fund our asset growth.

With that, I'd like to hand it back over to Doug.

Thank you, Hugh. So let me wrap up with some comments and observations about where to from here. Firstly, as you know, California is, in its own right, the sixth largest economy in the world. Further, as seen on Slide 13, Banc of California is the eighth largest public bank in California, and more importantly, we are only in and focused on California. We believe this foundation, great market, probably the greatest, and geographic focus, we are all California all the time, gives us a considerable platform and opportunity. When coupled with our balance sheet size and our brand, we have a great opportunity to attract and serve our clients and a great message to prospective recruits. Put it all together, our opportunity is to build a premiere California franchise, which we believe, in time, will deliver a very competitive return for our shareholders.

Lastly, on Slide 14, I want to review with you our top priorities as we head into the second half of 2017. We are working hard on a lot of things right now to build a strong and more focused and sustainable company. First, we must continue to grow both deposits and loans to rebuild the balances and thus the earnings profile of the company.

Second, we are focused on a sustainable strategy that looks to build a commercial bank the right way. We are building a more traditional commercial bank, focused on a more reliable, repeatable earnings profile. Building this bank requires that we continue to maintain the excellent credit metrics and credit culture that has been built to date.

Third, we are focused on generating core low cost deposits. Premier banking franchises are rooted in a core low cost deposit base. Lowering our cost of funds and building core deposits does not happen overnight. However, it is critical on our list of works ahead of us. We are ingraining this deposit construct into our culture every day.

Fourth, we must continue to drive efficiencies throughout the organization. We'll be embedding cost control into our DNA.

These 4 points sum up our near-term focus areas. To be sure, there will likely be a few bumps in the road as we go along. And some of these will gain traction at a pace different than others. In sum, we have a plan and a strategy to improve all of these areas, and the collective team is focused on execution against these goals right now. The collection of all this work should result in a more highly valued franchise that trades at or above industry averages. I expect to come back to you over the coming months with more detailed plans and stories of success.

That concludes my remarks. Now let's open it up to your questions.

(Operator Instructions) Our first question comes from Gary Tenner of D.A. Davidson.

I think a big question that I and others may have is kind of, when the dust settles, what the earnings power of the company looks like, and part of that is going to be probably predicated on where the balance sheet ultimately settles out over time. I know you've got $1.5 billion still of brokered deposits, still a pretty sizable securities portfolio. Could you give us any sense of how much more work you think there is in terms of balance sheet contraction before you get to a certain level to grow off of? Or is this just more of an, over time, remix story?

Well, I -- look, I appreciate the question. I think it's more the latter. So there is, in part -- this company has a history of a pretty sophisticated and larger securities book than one might necessarily want for a bank that we believe has the earnings potential and the outlook that we believe we do. So there is a degree of additional remix, if you will, of the balance sheet. A lot of that's associated with the securities portfolio. And in particular, when we made the move to take the HTM portfolio up to AFS, we wanted to afford ourselves the opportunity to evaluate those securities and put ourselves in a position to sell them if we thought that was the right thing to do.

I made the comment that those securities, while in very good shape, are not fitting for a -- overwhelmingly fitting for a go-forward Banc of California and the kind of model we're building here. So -- and look, I think the second part, when you talk about the remix of the portfolio and the balance sheet, is the commentary that this will take time. So when you think about the funding mix, while I'm happy with what it is we did in terms of taking down some of the costs on the brokered deposit side, building up a more organic deposit base is going to take time. So I think that funding mix is going to fluctuate a fair degree here over the next few quarters.

Okay. And just a follow-up on the expense side as well. Obviously, you've indicated that there's still some more work to do there in the back half of the year. But I suppose there's a balance between rightsizing the expense base but still giving the ability to kind of scale when growth resumes. Can you talk a little bit about where you think this bank, over the next 12, 18 months, could get to from any sort of profitability metric or efficiency ratio to give us any kind of guide as to where expenses might go?

Yes. Look, I know the guidance commentary and view is frustrating. What I would say is, as regards expenses, is that I'm proud of the team. They did a great deal of work before I arrived in terms of focusing on the expense side. And we do have important additional initiatives that we're evaluating and undertaking.

That said, we've also got some very important buildouts we're going to do. So we do have additional banking teams, additional product, some select executive positions that we're -- that we will be pursuing. So I think it's a relatively mixed bag on a go-forward basis in terms of expenses. So feel good about what we accomplished in the first half, and I think we'll hold that level more or less as we go into the second half.

Our next question comes from Andrew Liesch of Sandler O'Neill.

Just questions around the margin. Looks like, I mean, with funding costs doing what they've done, but you're also getting better prospects on loan yield, but also maybe some remixing of earning assets. Is this the floor for the margin? Can we build off here? Just what are your thoughts on that going forward?

Well, first of all, so 2 things. We were pleased with the improvement in the loan margin for the loan book that we saw come on in the second quarter. So that was the good news. Obviously, we faced a headwind on the cost of funds in the second quarter. And I think as -- it's fair to say that, as we have success, for sure, in building this loan book, and that is where we are very focused, and I've got to tell you, we have a team that has produced those kind of numbers that will give us that kind of outlook on a go-forward basis. So while I'm not happy with the loan production in the first half, that opportunity is out there for us in the second half, in this market and beyond.

So I do think there's a degree of loan improvement production that we are looking for in the second half. And -- so that's that one piece. And again, I go back to the margin side on the cost side. And look, the deposit piece is going to take time, and we're going to have a fairly stubbornly high cost of funds for a while as we work through it.

Okay. And then on the fee income side, looked like a lot was down from the first quarter. Is this the run rate we should be using? It sounds like we'll have some gains on sale of loans here in the third quarter, but what's the -- with what you've seen so far, what's the appropriate quarterly run rate for fee income?

Yes, let me -- Al, quick comments on the fee side?

Yes. Obviously, on a noninterest income basis, we're down prior to -- versus the prior quarter. A lot of this had to do with kind of the nature of the securities and the loans that we sold historically versus kind of what was sold in the current quarter. So it really depends on kind of what the market looks like. And when Doug talked about transferring our held to maturity securities, for example, to available for sale, and when we talked about the seasoned SFR portfolio that we moved over to held for sale, a lot of it, again, it depends on -- in terms of those kind of gain sales it really depends on the market. And going forward, quite frankly, we've talked about this before, we're trying to get away from kind of a gain on sale business model into more of a -- kind of a margin-based business and more traditional banking business, so...

Yes, look, Andrew, the only other thing I would add to that is, we talk a lot about loans and deposits, and of course that's the vast majority of who we are and what we intend to build, but our noninterest income complement otherwise -- think cards, think foreign exchange, think treasury management business more broadly -- is pretty darn modest, or said differently, is a really big opportunity for us. So we're about that side of it as well as we focus more and more on that California traditional client base, both, by the way, in the real estate space broadly as well as in the C&I space, private banking space, et al.

Okay. But just looking at like some of the certain line items like loan servicing income and loan brokerage income, is there any color behind why those were at that level, and could those rebound here going forward?

Yes, the -- we expected, obviously, lower kind of servicing income as we -- you know we sold our kind of Fannie Mae and Freddie Mac MSR book to Caliber. So that wasn't a surprise to us. Last quarter, we had a couple of months of that servicing income. So we are going to expect less servicing income, just be -- we still -- again, we still have a very large Ginnie Mae kind of MSR service -- MSR book. So we still will expect a level of loan servicing income, but not to the levels that we had in the past when we had the BHL business.

Got you. Then one quick question. On the held for sale loans, the $279 million, should that be down to 0 at the end of the third quarter?

The -- on the continuing ops side or the discontinued ops?

I'm just going through what was on the balance sheet.

Yes, I mean, we definitely for the -- I think we have -- the held -- all of the loans that were -- are with -- tied to BHL are held for sale and we expect that to clear out within the next several months. And then same thing for the held for sale on the continuing operations side as well. A large part of that, as we talked about, is $140 million or so of the seasoned SFR pools, which we expect to settle in August.

Our next question comes from Jackie Bohlen of KBW.

Question about accretion income on the PCI loans. With the sale of the majority of those next quarter, I would assume that, that would go all away. Was there a meaningful piece of that included in the second quarter?

Well, all -- essentially -- yes, all of the -- we transferred those loans effectively to held for sale at the end of the quarter. So yes, the margins are in the quarterly results for this quarter.

So what -- I guess what impact does that have on loan yields that you don't expect to go forward after the sale of those loans?

Yes, I mean, certainly, again, this goes back to kind of the remixing question. It's a trade-off, right? The main story here for the quarter, as you know, and as we kind of talked about, is just the level of earning assets that we had in terms of size. A lot of this is just to reposition ourselves and de-risk for the future. So obviously it's -- like I said before, we expect overall to get a gain on sale, a slight gain on sale on this portfolio. But we -- once the portfolio is sold, obviously we won't see that -- we won't see that margin for this portfolio in particular going forward.

Okay. And is it -- I mean, does it have a big impact on the margin? Is it something that would contribute to deterioration after its removal?

Not significant, because it was only $150 million or so of our loan portfolio. And we have -- as you know, we have $6-plus billion of loans, or $6 billion of loans. So it's not going to -- just the size of it shouldn't have a significant impact to our interest income.

So look, good yield on those loans, at a little over 5.5%, but income there was $2.1 million. So not -- just not a very big impact.

Look, I might also add, if you're the student -- if you are a student of our blogger, these are the loans that have been referenced in all of that and allegations around the lack of salability, et cetera. All of them will be sold. And in fact -- or virtually all of it will be sold in the next month and at a slight gain.

Also, second allegation, again, if you're around all of that, had to do with the accounting. And again, that issue largely goes away as a result of this sale. So I do want to make that point.

And then also the -- do you have the relative cost of the brokered funds that were removed during the quarter?

Yes. So -- this is Al. So, yeah, I mean, our brokereds are -- obviously have an elevated cost kind of profile to them. So kind of on the money market side we're -- it's about a 1.22% kind of rate. And on the CD side, it's about an 85 basis point rate. So it was obviously a pretty high kind of cost of funding and cost of deposits.

Okay. And what was the -- was it a gradual decline throughout the quarter? Or was it centered more towards the beginning or end?

Well, we were able to let it drift down as we were making moves with the securities portfolio and the balance sheet otherwise.

Okay. And based on your earlier comments, I would assume that that's the intention going forward as well?

Well, it is. I would say that this deposit mix, this funding mix that we are working with is going to evolve. So I certainly wouldn't necessarily promise that we won't have increases to the brokered CD world as we fill in gaps, as the loan book grows and the deposits perhaps don't grow as quickly. So I was very happy directionally with the move. And we're certainly focused on that on the go-forward basis. But I think it's going to be a little choppy as we experience, again, the degree of loan growth we anticipate and the likely slower but important growth we anticipate on the deposit side.

Okay, makes sense. And then just one last one and then I'll step back. The payments related to the sale of Banc Home Loans, the slide deck had mentioned that there was not the retention you had expected and that those payments were lower. What's kind of the go-forward assumption on that? Did you receive any payments from them this quarter?

Yes. This is Al. So as we said in the slides and in Doug's opening remarks, the amount of loan officers that kind of transitioned over was less than what we had anticipated. So we had kind of disclosed as part of kind of the transaction disclosures that there was an opportunity for us, for example, to get a $5 million kind of loan officer retention bonus this quarter. So just based on the level of employees or loan officers that went over, we didn't recognize any of that in this quarter. So obviously, there's still opportunity for some on the earnout, in terms of kind of loan production earnout kind of bonuses, but it's not going to be nearly as much as we had originally had anticipated.

Do you have any updated guidance on that, on what you would anticipate going forward?

Not at this time. It depends on -- yes, I mean, it really depends on kind of the productivity and the origination volumes that the loan officers that went over kind of generate.

So look, what I'd say about BHL is, for the largest part, we're glad to have it behind us. And for the largest part, the execution in terms of separating it from the bank went well. The absorption of it and some of it's -- some of our former team did not go as well. And so we did not enjoy the benefit that we were looking for associated with the retention. But I've got to say, all in all, we're pleased to have it and its related securities issues and other issues behind us.

Our next question comes from Steve Moss of FBR.

I wanted to start on the securities yield. Perhaps a different way of thinking about it is, what are you -- what is the type of structures you're looking to purchase today and at what rate versus what you currently have on the books?

Well --

Go ahead.

Well, I would comment on a couple things there. So when you look at the entirety of our book, we have in the HTM portfolio that we moved, as I mentioned, up to AFS, there are securities like the oil and gas MLPs, the subordinated bank debt and some longer dated CMBS. All of that, by the way, at the moment, positioned from a gain perspective. And so the portfolio's performing well. But as I mentioned, those are not as fitting a kind of securities as we would look to have in the future. So that's kind of step 1.

And then I think, as you look at the rest of the securities portfolio, we have a larger CLO book than most in our peer group. And that will be a number we will constantly look at. Again, if you think about what we're trying to do here, it's both the organic growth on the deposit side and the loan side. That takes time and a lot of work. And so we will be very thoughtful about how and when to reposition portions of that CLO book as well as the rest of these securities. But into the future, I think you'd see us with a much more traditional securities book, 3-ish year duration, good liquidity profile, et cetera, et cetera. It would be one that you would recognize.

Got you. And as I think about the runoff on the securities book over time, perhaps is it fair to think about it, it will be used to fund loans but also reduce borrowings and brokered deposits, so the reduction over the next 12 to 24 months could be pretty substantial?

The runoff in the securities book pretty substantial? Is that the question?

Yes.

Well, I don't know that I would frame it up as substantial. I think we're going to be very staged about it to a degree, opportunistic around certain of these. But look, our -- we're going to play this out in a way that allows us to thoughtfully grow our loan book, which we believe we can. And as we do that, we'll take the air out of the balloon in some of these securities portfolios.

Okay. And then with regard to loan originations, wondering how the pipeline looks today and if you could give color around that?

What I'd say is, third quarter is typically not as robust as fourth quarter. And we have a very good pipeline, good activity. So we have to -- there will be a lot more in the second half of the quarter than the first. But we're seeing a lot of activity, and we've got people back squarely in the market. And that's what we've got to have.

Our next question comes from Tim Coffey of FIG Partners.

Doug, I appreciate the color you provided on the call today, especially the discussion about deposits, and I had some more follow-up questions on that. What were the period imbalances for brokered deposits?

Let me get that number precisely. Yes, $660 million. And then $780 million. So roughly $1.3 billion total.

Okay. And the institutional banking group, it's -- what's the future of that business, given that there's been some key level departures from the company this past quarter?

Yes, I appreciate the question. The -- so on the one hand, there are various parts of the institutional bank that we really like and we very much are -- intend to retain and to work. But there were other pieces of it that had -- while on the one hand a high degree of volume, either on the deposit or the loan side, it also had a higher degree of volatility, a higher degree of cost in terms of deposits, and to some extent a higher degree of risk. So there is a quite purposeful readjustment in that institutional banking business that we will be going through.

I don't think you're going to see as a result a meaningful change in our cost of funding, because a lot of the deposits -- or much of the deposits that were created out of that group were higher cost. So that's the story on the institutional bank, some of the background there.

Okay. How much of company-wide deposits did the institutional bank group contribute?

Yes, we don't comment on specific segments. But fair to say that we believe, over time, with all that we're standing up in terms of the rest of the traditional commercial bank, we'll overcome that gap and that differential.

Okay. The rise in deposit costs this past quarter, was that an attempt to lock in some stable funding in case there was deposit runoff in the institutional group?

Well, look, a couple things. I think there was a degree of outlook on rates, but more importantly, we wanted to be sure that we were in a very good spot, which we were and are, in terms of our deposit mix, liquidity mix. And so we played that out across several different -- whether it was what we did on the retail CD side, what we did on the brokerage side and some of our borrowings.

Okay. And given that the core funding really is kind of the value of the franchise, and I see that's where you're trying to get to, given the current level of core funding at Banc, what is the amount of assets that core funding would support currently?

I tend not to think of it that way. The bank has both the infrastructure and the capability and the credit statistics to be in the business very fully. So we're going to continue to -- we'll adjust downward the cost of funding, adjust downward the higher cost mix as the organic deposit build comes about. And again, I said, it's going to take time, probably be a little bumpy, but it is definitely out there for us. And in terms of the loan mix, we're going to stay at it in terms of our balance sheet size.

Okay. And I apologize if I missed this earlier, but did you discuss what the cost would be for crossing over $10 billion?

I don't have a specific dollar amount. Obviously, it's an important dollar amount. Thankfully, Banc of California was building towards that, has the infrastructure and has a good -- and we are in a good place to be able to deal with all the additional rigors that come with crossing the $10 billion number. I don't have a specific dollar associated with that which represents the additional regulatory cost. But it's important, and it's a number we need to build scale around. And we know that. So it's not ideal to barely cross $10 billion, as everybody on this call well knows.

Right, right. And then just kind of one final question. You did consolidate some branches. You obviously have moved the headquarters this past quarter. Are you -- do you see more opportunities for cost saves with the smaller branch network? And is that something you're looking at in the near term?

Well, as I said, we're going to be looking at cost saves, as with every institution, probably for the rest of our lives. We always do. I think the branch network is largely in a pretty good place. A lot of work has been done there. And a lot of the real estate consolidation that we were planning on has also been accomplished. So the go-forward expense opportunities are less around the expense -- less around the space world and more involved in a series of other initiatives. So space won't be the biggest answer on a go-forward basis, probably.

Our next question comes from Don Worthington of Raymond James.

Just curious, are there any more severance costs to come or have they been pretty much recognized already?

For the most part, they have been recognized as regards the original [Warren 1] and [Warren 2] that we went through. There will be costs that will bleed over both from BHL and those actions in the third quarter, and maybe even a touch in the fourth, but we're through the majority of it.

And then on the loss on investments in alternative energy partnerships, what's the outlook for that going forward, relative to the last couple quarters?

Al, you want to comment on that?

Yes, sure. So we've made a couple of investments in partnerships over the course of the last year. Obviously, we started this kind of mid last year. And they really worked out well, not only for kind of our profitability profile, but also just in terms of kind of the benefits to the LMI communities and in terms of being able to kind of help their kind of energy costs. So we're very proud of what we've done so far in this space.

I would say that it really depends in terms of outlook. Obviously, it depends on kind of the amount of kind of success in terms of putting those solar panels in place and operating. And that really just does drive kind of the amount of tax credits and the level of, quite frankly, pretax losses you take on the investment.

So I would say, for now, since we've started this investment, it's been very favorable to kind of the tax line item. We expect to continue to see that trend. But it's -- over time, we expect that that's going to kind of glide downwards in terms of the benefit going forward.

Yes, maybe just to build on that, just one more minute. The other piece of it, I would say, is while it has obviously been a very effective tax shield, there will be less of that activity on a go-forward basis, and you will see our tax profile drift upward in terms of being a taxpayer as we go into -- beyond '18 and '19.

Our next question comes from Gary Tenner of D.A. Davidson.

I just have a couple of follow-ups, one of which was on that renewable energy investment. On that topic, so it sounds like for the remainder of this year you could get a tax benefit or probably a negative tax provision for 2018? So you're saying that there will still be amortization there? Those don't expire or anything at the end of this year? They go on beyond the end of this year?

Yes, look, I think the way to think about it is, there will be some degree of impact, or help, I suppose, from a tax line perspective in '18. But we also intend to be less prolific as an investor in those on a go-forward basis. So you will see our tax profile change and drift upward over time.

And then just another question on the mortgage servicing. Given the size of the Ginnie Mae servicing portfolio that you still have, I was just wondering, was there any change in the valuation of the MSR that impacted the servicing line item through the income statement this quarter? Is that a clean number?

Yes, from a pure -- I don't have the exact number on that, but from my recollection it's about maybe $1 million kind of unfavorable -- just on the mark itself this quarter. So nothing too significant. As you know, we have about $30 million, upper $30 millions to $40 million of MSR in terms of fair value kind of on our books today.

Right. So you're saying -- was there a $1 million negative impact on the loan servicing line item through the income statement? So the [$132,000] was $1 million lower than the run rate?

That's correct, that's correct.

And just finally just -- on the conversation regarding capital, I want to make sure I heard it correctly. The suggestion was that capital would be sufficient through '18, assuming an asset base in the $11 billion to $12 billion range next year. Was that what was positive?

That is correct.

I think that completes our questions. I thank all of you for dialing in, and I'm sure we'll be talking along the way. Everybody have a good day. Thank you very much.

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