Banc of California Inc (BANC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Banc of California, Inc. Fourth 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 fourth quarter 2017 earnings conference call. Joining me on the call today are Banc of California's President and Chief Executive Officer Doug Bowers; Chief Financial Officer, John Bogler; and Chief Risk Officer, Hugh Boyle. Today's conference call is being recorded, and a copy of the recording will be available later on the company's Investor Relations website. We've also 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 will turn the call over to our President and Chief Executive Officer, Doug Bowers.

Thank you, Tim, and thank you, everyone, for joining our call today. Last quarter, we laid out 5 near-term priorities between then and now. Let me kick off today's discussion by updating you on these 5 items. Number one is surrounding growing organic loans. We saw strong loan originations in the quarter, which resulted in held-for-investment loan growth of $433 million, which was a 7% quarterly growth rate or 28% annualized. One quarter alone does not make a trend. However, we are seeing reinvigoration of our banking teams and calling activities. Going into 2018, our goal is to amplify this momentum to generate additional high-quality loans that fit within our risk appetite and that will continue to support the re-mix into a more traditional bank balance sheet. Number two, continuation of our overall balance sheet re-mix. Alongside the loan growth, we enjoyed -- we continue to reduce our old securities balances, including fully exiting the remainder of the corporate bank debt portfolio, reducing CLO balances by $117 million and completing the sale of $24 million of MLP debt securities. Number three, refresh of our compensation philosophy. We are finalizing performance reviews for 2017, and as a part of this process, we are launching defined metric-based performance objectives for many of our employees and namely key leaders and producers across the organization for 2018. As you would expect, these performance criteria will ultimately follow a structure similar to my own, and those of our executive officers and will be consistent with any guidepost we publicly announce. Employees will have a component of corporate financial performance objectives in addition to individual or business unit goals for production, balances, earnings and other metrics. At first blush, this may not sound groundbreaking, but let me remind you this is a cultural change for this company. And we expect that 2018 will be a big year for aligning compensation with performance across the organization. As we move throughout the year, we can share more detail with you around how we are thinking about [something], the right behaviors and activities.

Number four, deposits, deposits, deposits. On the liability side, we continue to work hard on improving the funding profile of the company as we saw a modest decline in overall deposit balances, as we purposefully brought down balances of high-cost and high-volatility deposits. Offsetting the portion of these declines were increased core business-unit balances collectively from commercial, private and retail banking, which increased by $290 million. And the gap was backfilled with wholesale funding, namely FHLB and broker deposits. The buildout of our deposits and treasury management services team is in the early stages and expected to produce meaningful results as we move through 2018. Changing the sales culture of our front-line team to be deposit-minded, in addition to hiring additional deposit gatherers, should drive growth of core low-cost deposits, but this course will take time.

As we work toward a balance sheet that is increasingly core-funded and are less volatile, we will, indeed, continue to utilize the FHLB and other wholesale funding to supplement the net asset growth. The makeup of our funding base today is inherently more wholesale than we would like and this does put pressure on the net interest margin in a rising rate environment, and we need to improve our funding base. The transformation of the funding profile of the bank from wholesale to increasingly core-funded is the most important piece of our journey, and while these activities are underway, it will take time to complete this transition and demonstrate results.

Number five, deliver a strategic road map. We are finalizing our budget and plan for 2018 as we speak. And as we have said, we expect to share thoughts as to where we will go from here shortly. Our plan is to provide an update the first full week of February to all of you. These fourth quarter results reflect the continued execution of our plan to re-mix the balance sheet and focus the company on organic growth opportunities. Our expense-focused culture is taking hold as fourth quarter expenses, excluding a loss on solar investments and nonrecurring items, came in at $59.1 million. The quarter continued to include a handful of nonrecurring items impacting earnings, which John will detail later in the call.

These nonrecurring expenses have lingered longer than we would like, and looking into the new year, we expect a large part of them to diminish. This expense level is a result of both continued investment in front-line personnel, namely added bankers and front-line deposit producers, to drive deposit loan and revenue growth; and realization of efficiencies in the back office and reduction of legacy expense items. Strong credit continued to be a hallmark at Banc of California, with nonperforming assets to total assets of 21 basis points. Even though the NPA ratio moved up slightly from the third quarter, at these absolute low levels, nonperformers could bounce around a bit. That said, the credit environment overall remains very strong.

Our ALLL to total loans increased this quarter to 74 basis points, up from 67 basis points a year ago. On the capital front, we continue to have more than an adequate capital to fund our business with common equity Tier 1 ratio of 9.9%, the highest level in over 3 years. Before I turn it over to John, let me share a few thoughts of what I'm seeing across our markets since the last time we updated you. Over the past quarter, I continue to spend substantial time out in our markets meeting our people, visiting our clients and recruiting additional bankers to our business units. I continue to be proud of the deep and experienced talent we have across our company with 750 colleagues serving California's businesses and entrepreneurs each and every day.

We have a great brand, and we operate in a market that continues to show strength across virtually all metrics, including a strong job growth, economic expansion and business optimism. On the recruiting side, we believe there are many talented individuals in our markets that want to be part of what we are building here at Banc of California. For them, we represent an opportunity to join a firm where they can make a meaningful difference and be an active partner in our success.

We believe we are well positioned with the balance sheet, products and capital to serve clients across our markets. As we move throughout the year, I look forward to sharing some of these stories and successes with you. With that introduction, I'm pleased to turn it over to our CFO, John Bogler, to provide more details around our fourth quarter financial results. John?

Thank you, Doug. During the quarter, we continue to execute in our plan to re-mix and reorient the balance sheet toward more traditional and core assets. First, we further reduced our securities portfolio by $180 million, including the runoff of $117 million of CLO holdings. We completed our exit of the remaining $23 million of bank debt during the quarter, which was sold for a gain of $744,000. Additionally, we sold $24 million of MLP debt or 22% of that portfolio at a gain of $1.9 million. That leaves us with $84 million of MLPs on the balance sheet, which are carried at a $7 million unrealized gain at year-end. We expect to exit the remaining MLPs over the first half of 2018. These sales continue to be aligned with our strategy to reduce the higher risk portions of the securities portfolio.

The asset re-mix also includes growing held-for-investment loan balances, which in the fourth quarter, increased by $433 million or 7% from the prior quarter or a 28% annualized growth rate. Originated loan balances increased by $500 million or 9% during the quarter, and have increased by 21% from a year ago.

Gross loan production totaled $969 million for the fourth quarter, which we define as gross commitment originations and new production yields on average were 4.68%. Net held-for-investment loan growth occurred across all of our key portfolios, with multi-family growing by $198 million, residential mortgage growing by $135 million, C&I by $99 million and CRE by $11 million.

Consumer loans declined by $11 million during the quarter. Commercial loans collectively increased by $308 million or 7% from the prior quarter and are up $680 million or 18% from a year ago. At year-end, commercial loan balances totaled $4.5 billion, and represented 68% of the loan book, up from 63% a year ago. Additionally during the quarter, we sold $14.2 million of SBA loans at a gain of $1.2 million.

On the deposit side, we continue to reduce our reliance on high cost and high volatility deposits, as overall deposit balances declined by $111 million. We reduced institutional bank deposits by $603 million, driven by a planned reduction of high-rate, high-volatility deposits, resulting in $849 million of institutional bank deposits at year-end. Of these balances, we believe approximately $600 million are relationships and products that fit within our go-forward strategy, and from here, we'll be reflecting our current business unit deposit totals. The remaining $250 million of high cost and high volatility deposits are expected to runoff in the near term.

We were able to replace and re-mix $290 million of nonbrokered, noninstitutional bank deposits this quarter primarily through our commercial, retail and private banking areas. Although we were not able to fill the gap in 1 quarter alone, we have grown these deposits over the past 3 quarters and that growth accelerated in the fourth quarter. Non-brokered, non-institutional banking deposits now account for 68% of total deposits, up from 52% at the end of the first quarter.

Broker deposits balances increased by $202 million during the quarter as we backfilled the remaining gap from the decline of the institutional balances. Our primary goal is growing incremental core, low-cost deposit funding, but we recognize premier deposit franchises take years to build. In the meantime, we expect to continue to utilize brokered deposits as well as FHLB Advances as needed, while our core deposit strategies are implemented.

Transitioning to the income statement. Net income available to common stockholders for the fourth quarter was $6.2 million or $0.12 per diluted common share. For continuing operations, earnings per diluted common share were $0.11. These results included a number of items that we want to call to your attention. The company's fourth quarter reported financial results included $3.3 million of non-recurring expenses; $4.4 million of negative valuation adjustments related to the mortgage servicing rights, or MSRs; and $2.1 million of an estimated net tax benefit as a result of re-measurement of the company's deferred tax assets and liabilities.

After adjusting for these nonrecurring items, our core number was closer to $0.16 per diluted common share, and we have provided a reconciliation on Slide 10 of our slide deck. Noninterest income includes gains from the previously mentioned sales of MLP and bank debt securities. We intend to exit the remaining MLP portfolio during the first half of 2018, and as we do so, we expect to recognize an additional gain or gains on their sale. As noted earlier, noninterest income includes a $4.4 million negative valuation adjustments on the MSR asset.

As part of our ongoing efforts to focus on core assets, we have a nonbinding offer to sell the SFR agency-related MSR asset, which covers approximately $3.7 billion of underlying agency loans. The negative valuation adjustment reflects the offered price. The prospective buyer is conducting diligence, and we hope to arrive at a final agreement by early February, with servicing transferred to the buyer early in the second quarter.

Average interest-earning assets were flat from the prior quarter at $9.6 billion, after declining for the previous 3 quarters. We believe earning asset levels have stabilized, and have the opportunity to grow higher from here as we put on new loans and grow revenues. Disappointingly, but somewhat expected, the net interest margin decreased 14 basis points for the quarter to 3.01%. The yield on interest-earning assets decreased 4 basis points for the quarter, primarily driven by an 8 basis point decrease in loan yield to 4.42%.

Held-for-investment loan yield was 4.49% for the fourth quarter, which excludes held-for-sale loans, the majority, of which are re-recognized Ginnie Mae loans recorded in held-for-sale. We are required to record Ginnie Mae loans that are 90 days delinquent and eligible to be repurchased by the bank, even though we legally do not own these loans.

Security yields were flat from the prior quarter at 3.46%. The cost of interest-bearing liabilities increased 9 basis points to 1.21%, primarily due to an 8 basis point increase in interest-bearing deposit cost and a 10 basis point increase in FHLB borrowing cost. The increased FHLB borrowing costs were driven by both higher short-term rates on overnight advances, which totaled $1.1 billion at year-end as well as increased interest expense as a result of $550 million of term advances put in place during the fourth quarter. These longer-term advances are largely tiered over a 1- to 4-year period and are expected to improve our overall asset liability position.

As Doug noted, we are in the early stages of building a strong deposit franchise and recognize that our rate-sensitive deposit and wholesale funding base will continue to put pressure on interest margin. Deposit costs are the single biggest opportunity we have to improve our margin over time. As we continue to implement increased pricing discipline on the asset side and launch the new deposit and treasury management platform, we expect NIM to stabilize during the first half of the year, and begin a slow expansion thereafter.

Interest income declined by $400,000 from the prior quarter to $97.2 million, driven by 0 interest income on SFR pools in the fourth quarter and lower interest income on held-for-sale loans, which impacted interest income by $3.2 million. Additionally, interest income from securities and other assets was lower by $1.2 million while interest income on commercial and residential loans increased by $3.9 million.

Now that we have moved past the sale of seasoned SFR loan pools, we would expect loan growth to drive interest income higher over time. This is more apparent when you look at period-end loan balances compared to average balances, as late-quarter fundings caused average balances to lag period-end balances by $349 million and provides us with strong footings to start 2018.

Another item to note, given this strong loan growth, was the higher provision this quarter, which hurts us on the income statement in a period of origination. For the quarter, we recorded a $5.1 million provision for loan losses, while credit quality was relatively stable. With continued strong loan growth, pre-tax, pre-provision earnings power of the company will become increasingly important.

The composition of interest income continues to improve as commercial loan interest income now represents 52% of total interest income, up from 41% a year ago. Interest income from residential loans declined to 22%, down from 32% a year ago. Interest income from securities and other assets was 26% for the fourth quarter, and we would expect this percentage to come down over time as we exit the remaining MLP securities and reduce our overall securities portfolio. Total noninterest expenses for the quarter were $66.4 million and included a $4 million loss on solar investments. Excluding this item, noninterest expenses were $62.4 million and included a number of items that we do not consider to be core operating expenses. These items totaled $3.3 million and included severance, lease termination expense, legal items and software write-off expenses. Adjusted for these items, expenses came in at $59.1 million, in line with our near-term target level of $60 million. We are hopeful to be largely past these nonrecurring expense items as we head into 2018.

Our adjusted efficiency ratio came in at 75% for the quarter, which continues to reflect more of a revenue opportunity for us versus an absolute expense reduction opportunity. Noninterest expenses with average assets came in at 2.33% from continuing operations for the fourth quarter after adjusting for the nonrecurring expense items. This number is not overly an outlier for our balance sheet and business mix, although we recognize we have an opportunity to improve this ratio over time by leveraging our existing expense base and growing the asset base. We expect to be able to update you with more thoughts around our expense outlook when we share our strategic road map in early February.

Lastly, related to income taxes, we get a lot of questions on our outlook for tax rates and solar tax equity program. For 2018, it is likely that our effective tax rate for the full year will be substantially less than the full statutory rate. Given the level of our existing solar investment program, we expect our effective tax rate in the first half of the year to be minimal before reverting to a more normalized level in the second half of the year. As we finalize our plan and complete a full assessment of the recent tax reform program changes, we can share a tax rate expectation for the coming years. Moving to credit metrics. Asset quality trends continue to be strong and stable. Our nonperforming asset ratio for the quarter was just 21 basis points, up slightly from 16 basis points last quarter and a year ago. Given the absolute low level we are near, there could be some bouncing around from quarter-to-quarter.

Overall, nonperforming assets increased by just $5.2 million, and were primarily driven by 2 credits: It is important to know that these additional nonperforming loans resulted in a minimal amount of new specific reserves as we believe these loans were adequately collateralized. Nonperforming assets to equity continued to remain strong at 2.1%.

Delinquent loan metrics remain strong and delinquent loans to total loans ratio declined from 1% a year ago to just 63 basis points in the fourth quarter, which is up slightly from the prior quarter's 50 basis point level. On an absolute basis, delinquencies increased by $10.2 million from the prior quarter. However, I would note that after year-end, we have seen $16 million of these balances come current.

Net charge-offs for the quarter was $791,000 or 5 basis points annualized as a percentage of loans. The allowance for loans and lease losses increased to $49.3 million and ALLL to total loans in leases ratio ended the quarter up 2 basis points to 74 basis points and covered 255% of nonperforming loans.

Our capital position remained strong as the common equity Tier 1 capital ratio was 9.9%, which is the highest it has been in over 3 years. Tier 1 risk-based capital totaled 13.8%, which is also at a 3-year high. All capital ratios well exceed Basel III fully phased-in guidelines. Additionally, our TCE capital ratio has increased 13% from a year ago to 6.8% at year-end. That wraps up the summary of financials for the fourth quarter, and I'll hand it back over to Doug.

Thank you, John. The fourth quarter marked another series of steps on our journey toward building in a more core and traditional commercial bank. We are proud of our progress to date. However, we acknowledge the hard work ahead of us in 2018 and beyond to continue this transformation. We get a good deal of questions from investors as to how, what and when of our go-forward plan. We hear you. And we plan to share a few insights on these topics soon to help you see the direction we are headed in and how we intend to get there. We truly have a great opportunity in front of us. And with our focused and dedicated colleagues, I have confidence we are well on our way. That concludes my prepared remarks, operator. Now let's open it up for any questions.

(Operator Instructions) And our first question comes from Timur Braziler of Wells Fargo Securities.

First question for me is on the deposit front. So if I understand correctly, there's about $250 million more of what you classify as high-yield, higher-volume deposits that you expect to exit soon in first half of 2018. Is it possible to see deposit balances actually start to increase from a net basis starting in the first quarter? Or is that still going to be a little bit of too much of a bucket to backfill?

This is Doug. I think the short answer is that, we will be backfilling it substantially throughout the first quarter, but it's going to take a bit of time. And we point to the progress that we had in the latter half of the year. And I think maybe too, it would be helpful to have the color here. These legacy institutional bank deposits were both high-priced and volatile. And while the world of institutional funding also has a high price, it does not have a degree and volatility that we were experiencing with these legacy deposits. So we decided to set about a program to exit these both high-priced and high-volatility deposits. The gap was such that we were going to have to use institutional funding, which, of course, is stable and reliable, albeit at high cost. So as we've said, we may not like the geography from an organic deposit standpoint, but the range of cost differential is modest. So the key here is to get to a deposit platform that is: one, organic; two, stable, reliable, repeatable; and three, over time, lower cost. And we have to go through this last bit of reduction that we mentioned to get to the core.

Okay, that's helpful. And looking at the savings cost, the deposit savings cost, up 22 basis points this quarter. I know you guys are running a promotion of 1% savings rate on balances north of a $100,000. It seems like a very big jump. How much of that was negotiated? How much of that, I guess, is sensitive to future rate hikes? And how much are you paying up today to keep some of those core balances at the bank?

A lot of those deposits are rate sensitive. Embedded within that savings account, we extended duration on about $125 million of deposits and extended it out for a 4-year term. So that's certainly added to the increase that we saw during the quarter. We also had some other deposit relationships, where we were proactive in locking them down for a longer period of time and took action prior to the Fed rate increase to, again, keep those depositors for a longer period of time. So there was some proactive actions that took place that caused those money market balance rates to increase.

Okay. But going forward, we shouldn't expect to see some low level of increases from the future rate hikes?

I don't think you're going to see increases to the same extent. So if you think about kind of the beta concept, the impact is going to be lower with future Fed rate hikes.

Okay. And then, maybe one more for me, if I can. Well, just looking at the loan growth and the composition of it, certainly glad to see C&I balances or the growth rate accelerate over the last 2 quarters, but primarily looking at that multi-family segment, I guess what were the yields on originated production in the fourth quarter there? And as you look at future loan growth, if it's going to be coming from the multi-family segment and commercial real estate where the flatter yield curve is really impacting those spreads and you're putting on wholesale and cost for your funding to support that, is there any thoughts on maybe slow loan growth in this type of rate environment until the funding base is more stable? Or is the loan growth kind of an outcome of the production, let alone the funding?

Well, let me take the back end of the question first, and that is to talk about the multi-family business. So we went about a couple of quick, but very important, items here. First of all, Jason Pendergist joined us as Head of Real Estate Banking, has a considerable background in the greater world of real estate. One of the things that we have talked about is having a much higher component of retail-driven, multi-family business versus brokered, which has a degree of higher price content opportunity as well as deposit content opportunity. And that will play out throughout '18 and beyond. And that's what's important in terms of what's going on in the multi-family space. More broadly, we are also adding considerable talent to the C&I banking teams and to our private bank. So while real estate will always be a very significant component of who we are, we also intend to build out very aggressively other portions of our loan book.

Our weighted average debt to that -- our weighted average coupon for the fourth quarter was 3.91%, and that's down from the prior quarter, which is at 4.14%. What I would note about that, and as Doug talked a little bit about is, Jason came on board at the end of the third quarter, so he's got his first full quarter under his belt. And he's been hard at work implementing a retail strategy. And as we transition from more of a brokered strategy to more of a retail strategy, we're also seeing some pricing improvements. So while the 3.91% was lower than the prior quarter, we would expect it on an absolute basis, excluding even changes in general level of interest rates, we start to see that rate improve in the coming quarter.

Our next question comes from Jackie Bohlen of KBW.

Just touching on the deposit still. When I look at the quarterly averages on the rates, how do those compare to where you were end of period for the various account buckets that you have?

Are you talking about the average balances?

So for instance, if I look at saving deposits, they were a 115 basis points during the quarter, but you mentioned you had extended some duration on those ahead of the rate just to stabilize them. Where was -- I'm trying to understand the impacts that occurred during the quarter of some of the balance fluctuations that took place and how much of that is priced into the fourth quarter's deposit pricing versus what will flow through in the future pricing? Understanding, of course, that there was a rate increase in December.

Right. So taking my earlier comment, we did take some action with respect to some of our retail deposit accounts in the money market account segment and we increased the rates proactively in advance of the Fed rate increase. With the exception of the money market, we did not take any sort of action with respect to the savings accounts in advance. So we would expect to see some rate increase flow through as we move into the first quarter.

Okay. So the impact of what was undertaken in the fourth quarter is not fully reflected in the fourth quarter's numbers?

I'm sorry, say that again.

The impact of what was done within the fourth quarter, that's not fully reflected in the fourth quarter's numbers, you'll see some flow through into the first quarter on that?

That's correct.

Okay, all right. And that would trend -- excluding the impact of the rate increase that would trend first quarter deposit costs up? Am I understanding that correctly?

That's right. Yes. You'll see some additional impact in -- that will flow through into the first quarter.

Okay. And then, looking at loan yields, I'm -- and I apologize for my ignorance on this subject, but can you just provide a little more detail on the impact of the Ginnie Mae loans and how those are reducing loan yields by such a great extent, given -- and just where the portfolio yield is at? And then what you're bringing your new generation on at?

Sure. For the Ginnie Mae loans, these are loans that were sold to Ginnie Mae and under that program, we have an obligation -- or they have the ability to put back to us loans that are delinquent 90 days or more. They will continue to hold those loans, they will continue to work out those loans to resolution, but from an accounting perspective, we record those on our balance sheet. And so as a result, there were -- there, the asset sits on the balance sheet, but we don't have an associated yield and we don't legally own those loans. But from an accounting concept, we had to record them on our balance sheet.

Okay. And what's the total of those loans?

We have $70 million -- I think it's $70 million, about $75 million of those loans that sit on our balance sheet as of the end of the quarter.

Okay. And then, the increase on the yield on what you've been booking, was that mixture then? Or is that just general trends that you're seeing in the market?

That's general trends that we're seeing in the market. And I'd go back to the earlier comments, as we continue to switch to a retail strategy on multi-family, and that will be one of our larger categories for growth, we should start to see some yield pickup as we make that transition to the retail strategy.

And beyond that, in the private banking space, and in the C&I space as well.

Okay. And then, just lastly, what percentage of your loan book reprices immediately as rates change?

I'm not positive on that one at this time. I'll have to come back to you to give you a better percent.

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

Just a question around provisioning loan growth, certainly strong this quarter. If we continue to see loan growth north of 5%, 6%, 7%, or at that level, I mean, is this the right level of provisioning that we should be forecasting?

As we think about the provision for the quarter, we posted $5.1 million. And of that $5.1 million, approximately $800,000 was related to charge-offs. So on a net basis, $4.3 million. And the overall held-for-investment book grew by $433 million or so. If you think of it in those terms, it's a 1% provision rate. As we look at our overall book of business and kind of the mix of production that's expected to come on, we would look for a provision rate that's somewhere between 80 to 100 basis points, with probably a bias towards the lower end of that range.

Yes. And if you boil maybe a little bit more broadly on credit. We remain very comfortable with our asset quality. And the bank continues to focus on our core markets in California. The California-based economy in our markets, the real estate trends are all positive. And as the sixth largest economy in the world offers good diversification in our businesses. We remain focused on our core lending products. As we spoke about earlier this year, multi-family, residential, mortgages, warehouse and C&I and we maintain a conservative credit box. So the growth that you're seeing is really a function of investing in our relationship managers, lifting out teams and not expanding the credit profile materially of the company. So as we look forward, we're comfortable with the economic view of California, comfortable with the existing profile of the portfolio.

And then, just one housekeeping item here. What's the balance of the CLOs at year-end?

The CLO balance was about 1 point -- finding it here, real quick. $1.7 billion was the book value.

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

I wanted to follow up on one of your comments about thinking the [bringing] asset base has effectively stabilized and it should begin to grow. I'm just wondering, given the amount of pressure on deposit costs and the need to kind of remake that, you're having small runoff. And on the cost of growing that, why put additional pressure on the balance sheet and the funding need as opposed to running of more or allowing more of the securities portfolio cash flows to sort of reduce the need for incremental deposits?

Well, that's -- so there are several quick, but important comments around all that. First of all, from a regulatory perspective, as you know, we went over the $10 billion mark. And that has a set of requirements that are enhanced from regulatory perspective and related costs. And to contemplate going backward from there is a considerable undertaking, and ultimately one we didn't think would be as successful as the converse, and that is our go-forward strategy. So we have said that, we believe, and you're seeing it here in the fourth quarter that we will reduce that securities book and have started that program as we have begun to increase the loan book. So over time, that loan book will -- the securities book will come down from its approximate 27% level, and the loan book will continue to grow and that's the goal. And along the way, we're building out the deposit franchise to address it. And we've also had degrees of success, early going right now, but degrees of success of getting that underway as well.

Okay. And as it relates to the institutional bank deposits, I think the comment was it was about $850 million less, about $600 million of that's viewed as core and will be moved over to a different bucket going forward. What's the cost of that $600 million slug that you view as core and intend to hold on to?

We don't break out specific cost of those varying deposit buckets.

Okay. And then, just one last question. Just regarding tax outlook and the expense carry on the alternative energy partnerships. I got your comments on the tax rate assumption for the year and how that might trend. If you could give any color on magnitude-wise where we should be thinking about the expense item?

In terms of the expenses, we have one solar program that we're still investing in. And the expense recognition is largely dependent upon the timing of the other party deploying the various solar panels. So -- but I would expect that, we'd have expenses that somewhat mirror the tax credits that we received, so they're largely offsetting.

Okay. And should those -- the remaining investment there, does that run the course of 2018 and then 2019 becomes a cleaner number? Or how do you think about that?

We expect to be able to complete our investment commitment in the solar program in the first half of the year. And so that's why we'll have an effective tax rate that's closer to 0. And then, once we've completed our investment, I would expect that our effective tax rate would start to migrate up to something that's a more of a normalized rate. And for us, what I've considered to be normalized rate is somewhere between 20% to 25% for an effective tax rate.

Okay, so on the second half of the year, conceivably, the expense line item should go to 0?

Conceivably, it should go to 0 and then our effective tax rate would start to migrate to something that looks like 20% to 25%.

Our next question comes from Matthew Clark of Piper Jaffray.

Just on the -- on your core deposits. How should -- how do you think about -- or what is the kind of weighted average cost of the new core deposits you're bringing in the door? Just trying to get a sense for where -- after you run off all this noncore stuff, and obviously we're dealing with higher rates in the interim, but just trying to get a sense for can you kind of keep a lid on the deposit cost at some point here or not?

Look, I think -- I appreciate the questions around the deposit funding and cost. We'll have a lot more to say about that when we're together in early February in terms of outlook.

Okay. And then, just directionally, on the loan yield, with the noise around the Ginnie Mae loans, but also the weighted average rate on new production of 4.68% above the 4.42%. I mean when you think about all the moving parts, directionally, should we assume that, that expands once again or not?

Yes. We'll certainly provide more color as we get together in the early part of February, but directionally, you've got it correct. I think you'll start to see some benefits on the yield side.

Okay. Okay, great. And then, just on the income statement, the loans servicing line, which I think had a MSR write-down of that $4.4 million in it, which gets you, I think, back to a $2 million kind of an adjusted number. Anything else in there that's unusual? Or is that a decent run rate?

No. Nothing unusual. And again, we're coming very close to writing at a definitive agreement for the sale of the MSRs. And once that diligence is completed and we move forward with the disposition of that asset, we would expect that to occur in the early part of the second quarter.

Our next question comes from Steve Moss of B. Riley FBR.

With regard to -- just on the margin again here. Two things: one, where do you think the margin bottoms out in terms of the first half of this year? And then, the second part, what are you assuming for interest rate hikes in your margin modeling?

Well, all of that is forecast and outlook-oriented. And if I may, we have said that we will have a lot more to say about '18 outlook in the first week of February.

Our next question is a follow up from Timur Braziler from Wells Fargo Securities.

Just a couple of more for me. Following up on Matt's question on MSRs, the piece that's being sold, is that the final Ginnie piece of it? And would that sale down that line item should essentially be 0 going forward? Or is this still part of the previously announced MSR sale?

No. This is a new MSR sale, and it encompasses the remaining Ginnie book as well as the small book of Freddie and Fannie that we're looking to sell. So what should remain afterwards is our SBA, MSR asset.

And what's the size of that?

It's relatively small. I don't have that top of my head, I'll get that back to you.

And then, just last one for me. Just looking at the securities portfolio, last quarter, you had said that, over time, you're looking to exit out of that CLO book still at $1.7 billion. Maybe just what's the yield on that CLO portfolio? And for the guidance that you provided on the margin or the broader outlook on margin, kind of what's your assumption as far as letting that roll off? Is that going to occur naturally? Or are you guys kind of, helping that accelerate a little bit?

The yield, the book yield on that book of business is 3.29% at the end of the quarter, and so that's $1.7 billion. We did allow the -- a runoff of about $120 million over the course of the fourth quarter. We'll continue to have some controlled run-off of that book of business. There's frequent calls that occur within those types of securities, and we still like the security instrument. We just believe we have too high of a concentration in that investment security type. So we'll continue to manage the overall balance for that investment security over time and get it to be a little bit more of a right-sized. We won't necessarily run the balance down to 0 over time, but we will get down to be a much smaller portion of the overall investment portfolio.

And I would just add that all of that journey is in keeping with this quarter's elimination of the bank debt, the reduction in the MLPs, and then the ultimate elimination of them here in the first half, and then work that is being done around a steadier, slower reduction, but it will happen on the CLO side as well, particularly as we continue to see the loan growth we're seeing.

Okay. And if you look at the securities book, kind of on a core basis, x the CLO run-off, x the MLP reduction, and if you look at that core basis, what's that typical quarterly cash flow? What's the yield of what's running of? And then, what are you replacing that with?

Certainly, on the CLO, as we kind of control that rundown and we have a change of those instruments. So we'll have some that are called, and then we'll also repurchase as we control that rundown. So we're 3.29% today on a blended basis, and what we're seeing out there in the market in terms of new instruments coming on is somewhere in, call it, to 3% to 3.25% basis.

Okay. So the securities that are being purchased to offset the runoff are still primarily CLOs? Or are you guys purchasing other series of loans?

No. Yes, at this time, we're just purchasing CLO. So again, we're starting from a very high point in our overall mix of investment securities relative to the balance sheet size. So we want to start to migrate ourselves down to something that looks more like a peer institution, and that migration will occur as we see loan growth occur.

Okay. And just finally last one for me. Sorry to beat a dead horse, but what were the actual a CLO calls this quarter? So what was the actual reduction of CLOs from period to period? I know that net net runoff was $117 million.

I believe we had about $225 million, $250 million of CLO calls for the quarter. And so we had a net runoff of a $120 million. So the net there would be the purchased amount.

I might just add that CLOs, AA-rated C&I, well performing and most on this call would know that there has been a considerable amount of early calls on that activity. So while our book is higher than our peer group, the performance of that asset class has been quite good.

Our next question is a follow-up question from Jackie Bohlen of KBW.

Just one quick one. It looks like the majority, if not all of the gain on sale income was from SBAs, in the quarter, given the MSR sale that you're looking to do, is it safe to say that going forward, all loan sales and servicing, incumbent, everything associated with that will be purely SBA-driven once that sale takes place?

Yes. So certainly on a go-forward basis, we'll have a gain on sale related to SBA loans as we originate and sell those. We are also looking at kind of our overall balance sheet mix and our production capabilities. And so as part of the production capabilities in both the single-family and the multi-family, we will look at opportunities to selectively sell some of the production that's over and above what we might necessarily want to keep on the balance sheet. So we may have some gains on sale from those 2 product categories as we go throughout 2018.

And should we think of that as more one time in nature to work on concentration levels? Or something that would be ongoing?

I would look at that to be more of an ongoing event. And so we'll -- we potentially will have sales throughout each quarter of the year.

The only thing I would add to that, Jackie, is that the all-in levels will be relatively modest and far, far from the historical gain on sale and atmosphere that existed here before, in particular, related to the -- for Banc Home Loan mortgage. So we're going to do the right thing around our multi-family book and our resi book, so you'll see us package up and sell from time to time. But that gain-on-sale approach, again, will be very modest, certainly, by comparison to anything here in the past.

So it's complements to earnings rather than a driver?

Correct. That's right.

Precisely.

Okay. And then for the SBA, are we at a pretty good run rate of what you would expect going forward outside of seasonal trends?

Yes. I think that's within reason of what we would expect to see each quarter.

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

Thank you very much. Well, to close us out, a couple of things. I'd draw your attention to an 8-K that we filed with respect to the settlement of another litigation matter. And what's important here is that, first of all that it's settled, and it's regards one of our former executives. And I would also point out that, from a reserve perspective, we're pleased with our standing. So I wanted you to know that.

The second thing I would do is kind of revert to the overall story here. What we have said is, is that, first of all, we believe the decline that we are experiencing and managing in the securities book is right in line with the improvement and the increase we are experiencing in the loan book. That is precisely our game plan, and it began to really play out meaningfully in the fourth quarter. And we're seeing good pipelines and a good outlook as we come into the year. Our big effort is centered, additionally, around the deposit side. So with all of that, we will have a lot more to say the first full week of February as regards our outlook, and we look forward to talking to everybody then. Thank you very much.

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