Banc of California, Inc. (BANC) Q1 2014 Earnings Report, Transcript and Summary

Very good day to you, ladies and gentlemen, and welcome to the First Quarter 2014 Quarterly Earnings Call, hosted by Richard Herrin, Chief Administrative Officer. My name is Karen, and I'm your event manager today. [Operator Instructions] I'd like to advise all parties the conference is being recorded for replay purposes. And now, I'd like to hand over to Richard. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's first quarter 2014 quarterly earnings conference call. With me on the call today is Banc of California's President and Chief Executive Officer, Steven Sugarman; our Chief Financial Officer, Ronald Nicolas, Jr.; and our 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. Before I turn it over to Steve, I want to remind everyone that, as always, elements of this presentation are forward-looking and based on our views, best views of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. The forward-looking statements in today's 8-K filing also apply to our comments. That document is available on our bancofcal.com Investor Relations website, as are other 8-Ks filed regarding investor presentation material and other matters. We will have time for Q&A at the end of the presentation. And now, I'd like to turn it over to our CEO, Steven Sugarman.

Thank you, Richard, and welcome to everyone to the Banc of California's earnings call for the period ending March 31, 2014. I'm pleased to report steady progress during the first quarter towards our operational goals for 2014. We've substantially completed the platform-building objectives and reorganization initiatives that we previously announced and, as a result, we now have a more scalable platform for the future with the benefit of generating higher marginal returns as we continue to grow. The strong marginal economic benefits we expect to see from our recently announced acquisition of the Banco Popular California branches are similar to the marginal economics we believe our platform can now achieve for organic growth pro forma for the transaction. We target a marginal efficiency ratio under 55% and over 15% ROE for the growth in our commercial bank. Management expects that shareholders will begin to see improved productivity and profitability starting in the second quarter and meaningful progress towards our long-term targets as we close the Popular transaction. There was much progress towards these targets in the first quarter. First, our cost-saving initiatives through March will reduce the annual fixed cost of our mortgage banking division by approximately $15 million. Although some of these cost savings generated onetime charges to things like closed LPOs and severance expenses in the first quarter, and many of the cost savings did not manifest until towards the end of the first quarter, we expect these onetime charges to be worth approximately $1 million during the quarter. As a result, we expect to see the profitability from these efforts in the mortgage banking division to improve by more than $1 million per month starting in April, based upon similar levels of originations. Second, the expenses related to the buildout of our technology platform and our one bank initiative were substantially completed by the end of the first quarter. And although we continue to have expenses from several projects designed to enhance efficiency, we anticipate an earnings pickup starting in the second quarter now that we have completed the significant upfront investments in these important initiatives. Third, the bank rounded out its lending team during the first quarter by hiring a new SBA team and financial institutions team in addition to its recently added multi-family CRE group and renovation-ready business teams. As noted in our release, we saw solid commercial growth in first quarter. We do not envision adding any new lending teams over the next several quarters and expect to see commensurate earnings increase from the increased income as these new groups ramp up. Of course, it's important to note that as we start to benefit from these ongoing expense reductions, we expect to also begin incurring a portion of the restructuring charges that we previously announced relating to the Banco Popular transaction which, in full through the close the transaction, we expect to be up to $10 million. Finally, our data warehouse is now operational and will enable us to more efficiently manage our business with greater granularity, including with respect to operating segments. Taking a closer look at the first quarter, the biggest drag on earnings, as was the case at year end, came from our mortgage banking operation, which lost money during the quarter. January and February reflected a continuation of the losses it experienced in the fourth quarter 2013 as a result of higher than expected expenses and lower than expected volumes. However, we saw mortgage banking return to profitability in March, and we anticipate that April will be increasingly profitable as we have seen higher origination volumes and the benefits come through from our cost-saving initiatives. If April volumes and margins continue the rest of the quarter, combined with the anticipated and realized lower costs, we'd expect to see substantially improved profitability from our mortgage banking operations in the second quarter compared to first. So far, month-to-date in May, we are currently ahead of April's volume and margin pace, which, in turn, was ahead of March's. Turning briefly to our recently announced transaction with Banco Popular, we continue to target our fourth quarter closing, and we are working collaboratively with Banco Popular to reach that goal. As previously disclosed, we expect to maintain the company's key capital metrics post-closing, based upon the capital-raising transactions that we previously announced; our second and third quarter profitability; the execution of potential and pending loan sales and asset sales, including assets with mature levels of unrealized gains; and the potential impact relating to the existing valuation allowance on our DTA, among other factors. As the company has consistently demonstrated in the past, we carefully manage capital to maintain our well-capitalized status, and we remain alert to opportunities that may arise to raise capital under favorable terms, when needed. I will now turn it over to our CFO, Ron Nicolas, to provide a more detailed update with regard to today's earnings report.

Thanks, Steve, and good morning, everyone. As customary, I will be directing my comments to the financial statements included with the release provided this morning, focusing primarily on the comparison to the fourth quarter of 2013, starting with the income statement. For the first quarter of 2014, the company reported net income of $800,000 and a net loss available to common shareholders of $153,000, or $0.01 per share on just over 20 million average shares outstanding, compared with net income of $2.4 million to common shareholders for the fourth quarter of 2013 and $600,000 to common shareholders for the first quarter of 2013 as highlighted in our release. The fourth quarter results included a net gain of $12.1 million from the sale of our 8 legacy branches and deposits in October of 2013. Total revenues before loan loss provision were $60.5 million compared to $67.8 million for the fourth quarter. Excluding the fourth quarter gain of $12.1 million resulting from the deposit branch sale, total revenues were up $4.8 million in the first quarter of 2014, primarily as a result of both higher net interest income and higher mortgage banking revenue. Net interest income of $35.2 million was higher by $1.9 million, driven principally by the $235 million of average loan growth during the first quarter of 2014. Our consolidated net interest margin expanded to 4.0% for the first quarter from 3.9% for the fourth quarter 2013, largely as a result of a higher loan balance mix as a percentage of total earning assets. Our cost of funds remained fairly stable at 0.92% versus 0.93% on a consolidated basis. At the bank level, the net interest margin also expanded to 4.19% in the first quarter of 2014 from 4.05% in the fourth quarter of 2013, again, as a result of the higher loan portfolio mix contributing to the overall higher earning asset mix. Cost of funds at the bank was flat to the prior quarter at 0.72% excluding the impact of the parent's consolidated senior debt. Noninterest income of $25.3 million increased by $2.9 million, excluding the branch sale gain, reflecting improved gain on sale margins in the mortgage banking business, a full quarter's contribution of CS Financial, acquired in November of 2013, and the sale of $31 million in SFR loan pools as well as a $51 million sale in our investment securities during the quarter. The latter loan and security sales contributed approximately $1.5 million to the favorable impact. In addition, the company sold $97 million in jumbo loans compared to $150 million sold at a similar price in 2013 as the company continued to acquire and sell jumbo loans to manage both risk and economic returns. The company also realized increased mortgage banking income of $17.3 million versus $15 million in the fourth quarter. The company experienced improved gain on sale margins by roughly 70 basis points compared to the fourth quarter. During the quarter, the mortgage banking operations sold $532 million versus $616 million in the fourth quarter of 2013. Our total SFR mortgage originations were $870 million in the first quarter, down slightly from the $910 million in the fourth quarter of 2013 with mortgage banking conforming and agency originations not unexpectedly down in the first quarter at $510 million versus $550 million in the fourth quarter. The first quarter is typically a seasonally low point in mortgage originations. Our nonconforming jumbo originations were flat at approximately $360 million on a linked quarter basis, which includes the additional month of CS Financial. For the quarter, the company provisioned $1.9 million for loan and lease losses. Overall, our ALLL was higher by $1.2 million, reaching $20.0 million when compared to the fourth quarter, and our ALLL-to-originated loans ended the quarter at 1.43% compared to 1.45% at the end of the fourth quarter. Net charge-offs were a net recovery of $230,000; and the company transferred a portion of the allowance of approximately $1 million with approximately $60 [ph] million of HFI jumbo loans that were transferred to HFS during the quarter. Additionally, loans originated and acquired attributable to the ALLL, including the discount, were at 1.64% compared to 1.63%. Hugh Boyle will address the asset quality more specifically in a few minutes. Noninterest expense of $57.8 million increased $600,000 from the fourth quarter despite lower fixed expenses within the mortgage banking division. Mortgage banking expense fell by $2 million from the prior quarter due to the successful execution of our expense reduction initiative. In addition, mortgage incurred onetime expense of approximately $1 million relating to severance and loan production office closures. So the gross savings was closer to $3 million for the quarter. Also, offsetting the expense reductions were a full quarter's worth of operating expense for CS Financial, again, acquired in November of 2013. Expenses at the bank were flat on a quarter-to-quarter basis as well as other operating entities, including the holding company. Overall, company headcount decreased 167 to 1,217 as of March 31, compared to 1,384 as of December 31. The expense-reduction initiative in mortgage banking accounted for 178 FTEs of the decrease, partially offset by the growth of 11 FTEs through the combination of both the bank and TPG. The company experienced higher occupancy and equipment expense as a result of the aforementioned office closings related to the mortgage banking expense initiative. However, we do anticipate this number coming down in the near future. For the quarter, our tax expense was $9,000 on $766,000 of pretax income for an effective tax rate of approximately 1%. The company's statutory rate was reduced through the utilization of its deferred tax assets by virtue of reversing partial of its valuation allowance. While it is impossible to accurately predict the future utilization of the company's DTA, to the extent we continue to have positive earnings, the company's tax rate will be significantly reduced by the realization of its DTA. The fully valued $17 million deferred tax asset, as of March 31 quarter, represents approximately $0.84 of book value currently not recognized. Turning to the balance sheet, the company finished the quarter at over $4 billion in assets compared to $3.6 billion at the end of the fourth quarter. Organic loan growth during the quarter added approximately $235 million net of payouts in sales as total loans grew to $3.4 billion. Loans held for sale increased to $1 billion from just over $700 million in the fourth quarter, consisting of just over $800 million in nonconforming jumbo loans and just under $200 million of agency and conforming. The company anticipates selling significantly more jumbo loans in the second quarter, approximating its originations for the quarter. Loans held for investment were down slightly from fourth quarter but included a transfer of approximately $60 million to held for sale as well as the sale of the $31 million of our seasoned SFR mortgage loans. Adjusting for these onetime items, loans held in portfolio actually increased, primarily as a result of our CRE and C&I categories, $27 million and $19 million, respectively. At quarter end, the company strengthened its short-term liquidity position to complement its loan growth for the quarter. With the anticipated higher jumbo loan sales in the second quarter, we would anticipate this reducing as well. On the liability side, as anticipated, deposits grew by $190 million from the prior quarter, helping to fund the company's robust loan growth. Excluding loans held for sale, the loan-to-deposit ratio was 77% compared to 84% at the end of the fourth quarter. The company continues to grow its retail deposit base to fund loan growth and utilize additional sources of liquidity to fund its mortgage production ahead of loan sales and balance its short-term liquidity needs. Equity was flat during the quarter at $325 million compared to the prior quarter, and total shares outstanding were also flat at 20.25 million versus 20.15 million in the fourth quarter. The company's tangible book value was at $9.94 per share from $10.06 at December 31, primarily driven by the goodwill recorded with the acquisition of RenovationReady. The bank and company both remain well capitalized at the end of the quarter for each of the key risk-based and leverage ratios. I'll now turn it over to Hugh Boyle to highlight credit quality.

Thanks, Ron. Asset quality remains strong and steady at Banc of California in the first quarter. Total gross loans grew by $235 million, or 7%, in Q1, reflecting strong growth across all of our business channels. Consistent with one of the central themes of our strategic plan to diversify our loan portfolio and lower our reliance on single-family mortgages, we are seeing particularly strong loan originations in our multi-family and private banking sectors. Nonperforming loans of $32 million remained flat versus the prior quarter, and OREO remains negligible. As a result, nonperforming assets to total assets declined from 87 basis points to 81 basis points in Q1. Our mortgage originations continues strong in Q1, but, consistent with our business plan, this production was book to loans held for sale. As a result, held-for-sale loans increased from $716 million in Q4 to $1 billion in Q1. Our ALLL to gross loans held for investment increased from 77 basis points in Q4 to 83 basis points in Q1. ALLL to attributable loans, and we define this as non-PCI, SOP 03-3 and held-for-sale loans rose to 1.17% in Q1 from 1.1% in Q4. Gross charge-offs fell during Q1 to $203,000. We booked a gain in net charge-offs for the quarter as our recoveries exceeded charge-offs at $435,000. We are pleased to report that delinquencies improved significantly in Q1 versus Q4. Overall, past-due loans fell by 16% in Q1 from $94 million to $78 million. The bulk of our improved delinquencies was attributable to the 30- to 60-day bucket. Last year in Q4, the bank transferred the servicing of over $1 billion in single-family residential mortgages to a third party. We closed the integration of Private Bank of California and consolidated our back office onto a new core operations platform. As is typical in such transactions and transformations, there is often a short-term increase in early-stage delinquencies as borrowers reestablish their ACH, or automated payments, with the new vendor and internal processes are reestablished. The decline in early-stage delinquencies this quarter towards more normalized levels was fully in line with our expectations. With that, I'll turn it back over to Steve.

Thanks a lot, Hugh. As we move into the second quarter, management expects that noninterest expenses, excluding variable loan origination expenses, such as loan officer comp, to remain flat at just under $45 million as our revenues continue to increase from increased earning assets, increased asset origination from recently added teams, and increased mortgage banking and SBA business. We expect this to begin to result in increasingly efficient revenue growth starting in second quarter. With that, I turn it back to the operator as this completes our prepared remarks today. And we would like to open up the call for questions.

[Operator Instructions] First question we have comes from the line of Andrew Liesch of Sandler O'Neill + Partners.

Just curious if you could talk a little bit about the new teams that you brought on and how long you expect them to get ramped up and start contributing to commercial loan growth as well as like where's the, just in general, where's the commercial pipeline now versus, say, a quarter ago?

Yes. Thanks for the question. As we previously had announced, we brought on a multifamily commercial real estate team in the fourth quarter. They're now fully producing and, in the second quarter, will be ramped up. Importantly, while we continue to carry the cost of the existing commercial real estate team through much of the first quarter, we would now kind of combined and reduced the cost down from the one kind of new team that we've hired. So that J-curve process is substantially complete. With the SBA team that we brought on, it's been a similar process. We have an SBA business. They are ramping it up, but the business has a quicker ramp period given that we're already in that business. And many of the people we brought on are partially offset by existing SBA folks that are no longer with us. With regard to the financial institutions group, which was a team that came on largely in the first quarter, we'd expect their first contributions on the loan and also on the deposit side to hit in the second quarter and for their ramp period to be over the latter half of the year.

Got you. And then, could you -- my last question is just on the restructuring charges on the Banco Popular deal. I'm just curious what those are.

Yes, so we conducted a meaningful amount of diligence, including legal and credit diligence. So some of those charges will be reflected in the second quarter. We provided guidance this morning. That will be around $1 million or so. But as we move forward and close the transaction, we'll have the standard restructuring charges around integration expenses, system consolidation, signage changes, legal and all kind of the standard expenses. We provided a number, which is the totality of the cumulative expenses that will occur over the course of this year with the vast majority of those expenses occurring only after or at the closing of the transaction.

The next question comes from the line of Richard Sloane [ph], who's a private investor.

Yes. I'm calling concerning the expenses, the salaries and the other compensation. I understand there's 3 issues. The board members are getting $150,000. To me, that seems excessive. Second, the plan in 2011 provided for 950,000 share allocation, with 100,000 each year max. And that seems to have been exceeded substantially, and some people got compensation or shares even though they didn't vest under the terms of the plan. And third, the compensation or that is warrants that were issued to the Chairman upon the raising of capital. Could you address those 3 points for me, please, and tell me how they're interrelated?

Yes. Thanks for the call. We have an outstanding proxy that I'd direct you to that goes through, in pretty substantial detail, that addresses both the compensation philosophy behind it, and the independent third-party advisers that are involved in that process. The process is independent of management and led by independent board members. So I'd direct you to that.

Well, let's -- to be more -- let's just take it one at a time. Is it reasonable to pay $150,000 to a board member for a bank of this size? I mean, I have investments in many banks. And they're banks that are 10 and 15 times this size, and the board members are getting $100,000. So I'm curious as to how that number was arrived at. And is there any relation between that and the warrants that are issued when the capital was raised?

Yes. Again, I mean, I'm going to have to leave it to directing you to the proxy since there is a proxy going on right now, but I believe it lays out kind of methodology and that's it very fair and appropriate. And one of the strengths we have at this bank is the strong and diverse board, led by a very strong leadership. So thanks for your question.

Okay. Well, let me just -- you didn't answer the other question concerning the plan, which was dated May 25, 2011, which provided certain shares that could be allocated in any one year. Those amounts seem to have been exceeded. And I wonder if you could just address that question. Is that an incorrect statement that I'm making now? Those amounts, were they or where they not exceeded?

I'm not familiar with what you're discussing so I can't address it. But I can you assure that there's a very thorough process. And I don't think that you'd be evaluating it accurately if you think it was exceeded.

The next question comes from the line of Gary Tenner of D.A. Davidson.

Just had a couple of questions regarding the, I guess, the comments in terms of the pending transaction with the Banco Popular branches. Steve, you mentioned that the capital that you've got the commitment for plus expectations of some asset sales, it sounds like, and assuming some level of DTA recovery, unless I missed it, did you say anything about additional capital raise at the holding company? And I wonder if you could just talk to expectations for DTA recovery and how that flows into regulatory capital as opposed to flowing into GAAP. Maybe, Ron could address that.

Sure. It's a good question. As we've stated previously, we're evaluating kind of the process and potential on the capital side. We have stated that we'd expect that with the closing of the Banco Popular transaction, we would not be looking to dilute our core regulatory capital ratios at the bank. And so we continue to be firm in that commitment. You pointed out and asked a question about the DTA. As we have reported and continue to report, we evaluate the DTA and the valuation allowance against the DTA on a quarterly basis to determine the appropriate nature and size of the valuation allowance. As it exists today, it's fully reserved, which is a little bit over $17 million. As John -- I mean, as Ron mentioned, that relates to about a $0.84 impact to our tangible capital. And in turn, that relates to certain capital ratios that we track, including common equity and tangible common equity. So to the extent any decisions were made or earnings were sufficient to bring the valuation allowance down or reverse out the valuation allowance at or prior to the closing of this transaction, that would meaningfully impact the amount of capital and the pro forma capital ratios. But at this point, we don't have any decisions on that. We evaluate it quarter-to-quarter, but it is something that's meaningful to our evaluations.

Okay. And...

I'm not sure if I missed another element of your question. If I did, please let me know.

Well, actually, there's -- I have a follow-up, but the other element was the DTA. As that gets recovered, my understanding is that it goes into your credit on the regulatory ratio side at a different pace than just kind of the GAAP impact. So Ron, I don't know if you could talk to that at all.

Yes. You're absolutely right, Gary. And that goes under a similar type of evaluation and analysis as does the GAAP. And I think, to this point, we'll just continue to evaluate it and that will also give rise to an increase in our capital ratios. Our capital ratios, at least at the bank -- or at the bank level are very -- were very well-capitalized right across the board from our Tier 1 leverage all the way to our Tier 1 risk base as well as our total risk base. So regardless of the DTA, the bank is in a very good capital position. The other thing I might add is, notwithstanding Steve's comment on the DTA, as far as reversing it, the valuation allowance in totality, we'll continue to see the benefits of the DTA as we continue to earn in subsequent quarters as well to the extent we don't end up reversing it out. We'll see that benefit bleed through in a substantially lower effective tax rate.

Okay, I appreciate that. And just one more question just to kind of stay on the capital front for a second. I know that you guys focus at the bank level and the holding company much more the regulatory ratios, the risk-weighted assets ratios, et cetera. Your tangible common equity was just over 5% at the end of the first quarter. Is there, in your mind, what -- or I guess, in your mind, what is the minimum number that you think is acceptable to manage the bank at with regard to that ratio?

Yes. It's a good question and a complicated question as we have a substantial view on the totality of the capital structure and take great pains, I think, through our capital planning process. That said, pro forma, for the previously announced capital raise that was led by Oaktree, and that number does begin to adjust higher. But it is something that we're cognizant of and something that we believe, over time, whether through earnings or otherwise, would benefit us from keeping at levels that are as high as possible.

The next question comes from line of Brett Villaume of FIG Partners.

Ron, I think you mentioned you had $870 million in the mortgage originations last quarter. Can -- and, Steve, you said that it was sort of a substantial improvement in second quarter so far, or that you expect that. Can you give us an estimate of the quarterly run rate on what originations have been so far in the second quarter?

Sure. Just to give you a sense on the mortgage banking business, in particular, which is the aspect of the business that my comments related most directly to, meaning the gain on sale, held for sale part of the business where we sell residential mortgages to the government and agencies, such as Freddie, Fannie and Ginnie Mae. In that business, one of the key metrics that we track is the locking of loans. In April, our loan locks were up over 30% over March. And in May, they're up over April. So we continued to see that metric trend very positively on a pretty stable and reduced employee base. So the fixed costs will be stable over the period from March, April, May. So that's just incremental volume on that business. And importantly, alongside the locks, we're also seeing a strong recovery from the end of last year and beginning of this year in terms of margins in that business, where our margins are -- have been trending above kind of our budgeted levels. So that business is something that we feel good about. It's important to note that the mortgage banking business does have a seasonality effect. And so, part of the increases, as we enter into the summer, are consistent with the typical annual cycle of increases as we move into the second and third quarters of the year. But importantly, if the trend was kind of, say, you're looking at a meaningful uptick in the contribution from that part of our business.

Okay. And what was the margin? I think, Ron, you mentioned it was up 70 basis points. What was the gain-on-sale margin for this quarter?

Yes. The gain-on-sale-margin was 3% for the quarter.

I'm sorry. What was that, Ron?

Brett, I'm sorry. The gain-on-sale margin was 3% for the quarter.

3%?

Yes. That's a net gain on sales. So that's net of all the fair value marks for locks and loans held for investment and net of all of our -- the expenses, the fees that go against the gain on sale directly. So that's a pretty healthy margin, and that's up from about 2.30%, which where we were in the fourth quarter of 2013.

Okay. And finally, I just wanted to ask what was the contribution to the NIM from yield accretion this quarter?

I don't have that, Brett, off the top of -- ratio, off the top of my head. I'll have to circle back on that.

The next question comes from the line of Jackie Chimera of KBW.

I had a question on the timing of the Oaktree and the Patriot capital raise. Do you expect that to happen prior to the closing of the transaction?

No. The capital will fund just immediately prior to the closing of the transaction. And so, it's something that we would expect in the fourth quarter along with the close.

So how does that -- and granted, my understanding of this is not big, so please take this with a grain of salt. But how does that reconcile to the September 30 date that was mentioned in the 8-K filing that came out a couple of weeks ago?

The September 30 date is the date that we have with Popular as the seller by which we have an election of whether to walk away from the transaction without -- with the $2 million penalty. So to the extent that we determined that our transaction and the cost of capital was something that offset some of the benefits of the transaction and we determine that our shareholders would be better off walking away, we have that decision until September 30, which just ensures that we're not hostage to capital markets or otherwise. With the commitments that we received independent of the transaction from Oaktree and Patriot Financial and their affiliated funds, management and the board felt highly confident that we understand and have some transparency into the cost of that capital and can model both the cost of capital and the use of proceeds in evaluating the transaction. So while they're independent factors, they're important to us to be able to get comfort that as we look at this transaction and we model for a potential effect with the guidance that we previously provided that we would expect the transaction to be 20% accretive to both internal management estimates and consensus estimates that we have the confidence that, that would be true that we don't have any sort of gun to our head on the capital side because we do have the additional protection and the risk-lowering potential of a financing contingency that extends all the way out through September 30. And importantly, through the ability that we'll provide [ph] the market if necessary an additional quarter or so of earnings and progress.

So essentially, if I understand it correctly then, what you spoke about earlier in the call with 2Q, 3Q earnings and the execution of loan and asset sales and then the potential reversal of the valuation against the DTA, that's all something that you're looking to have in place by 9/30. And then, any other potential capital raising you might do, understanding that, in fourth quarter, you'll get the additional funds from Oaktree and Patriot. And so, you want to have that base all set by 9/30, and that's when you can make that decision.

I mean, I think that we'd want to have it all set. And in fact, as part of our regulatory process, we want to provide clarity as to exactly what we'd look like pro forma for the transaction. So yes, it would be important to have it all set. That being said, we don't comment on timing channel or process for capital. We're very -- we were trying to be very thoughtful about it. We have a number of conversations and, as some of your colleagues pointed out, there may be benefits to bringing up certain ratios and there may be benefits for quicker timing or for slower timing. So we continue to be very proactive with that thinking. And now that we've reported first quarter earnings and expect to file the 10-Q here shortly, our organization and management team is very focused on the right action steps to achieve a successful close of this transaction with Popular Community Bank because we continue, and even since the last call, as we've met the people and the team and the branch managers and continue to work through this integration plan, we continue to be very bullish and excited about the transaction. We continue to think that strategically it's very complementary to our existing footprint and our existing strategy and that financially, we continue to think they would be very helpful and compelling to us to get it closed. So we're very focused on it. We're thinking about it a lot. We're in the business, and we've seen in the past, we're trying to take some risks off the table because we don't need to have extra risk. But we want to do it thoughtfully where we respect kind of the existing shareholders as well and maximize kind of the long-term value of our shares.

Switching over to the held-for-sale portfolio. What's the level that you're comfortable with in that portfolio? Where -- or not comfortable. It's the wrong word. But what's the level that you would look for that portfolio to be at? Might it decline next quarter as you do additional sales?

Yes. It's a good question. And that portfolio, by and large, is held at kind of a low-COM methodology, lower cost of market. And so, the holding cost of that tends to reflect all the origination fees and things like this such that there has been, historically, on the loan sales, a good pickup in terms of unrealized gains. So as we move through the next few quarters, we'd expect to continue to sell pieces [ph] of that portfolio. And in fact, the growth that we had in that portfolio in the first quarter is something that over the course of the year, we won't expect to continue. We would expect to sell at a higher rate. In fact, in some of our previously disclosed investment presentations, we walked through kind of the net loan production we'd expect for the year and provided some guidance in terms of the net loan growth we'd expect in the single-family side, which is the preponderance of the held-for-sale portfolio. And that net growth is pretty close to de minimis. And so our expectation is, over time and recognizing that sales take some time and you can't match them exactly each quarter, but over time, I'd expect the sale to match the originations, at least in the immediate long [ph] term.

Jackie, if I might just amplify what Steve just articulated there, there's a couple of other things. Obviously, we took advantage of deploying some excess liquidity that we had in those loans. The jumbo piece -- or excuse me, let me talk about the mortgage banking component of that. It's much more routine in terms of originate and sell, originate and sell, originate and sell. The jumbo portfolio is a little less routine. I wouldn't call it episodic, but the investment -- the investor on that side, on the other side is -- those are usually unique transactions. So we decided we took a little -- we took advantage of some of the excess liquidity, and we're continuing to expand our investor base with respect to the jumbo side. What I would anticipate is I'd see, as Steve indicated, I see an acceleration of sales on the jumbo component of that for the next few quarters until we were pretty much in balance. And I would suggest to you that we'll always have probably about 1 months’ worth of production on the mortgage banking side and probably about 1 quarter's worth of production on the jumbo side. So I don't know, in today's volume levels, that's roughly about $600 million or so $700 million, $800 million of held for sale.

Okay. So essentially the $200 million piece -- I know it's a little bit below, but the $200 million piece is what's moving in, moving out, moving in, moving out. And then, the $800 million piece is what -- is a little bit elevated now, will come down a little bit as you get more investors wherein [ph] the process will be more smooth in future quarters.

You said that better than I did. Yes, exactly.

So the jumbo loan sale then, is that captured in your other income line item, or is that captured as part of mortgage banking?

No. That's in the other. That's not in the -- the mortgage banking is purely the originate and sell piece.

The liquidity...

Okay. So the roughly $7.7 million that was in the quarter, we could look to see that go up as more loan sales are taken on.

What number...

Which income just other items in there -- the other income line item, basically, we would see that move up from here as the jumbo mortgage platform continues ...

The portion of that...

That's right.

Yes. The portion of that line item associated with loan sales will move up as loan sales move up, assuming standard spreads.

That's right. That's right.

Okay. And then, just lastly, I want to make sure. I missed the very beginning of the call, so I want to make sure that I understood this correctly. So there was -- in the quarter, you had $1 million in severance and closure fees that were associated with mortgage banking, and that is separate from the $1 million that you expect in 2Q related to the Popular transaction. And is that $1 million in 2Q, is that part of the overall $10 million, or is that in addition to the $10 million?

No, no, no. Yes, that's -- you're correct. That's part of the $10 million. Our guidance on the restructuring charges is inclusive of any charges that would come in, in the second and third quarter pre-close. And so, that's for things like the credit diligence and legal diligence and other diligence we did prior to executing the agreement and some of it shortly after, like our fair value work. As far as the expenses, you're correct. There are separate from that, expenses related to some cost reductions that we did in the first quarter that are expenses typically associated with things like risk or closures of facilities where you'll charge off a lease or a severance fee as you reduce staff. As you may recall, we reduced about -- we had terminations or reductions of over 300 people in late fourth quarter through the end of the first quarter. That results in meaningfully lower fixed operating expenses in the mortgage business. And at the beginning of the call, what we relayed on that is that we believe that following the reorganization in the mortgage business, which is now substantially complete, compared to last year before the reorganization began, you're looking at an annualized cost save from fixed costs of about $15 million.

There's no further questions. [Operator Instructions] There's no further questions coming through.

All right. Well...

We do have one that just popped in, Gary Tenner of D.A. Davidson.

Just regarding the amount of fees from the jumbo business that was in the other income line. Of that $7.7 million, how much was related to the jumbo business?

Yes. There was a substantial, and I think it's just under a couple million dollars of fees. Those fees are typically as our costs deferred until they're released, until we sell those loans. So there's a chunk of fees that are also reversed at that point in time as well.

Just 1 second, Gary. Let me -- okay, so the number is approximately $2 million, Gary, for that quarter.

There's no further questions coming through.

All right. Well, thank you, everyone, for participating in the first quarter earnings call. We appreciate your time, are excited about where the business is, and excited about the progress we've made completing some of our reorganization activities through the first quarter so that hopefully we'll see a nice cleaner run rate starting in the second quarter and excited to kind of continue to make progress towards the closing of the Popular Community Bank branch sale. So thanks a lot for your time.

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining. Have a very good day.