Banc of California, Inc. (BANC) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Banc of California, Inc. Q2 2014 Earnings Call. My name is Joyce, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. John Grosvenor, General Counsel. Please proceed.

Thank you, operator. Good morning, ladies and gentlemen. I'm John Grosvenor, and I'd like to welcome you to Banc of California's Second Quarter 2014 Earnings Conference Call. Joining me on the call this morning will be our Chief Executive Officer and President, Steven Sugarman; our Chief Financial Officer, Ronald Nicolas; and our Chief Risk Officer, Hugh Boyle. In addition, it's my pleasure to welcome and to introduce our new Director of Investor Relations, Tim Sedabres. Today's conference call is being recorded, and a copy of the recording will become available later on the company's website. In addition to the earnings release, we have also furnished presentation materials that will be referred to during this morning's call, and copies of both the earnings announcement and the presentation materials are also included on the company's website. Before I turn it over to Steve, I want to remind everyone that our presentation materials include forward-looking statements that reflect our best view of the world and our businesses as we see them today. Those circumstances can change and those forward-looking statements should be interpreted in that light. You may refer to the specific limitations that apply to reliance on our forward-looking statements included in the presentation materials and in our earnings release. As always, we will provide a Q&A session at the end of the presentation. However, I want to advise everyone that upon the advice of the company's outside litigation counsel, during our presentation today, we will not comment upon or respond to questions during the Q&A period that are subject to or related to the currently ongoing litigation involving the company and certain of its current or former stockholders. This morning's call will focus solely on the company's second quarter performance, and those matters that are the subject of ongoing litigation will be properly addressed in the normal course through the formal judicial process to which those issues have been submitted. And with those formalities concluded, I'd like to introduce our President and Chief Executive Officer, Steven Sugarman, and turn the call over to him. Steven?

Thank you, John. Welcome, everyone, to Banc of California's earnings call for the quarter ending July 30, 2014. We continue to make strong progress in building California Banc, a leading full-service bank, catering to California's diverse private businesses, entrepreneurs and homeowners. We have successfully grown our business organically and through strategic acquisitions and will be greater than $5 billion in assets pro forma with the close of the Popular branch acquisition. This is a significant milestone for our company because it represents a threshold level of scale required to drive robust returns on capital. We've been able to achieve our growth while maintaining our disciplined underwriting standards in a strong governance and controlled environment. As we look forward, we're confident in the trajectory of Banc of California and our ability to achieve our long-term operating targets. I'd now like to turn to our second quarter results, which demonstrate steady progress towards achieving these financial targets. Let me begin by providing a few key highlights from the quarter. First, the company earned $0.27 per share on a fully diluted basis. Second, the company earned a 12% annualized return on tangible common equity. Third, the company funded over $1.4 billion in total loans and is on pace to reach its goal of $5 billion in originations in 2014. Fourth, the company finished the quarter with $4.4 billion of total assets and approximately $5.5 billion of pro forma assets, inclusive of the pending Popular Community Bank acquisition. And fifth, the company's fixed noninterest expenses fell by almost $1 million in the first quarter to the second quarter, notwithstanding our rapid asset growth. Importantly, during the second quarter, we saw strong underlying performance across our business as both our traditional banking operations and our mortgage banking operations had strong revenue performance. We remain enthusiastic about our acquisition of the Popular branch network, which is both strategically and financially compelling. It strengthens our footprint in Los Angeles and Orange County and enhances our ability to serve the fastest-growing and, we believe, most attractive market segment in our territory, the Latino segment. we continue to target a fourth quarter closing, and we are working collaboratively with Banco Popular and our regulators to achieve that goal. The return profile of the transaction remains consistent with what we disclosed at the announcement, including the guidance that the transaction will be 20% plus accretive to earnings per share in 2015. However, our estimated payback period has increased from less than 1 year to less than 2 years based on the pricing levels of our recent capital raise. I want to take a minute to thank the dozens of local Southern California-based, not-for-profit organizations, community groups and CDFIs, who submitted to us and the OCC letters of support for our transaction with Popular. We believe that the 35 letters of support submitted is the greatest outpouring of support from the local communities that we aware of for a bank transaction like ours. This is testament to our 30 -- our 73-year relationship serving Southern California's diverse communities and the great work of our Community Development Officer, Gary Dunn. I'd also like to provide an update on some of our key strategic initiatives. As discussed last quarter, we've largely completed our technology initiative and platform initiatives. Building a stronger, more robust technology platform is already starting to pay dividends with respect to operating costs. We expect those savings within our technology division alone to grow to a run rate of over $4 million in 2015. This is primarily from reductions in third-party vendor and systems contracts. Our investments in technology are able to provide us the integrated data and analytics that are crucial to robust enterprise risk management and governance. It will also enable us to continue to improve and optimize the efficiency and profitability of our business. In addition to building out our technology infrastructure, we're beginning to see strong results from the new origination teams we hired over the past 9 months. Each of our multi-family lending, financial institutions, renovation and small-business lending teams are exceeding expectations and should see their business and production continue to ramp up over the residual of the year. Personally, I want to thank Tom Senske, Frank Turner, Heather Endresen and Jim Fraser for their decision as leaders of these groups to join us at Banc of California. They're each incredibly respected and talented bankers who we're proud to have on board, and their early returns for the company have been very positive. It is a strong endorsement of our vision of building California Banc to be associated with them. Our strategic initiatives, coupled with the close of the Popular transaction, will generate meaningful shareholder value. We've worked carefully to align management's and employees' interests with those of shareholders, and we remain committed to achieving our long-term operating targets, including an over 1% return on assets and 15% return on common -- tangible common equity. With that, I'll now turn it over to our CFO, Ron Nicolas, to provide a more detailed update with regard to today's earnings reports.

Thanks, Steve, and good morning, everyone. As customary, I will be directing my comments to the financial statements included with the release provided earlier this morning, along with our supplemental presentation, focusing primarily on the comparison to the first quarter of 2014, starting with the highlights for the second quarter on Slide 2. As Steve mentioned, today, we reported net income of $8.1 million and net income to common shareholders of $7.2 million or $0.27 per diluted share with an average return on tangible common equity of 12%. The quarter was punctuated by strong loan growth, improved results from our mortgage banking operations, lower operating expense, excluding our volume-related costs. We experienced strong loan growth during the quarter with total loans increasing by $301 million or 9% for the first quarter. As Steve mentioned, recent additions to our lending teams are gaining traction and quickly ramping up to our full production capabilities. In addition, we experienced solid deposit growth as well during the second quarter, which increased by $238 million or 8% compared to the prior quarter. Our net interest income increased just over 1% from the first quarter, and our consolidated net interest margin finished the quarter at 3.7%. Our noninterest income grew by $10.1 million compared to the first quarter and was largely driven by the strength in mortgage banking. The second quarter marked an important turning point for our mortgage banking operations, as the completed cost efficiency work is beginning to bear fruit. Keep in mind these cost reductions were implemented without compromising origination growth. Second quarter mortgage banking originations experienced nearly a 40% increase compared to the first quarter, resulting in a positive net contribution to earnings this quarter. Lastly, with respect to our highlights, our capital ratio has improved during the second quarter due to our main capital raise with our Tier 1 risk-based capital ratio of 14.1% at June 30. Our capital ratios for the bank subsidiary remained strong and well in excess of regulatory guidelines. Our TCE ratio also improved during the quarter to 7.3% from 5.1% at the end of the first quarter as a result of the offering. Turning now to Slide 3. We're taking a closer look at the income statement for the second quarter. As noted, we reported net income of $8.1 million and $0.27 per diluted share on approximately $26 million average diluted shares. That compares favorably to the net loss to common shareholders of $153,000 for the first quarter of 2014. Profitability increased was driven principally by higher revenues of $71 million before loan-loss provision for the second quarter, an increase of over $10 million from the $60 million reported in the first quarter. Net interest income highlighted on Slide 4 was $35.6 million for the second quarter, an increase of over 1% from the first quarter, largely due to higher loan balances during the quarter. Our consolidated net interest margin for the second quarter was 3.7%, and we expect our NIM to remain at or just below the lower end of our target net interest margin range of 3.75% to 4% during the quarter and return to its target range upon the closing of the Popular transaction. Our cost of interest-bearing liability declined by 3 basis points from the first quarter to 1.02% on a consolidated basis. Average deposit costs were down 3 basis points from the first quarter to 0.74%, as we work to reprice and actively manage down our cost of funds. We're taking a closer look at noninterest income for the quarter. We reported $35.4 million, an increase of $10 million compared to the first quarter. The primary driver of the increase, as mentioned, was higher mortgage banking revenues, both higher origination fees, driven by the higher volumes and higher gains on sale achieved on the sale of our loans. Our gain on sale rate widened to 3.25% for the second quarter from 2.96% in the first quarter. Total SFR mortgage originations for the quarter were $1.1 billion, up from $870 million in the prior quarter with our agency and conforming mortgage banking operations originating $715 million and selling $651 million for the quarter. The second quarter production of nonconforming jumbo originations was $378 million with sales of $224 million in total fees and gains, delivering over $4 million in noninterest revenue. You will recall we sold $97 million of jumbo loans during the first quarter and indicated we would be selling more here in the second quarter. We intend to continue to originate and sell jumbo mortgage loans to manage both portfolio risk and economic returns. In addition, during the second quarter, we sold mortgage servicing rights with an unpaid principal balance of approximately $400 million, achieving approximately a 1% gain. On Slide 6, taking a closer look at noninterest expense. We continue to be diligent in managing our noninterest expense. The second quarter noninterest expense totaled just over $60 million, up $2.5 million from the first quarter, primarily as a result of higher loan-related origination expense. This quarter, we saw the benefits of our efficiency plans within the mortgage banking area as fixed expenses were lower than the prior quarter, while variable volume-related expenses increased due to the higher production volumes. The total volume-related expenses for the second quarter totaled $12 million compared to $9 million in the first quarter. Fixed expenses decreased compared to the prior quarter, including nonrecurring charges, such as those related to our pending acquisition of Banco Popular of approximately $1 million. Overall, the company headcount was flat at just over 1,200 employees compared to the first quarter, and our account in the residential business lending area, which includes mortgage banking, saw a decline of 39 employees during the quarter that was offset by an increase of 42 employees in both the bank and TPG combined. TPG added employees during the quarter, as well as retail banking related to our new branch locations, and the remainder was spread across the company. For the quarter, our cash expense was $253,000, an $8.4 million of pretax income for an effective rate of approximately 3%. The company statutory rate was reduced through the utilization of its deferred tax assets by virtue of reversing out a portion of the valuation allowance. As we indicated last quarter, 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 or until the valuation allowance is fully reversed. Turning now to the balance sheet on Slide 7. The company finished at $4.4 billion in assets compared to $4 billion in assets at the end of the first quarter. This increase came primarily as a result of loan growth and, to a lesser extent, an increase in our securities portfolio associated with the second quarter capital rates. Also related to the capital rates, our notes payable increased by $14 million to $96 million, as a portion of the TEUs were classified as debt. In addition, equity increased to $439 million, which includes both the equity portion of the TEUs and the common raise completed during the second quarter. Total organic growth outlined on Slide 8 added $301 million of net loan balances during the quarter, as total loans increased to $3.7 billion, representing a quarter-over-quarter growth rate of almost 9%. As highlighted in the release, our commercial loan portfolio grew to 48% of total loans held for investment, up from 46% with C&I and multifamily both contributing significantly to the increase. Loans held for investment increased by $205 million or 7% for -- from the first quarter and was comprised of broad-based growth across various portfolios outlined on the chart on Slide 3 -- Slide 8, excuse me. Commercial lending, C&I, SBA and leases grew by $81 million during the quarter, and multi-family business -- balances increased by $79 million from the first quarter, as we begin to see production from our new multi-family lending team. In addition, we transferred to HFI approximately $80 million of jumbo SFR previously classified as HFS. Our loans held for sale increased by $95 million during the quarter to $1.1 billion and is comprised of approximately 80% of nonconforming jumbo loans and 20% of agency and conforming. Both increased from the previous quarter as a result of higher originations, partially offset by higher loan sales. We anticipate selling more jumbo loans through the balance of the year to approximate the level of originations. Continued growth from our commercial and multifamily portfolios, coupled with lower levels of loans held for sale over time and the pending acquisition of our Banco Popular loan portfolio, will accelerate the rebalancing of the loan portfolio to a higher concentration of commercial loans. As mentioned earlier, the securities portfolio increased by $125 million during the quarter, primarily as a result of investing the capital raise during the quarter. Our securities purchases for the quarter were primarily of shorter duration, such as agency CMOs in anticipation of our acquisition. On the liability side as highlighted on Slide 9, deposits grew by $238 million overall from the prior quarter, with money market accounts, interest-bearing checking and CDs primarily providing the increase. Money market deposits were up $116 million from the prior quarter, and interest-bearing checking balances also increased by $44 million. In addition, we added $100 million of brokered CDs to help fund the increase in our loans-held-for-sale originations during the quarter. Excluding the held-for-sale portfolio, our loan-to-deposit ratio was 75%. The company continues to successfully grow its retail base to fund loan growth, as well as utilize additional sources of liquidity to fund loan production ahead of loan sales and balance its short-term liquidity needs. To that end, during the second quarter, we opened a new branch location in Fullerton as part of our branch deposits -- franchise expansion strategy. We intend to open 2 additional locations in the back half of the year in Santa Barbara and Rancho Santa Fe. Slide 10 highlights our capital position as equity increased during the second quarter to $439 million as a result of the May capital raise, while total shares outstanding increased to $27.6 million versus $20.3 million during the first quarter. Our tangible book value increased $11.45 per share from $9.94 as of March 31. When adjusting for the TEU conversion, tangible book value per share is $9.66. Our TCE ratio improved to 7.3%, up from 5.1% during the first quarter, and the -- both the bank and the company remained well-capitalized at the end of the quarter for each of the key risk-based and leverage ratios. With that, I'll now turn it over to Hugh Boyle to highlight our asset quality.

Thank you, Ron. Total gross held-for-investment loans grew by $205 million, reflecting strong single-digit growth for Q2 2014. That growth occurred across all business channels with the exception of Commercial Real Estate, which experienced a small 4% decline, largely due to maturities and scheduled payoffs. Consistent with one of the central themes of our strategic plan, which is to diversify our loan portfolio and lower our reliance on single-family mortgages, we are seeing strong loan origination growth, particularly in our multifamily, C&I private banking and leasing sectors, with quarterly growth rates of 51%, 23% and 19%, respectively. As a result of our diversification initiatives, single-family residential mortgages have fallen to 47% of total HFI loans as of June 30, 2014, down from 53% of total HFI loans at December of 2013 and 62% of HFI loans as of June, 1 year prior. We continue to work actively to ensure the smooth integration of approximately $1.1 billion in California-based loans and deposits from Popular Community Bank. We have a dedicated transition team and a comprehensive conversion plan with detailed work streams and tasks led by all the key subject matter experts, senior executives across the bank. Banc of California and Popular Community Bank are engaged in continuous dialogue, and we are making substantial strides daily. We remain on track for our early fourth quarter close, and with full integration of this portfolio, it will further accelerate the diversification of our loan portfolio. On Slide 11, you can see our asset quality metrics. Total delinquent loans increased by $21 million quarter-over-quarter and by $5.5 million from December 2013. The bulk of our increased delinquent loans was attributable to first-lien, single-family residential mortgages with a portion attributable to our seasoned loan pools. Management regularly reviews our seasoned loan portfolios and calls delinquent loans as appropriate, and we will continue to do so. Nonperforming loans grew by $9.2 million quarter-over-quarter to $41.6 million. The quarterly increase was primarily attributable to 3 single-family residential loans. The largest of the SFR or single-family residential loans, which represents the bulk of this increase, is well secured with a conservative loan-to-value. The borrower, subsequent to quarter end, has listed the property for sale and has brought the loan current. We believe that there is little inherent loss associated with this exposure. Of the 2 remaining loans, we believe that one will be brought current shortly, and the other will pay off in full within 30 days. Gross charge-offs rose slightly quarter-over-quarter to $383,000 for Q2. Recoveries improved quarter-over-quarter, with total recoveries equaling $641,000 for the quarter. On a net charge-off basis, we saw improvement quarter-over-quarter, with both Q1 and Q2 showing net recoveries. REO, while increasing slightly from $150,000 in Q1 to $600,000 in Q2, remains negligible. And as a result, nonperforming assets to total assets increased from 81 basis points in Q1 to 96 basis points in Q2. For the quarter, the company provisioned $2.1 million for loan and lease losses. Overall, our ALLL or allowance for loan and lease losses was higher by $2.6 million, reaching $22.6 million when compared to the first quarter. Our ALLL to gross loans held for investment increased from 83 basis points in Q1 to 87 basis points in Q2. And our ALLL to total attributable loans, and we define again attributable loans as non-PCI and non-bank acquired, i.e. FAS 91 or SOP 03 loans, and excluding held for sale loans, that ALLL to attributable loans ratio remain flat and strong from Q1 to Q2 at 1.18%. With that, I'll turn it back over to our CEO, Steven Sugarman.

Thank you, and thanks, Ron. This concludes our prepared remarks today. With that, operator, we'll open up for questions.

[Operator Instructions] Our first question comes from the line of Brett Rabatin.

The gain on sale margin in the quarter moving up, was that a function of the increased jumbo loan sales? And then just maybe give us some additional color on kind of how you see the back half of the year shaping up. Most people are talking about the summer is still going to be robust but then a decline seasonally in the fourth quarter. Any thoughts around that and what you've done as it relates to -- you've obviously changed personnel in that division.

Good morning, Brett. This is Ron. The -- no, the gain on sale -- the widening of the gain on sale was somewhat a function of, obviously, our disciplined approach to our pricing. And during the quarter, we saw the 10-year, on average, moved down about 16 -- 15, 16 basis points from the first quarter. That has a tendency, all else being equal, that will open up your spread income and your margins, and we saw that as we held the line pretty well with respect to our agency and conforming business. And I might add, we originated up from about 60-40 purchase to refi, that increased to about 66% purchase. And purchase has a little bit better pricing and stickier discipline around the pricing, so I think the advent or the growth on the purchase versus the refi also added to the widening in the margin.

And Brett, this is Steve. Just to comment on the second part of your question around the latter half of the year. In an environment where rates and the economies stay steady here, we feel very confident about the improving financial results that our platform is able to generate. One of the primary factors, just being that we start the third quarter with much more earning asset footings for the second quarter. And so the benefits of the sale are really starting to take hold. That being said, the fourth quarter will be marked by the acquisition we expect of the Popular Community Bank branches. That will be accompanied with some onetime charges and restructuring charges. In aggregate, we've previously provided guidance. We expect to be up to $10 million. Additionally, in the third quarter, given that the Popular acquisition is a branch acquisition, some of the shared services staff and, in particular, in key areas such as BFA and central ops will be staffed up in advance of the close of the Popular transaction. And therefore, we would expect to see the addition of some headcount during the third quarter that really is linked to that acquisition. And so those are some of the considerations as we look forward to the rest of the year. Our business model is increasingly diversified between businesses that perform well and moderate decreasing interest rate environments and businesses that would be advantaged by increasing rates. So there are some national hedges within our business. But clearly, one of the more volatile parts of our business continues to be the mortgage banking piece. So that would be a part that, looking forward, is a source of volatility or potential volatility. However, the business is being run and has been post the changes we've made over the last couple of quarters. Leanly, we're hitting our metrics of less than 2% fixed cost to origination for that business, and we're optimistic about the operations within that business and also the declining percentage of total revenue that comes from that business, which we expect as we move forward to provide a less volatile earning path, as the Popular deal closes and we reach kind of our target assets and business model.

Okay, that's helpful. And then, I guess, the other thing I wanted to talk about was just, given the growth you had this quarter pro forma, you were talking about a 6% plus TCE ratio post the branch deal. And just with the growth this quarter, I mean, it looks to me like it will be under 6% unless you make some changes prior to that, assuming you do have some growth in the third quarter. Can you comment on maybe an update on the capital outlook? And just what you'll be doing to kind of bolster ratios either pre or post the transaction closing?

Sure, and I just want to remind you and the group that we remain outstanding. The private placement that was previously announced, led by Oaktree, that should close immediately preceding the capital raise. So I just caution you to make sure you look at that and the profitability with your analysis. That being said, I would suggest that there are actions that we continue to take in advance of the Popular closing to make sure that the diversification and the composition of our portfolio is appropriate from different concentration risk perspectives. And you start seeing impact of things like that in parts of our financials, and I'd expect including the third quarter, including things like the net interest margin where you'll see declines in commercial real estate. We'd expect to continue to make room for the Popular assets. And on a pro forma basis, it may be helpful to look, not only at the capital with that private placement that is still yet to close, but also add our portfolio and the net interest margin pro forma for the close of the Popular transaction, which we expect to be right back within our target range.

The next question comes from the line of Kevin Reynolds, Wunderlich Securities.

So quick question. I think Brett hit a lot of the questions I was going to ask, but 2 others that I want to put out in front of you. One is just when we think of seasonality in the mortgage origination piece by itself, what do you -- how do you feel about this quarter's level versus, say, going back to Q1? Was Q1 a real seasonal quarter or was there -- we -- I know in the broader economy, there's been a lot of talk about weather impacting the Q1 production levels just in virtually every business. Would you say that, that's a level that is real for your business? Or do you think that it was maybe depressed in Q1? And if it -- if we do follow the typical seasonal pattern as we get into 2015, do you think it could be a little bit higher than that or not? And then I've got a question about the HFI loan growth after that.

Sure. With regard to the mortgage banking business, we view it as a seasonal business. We view the fourth quarter and the first quarter as seasonally weak quarters, with the second and third quarters more strong. And so as we think about our originations over the course of many cycles, we'd expect the summer months to be stronger than the winter months. That being said, we've made systematic changes and improvements to both the mortgage business and its operational and cost metrics. But also, we've now had about 1 year or 2 identifying higher kind of the quality originators and team members that we need. And so it would be -- I wouldn't attribute the entire difference in volumes to seasonality. So I think that as we look forward, you'll continue to see a seasonal effect. But the first quarter and fourth quarter of last year probably aren't the right baseline. It's probably a seasonal effect off of the current production levels.

And then the next question I had on the organic loan growth you had in the quarter, it looks pretty strong and it looks like it's heavily in the commercial space. Can you characterize or give us a sort of the rate profile and duration profile of what you were putting on during the quarter? And I guess, what I'm trying to get to is, is there -- the margin came in a good bit during the quarter, is there some -- are we giving up a little bit of yield now but maintaining flexibility as we go forward when the fed ultimately starts to raise some day in the future? Or is there some...

Yes. I think I'd agree with your assessment. Our originations and the yields -- for a couple of reasons. One is market related, but also the deployment of some of our new capital to deploy it into working assets and things in advance of our acquisition makes it the right decision as well. But new origination yields are tight. I think they're tight across the industry. That certainly applies for us. That being said, one of the decisions that could be made in reaction to that is just lengthening durations and things like that. That has not been our approach. So our durations continue to be pretty short as well where we're focused mostly and lots of this commercial loan categories on things that are 3 years or less as far as originations. So that probably exacerbates for this quarter and next quarter, kind of some of the NIM pressure because we're not looking to take -- make up for the rates with extra duration risk. And in fact, it fits well with our model to have our portfolio get into shape for the closing of the Popular transaction, which pro forma of those assets brings our NIM rate squarely within our target area.

The next question comes from the line of Andrew Liesch, Sandler O'Neill and Partners.

Curious just looking at the loan growth for this quarter. Was any of this from loan purchases or participations?

I'll let Ron answer, but I don't think that we had any loan purchases or participations in the quarter. Is that right, Ron?

Yes. That's exactly right, Andrew. The growth was all organic, originated directly by the bank.

The only thing that, technically, in our disclosures that might show up as loan purchases are things like our correspondent business where loans fund in other people's names for our mortgage banking business but nothing that's not kind of ordinary course.

Right, right. Okay, and then of the $0.27 that you reported this quarter, it sounds like the mortgage banking business was small or, at least turned profitable. I'm just curious like what percentage or how many cents of the $0.27 was from mortgage banking.

Yes. What I can tell you is that when you look across our business, the mortgage banking was a meaningful impact as it turns from negative to positive, but the preponderance of the income came from non-mortgage banking businesses. So I don't think we've put out the exact percentage, but I can tell you that the preponderance was not mortgage banking.

Okay. And then just one last question. I was just looking at the margins. I'm kind of struggling to get back to your 3.75% to 4% margin just based on where -- like where the loan portfolio yield came in. And I mean, I know there could be some production and funding cost going forward and maybe a little bit better earning asset mix as you take some of these funds and put them into the Popular deal. But I'm just curious like how much accretion from the Popular income is going to be benefiting the margin. Is that a lot of it or maybe is it just like the Popular portfolio have a higher yield? I just can't remember.

Yes, and just for clarity on my prior comments, that was not inclusive of accretable yield or fair market accounting. That was just taking the loan yield and the deposit yield as it existed as of the end of the second quarter as we understand it. So yes, so the cost of deposits -- we'd expect our cost of deposits to be lowered pro forma for the transaction, and we'd expect our overall cost -- or yield on loans to be higher.

Okay. Do you remember what -- do you know what the yield on that portfolio was in the second quarter?

On the Popular?

The Popular?

Yes.

That was a high 4 yield on the loan portfolio.

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

Just a couple questions. One, just on the DTA rank, you just -- sorry, update the remaining amount of recoverable DTA.

It was a -- we ended up reversing out about $2.5 million. There's a lot of temporary timing differences, not the least of which, of course, is bad debt losses versus provisioning and that -- and it's a little bit complicated. But effectively, our cash income was higher than our book income as a result, and we ended up reversing out roughly about $2.5 million of our valuation allowance. And we have...

So the valuation allowance, I think, was $17 million at the end of the first quarter, so roughly $14.5 million remaining now?

Yes, we have roughly around $14 million remaining with the valuation allowance.

Okay. And then on the -- the $4 million or so of noninterest revenue that you attributed to the jumbo production sales, is all that in the other income category? Or is any of that in the mortgage line?

No, it's in the other -- on the slide, I think it would be categorized in that $9 million bucket.

Okay. And the gain on the MSR sale, is that in the other category as well?

That is correct.

The next question comes from the line of Jack Chimera, KBW.

As I'm looking over -- Ron, I have a question for you. I'm just trying to understand the accounting behind the TEUs in the quarter and understanding that they closed in May, so it make things just a little bit more difficult with the averages and whatnot. And what portion of the TEUs added to the dilution impact between your average outstanding shares and then your average diluted shares?

Yes. So you're absolutely right, Jackie. It is complicated, but let me see if I can summarize it for you. So approximately 80% of the raise was categorized as paid in surplus, and the remaining 20%, roughly about $14 million, was categorized as debt. And that would be based on effectively the fair market value of the instruments, that split between the allocation between the 2. As far as the EPS calculation, on the basic categorization for EPS, we included the minimum amount of shares as of 6/30 day weighted. So approximately, I think it came out to about 30-some-odd days on the day weighting. And then on -- and the reason they were categorized in basic is because they are considered to be mandatory forward-purchase contracts. So they were included in the basic. Any other additional shares based upon the stock price as of 6/30 versus the conversion rate, any other additional shares would be treated under the diluted. So in effect for this particular quarter, I don't have the percentage off the top of my head here, but I would suggest to you that 95% of the TEUs were included in that -- in the basic calculation and the remaining were included in the diluted.

Okay. So then that does convert -- and I apologize because my understanding of these is not great. So as I look at it then, does it essentially remove any debt payment and consider it as an as-converted basis, and so that's how you're calculating the EPS? It has no impact on anything that's margin related because of the conversion assumption and it all hits EPS in the denominator.

It -- for all intents and purposes, that is true. There's a small debt component to it, but it's not material in the grand scheme of things, and you'll see, they'll -- in our Q, there'll be further disclosure, which will probably give you a little bit more clarity. And then I would also point back to the prospectus, which also provides additional amplification of the TEUs.

Okay. And is the treatment of them in this quarter, is that somewhat indicative of how we can expect them to be treated in future quarters as well?

Absolutely, yes.

Okay. Okay, and then I just want to make sure that I heard you correctly in your prepared remarks. It was about $1 million in expenses in the quarter that was related to BPOP?

Yes. In terms of nonrecurring charges, yes, roughly about -- the majority were related to BPOP.

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

I just wanted to know if out of the loan yield this quarter that you reported for the quarters, do you have an estimate what that amount of accretable yield contributed to that?

Brett, I don't have that off the top of my head here, but it wasn't inconsistent with prior quarters.

Okay. And then I want to ask on the -- you've mentioned a -- excluding held-for-sale loans at a loan-to-deposit ratio of approximately 75% but then commented that you may continue to originate jumbo and sell jumbo loans according to how much you originate. Is it reasonable to expect that, excluding the pro forma basis, you're going to see a similar loan-to-deposit ratio for the next couple of quarters?

I just -- I'd -- I think that, that's reasonable. The biggest variables on that are potential timing factors relating to end of quarters for loan sales. Some of these are packaged loan sales, especially in the single-family where you do a bulk sale. And so there could always be timing issues about whether it closes 1 week or another. But generally speaking, over time, that's a reasonable expectation.

We have a follow-up question from Brett Rabatin, Sterne Agee.

I just want to follow up on the NPAs you mentioned, and it sounded like those 3 mortgages or one of them was kind of a lot bigger than the others. Is this a function of the -- some purchase loans, the TPG-related stuff? And can you sort of comment on if you're seeing delinquencies in any other pieces of that portfolio?

Yes. Thanks for the question, Brett. No, these are primarily the green loans that we inherited back in 2010 when the bank was recapitalized. Some of those loans have larger balances, but they tended to have pretty attractive LTVs. Within our Qs and our most recent K, we disclosed kind of the LTV tables of those loans, but the nonperformers that you referenced were primarily in those legacy green loans that have been with us for multiple -- over 4 or 5 years.

Okay. And then, I guess, the other thing, I know you're not going to comment specifically on the litigation stuff. But as we're thinking about expenses, should we be thinking about adding anything in for that? And maybe if you could just let us know like how we're going -- like what's the next step? Or at least, what, as investors, what should they expect to see in the next news from that situation?

Yes. I'm not sure that we can add much more for you. We'll be sure to make the announcement, an 8-K, anything that's material that comes along. And unfortunately, part of that has an expense associated with it, but we don't have any specific guidance on the levels at this time.

Okay, fair enough. And then the last thing I was just curious around was you added the multi-family team. And I guess I'm just curious to hear any color on what you guys did in the multifamily book and then just how you view that competitive environment. And then just lastly, the really strong growth you had organically in 2Q, as you kind of -- if there was a lot of pent-up stuff that they were bringing over in terms of whether C&I or multifamily or SBA, or if the pipeline is just -- the type of growth is potentially the same in the back half.

Yes. Thanks for the question. What we -- well, what we have seen or expect to see is that over the course of the second quarter that origination volume increased and kind of a ramp-up period, so -- and that continued into the third quarter. And so what we see is higher total originations quarter-over-quarter to the extent that the market stays similar and production stays at current levels. So the second quarter within multifamily will probably suffer from some "lower than run rate" originations due to a ramp phase. As far as some of the other teams that I mentioned, the multi-family team was hired first and is farthest along in their path. Last quarter, we mentioned that we hired some other teams, one being our financial institution's groups, and we expected some initial loans and deposits in the second quarter. We've seen that, and we have some deposits on the books from that from that group. But that's still primarily in a ramp phase through the second half of the year. Also, our SBA team, while we are already in the SBA business as a preferred lender, those teams continue to manage those relationships. But the preponderance of ramp from that group according to our expectations and business plan is still future looking. And the same goes for the Renovation team that we had hoped to close on our first kind of FHA 203K loans when we last had a conference call. We've now done that. So we have gotten into that business, but the ramp phase is far from complete. So the multi-family is probably the farthest along.

We have a follow-up question from Jackie Chimera, KBW.

Ron, were there any conversions on the TEUs in the quarter? If I take the tangible book value that you gave, the $9.66 and back into -- the impact of those, I'm getting around $5.1 million instead of the $6.1 million. Am I calculating that properly?

Yes. There were a small number of conversions in the first quarter. They're all -- when that happens, convert at the kind of most favorable conversion factor for the company, and the Q will lay out the specifics of the details.

And then did I understand you correctly when you were talking about $4 million of cost saves that are still available from noninterest expense? Those are still yet to come, and they haven't hit already in your run rate from the LPO closure and everything else, right?

Yes. And just to be clear, that was savings that we expect out of the technology group. That wasn't to say that -- that wasn't a statement about -- across the banks. But yes, those are things that began getting implemented a little bit in the second quarter, but the guidance I gave was for a full 2015 run rate on those expenses.

Okay. And then just lastly, any reason in particular why after 2 quarters of moving loans from held to investment -- from held for investment into held for sale we did the reverse switch this quarter?

Well, look, we had some significant activities this quarter. And as management looked at the right things for the company, one of the things that we found was with the additional capital and our desire to deploy it and with the on-boarding or the expectation of on-boarding the Banco Popular loans, that they dramatically kind of bring our residential exposure into line. We felt that holding these $80 million of loans was a more profitable step that we are now able to take instead of their sale. The -- we won't expect a lot of that type of transaction, but when management sat down following this recent capital raise and acquisition announcement, there's some steps that I referred to earlier about pruning and preparing a portfolio for an inevitable closing of branch acquisitions.

I'd like to add -- just to add to that, we're -- in order -- we're refining our held for investment in our -- the profile of the loans and the jumbo of which we want to sell and those that we want to hold for investment, so that also played into the analysis.

Okay. But it sounds like basically overall with everything that's going on, once the Popular deal closes and the technology cost saves start to become infiltrated and you're ironing out portfolios, absent any further large announcements, we should be by 1Q '15 at a pretty good run rate on everything?

Yes. I mean, we believe that the company, subject to stable or market conditions consistent with today's conditions, is in a very strong position to see the financial metrics that we target come into -- materialize during the course of 2015.

The next call comes from the line of Don Worthington, Raymond James.

Just was looking at the noninterest-bearing deposit balance, which was down linked quarter. Was that just seasonal issues? Or was there a large withdrawal? Any color on that?

I think there was several factors. I don't know that there's a predominant shift, but we have seen some of our deposits within some of the groups that we had acquired shift into different deposit products and things like that, where they might go from a TDA to a business checking and things of that nature. It's something that we keep an eye on. But at this point, we're not concerned about it as we think that there's a pretty good progress that we're making as far as bringing our overall cost of deposits down, and then we also think that we're making some progress on, in particular, focusing on ramping up some of our TDA deposits over the back half of the year. But it's a number that were watching closely. It's something that is important and as of now, we don't see any kind of single kind of cause of it.

Okay. And then any update on the contribution from The Palisades Group in terms of revenue and whether those assets under advisement, they're continuing to grow?

Yes, Palisades Group continues to perform very strongly. Their revenues increased in the second quarter by over $1 million. They added very strong and well respected clients to their ranks, and they continue to perform in a way that makes us proud. As we look forward, the assets that they manage have now been on their books in large part for 1 year or 1.5 years. It's been a positive time in the market from a home price depreciation perspective and from a credit perspective. So our hope would be that as The Palisades Group business model continues to mature, that you could also see some performance fees materialize. Well, thank you, everyone, for joining the call. We appreciate it, and we look forward to talking with you after the third quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.