Banc of California, Inc. (BANC) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Banc of California, Incorporated First Quarter 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Tim Sedabres, Director of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us for today's First Quarter 2018 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 Credit Officer, Kris Gagnon. Today's conference call is being recorded, and a copy of the recording will be available later today 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. Good morning, everyone and thank you for joining our call today. Approximately 11 weeks ago, in early February, we shared with you our business outlook and strategic road map for our journey here at Banc of California. That road map included the four primary points of focus that we expected to achieve over the ensuing 12 quarters. While we have only completed the first of those 12 quarters, I want to spend some time updating you on our progress and work to date on these priorities. In short, we are largely pleased with the work and progress so far from our teams across the bank. That said and as you know, we have much work ahead of us. These four focus points on the BANC road map, B-A-N-C, are build core deposits, amplify lending, normalize expenses and creating stockholder value. First and most importantly, build core deposits. On this front, we have largely stabilized the deposit base as we completed the exit of the legacy high-rate, high-volatility deposits. Last quarter, we indicated we still held approximately $250 million of these deposits, and we expected to exit those positions during the first quarter. More importantly, we saw a modest growth in core deposit balances during the quarter totaling $55 million. This growth, coupled with $207 million of deposit outflows from the final runoff of institutional bank deposits and $31 million of lowered brokered deposit balances, drove the reported $183 million lower deposit balances during the quarter. Core deposit growth represented a 4% annual growth rate, below our long-term target of low-to-mid teens. However, we completed substantial work in the first quarter on our deposit growth initiatives and putting in place very talented team members. This included adding two key sales and product leaders in the commercial deposit and treasury management space, Nicole Lorenz and Anel Califano. With Nicole and Anel onboard, the next phase for this initiative is to expand the ranks of our dedicated treasury management sales professionals. Expect to see the announcements regarding several talented sales professionals that are in the pipeline that are expected to join the team over the coming weeks. Additionally, we launched some expanded payments offerings, including not only the LAFC debit card but also a re-launch of our consumer credit card and corporate credit card programs. We have also bolstered our focus on depository efforts in all of our other business groups. In commercial real estate and multifamily, we are already seeing new production volumes from our direct-to-consumer bankers. And we are seeing early opportunities to develop a more full and comprehensive banking relationship with these clients, including deposit balances. In our Community Banking Group, we hired Leticia Aguilar as our new Head of Community Banking, which has at its core our 34 branches. Leticia joins us from MUFG Union Bank, where she was responsible for all retail banking efforts and offices across Greater Southern California and held similar roles at Bank of America. Leticia is just the type of talent we are delighted to have joined the Banc of California team. With her track record and expertise in these key business areas, we believe we have a terrific opportunity. She is already hard at it and will work to continue to evolve our community banking group to focus ever more so on small business sales efforts centered, as you would guess, on deposit-gathering capabilities. In the Commercial Banking Group, we hired a strong leader for our middle market practice in Los Angeles, Tom Hill; and added to both our Los Angeles and Orange County commercial banking teams during the quarter. In the Private Banking Group, we expanded our reach and coverage in San Diego and to complement our commercial, community and real estate banking teams already in place in that market. Secondly, amplify lending. Our loan production efforts were strong in the first quarter, as gross loan production totaled $867 million. And net held-for-investment loan growth totaled $271 million, for a 16% annualized growth rate. This rate of loan growth was right on top of our outlook for mid-teens annual loan growth and supported the continued balance sheet re-mix efforts this quarter, which John will walk through later in more detail. We continue to expect accelerated loan production efforts over the course of the year, and the loan pipeline we are seeing today supports that expectation. To bolster these efforts and as a part of our infrastructure and technology investments, during the first quarter, we launched a pilot of our new loan origination system for commercial real estate and multifamily lending. This is a great example of how we view the opportunity to bolster technology in order to improve business process flows and gain operational efficiencies. This system should significantly improve capturing of information at the time of origination, help to enhance the underwriting process and support a more efficient and streamlined loan onboarding process. Third, normalize expenses. This quarter included numerous transactions and nonrecurring items. However, the core outcome was operating expenses of $58.8 million as a result of disciplined expense management even as we continued to invest in the company and execute on our strategic initiatives. Fourth, creating stockholder value. First quarter reported ROAA and ROTCE were 34 basis points and 2.37%, respectively. We recognize these results are well below our long-term targets of 1-percent-plus and 12-percent-plus, respectively. We are confident in our plan and initiatives underway. And by continuing to focus on growing core deposits and accelerating core lending efforts while leveraging our expense base, we strongly believe we can drive returns towards these long-term targets. As part of our commitment to aligning our interests with those of you, our stockholders, you saw earlier this month we published the metrics for our 2018 annual incentive plan, which apply to myself and the entire executive management team. These metrics are aligned with the plan we shared with you and the metrics we are focused on. Those include core deposit growth, ROAA, loan growth and adjusted efficiency ratio, in addition to minimum gaining thresholds around capital and credit quality. Our goal here is to be good stewards of your capital, and the board and I take that task very seriously and want to ensure all of our interests are aligned. As I have noted before, the incentive approach and goal-setting efforts are aligned not only with my leadership team but just importantly throughout the organization. Finally, I want to give you a brief update on the loan fraud matter we alerted you to in March. This matter remains under investigation by federal authorities, and as such, we are largely precluded from discussing details. That aside, there is no other way to say it other than we are extremely disappointed with this set of events. Our teams have done great work to date to stabilize the bank and position it for future growth and success. This event is unfortunate given the tremendous progress we have made. I can assure you we do not take this situation lightly. To be clear, everything we have reviewed to date leads us to believe this was an isolated one-off incident related to this single credit and single borrower. We are continuing to pursue any and all potential legal and collection avenues. In sum, we want investors to know we are completing our homework on this matter, taking our medicine and are evaluating all remedies. From here, our job is to focus every day on doing what we do in all the right ways. You have my commitment that we will not waver from this approach. More broadly speaking, on credit metrics, our ratio of nonperforming assets to total assets continues to remain near the top of the peer group by just 22 basis points. And a strong credit culture has and will remain a hallmark of this bank. On today's call, we are joined by Kris Gagnon, who joined us Chief Credit Officer in February. And Kris will share an update on credit more broadly following John's comments. With those opening remarks, I would now like to turn it over to our CFO, John Bogler, to provide more detail around our first quarter financial results.

Thank you, Doug. During the first quarter, we continued our plan to re-mix the balance sheet toward more traditional and core assets, as the balance sheet overall remained flat compared to year-end at $10.3 billion. First, we continued to reduce our securities portfolio, which declined by $151 million and securities as a percentage of total assets declined to 23%. We completed the exit of all the remaining MLP debt securities, which totaled $77 million, and sold $103 million of long-duration commercial mortgage-backed securities. Now that we have exited the last of the MLP debt, our remaining securities portfolio totaled $2.4 billion at the end of the first quarter and is 99% comprised of AA- or AAA-rated securities. As we continue to reduce the securities portfolio to our targeted range of 15% to 20% of total assets, we may continue to reduce the higher-risk portions of the portfolio. The sale of the CMBS during the quarter was a part of that strategy to reduce exposure to longer-duration fixed-rate securities. Additionally during the quarter, we completed the sale of $26 million of mortgage servicing rights or MSRs, with an additional $3 million expected to be sold in the second quarter. The sale of the MSRs reduces earnings volatility and focuses us increasingly on core commercial banking assets. The asset re-mix was supported by continued growth of core held-for-investment loan balances, which increased by $271 million or 4% from the prior quarter for a 16% annualized growth rate. Gross loan production totaled $867 million for the first quarter. And new production yields on average were 4.99%, substantially above the blended portfolio loan yield of 4.48%. The higher loan production yields we saw in the first quarter were largely reflective of a higher macro rate environment. And the spread above existing portfolio yields should give us a degree of tailwind as new production balances continue to grow. Net held-for-investment loan growth was primarily driven by residential mortgage growth of $146 million, multifamily growth of $128 million and commercial real estate growth of $56 million. C&I loans declined by $63 million from year-end and was driven by the exit of two select legacy institutional bank relationships totaling $61 million and by lower mortgage warehouse balances of $57 million. Commercial loans collectively increased by $138 million or 3% from year-end and are up $631 million or 16% from a year ago. At quarter end, commercial loan balances totaled $4.6 billion and represented 67% of the loan book. Additionally during the quarter, there were no material SBA or portfolio loan sales. On the deposits side, we saw a modest core deposit growth of $55 million alongside lowered brokered deposit balances of $31 million. During the first quarter, we completed the exit of all remaining targeted legacy high cost and high volatility deposits we discussed last quarter. This totaled $207 million of deposit balances, which was runoff during the quarter and contributed to the reported $183 million lower deposits for the quarter. We believe the core deposit portfolio today is reflective of go-forward business and should grow from here as we execute on our deposit growth initiatives. Core deposits or nonbrokered deposits now account for 80% of total deposits, up from 77% at the end of the fourth quarter. FHLB advances increased by $210 million during the quarter as we backfilled the portion of the runoff deposit balances. The majority of the increased FHLB advances were term advances primarily two to six years in duration, which totaled $180 million and are part of our overall balance sheet and asset liability management activities. Transitioning to the income statement. Net income available to common stockholders for the first quarter was $3.4 million or $0.06 per diluted common share. For continuing operations, earnings per diluted common share were $0.03. These results included a number of items that we want to call to your attention. The company's first quarter reported financial results included $1 million of net nonrecurring expenses. This included $4.4 million of legal and professional fees, a $700,000 recovery of legal settlement expense, a $900,000 benefit to salaries from the reversal of a portion of the 2017 bonus accrual and $1.8 million released from the loan purchase reserve as a result of the sale of the MSRs in the quarter. After adjusting for these nonrecurring expense items, our operating expenses for the first quarter were $58.8 million. And we have provided a reconciliation on Page 8 of our slide deck. In addition to the expense items, the quarter included other nonrecurring items I want to call to your attention. The reported provision expense was $19.5 million, and $13.9 million of that amount was related to the charge-off of the previously disclosed fraudulent loan. Non-interest income benefited by $5.2 million from the gain on sale of MLP and CMBS securities, which was partially offset by $2.3 million of transaction expenses related to the sale of the MSRs during the quarter. The net of these two items benefited noninterest income by $2.9 million. The result of nonrecurring items for the first quarter and normalizing our tax rate at 20% puts us closer to a core earnings figure for continuing operations of $0.10 per diluted common share, which we have detailed on Page 9 of today's slide deck. Average interest-earning assets increased slightly from the prior quarter to $9.7 billion. Both the re-mix of assets from securities into loans and the growth of earning assets are key to our plan to drive revenues higher over time. Net interest margin decreased by 3 basis points for the quarter to 2.98%, slightly above our expectations for the quarter. The yield on interest-earning assets increased 12 basis points for the quarter, primarily driven by a 6 basis point increase in loan yields to 4.48%. The securities portfolio yield increased by 1 basis point from the prior quarter to 3.47%. The costs of interest-bearing liabilities increased 17 basis points to 1.38% primarily due to an 11 basis point increase in interest-bearing deposit costs and a 27 basis point increase in FHLB borrowing costs. The increased FHLB borrowing costs were driven by both higher short-term rates on overnight advances, which totaled $1.2 billion at the end of the first quarter; as well as increased interest expense as a result of the term advances I mentioned earlier. We are in the very early innings of our deposit growth initiatives, and core deposit funding remains our number one focus and opportunity. We believe we could see another quarter or two of margin pressure where we are sub 3%, at which point incremental deposit traction and higher loan yields can prospectively drive the margin above the 3% bar and slowly expand thereafter. Interest income increased by $1.7 million from the prior quarter to $98.9 million, driven by $3.3 million of higher loan interest income and $1.5 million lower interest income from securities. This growth in total interest income is an important step after seeing declines for a better part of a year as we re-mixed and repositioned the asset mix and balance sheet. The composition of interest income continues to improve, as commercial loan interest income now represents 53% of total interest income. Loan interest income now comprises 76% of total interest income, up from 71% a year ago. Continued loan growth should drive interest income higher over time. This quarter again saw loan production weighted toward the back half, as late-quarter fundings caused average balances to lag period-end balances by $223 million. For the quarter, we recorded $19.5 million provision for loan losses, while credit quality was relatively stable; excluding the isolated fraudulent loan item discussed earlier which accounted for $13.9 million of the first quarter provision expense. Excluding this item, provision expense was $5.6 million, of which $2.9 million was related to the overall growth in the loan portfolio. And $2.7 million related to additional specific reserves, other net charge-offs and a modest uptick in various credit metrics. The ALLL balance coverage ratio of nonperforming loans was 258%, while the overall ALLL ratio was 79 basis points. Total non-interest expenses for the quarter were $59.8 million and included virtually a zero loss on solar investments this quarter due to solar tax model updates. For the second quarter, we would expect to see losses on solar investments more so in line with the previous experience and normalizing tax rates toward the second half of 2018 as existing solar tax credit programs are fully utilized. Non-interest expenses included a number of items that we do not consider to be core operating expenses. These items totaled $1 million and adjusted for these items, expenses came in at $58.8 million. We continue to see higher legal and professional fees due to certain legacy items. Our adjusted efficiency ratio came in at 66% for the quarter and continues to reflect more of a revenue opportunity for us as we improve our net interest margin grow the earning asset base and begin to generate fee income from our expanded deposit and treasury management initiatives. Non-interest expenses-to-average assets came in at 2.29% from continuing operations for the first quarter after adjusting for the nonrecurring expense items. Over time, we expect to leverage our expense base and, coupled with infrastructure investments over the three-year plan horizon, manage this number closer to 2% as we grow the asset base. Lastly, related to income taxes and the outlook for our tax rate, we expect our effective tax rate in the second quarter to be minimal before reverting to a more normalized level in the third and fourth quarters of between 20% to 25%. Our capital position remained strong, as the common equity Tier 1 capital ratio was 9.8% and Tier 1 risk-based capital totaled 13.7%. With that summary of our first quarter financials, I would now like to turn it over to our Chief Credit Officer, Kris Gagnon, to cover credit and asset quality metrics.

Thank you, John. Let me begin by sharing a brief background of my experience prior to Banc of California as well as my thoughts around our portfolio today. I had the pleasure of joining Banc of California on February 6 of this year. I started my career with Bank of America, working there for 30 years in roles primarily focused on credit within the commercial bank and included serving as credit executive for the global corporate and commercial bank, which included responsibility for C&I and commercial real estate and ABL lending. In 2011, I joined OneWest Bank as Chief Credit Officer. Having spent a great deal of time on the West Coast and California specifically during all of my time with Bank of America, I welcomed the chance to focus on California full time. I stayed with OneWest through the sale to CIT and helped with the transition to integrate OneWest into CIT. I grew up in California, and I understand these markets fairly well. When Doug reached out to me about this opportunity, I thought about the bank, its size, these markets and the opportunity here and was thrilled to join Doug and the rest of the Banc of California team. My focus here is to ensure we maintain the disciplined credit culture in place today and conservative lending approach. At the same time, my previous experience lends itself to building an enhanced portfolio and management program, standardizing credit processes and implementing technology for credit origination approval, booking and onboarding. Additionally, from my prior roles, I have a background in many of the asset classes and Southern Californian markets at the core of our business today. Now on to what I've seen to date here at Banc of California. I recently completed a series of portfolio reviews across all of the bank's primary lending groups with leaders in both credit and the business. Overall, I was very impressed with the quality of the people, process, mindset and underwriting I am seeing across the bank. There are experienced credit professionals across the institution with the traditional credit mindset you would expect. And the same goes for the business leaders, who understand the credit process, risks, mitigants, collateral and controls. Moving on to credit and asset quality metrics for the first quarter. Our nonperforming asset ratio for the quarter was 22 basis points, up slightly from 21 basis points last quarter. This absolute low level of nonperformers reflects the disciplined credit culture I described earlier and is very strong compared to peers and the industry broadly. Nonperforming assets-to-equity continued to remain strong at 2.2%. Delinquent loan metrics were strong and remained flat compared to year-end at 63 basis points. Net charge-offs for the quarter were $14.1 million or 84 basis points annualized as a percentage of loans. Absent the loan fraud matter, net charge-offs would have been de minimis for the quarter. The allowance for loan and lease losses increased to $54.8 million. And ALLL-to-total loans and leases ratio ended the quarter up 5 basis points to 79 basis points and covered 258% of nonperforming loans. That completes my remarks on credit, and I'll hand it back over to Doug.

Thank you, Kris. As I mentioned in my opening remarks, we are on a very important and I believe, fruitful journey here at Banc of California. This quarter marks the first quarter of our three-year strategic plan, and we are well on our way. There is much hard work ahead of us, but I come at it every day knowing we have the people, the leadership and the market to deliver value for all of our stakeholders. That concludes my prepared remarks, operator. Now let's open it up for any questions.

We will now begin the question-and-answer session. [Operator Instructions]. Please forgive any mispronunciations. The first question comes from Timur Braziler with Wells Fargo Securities. Please go ahead.

My first question is more broad around the deposit base. Just looking at a big picture, do you expect to see balances start to actually increase on a linked-quarter basis in the near term? Or is the next opportunity going to be to lower the brokered book a decent amount now that some of the higher-volatility deposits are off?

Yes, well, the step one is to reduce and eliminate the institutional bank deposits, which we largely completed here in the first quarter, high volatility, high rate. And we wanted to exit out of that, and we've largely done that. Step two is to put in place programs and people that will start us on the journey towards growth. So that is where we are focused. It's both on the growth side but also on the cost side. And I think you'll see the cost issue play out over a slightly longer period of time and the growth opportunity more near term.

Okay, that's helpful. Maybe switching over to the securities restructuring, looking at the CLO portfolio. That actually increased on a linked-quarter basis. Can you provide what ran off during the quarter and what the purchases were in that portfolio?

I'll speak less to the ins and outs, but one thing I would comment about the ending balance there, there's about $59 million of securities that were purchased. We used trade date accounting, and so they were purchased and they haven't settled. On the flip side of that, we have a similar volume of instruments that are going to be called, where we have an indication that they're going to be called. And that call will also occur in April. So some of that was just kind of front-running what we expect to occur in April. So the sales are not reflected in the portfolio, but the trade date purchases are reflected, so that's why you see that bit of an increase.

Yes. The only other thing I would add to that just to be sure is we did make progress. Of course, we sold all of the remaining MLP debt securities. That was important to us. Now we're out of the MLP business. We're out of the bank debt business. And we made considerable progress on the CMBS side. And our goal, as we stated in our plan in February, is to get securities to the 15% to 20% range, again more normalized for a commercial bank that we are building here.

Okay. And then looking at the loan growth, which was impressive, for the first quarter here, as we look forward, the pipeline is strong. Growth is expected to remain there. How should we think about funding that loan growth? Is more of that going to actually come from deposits going higher? Are you actually going to take some of the CLO runoff and park that into loans? Or should we expect to see continued increases in borrowings?

Well, I'll start. The -- we're going to continue to re-mix the balance sheet. So you will see, as we've stated before and again as part of our plan that our intent is to mix down the securities along the way while we grow the loan book. So the overall asset base won't overwhelmingly grow here, at least for a bit. So that's the intent in terms of how that will grow.

Okay. And then just one last one for me. It's been over a year now since the SEC investigation was announced and started. Any updates that you can provide there? Is there still ongoing communication with the different regulators? I know they don't have to -- they don't issue an all clear, but any kind of color you can provide on with the status of pending investigations?

Not really. There is a -- we continue to, of course, cooperate. You said it well. These things go on for some considerable time, and the all clear is often elusive. So no additional commentary there other than we are continuing to cooperate and do all the things you would expect us to do.

The next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

First, on the core expenses, the $58.8 million. I know you guys are continuing to hire revenue producers. Wanted to get a sense for how we should think about the comp line going forward and the overall kind of core run rate, whether that can still remain flat despite the hiring.

Certainly, Matthew, as we indicated with our three-year plan, we'd expect over the long term to continue to drive the NIE-to-asset ratio down to 2%. And that's our primary focus. And we will continue to focus on repurposing expenses, as we've talked about in the past, from more back-office functions to more front-office functions. And that transition will continue throughout the course of the year. And we'll continue to try to manage that expense ratio down towards the 2% level over the course of the three-year planning period.

Great. And then just on the net gain on sale of loans. This past quarter, a little negative. I don't think the MSR expense ran through there. Correct me if I'm wrong, but just wondered what you thought about. And I guess, what impacted that line in this quarter? And whether or not you might see some normalizations going forward.

Yes, as part of our past and current practice, we continue to look at credits within the portfolio and take advantage of opportunities to exit. And so we had a small pool of loans that we chose to exit out during the quarter that resulted in a small loss. On a go-forward basis, to the extent that we have SBA production, we will take advantage of opportunities to sell the guaranteed portion, which will result in gains. During the first quarter, we had no such sales. I would also say that we will continue to look at the overall portfolio and continue to make adjustments around the edges, taking out some longer-duration or lower-WACC-type loan pools and executing sales into the secondary market. Those will be done at smaller gains. That will start to generate a little bit of gain on sale. This will not necessarily be a recurring event, but it's nonetheless part of our overall portfolio management strategy.

Okay. And then just on the deposit costs, it sounds like in the costs we'll take longer to manage or rein in, but how do -- how should we think about the pace of deposit costs or beta going forward if we have an -- a couple more rate hikes this year? I think you've done about -- I think it was about 53% in terms of a beta over the last 12 months. Whether or not that might be lower going forward or not.

Well, I think here in the -- so a way to think about that is this strategy that we have in terms of deposit gathering and for what it is we're building here is underway. The first steps are going to be around that which is associated with the embedded client base as well as certainly -- certain specialty deposit areas. And so we're underway on both of those strategies, but as we've said all along, the deposits part is the hardest part. And so there will be probably a degree of continued pressure on the NIM. That's the way we think about it here in the early goings, and then that will ease as we continue to get traction on the deposit side.

And then on the asset side, as I said in the past, we've got about 40% are variable in nature, meaning that they reset zero to three months, yes. So we'll continue to see some benefits through each quarter through each rate hike that occurs. And then additionally obviously with all of our new originations we will continue to see ever-higher yields, so that will also have some upward benefit as well on the portfolio.

The next question comes from Andrew Liesch with Sandler O'Neill. Please go ahead.

Just wanted to follow up on deposits here. Certainly nice to see some good core inflows, but should the pace accelerate from this number and -- from the $55 million? And should it accelerate this quarter? I'm just trying to get a sense of when we're going to start to see even better traction on the core side than we saw in the first quarter.

We have -- Rita Dailey and her team have begun to very much build out: build out the strategies, the products, the improvements to the operations platform and the feet on the street across all the banking lines. The short answer to your question is yes. We anticipate an improvement in the deposit side going forward throughout the rest of the year. And I was saying that, look, there is bumpiness. The deposit world is competitive, but it's out there for us. I might also add adding Leticia as head of everything that we're doing on the community banking side, our retail branches, the efforts in the small business side, should also begin to bear fruit. But it is the -- to be clear, it's the bumpiest part and will take time, but yes, we anticipate growth on the go forward.

Okay. You've covered all my other questions. Thanks.

Thank you.

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

It's Gary Tenner. I wanted just to ask a question on that credit, that fraud issue. I know you said you can't talk much about the credit specifically, but I wonder, maybe for Kris, as part of your portfolio review, can you talk about the existence of similar credits, if there was any -- if you guys have made any changes to your kind of policies and procedures on any similar credits or anything along those lines?

Sure. Thanks for the question. And what we did is we did a review of the portfolio to see if there were any loans that had similar characteristics to the fraud loan. We did find 18 loans where the collateral was held in a similar situation. We reviewed all of those credits. The majority of them would have been securities-backed credits. And so after our review, we're comfortable that all of those credits are in good shape. And we are doing a review of all of our policies and procedures to see if there is anything that we should enhance in light of the situation, and that's an ongoing effort at this point.

Okay. And then on the loan-servicing fees, obviously, selling the -- most of the remainder of the mortgage-servicing portfolio that should decline to close to zero, I would imagine, in the second quarter. And then is that remaining $3 million, I think you said, scheduled to sell and close in the second quarter?

It is, yes. So we would expect to sell that in the second quarter. Then the only MSR that should be remaining is going to be related to the SBA book of business.

Okay. And roughly what is the kind of quarterly run rate on the servicing income from that book?

That'll be relatively smaller. It's not significant.

The next question comes from Tim Coffey with FIG Partners. Please go ahead.

As we look at loan growth going forward, do you anticipate that the trends that we saw this quarter in terms of growth in multifamily and residential mortgages are going to lead the way? Or do you start seeing that mix start to change a bit?

Well, first of all, we feel very good about the first quarter. It's a follow-on to a good fourth quarter of last year. And pipelines are robust across both of those businesses. We do intend over time to build out more and more on the C&I side. So Tim, the short answer to the question is we like where the pipeline is. We like our markets very much, and we have our teams playing offense. And we're attracting talent more and more.

And as also as I indicated in my prepared remarks, we also exited about $61 million of C&I business from the former institutional banks, so for the quarter, that put some downward pressure on the growth within that segment. And so that won't repeat in the second quarter.

Yes, yes.

Okay. That's good color. And can you kind of provide us a little bit more color on what's driving the growth in loan yields? Because if I look at the loan growth that you had this quarter, I wouldn't think that loan yields will be going up that much.

Well, certainly in the kind of the two leading portfolios, the SFR and the multifamily portfolio, the rates in those increased relatively consistent with market interest rates. So the SFR was up 24 basis points, and similar increase in the multifamily portfolio. So we would continue to expect to see those increase. I'd say the other thing that we're doing in the multifamily book of business is we've been transitioning from this brokered model to much more of a balance between broker and direct to consumer. And so we are starting to see some benefits in the direct-to-consumer model. And then I'd say overall we're just starting to apply more discipline to our pricing strategies, and that is starting to produce some added benefit.

Okay, great. And then a question on tax rates. In the presentation you presented a normalized tax rate of 20%. My question is, was that for presentation purposes? Or do you think the kind of going-forward tax rate could be at the lower range -- lower end of your range?

Well, I'll start. And John, you could build on this. As we've said in our strategic plan, our goal is to get to a more normalized tax rate. We believe that will begin to happen very much in the second half of the year. And the first half, particularly as a result of the solar transaction, just continue to have a lot of downward pressure on the tax rate, thus essentially a zero taxpayer. John, other things you'd add?

No. In terms of kind of the range between the 20% and 25%, that's a little bit hard to predict at this time, but we do believe that going forward it will be within that 20% to 25% range once we get past our solar commitment which we expect to fulfill by the middle part of this year.

The next question comes from Jackie Bohlen with KBW.

Focusing on the loans servicing line income. The $2.3 million in income from the quarter, was that at all related to the MSRs that were sold? And if not, what drove the linked-quarter increase?

It is related to the MSRs. And so as -- so that's the servicing income from the first part of the quarter. So the transaction that traded the MSRs occurred late in the quarter. So as we go into the second quarter, I would not expect to see the same type of servicing fee income. And then as we complete the last part of the sale of the MSRs, then that line item will largely reduce to a minimal amount.

Okay. And given that the only remaining MSRs will be with the SBA portfolio, should we expect a similar limited forward impact from the provision for loan repurchases?

That's correct. So the provision for the loan repurchases will also continue to decline. With respect to that line item, that's related to a lot of the agency loans that we originated and had sold previously, so even though we sold the MSR, some of that liability still remains with us. So as that book of business continues to wind down, we'll continue to see release of that provision, absent any need to actually execute on repurchases.

Okay, so absent that need, that would be a slightly positive benefit or a contra expense basically on a forever basis?

That's correct.

Correct. And then with the normalization of the tax rate in the second half of the year, can we expect the associated expense on the energy partnership to also decline down to a less-relevant level?

That's right, yes. Both of those will decline somewhat hand in hand.

Okay. And I realize we're still a good deal away from this point in time, but do you expect much impact from either the tax rate or the expense associated with it in 2019?

No. I think that it'll be relatively minor, much like as the trend that we'll see in the second half of 2018. As we go into 2019, it'll be a minimal pact -- impact on both the expense and the credit side. Again, that's absent any new additional tax-planning strategies. And we do expect to engage in some additional tax-planning strategies. They just won't be to the same magnitude as what has been done previously.

Okay. And I would guess whatever it is that you're looking at would have a lower level of volatility associated with it.

That's correct, yes.

Okay. And then just more broadly speaking, if you could just provide some color on how you see the treasury management ramp occurring in fees and just in general, non-interest income and how you expect that to kind of ramp up over the next couple of years.

Well, specifically on the noninterest income side with respect to treasury management, that has begun to get attention. We've rolled out, for example, a completely refreshed credit card program, both retail and corporate and T&E. We've also done some work on the foreign exchange side. But saying all that, those arenas are relatively modest. Our primary focus has been on deposits, as you can well imagine, and with that certainly should come certain amounts of noninterest income as a result of setting up those varying corporate-type accounts. But the whole treasury management arena today is primarily focused on deposit gathering.

Okay, so if I understand you correctly, then most of the growth in noninterest income over the next several quarters will likely come from service charges on accounts.

That's right.

That's correct.

Okay. And is that more driven by customer growth or by a new fee structure?

Well, we evaluate the fee side of things, as you can well imagine, but it's primarily from what we believe we can do on the growth side, client count.

The next question comes from Don Worthington with Raymond James. Please go ahead.

In terms of the discontinued operations, how long do you think that will be part of the equation in terms of going forward? I know it's a relatively small amount, but it kind of bounces around a little bit.

Yes. And for the quarter, because of the transactions that took place with respect to the MSR, related to the MSRs and some other activity, we had a little bit of volatility. But as you noted, the balance of discontinued operations on the asset side is down about $30 million. That will continue to wind down. And I'd like to think, by the end of the year, it will be down to a significantly lower level, but again it's relatively immaterial.

Okay, all right. And then in terms of your strategy of growing deposits, do you have any plans to increase branching?

Not meaningfully, at least not at this point. It's early stages and that is not on the whiteboard. I don't want to preclude it, but that's not where our thinking is at the moment. We believe we have considerable room to maximize on the franchise we have.

[Operator Instructions]. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Doug Bowers for any closing remarks.

Well, thank you, everybody for participating and for your questions. As we commented upfront, this is a first quarter in a three-year plan. We're pleased with the progress that we have made on a number of fronts, and we will look forward to reporting out to you as we go along. Thank you very much.

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