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Banc of California, Inc. (NYSE:BANC)

Q4 2013 Earnings Conference Call

March 13, 2014 11:00 AM ET

Executives

John Grosvenor - General Counsel

Steven Sugarman - CEO

Ron Nicolas - CFO

Analysts

Brett Rabatin - Sterne Agee

Andrew Liesch - Sandler O'Neill & Partners

Kevin Reynolds - Wunderlich Securities

Don Worthington - Raymond James & Associates

Jackie Chimera - Keefe, Bruyette & Wood

Operator

Good day ladies and gentlemen and welcome to the Banc of California Quarterly Earnings Conference Call. My name is Ketene and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Mr. John Grosvenor, General Counsel. Please proceed.

John Grosvenor

Thank you, operator. Good morning everyone. And I am John Grosvenor and let me be the first to welcome you to this morning’s conference call to discuss Banc of California’s results of operations for the quarterly and annual period ending December 31, 2013. With me on the call this morning will be our Chief Executive Officer, Steven Sugarman and our Chief Financial Officer, Ronald Nicolas. This morning’s presentation is being recorded and a copy of the recording will be available later today on the Company’s Investor Relations Web site.

Now before I turn it over to Steven I want to take a moment to remind everyone that our presentation today contains forward-looking statements which reflects our best view of the world and our businesses as we see them today. Those views can change as the world changes, so please interpret those statements in that light. Further information regarding reliance on our forward-looking statements is included in today’s 8-K filing and applies as well to our comments during today’s call. The 8-K covering our earnings announcement is also available on our Investor Relations website.

Finally, we’ve reserved time at the end of the presentation to address questions. We’re concerning the announcement. So with those formalities concluded, it is my pleasure to introduce our Chief Executive Officer, Steven Sugarman ensuring the call [indiscernible].

Steven Sugarman

Thank you, John. Welcome to everyone. This is Banc of California earnings call for the period ending December 31, 2013. We issued a short presentation alongside our earnings release, which you can find on our Investor Relations Web site at bancofcal.com. You may find a worthwhile supplement for my comments this morning as I’ll reference the slides during the course of my remarks.

2013 was a year of significant transformation for Banc of California and I’m very proud of our team and all they’ve accomplished this year. This is my first full year as CEO of the holding company and 2014 will be my first full year running the Bank. During this period we have taken focused steps towards achieving our mission of becoming California’s bank. So far we’ve accomplished a lot.

I am more optimistic about the value we’re creating at the Bank and excited about the future of Banc of California today. This is primarily due to the talented leaders I’ve surrounding me and working in positions throughout the Bank. The change we’ve embarked on is not easy and we’ve seen some bumps in the road but the progress we’ve made over the past year is exceptional and the shared accomplishment of the broad group of professionals throughout the organization who’ve worked tirelessly and made sacrifice and performed very well.

During the fourth quarter we rewarded all of our employees by establishing an employee equity ownership plan that has result in each employee becoming an investor in the Company. So this morning we have a little bit over a 1,000 new owner employees interested in our financial results because each one of them is personally impacted by the price of our stock and the amount of the Company’s profits. I can tell you that now every meeting that I have with the Bank is a shareholder meeting and I think that’s how it should be.

Now turning to the presentation and Page 2 in particular our key accomplishments in 2013 included the completion of our acquisition of The Private Bank of California the acquisition of CS Financial and the acquisition of The Palisades Group. Each of these transactions added significant strategic assets and capabilities to our organization. In addition during the fourth quarter of 2013, we sold eight branch locations that were non-core to our franchise, merged our banking subsidiaries into a single national bank regulated by the OCC, and implemented a conversion on to a new core banking technology system while changing our name to Banc of California. The ability of our team to accomplish multiple significant strategic objectives during the fourth quarter was a testament to their expertise, commitment and capabilities. The results are meaningful.

Banc of California finished 2013 with 3.6 billion in assets and over 1.5 billion in assets under advisory fee agreements with our RIA subsidiary, The Palisades Group. Banc of California is quickly becoming the largest bank headquartered in California in Orange County, California and we’re also the 10th largest bank headquartered in California as measured by loan portfolio of us. Importantly, despite the significant acquisitions mentioned above, our growth in 2013 came primarily from organic sources not acquisitions. In fact approximately 1.3 billion of our 1.6 billion in deposit growth in 2013 was organic. This represents approximately 80% of our deposit growth.

The trends on the loan side are similar with only 500 million of our 1.8 billion in loan growth coming from acquisitions. This means that over 70% of our loan growth and 80% of our deposit growth came from sources other than our M&A activity. We saw a similar success in the increases in our overall assets under advisement by our Palisades Group registered investment advisor subsidiary which grew its assets under advisement by over 1.6 billion. We believe that the ability of Banc of California to generate strong organic growth distinguishes our Company in the marketplace. We also believe that this strong organic growth is a primary factor in Banc of California’s ability to raise capital efficiently as it did in 2013. We raised approximately $150 million through issuances in 2013 to support our growth based on a total leverage ratio of 9% to 10%.

We completed successful capital raises of non-cumulative perpetual preferred and common stock during the year. We were excited to welcome several new bank investors into our stock including the recent direct placement to Patriot Financial Partners. Management and our Board is very aware of the dilutive effect capital issuances can have and therefore we’re very focused on insuring that these capital raises are used to finance compelling projects that meet our economic return hurdles and enhance the overall value for our common shareholders. We recognize that growth is not meaningful without profitability and the increasing earnings power.

We believe that 2013 was transformational on this front as well. Banc of California made significant improvements in its cost structure and ability to drive organizational efficiencies. We also made significant investments in technology and systems that will enable us to benefit from compelling economies of scale as we grow. Cost cutting efforts are never easy and it’s important that costs are cut prudently and without introducing unnecessary risks to the business. We have and continue to focus on this approach. That said, the investments we have made in our platform are now enabling us to focus on cutting a number of expenses that we’ve been carrying by necessity.

As we turn to Slide 3 I want to take a moment to comment on something in which I take particular pride. In January our election to become a financial holding company was approved by the Federal Reserve. Unlike in the ordinary bank holding company, a financial holding company and its bank subsidiaries must satisfy strict regulatory criteria in order to be approved as a financial holding company and the company must certify to each of these criteria. These requirements have three primary elements; first our subsidiary bank must be both well capitalized and well managed. Second, the parent company must also be both well capitalized and well managed; and third the bank must have satisfactorily fulfilled its CRA and community obligations.

Since our transition from being a savings and loan holding company to becoming a bank holding company occurred a little more than a year ago, it’s personally very satisfying to me that we’re able in such a short period of time since then to join the ranks of the strong, stable and well run financial holding companies. Although we have no current plan to avail ourselves of the expanded authority available to financial holding companies, it’s consistent with our strategic objectives to enable us to capitalize on opportunities to launch and acquire complementary businesses. It should also provide all our investors greater comfort and transparency as to the quality of our management, sufficiency of our capital and soundness of our organization.

Next, you can see the significant cost cutting we have engaged in since the end of the third quarter of 2013. The Company has historically carried a separate management team at the bank and the holding company for the past several years during which time we’ve had multiple subsidiary banks. However since the completion of the merger of our banking subsidiaries on October 11, 2013, we have eliminated virtually every overlapping executive position. The duplicity of officer positions that we have consolidated since the end of the third quarter of 2013 include the officers of CEO and President, Chief Financial Officer, Chief Lending Officer, Chief Credit Officer and Chief Administrative Officer of the bank. Importantly each of these positions has been filled by an existing member of our leadership with a deep knowledge of our Company and a strong track record of delivering results for us. This management team is willing and able to make the hard decisions to enhance shareholder value.

That said, we’re also proud that some of our departing colleagues are leaving to pursue very exciting new opportunities for them in their careers. One such leader is Lonny Robinson. I want to thank Lonny for his time with Banc of California, and congratulation on his new job as CFO at Heritage Oaks. He helped to lead the integration of our banks together and provided leadership to our bank. While we will miss Lonny, Heritage Oaks have made a commendable decision and will benefit from Lonny’s steady hand.

The consolidation of our management team is consistent with our approach of managing the consolidated organization as one Company in order to maximize efficiencies and synergies we get from our diverse offerings. We are focused on a simplified organizational structure that will save us money and better reflect the holistic enterprise approach we take towards our businesses. In that sphere the Company’s Board of Directors has also taken steps to harmonize membership on the Boards of both the Company and the bank in order to improve corporate governance and risk oversight and reduce overall costs. And we expect to complete that process upon the election of directors at this year’s annual meeting of shareholders scheduled for May 15th.

Our successes are starting to beget further success. For instance, we recently announced the addition of Tom Senske and his team of eight professionals to launch our new multifamily lending team. Tom joined us from one of our peer banks where he had a formidable record of originations and compelling financial results. Tom and his team began at Banc of California during the fourth quarter and they funded their first series of loans during February. We are excited about the pipeline they have already developed and the diversification and risk adjusted returns on capital their multifamily loans will bring to our balance sheet.

Similarly, we are thrilled to have completed our purchase and assumption transaction with RenovationReady during the first quarter. This transaction took many months in the making and while a small transaction in terms of cost, we believe it is strategically important to us because RenovationReady provides specialized loan administration services for FHA and other renovation loans. This new business line already boats more than 30 clients and enjoys small operating profits. For us, it provides Banc of California key expertise relating to fund control and will enable us to expand our average gain on sale margins by introducing FHA 203(k) products to our retail clients.

We believe that our value proposition as the bank of choice for top originators of both loans and deposits is gaining traction and we hope to be able to announce additional team lift outs in the coming weeks. While we manage your business on a consolidated basis, investors have requested the management provide updates as to certain merger and acquisition related activities. On slide 4, we attempt to do this. For Banc of California N.A. we are using publicly available information from our call report, and for the acquisition of The Palisades Group, we have were appropriate, used fourth quarter results and annualized them to provide a pro forma for full year run rates.

For investors seeking to isolate the Bank’s performance from the rest of the Company and its operating results from holding company expenses including expenses relating to our debt, Slide 4 should be informative. For instance, you will see the pre-tax, pre-provision earnings of the Bank grew by 59% year-over-year in 2013. This compared to 32% year-over-year growth of the consolidated Company. The Palisades Group finished 2013 with just north of $1.6 billion of assets under advisement and was profitable in 2013. For more information relating to their business and the status of the Palisades Group, I would direct you to the 8-K that we filed on March 6, 2014. In that presentation be disclosed the mortgage balances under advisement for the Palisades Group, now exceeds 2.4 billion, and the Palisades Group is currently in the process of transferring approximately $3 billion of additional loans onto their platform.

We are excited with the significant growth in our RIA business and assets under advisement in 2014. As you can see on Slide 4, The Palisades Group business model requires less equities than our banking activities and therefore capital requirements relating to scales are less. With respect to expenses, the acquisitions of CF Financial and The Palisades Group added almost $5 million to the Company’s fourth quarter expenses. These are not new expenses but just a result of consolidating those Company’s existing operations with our financials post acquisition. Also for future periods, investors should know that for CF Financial the operating cost in the fourth quarter only reflects the partial quarter that occurred subsequent to the Company’s acquisition of that business.

Turning to Slide 5, you can see the effects of the holding company expenses on our consolidated profitability. This is one of the factors that led to the decision to eliminate headcount through the consolidation of overlapping executive positions at the holding company and the bank. The levered capital structure at the holding company is the most significant holding company expense. There are several non-recurring items that impacted our numbers during 2013, but two items standout for some particular attention. You can find these on Slide 6.

First taxes, I was going to leave this item to Ron Nicolas to explain but he won the coin flip so I’ll tell you my best on how to explain a 99% effective tax rate in 2013. At the highest level it’s due to some complex factors but the main driver is that we increased our valuation allowance by $8.9 million during the course of 2013 and it finished at $17.3 million. That valuation allowance is now 100% of the DTA that existed as of December 31, 2013. Therefore the effective tax rate on future earnings should be reduced as the deferred tax allowance is. The second item on this Page involves the reclassification of several $100 million of jumble mortgages on our balance sheet from held for investments that are held for sale.

For existing loans reclassified this does not affect income as the ALLL allotted to these loans which were initially classified as held for investment is used to reduce the cost basis for these loans once moved to held for sale status. This impacted approximately $150 million of loans. During the fourth quarter there were another approximately $350 million in loans that were classified as held for sale in the fourth quarter that under our prior policy and approach would have been classified as held for investment. These loans and similarly classified loans in the future that are new originations will be held at the lesser of cost and market value and not subject to a separate ALLL reserve.

Now turning to Slide 7, we continue to be focused on targeted expense reductions and increased efficiency. With respect to cost cutting we previously discussed the progress we have made eliminating excess overhead by consolidating executive positions. We have also been focused on reducing the cost associated with our mortgage operations based on the more difficult market conditions and lower industry-wide volumes we have seen in relation to the single-family residential mortgage business.

Since December 1, 2013 we have terminated over 250 positions and closed eight loan production offices in the residential mortgage lending operations. These cost reductions will not be fully realized until the second quarter of 2014. Unfortunately the cost cuts come on the heels of the significant growth in our mortgage banking operations which saw a cost increasing into the deteriorating market conditions during the second half of 2013. So the cuts will first serve to eliminate the additional costs related to the growth of the bank’s fixed expenses during the first half of the fourth quarter compared to the third quarter.

We believe our organization is being right sized to current market conditions and we continue to evaluate market conditions to ensure that the size of our mortgage lending operations remains consistent with our expected origination volumes. We also continue to focus on technological improvements that we expect to result in further efficiency gains. This means automation analytics and systems. The four most important software and systems upgrades we’re focused on for 2014 are the implementation of an automated commission system, servicing software for mortgage loan service by third-parties, a consolidated loan pipeline tracking and reporting system and the consolidation of our general ledgers.

Now turning to Slide 8, it’s important to note that we finished 2013 with over $3 billion in total loans. We were encouraged by seeing over 50% loan growths during the year in our commercial loan book which finished at over $1 billion of loans. We seek to see commercial loan growth to exceed residential loan growth in 2014 as well.

Finally before I turn it over to Ron to discuss our results in more detail, we have provided our loan activity by product type for the fourth quarter and full year 2013. As you can see on Slide 9, our non-residential originations continue to grow and we’re seeing significant traction in several areas. Notably our new originations in the fourth quarter for C&I loans reached 60 million and for CRE reached $100 million in the fourth quarter alone. As you can see from this chart, our multifamily originations were lagging, this is a trend that we expect to see reversed with the addition of our new multifamily lending team. Overall our $220 million of non-residential originations in the fourth quarter alone was a very positive step and is in line with our strategic goals.

I will now turn it over to our CFO, Ron Nicolas, to provide a more detailed update with regard to today’s earnings report.

Ron Nicolas

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 focusing primarily on the comparison to the third quarter of 2013 starting with the income statement. Note, these figures through December 31st include the impact of the deposit branch sale and bank consolidation completed in October, as well as the full quarter impact of the acquisition of The Palisades Group in September and the partial quarter impact of the acquisition of CS Financial in November. I will provide some insight as to the impact of these activities to our deposits and balance sheet where applicable.

For the fourth quarter 2013, the Company reported net income of $3.3 million and net income available to common shareholders of $2.4 million or $0.12 per share on just over 20 million average shares outstanding. This compares to a net loss of $9.5 million to common shareholders for the third quarter of 2013 and a net loss of $3.5 million to the common shareholders for the fourth quarter of 2012 as highlighted in our release.

The fourth quarter results included a net gain of $12.1 million from the sale of our eight legacy branch locations and deposits in October partially offset by one-time expenses the Company incurred related to the acquisitions, bank mergers and divestitures as well as the margin squeeze in the mortgage business. I will highlight these particular areas as we review the financial results. Total revenues before loan loss provision were $67.8 million for the quarter compared to $45.2 million for the third quarter. Excluding the fourth quarter gain of 12.1 million resulting from the deposit branch sale, total revenues were $10.6 million.

Taking a closer look at the components of that net interest income of 33.3 million was higher by 6.4 million driven principally by the purchase of 500 million of seasoned SFR loans towards the end of the third quarter. As anticipated, our net interest margin rebounded to 3.9% in the quarter after dropping to 3.25% in the third quarter reflecting the release of the excess liquidity subsequent to the deposit branch sale, the seasoned SFR portfolio acquired towards the end of the quarter and the overall growth in our earning assets. Non-interest income of 33.5 million increased by 4.2 million excluding the branch gain reflecting the contributions of the recent acquisition of The Palisades Group and CS Financial as well as a realized gain of 2.6 million from the sale of a credit impaired loan acquired through the acquisition of PBOC.

In addition, the Company sold $150 million of jumbo loans compared to 108 during third quarter sold at a similar price for the first nine months of 2013 as the Company have continued to acquire and sell jumbo loans, mortgage loans to both manage risk and economic returns. As a result, during the quarter, the Company reclassified approximately 500 million of its jumbo mortgages as Steve highlighted earlier to held for sale from held for investment, approximately 150 million of which was transferred and previously classified as HFI in the third quarter of 2013.

The Company also experienced lower mortgage banking income of 15 million versus 16 million in the third quarter partially offset by a higher MSR valuation and higher servicing fee income. The Company experienced softer gain on sale margins by roughly 25 basis points compared to the third quarter. Our total SFR mortgage originations increased to 910 million for the quarter from 764 million in the third quarter. This breaks down with mortgage banking conforming loans up slightly at 552 million versus 521 in the third quarter while non-conforming jumbo loans increased to 358 million from 243 million in the prior quarter.

For the quarter, the Company provisioned 1.8 million for loan and lease losses which covered net charge-offs of 650,000. Overall, the ALLL was lowered by 325,000 at 18.8 million when compared to the third quarter, but the fourth quarter included the transfer of $1.4 million of allowance with the aforementioned $150 million of residential mortgage loans transferred to held for sale status during the quarter. The ALLL through originated loans ended the quarter at 1.45% compared to 1.39% in the prior quarter. Additionally, loans originated and acquired and attributable to the ALLL including their discount were at 1.63% compared with 1.56% in the prior quarter. These loans are fair valued at time of acquisition specific to our Beach, Gateway and Private Bank transactions. The Company believes including the discount provides for a better measurement of the credit loss coverage ratio as the discount is in the first loss position.

The ratio was calculated by dividing the sum of the ALLL and discounts by the carrying value of the loans as of December 31, 2013. This measurement does exclude the seasoned SFR loan pools purchased at a substantial discount. That discount is accreted into income and if the future loss projection exceeds that discount the Company will then begin to add to the ALLL through the more traditional loan loss provisioning approach, more on asset quality in a moment.

Turning to expense, non-interest expense of 57.2 million increased $5 million from the third quarter reflecting the full quarter impact of The Palisades Group acquired in September and the acquisition of CS in November combined these acquisitions added approximately $5 million in higher operating expenses for the quarter. Higher overall mortgage originations also contributed to higher operating expense in the form of higher commission. Of the increase in salaries and benefits of $6 million, 3 million is related to the commission the increase in commission expense with the remaining difference related to the combination of the CS and TPG acquisitions as well as a year-end annual bonus true up.

Overall, the Company headcount grew slightly to 1,384 as of December 31st compared to 1,318 as of September 30th. Of that 66 headcount increase the acquisition of CS Financial added 58 the continued expansion in the mortgage banking operation grew by 39 to 908 and the remaining company added 19 FTEs offset by a reduction of 50 associated with the branch sale transaction. Higher occupancy and equipment costs are related to the core growth of the Company. The Company also incurred higher one-time cost in the third quarter reflecting the lower operating expense on a linked quarter the operating expense on a linked quarter comparison.

As Steve talked about earlier the Company incurred a tax expense of 5.5 million for the quarter adjusting for the year-to-date tax provision and added to its valuation allowance reducing the realizable portion of the deferred tax asset to zero. The year-to-date tax rate reflects both the effect of tax planning strategies completed during the year and the Company’s decision to fully reserve its net DTA. The Company currently does not consider the potential of future earnings in recognition of its deferred tax asset. Through the extent the Company realizes future earnings the effect of potentially reversing its $17 million deferred tax asset valuation allowance will be realized through a reduction of its effective tax rate.

Turning to the balance sheet, the Company finished the quarter at over 3.6 billion in assets compared to 3.7 billion in assets at the end of the third quarter after releasing over 300 million in excess liquidity related to the aforementioned deposit branch sale. Organic loan growth during the quarter added approximately 200 million net of payoffs as total loans grew to over 3.1 billion. The bulk of the loan growth was the SFR loan portfolio which grew by approximately 110 million fueled largely by the higher non-conforming jumbo originations but we also saw growth in the CRE and C&I categories of 60 million and 40 million respectively as Steve highlighted.

Additionally, the Company reclassified approximately 500 million in non-conforming jumbo loans during the quarter to held for sale status reflecting the organization’s continued strategy towards loan diversification. Keep in mind of the 500 million now held for sale approximately 150 million was held for investment in the third quarter with the remaining fourth quarter new originations.

On the liability side, as anticipated deposits dropped by 340 million from the prior quarter reflecting the sale of 464 million in branch deposits which was partially offset by nearly 100 million in organic deposit growth or 18% on an annual basis. Excluding the loans held for sale, the loan to deposit ratio post the sale was at 84%. The Company continues to grow its retail deposit base to fund loan growth and utilize additional sources of liquidity to fund its mortgage loan production ahead of its loan sales. Equity was up during the quarter at 325 million compared to 303 million of the prior quarter reflecting issuance of 20 million of common equity during the quarter through a private placement transaction.

The Company’s tangible book value fell to $10.06 per share from $10.40 at September 30th primarily driven by the acquisition of CS Financial and the full reserve of its net DTA. The Company and the bank both remained well capitalized at the end of the quarter for each of its key risk base and leverage ratios. Asset quality continues to improve with overall delinquency dollars essentially flat quarter-to-quarter and delinquency rates down. Although non-accrual loans increased, it was not a surprise as almost the entire amount of the increase was related to the seasoned SFR mortgage purchase pools which is not unexpected given the nature of these pools. The credit quality profile of these types of loans brought at a very attractive economic discount will not be a seller if those newly originated at par. As previously mentioned, net charge-offs for the quarter were $650,000 and the Company had no OREO as of December 31, 2014.

With that I will turn it back over to Steve.

Steven Sugarman

Thanks Ron. This completes our prepared remarks today. With that operator, we would like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Brett Rabatin representing Sterne Agee. Please proceed.

Brett Rabatin - Sterne Agee

Hi guys, good morning. Wanted to first I guess start off with the usual question on the expenses and just I guess first, is there anything besides, I think you mentioned 5 million, where there any other non-recurring things that affected the fourth quarter in terms of the initiatives you had in place? And with the growth or the expenses in 1Q ’14 for CS Financial and the other new acquisitions, can you give us maybe a little better feel for what the run rate might be with the expenses on a go forward basis?

Steven Sugarman

Thanks for the question Brett. Yes, the $5 million number mentioned was the incremental expense approximation for the two acquisitions The Palisades Group and CS Financial. I am not sure that I would characterize those expenses as non-recurring or one-time, however they do also happen to approximate the increase in expenses over the course of kind of just a quarter-over-quarter look. There were a number of non-recurring and one-time of revenue items and expense items relating to the two acquisitions, the branch disposition, our platform initiatives and some of the cost cutting. What we could do is if you have kind of specific kind of breakdowns you would like to see, we will figure out how to include that. We are looking at doing an investor conference. We would looking at including it or including it in our investor presentation going forward, so we welcome you to kind of help us understand how you would like to see it. But just at a high level The Palisades Group and CS consolidation of their financials kind of represented that $5 million number.

Ron Nicolas

And just Brett, to put just a little bit of a finer point on that last comment by Steve that 5 million attributable to the two acquisitions, just keep in mind that the CS acquisition only represents roughly about two-thirds of their what I would characterize as their normally quarterly run rate. So, I would expect that number to be probably around 20% higher on a full quarter basis.

Brett Rabatin - Sterne Agee

Okay. May be we can follow-up some more about expenses upfront, can I move maybe to capital and I know given that you guys a lot of grief over the past year or two on just ratios but you have got your total risk based capital ratio 12.5 now and just with all the people you are adding to produce loans. Do the capital ratios from here build a little more or is this sort of the level that you are comfortable with in terms of the various ratios?

Steven Sugarman

Look, the capital ratios are going to be dependent a lot on our rate of growth because one of the primary drivers is the pace of growth. One of the things that we discussed in our earnings today was the transfer of certain parts of our loan portfolio into are held for, into a new policy which results in new originations being placed under our held for sale category that’s part of our view on, one example of what is the -- we believe the profitability can be enhanced but also these ratios can be managed without compromising profitability. So, there are steps like that that are being taken. We don’t see -- we feel comfortable with where we are on a capital perspective that being said we also provide guidance that our optimal size and our strategic plan is the size that’s materially bigger than we are today and therefore if there are opportunities to grow where we have very compelling use of proceeds, we’ll take on those opportunities and that could require capital in the future but there is no kind of current issues on our capital front and that’s kind of underscored by kind of our new regulatory status as a financial holding company.

Brett Rabatin - Sterne Agee

Okay. And then just one last and I’ll hop off, the other thing I was just curious about was just the thinking about what you’re doing in the mortgage banking operation can you maybe, I guess first I didn’t catch the number if you gave it what you actually sold in the quarter, I know you said the gain on sale margin was down a little bit but if I understand correctly it sounds like you’re basically saying you’re going to increase somewhat substantially the amount you are going to sell in the next few quarters but you’re not going to have the expenses from a portion of that operation given what you’ve done with a few folks there. Can you I guess, first just give me the number for the actual loans sold in 4Q?

Steven Sugarman

Yes. Let me just -- I’ll turn it over to Ron in a second. But one of the things I want to emphasis is that when we manage our business, we’re doing it kind of a, on a consolidated basis. So, some parts of your question are kind of driven a little bit unique here, but I want to make sure that you’re not confused. We have certain parts of our mortgage operations which are done on kind of a flow basis where we sell the production to Fannie Mae, Freddie Mac or others and then we have other parts of our mortgage banking activities that are underwritten to the credit criteria that basically we’ve developed and have had prior to the fourth quarter historically been held for investment and set on our portfolio.

So, the new accounting policy relating to held for sale is something that only impacts that second category of loans are not kind of originated typically on a flow basis. And so that category of loans has a separate underwriting team, a separate kind of a lot of differences and how that loan gets originated from a cost standpoint than loans that are in the conforming flow business that we breakout on Slides 8 and 9. So, my comments around headcount reductions are and since sited were over 250 fewer terminations since December 1st, those were related mostly to the origination and sale of the conforming flow mortgages. And so the volumes that you’re seeing from the jumbo non-flow is kind of an apples to vendors so I just want to help you understand that the volumes -- the growth or shrinkage of volumes are different for those piece of operations at different points in time.

Now, when we look at it we believe we have a nice comprehensive business where these provide diversification and the actual underlying operations collectively supports both of these businesses. And so we don’t break it down exactly how we’re talking about it when as we manage the business. But I just want to make sure that you’re not confusing a reduction in originations in the conforming business with anything to do with this accounting policy change that we made in the fourth quarter. With that, Ron if you have.

Ron Nicolas

Sure. So, Brett, we sold roughly a little over 700 million in total residential mortgages and approximately $150 million of that was the jumbo non-conforming piece and roughly a little north of 550 million, 560 million was the mortgage banking or the conforming piece. Actually, I’d take it back, that number was closer to 600 million on the mortgage banking piece. So, all told we sold roughly about 750 million in total during the quarter.

Brett Rabatin - Sterne Agee

Okay. Great, thanks for all the color.

Steven Sugarman

Thanks Brett.

Ron Nicolas

Thank you.

Operator

Your next question comes from the line of Andrew Liesch representing Sandler O'Neill & Partners. Please proceed.

Andrew Liesch - Sandler O'Neill & Partners

Good morning guys.

Steven Sugarman

Hi Andrew.

Andrew Liesch - Sandler O'Neill & Partners

I just want to go back to the expense question here for a second. So and just looking at it differently kind of on an average asset basis, expenses have been running north of 6% this year, is that like a good level for us to forecast and continue or what level do you think would be a good percentage?

Steven Sugarman

I’m not sure that we’d view an expense to averaged asset as relevant to our business given the high degree of variable expense on parts of our business relating to assets under advisement that don’t hit the asset level from The Palisades Group and also related to held for sale loans, which if you look at Page 8 you will see that are kind of conforming for our mortgage banking business, uses about 6% of our balance sheet as of the end of 2013, which means on an average assets basis it’s pretty low. That being said, the expense structure is based mostly on volume of originations and so I’m not sure you could just take a expensed averaged ratio and apply it over market cycles and have it be standard at all.

Andrew Liesch - Sandler O’Neill & Partners

Okay. And then Ron can you give some more clarification on why it’s not unsurprising for non-accrual loans to rise in a seasoned mortgage portfolio, if you bottomed out these portfolios at a discount and they performed worsened than expected then I would assume non-performers would rise, so I am just kind of curious like why it’s not unexpected?

Steven Sugarman

Well, I guess I would just clarify that comment to suggest that they are a little bit more volatile type of performing assets they typically do go delinquent by a month or two, they bounce back and forth.

Ron Nicolas

But look I’d add that the actual performance of these loans during the fourth quarter never exceeded our expectations at the time we brought it. So if you look at on a pool basis within a pool sometimes you receive a loan that maybe on non-accrual status, but the portfolios as a whole have performed very well and therefore the elevated characteristics like this are things that were priced in as we bought in with our expectations at the time.

Andrew Liesch - Sandler O’Neill & Partners

So would be not unsurprising to see another increase?

Steven Sugarman

Well, he’s not saying that these increased apples-to-apples same loan-to-loan. What he’s saying is that we have -- we closed our purchase of over $500 million of these at the end of the third quarter and so the steady state of percentage of that pool that you’d expect to see have some non-accrual elements as higher than some other parts of our portfolio. So it’s the change of mix in composition of our portfolio on the growth of the portfolio that makes the notional number of non-accruals higher, it’s not that loans that weren’t on accrual went on accrual and spiked up just without any growth.

Ron Nicolas

Yes, that’s correct and also during the quarter, the Company directed a servicing transfer for that pool that fairly large and substantial pool and that also typically what you see is a little bit of a spike in some of the credit profile numbers as a result of that usually that spike those are temporary type of phenomenon and we see a return back to normalcy. But again think of these loans, as Steve indicated, it’s the overall economic performance on a pool basis that we look at less differently than newly minted loans again originated at par.

Steven Sugarman

And just to follow-up. We discussed on, I believe, our second quarter conference call that we went through the same process on a seasoned loan pool on the servicing transfer and saw a spike in that portfolio and later subsided as we thought was expected, but the numbers here are just largely growing because the size of the portfolio grew and not because loans that already existed on the portfolio changed to negative in terms of its characteristics.

Ron Nicolas

That’s right.

Andrew Liesch - Sandler O’Neill & Partners

Okay, thanks for taking my questions.

Steven Sugarman

Thanks Andrew.

Operator

Your next question comes from the line of Kevin Reynolds representing Wunderlich Securities. Please proceed.

Kevin Reynolds - Wunderlich Securities

Alright, thank you. Good morning Steve how are you doing?

Steven Sugarman

Good, hey Kevin.

Kevin Reynolds - Wunderlich Securities

A couple of questions here and I’m going to sort of try to attack the expense item a little bit differently. I think you all said that and I’ve got a few questions to follow-up on that, but I think you all said that with Palisades and CS being about 5 million of the increase sequentially in the quarter and I believe mortgage commissions were about half of the $6 million increase in salaries expense, so just kind of, if you took those numbers just to simplify the matter and then went back to last quarter where I think you’d identified $6 million roughly in non-recurring items of a variety of sorts. It looks like there were still another 3 million to 4 million or something in that ballpark of sequential increase in expenses, so I was just trying to figure out if you could talk about what might have caused that?

And then I guess just kind of conceptual question along those lines of, if we can identify $6 million in one-time versus last quarter is there some reason why we can’t identify similar explicit expenses associated with conversions and what not because there was a lot of that activity going on in this quarter to back out the expenses to get to mortgage free true run rate and maybe the offset to that one-time gain on the branch sale in the quarter. And I guess that’s my first question.

Steven Sugarman

And I appreciate the question. If you remember we have previously given guidance on the last quarterly call and on an interim update call that we expected the total one-time costs on the second half of or the total one-time cost around our platform initiative to be I believe we sited it at $10 million to $12 million and that about half of that was in the third quarter, and the preponderant to that would be on the second half of the year. And so you’re numbers are very consistent with the guidance we have given.

The only hesitation is that even on the platform cost there were one-time costs. You also have benefits in the numbers after the third quarter relating to the branch sale and you have other costs relating to these M&A transactions. And so I guess the question is, where do you summarize these to be? But your estimation of kind of non-recurring of one-time expenses and approach to thinking about that I think it’s fairly consistent with the guidance we have previously given around the expectations for one-time cost in the fourth quarter. Some of these things also have one-time benefits. So we are just a little bit hesitant to start digging into one-time costs without also digging into one-time benefits, and then it gets to be a pretty blurred story. Do you have anything to add, Ron?

Ron Nicolas

No, I think you covered pretty well there, Steve. There was some spillage into the fourth quarter on the one-time cost. We had roughly a couple of million dollars on that from -- so that number was down a little bit from the -- on a linked quarter basis, from I think we have identified $5 million or $6 million in the third quarter. But again the higher commission expense related to the higher mortgage originations and the true up of the bonus in the fourth quarter, where there was a couple of 3 million on a combined basis and then the bank was up another million dollars. So just to add a little finer point, there are a lot of moving parts as Steve indicated. There is one-time benefits associated with that. Some of the economics that we will see come about as a result of the higher originations, won’t be realized on the jumbo side at least until the first quarter. But that basically is what gives rise to the $5 million in summary.

Kevin Reynolds - Wunderlich Securities

Okay. And then I guess to sort of maybe beyond that a little bit. I guess what I am struggling with is, in your presentation accompanying the press release here, I think you have identified specifically operating efficiencies designed to generate roughly $12 million or so annually in savings and there is I’m sure other things behind the scenes that will be ongoing in nature, and maybe not as direct or explicit. But it seems to me that that number is not nearly enough to get to an expense run rate that ultimately would this -- with the revenue that you’re putting up this quarter, annualized and projecting even some growth in there too to move the EPS needle meaningfully higher. And so I guess I want to ask a question that is if you step back and look at your organization today, very different than when it began, from 30,000 feet, and then look out into the future, what are you seeing down the line longer term? What is Banc of California? What does it look like, asset size? What kind of business mix is it going to be? What is the profitability, the ROA, after tax that you have to generate to say we’re doing a pretty good job here that should be rewarded with a higher pricing in the market? And then secondly as you go down that path, does it trouble you, that we are spending so much time talking about mortgage, mortgage origination, the decline in volumes, the expenses and what has to be done to something that doesn’t really add to most investors view of franchise value?

Steven Sugarman

Well, I appreciate your question. I think that our goal is, what we’re doing here is similar to the goal that we have set out for the last kind of three years, pretty I believe clearly and consistently which our first target is our banking operations should be at $5 billion in Southern California with minimum scale in each MSA that we are in. That our balance sheet, we target to be balanced across five different origination categories to be a full service bank which is residential, C&I, commercial, real estate, multi-family and specialties. And that we also seek to have complimentary financial services businesses that are profitable and add to the profitability of the bank and vice versa such as The Palisades Group.

So when we think about that we believe that there is some pretty standard metrics to what a profitable commercial bank is $5 billion in size will generate. The target on size is kind of pretty well laid out, for kind of what our near-term focus is. And the profitability metrics for that piece, that operating piece are, from your perspective are probably pretty well understood.

That being said when you look at strong franchises of full service banks here in California, we believe that lending against real estate and residential real estate is an important component of that. And if you look at tiers that we look at that we believe are kind of some of the more valuable banking franchises we believe that a portion of their balance sheet is to support a private mortgage banking operation which serves the high net worth needs of their clients. And so all the banks in Southern California that are the standard bearers in terms of valuation and value to the shareholders so that we looked at have an important complementary part from residential lending that’s consolidated with their ability to be a full service banks to their depositors.

So I am not sure which kind of larger peer you’d site where that’s not as true but that being said we also think that there is enhanced profitability in our business model from the complementary businesses that we’re in that don’t track to an asset based return because if we had a bank that had $5 billion of assets within the bank we would also like to have our registered investment advisor gaining fees from assets under advisement of 5 billion plus also and that’s something that you don’t have the same capital reserve requirements again so that would be additive to the economics of that you could achieve typically from just the standalone banking enterprise.

And we also believe that if you have the systems and infrastructure where you have a core business which is the private mortgage banking then you should also be serving the communities you are in with homeowner’s need to need conforming loans and other real estate loans. And so I am not sure that we would buy into a fact that you should serve only the rich in the community or that you shouldn’t have a business where you can also sell some of the production to Fannie Mae or Freddie Mac. So we intend to build a bank right now focused in Southern California that serves the needs of private businesses, entrepreneurs and homeowners.

I think that’s a pretty clear vision I think that it’s a pretty valuable vision for our shareholders but I do think that if you have a stated goal of believing that you need to get to a 5 billion of scale and you want to have five different business lines you need to build your teams to be able to originate appropriately which I think we have and you need to be able to build your asset management capabilities to be able to manage the diverse loans and you have to build it so you’re prudent on your growth. And maybe there are other ways to do it but I think if you look at our credit metrics and our asset quality and how we’ve been growing it I am pretty proud that we finished the second quarter in a row I believe with zero OREO.

We have very strong credit metrics. Our production numbers are unequaled in this region as far as high quality originations. We’re not generating huge goodwill to grow it I mean a lot of the peers who are growing are taking on goodwill rates that we don’t believe kind of is attractive for our model. So to the extent that we’re not generating goodwill but we’re taking on some growth expenses that are a fraction of the goodwill and we take to acquire a bank we think that’s a good thing.

Kevin Reynolds - Wunderlich Securities

Okay, thanks a lot for taking my questions.

Steven Sugarman

Sure.

Operator

Your next question comes from the line of Don Worthington representing Raymond James. Please proceed.

Don Worthington - Raymond James & Associates

Well, good morning Steve and Ron.

Steven Sugarman

Good morning Don.

Don Worthington - Raymond James & Associates

A couple I guess follow-ups, in terms of the headcount where are you today rather than or as opposed to the end of the year and I guess I am trying to figure out how much of the mortgage banking reductions were December versus after the first of the year?

Steven Sugarman

A majority of them were after the first of the year.

Don Worthington - Raymond James & Associates

Okay. And then I noticed FHLB advances were up about 225 million quarter-over-quarter. Was that just for the liquidity adjustment purposes or did you do some match funding on a longer term basis for interest rate risk?

Steven Sugarman

Don, that was for liquidity. So as we and to my earlier comments with the growth that we saw on our loans held for sale portfolio we saw a pretty sizeable uptick on our SFR jumbo piece. We took down some additional liquidity to fund that for that interim period until that the sales catch up with the origination so when you see an origination spike as we saw here in the fourth quarter versus the third quarter obviously you’d prefund that with your additional liquidity until your sales catch up. So it’s really no more than that. There is more to it obviously as it relates to the branch sale as well but effectively it was the increase in our loan growth and volume related to the held for sale portfolios.

Don Worthington - Raymond James & Associates

Okay, great. And then on the specialty loans, what types of loans are those typically?

Steven Sugarman

I mean to give you an example we have an equipment lease business that we launched a couple of years ago that has been continually growing and ramping up its growth, that’s an attractive business for us. We also have a number of other loans either that were acquired in some of the acquisitions or just dumps that cleanly into these categories. Ron do you want to expand on that?

Ron Nicolas

With respect to the specialty -- I think the bulk of it is the equipment leasing small ticket equipment and everything from copiers to factory machinery in that. I think there is some other consumer type, smaller consumer type loan ticket items that are also included in that Don.

Don Worthington - Raymond James & Associates

Okay, okay. And then is there any overlap between Banc’s assets and The Palisades Group, the reason I am asking is I think you were actually a customer of Palisades before they became part of the Company. And so was there any overlap in that 1.6 billion being Banc loans?

Steven Sugarman

Yes, we -- The Palisades Group manages the season loans on our behalf or it buys it on them, and so the preponderance of our season loans are within that number. Importantly over the back half of last year and now into this year the growth that we discussed is coming from third-party fee sources. So that may also be a little bit of confusion that could be generated from looking at the call reports versus line items where there are eliminations that occur relating to those if.

Don Worthington - Raymond James & Associates

And I guess my last question any, what was the balance of TDRs that are not included in non-performers?

Steven Sugarman

You know what Don I have to get back to you on that. I have got the number.

Don Worthington - Raymond James & Associates

Very well.

Steven Sugarman

But yes it is a very low number. We’ll have to follow-up with that with you on that.

Don Worthington - Raymond James & Associates

Okay, alright thank you.

Operator

Your next question comes from the line of Jackie Chimera representing KBW. Please proceed.

Jackie Chimera - Keefe, Bruyette & Wood

Hi. Good morning everyone.

Steven Sugarman

Hi Jackie.

Jackie Chimera - Keefe, Bruyette & Wood

I wanted to make sure that I am understanding the jumbo transfer that happened in the quarter the 500 million, so I understand the component about the 150 that’s associated with the 1.4 million reduction in the reserve. So that 150 came from held for investments, the other 350 component was that ever included in the September 30th and the period loan balance in held for investment or was that just internal generation in the quarter that was transferred before quarter end?

Steven Sugarman

Yes, that was a function of our new originations during the fourth quarter and in the presentation that we gave you on Page 9, you could look at the total amount of new originations in the fourth quarter of around 380 million. So a preponderance of that is now going to, held for sale.

Jackie Chimera - Keefe, Bruyette & Wood

Okay. So if I am looking to calculated growth maybe on the originated portfolio, I would only subtract 150 million and not 500 million for the change in what happened in the quarter?

Steven Sugarman

That’s right and I think we’ve done that for you on the Slide 9 that we provided which shows fourth quarter originations on the jumbo at 380.

Jackie Chimera - Keefe, Bruyette & Wood

Okay. Okay there is the chart. Okay thank you. Looking at just kind of centering it on the other fees, if I take out the 12.1 million for the gain from the branch divestiture and then the 2.6 million on the PCI loan from Private Bank, I am getting a run rate of about 4.5 million in fees, does that sound pretty standard go forward given the addition of house agency at Financial?

Steven Sugarman

Jackie I am sorry I was distracted would you mind asking that question one more time please.

Jackie Chimera - Keefe, Bruyette & Wood

Sure, so if I take the other fee income that started out at the 19.2 million and I take out the 12.1 million from the branch divestiture and then I take out the 2.6 million from the PCI loan sale that you had from The Private Bank acquisition. That gives me around 4.5 million as a run rate in other fees. Is there anything else included in there that would be on a non-go forward basis or is that a pretty good run rate understanding that we’re still missing an additional month in CS Financial in that number?

Steven Sugarman

Yes, that’s exactly right, the math you just described there that would be a pretty good run rate number for the quarter.

Jackie Chimera - Keefe, Bruyette & Wood

Now does all of the income that was discussed in the slide deck, does that all hit in the other income or is some of that also flowing into the NIM someway?

Steven Sugarman

Jackie I just want to go back to that prior quarter, there was one other non-recurring item that I don’t know if in your analysis there you just recapped to me included and that was a $2.6 million one-time recovery related to a credit that was previously fair valued at acquisition that we ended up recovering.

Jackie Chimera - Keefe, Bruyette & Wood

And that was what you had mentioned from The Private Bank of California transaction?

Steven Sugarman

That is correct, yes.

Jackie Chimera - Keefe, Bruyette & Wood

Okay. Yes, that was included as well.

Steven Sugarman

Okay, terrific. Your second question?

Jackie Chimera - Keefe, Bruyette & Wood

You know what I lost my train of thought so it must not have been important and going back not touching too much on expenses but just making sure that I understand, I know we have already discussed this quite a bit. But the 12.1 million gains from the branch divestiture that took place in early October you had mentioned with expenses in quantifying that additional 5 million to 6 million remaining from the original 10 million to 12 million guidance that you’d given. Would any of that have been associated with the branch divestiture, because I know you had said that there were benefits attached to those one-time charges but would any of that benefit be related to the 12.1 million or is that completely separate?

Steven Sugarman

Well, yes the branch divestiture caused a couple of things. One is the net interest margin kind of expansion you started to see in the fourth quarter. Number two is I think we reduced headcount by approximately 50 people as that occurred. And then number three is the transactions that we were processing for those branches represented the vast majority of the overall transactions and therefore it helps us on the indirect cost to become a lot more efficient within the organization and to implement kind of some of the cost saves kind of following the branch disposition.

That said, some of those things happened in the third quarter following the branch sale where the people who were transferred with the branch got transferred on the day of the sale, so it was only a few days under the quarter. But some of the other things happened over the course of the following months and even today we are working on our one-bank initiative where we are bringing together kind of the policies, procedures and processes from all the organizations we have acquired over the last year or two under one kind of common and comprehensive set of policies and procedures. And so the efficiencies from that and some of the expenses from updating the systems to accommodate for that kind of are ongoing.

Jackie Chimera - Keefe, Bruyette & Wood

Okay. And where there any loan pool purchases or sales in the quarter, I know there were sales but were there any purchases in the quarter?

Steven Sugarman

No.

Ron Nicolas

No, no purchases here in the fourth quarter.

Jackie Chimera - Keefe, Bruyette & Wood

And then lastly just to touch on taxes, so now that the DTA is fully reserved against and on a go forward basis, would it be correct to assume that, I know that the valuation allowance will trend downward as you earn income, so would it be correct to assume that you will have an effective tax rate of zero until the potential reversal of that valuation allowance?

Steven Sugarman

I don’t think zero is the right number, Ron can dig into the specifics but it will offset a portion of our taxes in the future but it’s not a 100% offset.

Ron Nicolas

So, just to amplify that a little bit more, on the income statement it will of course bleed in through the effective tax rate and there is a lot of moving pieces not the least of which is the timing and recognition of the reversal of that deferred tax asset once the valuation is removed. The other thing is that considers on the balance sheet the -- it is likely as future earnings are recognized the reversal of the valuation allowance will happen all at once. So, even while the reversal on the balance sheet would happen all at once and we will have the corresponding pickup in tangible book value the income statement will be recognized on a more discrete and timely basis through the effective tax rate. But as Steve indicates, it won’t be, it definitely will not be zero.

Jackie Chimera - Keefe, Bruyette & Wood

Are there -- sorry I am just trying to wrap my mind around this and obviously every company is very different and I know you have many different line items. The way that I have seen it from several companies is in the past is that it flows straight through and then you do the reversal through the year-end and you continue to have a lower or 0% tax rate, so that’s not the case here then? You will continue to have…

Ron Nicolas

We will once the Company decides to reverse out the valuation allowance, we will begin to recognize a lower tax rate. To exactly quantify that what that rate will be is the difficult thing, you are asking us to try to predict into the future, what the timing of the earnings and the timing of the reversal and that’s impossible to do at this point.

Jackie Chimera - Keefe, Bruyette & Wood

Okay. And then just lastly and I am not sure if you are able to answer this or not but do you know when you intend to file the 10-K?

Ron Nicolas

The filing date is due on Monday the 17th and we anticipate filing it on time.

Jackie Chimera - Keefe, Bruyette & Wood

Okay, great. Thank you very much.

Operator

Your next question comes as a follow-up from the line of Andrew Liesch representing Sandler O'Neill & Partners. Please proceed.

Andrew Liesch - Sandler O'Neill & Partners

Hi guys. I have got just one follow-up on Kevin’s question, I mean what is your ROA, ROE and efficiency ratio target and when do you think you can get there?

Steven Sugarman

I think that the target requires us it depends on when we get to our scale targets which our plan would set those in 12 to 24 months. So I think that’s still a reasonable projection of when we’ll reach kind of our goals which would equate to approximately five years after the recapitalization of First PacTrust at which time I think we guided that we thought it would be a five to seven year process to get where we targeted. As far as the metrics you’re talking about, we’ve talked a little bit about you can, from an investor standpoint you can measure things like efficiency ratio for some of our businesses but some of the businesses that metric is tougher to measure against because it wasn’t designed for things like an RA business or even a retail broker business.

So, I don’t think we’ve provided guidance on it and the reason is that we’re looking to optimize our business as a whole in the profitability as a whole and something like a dent only metric like an efficiency ratio investors have asked me provided some colors as far as target efficiency ratios and those tend to against just kind of some model line peers. But -- model line just means bank-only operations. But to try and jam in efficiency ratio into kind of see a financial business or The Palisades Group’s business, this is something that that we don’t find particularly productive because just to give you a sense as an example, the revenues on the CS Financial business and the expenses that get incurred tend to be payments of fees or loans from borrowers that didn’t get paid out to the brokers.

And that tends to be pretty close to 100% correlated expense where the margins on wide online but it facilitates all rest of our business and the loans that we book. And before we acquired CS Financial that was just in some instances borrower paid comp and so I never went through the bank’s balance sheet but it was paid and the broker got paid and the economics of the transaction terms were very similar, now that it becomes a retail channel that we control, we think that’s a lot more valuable to us but the efficiency ratio on paying that brokers close to 100%, 90% to 100%. And so, the more jumbo loans we originate, the higher our efficiency ratio would go just because of the nature of that business not fitting well into a single metric like efficiency ratio because it is not a traditional metric.

If we set up our business as a wholesale originator, our efficiency ratio from that business would go way down now managements made the view that we’d rather control our origination channels from a quality perspective and origination perspective and we think that’s a lot higher value business model and one that’s really kind of build customer relationships and serves our depositors and so we’ve chosen to focus on retail origination and not wholesale. However, if we stuck with a wholesale only model it would drop our efficiency ratio dramatically even though all the financial parts of the transaction would be just about the same.

So, we don’t find that particularly helpful, in fact over the last several weeks we’ve stopped originating jumbo loans to our wholesale channel. So, when we took over the recapitalized bank in 2010, 100% I think of it single-family jumbo mortgages were originated through wholesale brokerage relationships. Today, we no longer do jumbo loans through that format because this gives us a much better control of our credit quality this is kind of how our highest performing peers focus their business and we take some comfort in that and it’s something that we think is a very value-added to us because we get control of our business in all aspects. That being said, that decision which I think helps our business definitely adds a lot of variable expenses that will increase efficiency ratios but have no material impact on profitability or potential profitability or ROA or ROE.

Andrew Liesch - Sandler O'Neill & Partners

So, in that case, how do you or what metrics do you look at that analysts, investors can also look at to compare you to competitors?

Steven Sugarman

Well, what we look at is our strategic plan, which takes the business as a whole and sights the question that Kevin asked, which is what are we building here. And as we build it, what's the consolidated profitability we'd expect for that future business and…

Andrew Liesch - Sandler O'Neill & Partners

Is that ROA or ROE?

Steven Sugarman

No

Andrew Liesch - Sandler O'Neill & Partners

Consolidated profitability?

Steven Sugarman

Yes sure. And I think we've given guidance before that when we do investments for -- based on ROE, you're looking at things that are in the high-teens as a return hurdle. Even in our acquisitions we've given guidance that we have return hurdles over 15% ROEs and that's consistent with how we look at our business.

Andrew Liesch - Sandler O'Neill & Partners

Got you. Thank you very much.

Operator

With no further questions at this time, I would now like to turn the call back to Mr. Steve Sugarman for any closing remarks.

Ron Nicolas

Steve, this is Ron. If I may, I just want to go back to a question I was asked earlier. I believe by Don Worthington on the TDRs. We have roughly, approximately 13 million, 26 loans that are in a TDR status. Of those 26, 25 are paying under the currently modified terms and are less than 90 days delinquent and roughly about $12 million is paying according to those terms. So that’s basically one loan Don, roughly about $1 million.

Steve Sugarman

Very well, we hope that you guys found this call productive and we really appreciate you taking the time. Thanks again to all the employees and professionals at Banc of California. And I think we are going to continuing to make good progress towards our business plan. We look forward to reporting to you in a couple of months on the first quarter. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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