Opus Bank's (OPB) CEO Stephen Gordon on Q1 2016 Results - Earnings Call Transcript

| About: Opus Bank (OPB)

Opus Bank (NASDAQ:OPB)

Q1 2016 Results Earnings Conference Call

April 25, 2016, 11:00 AM ET

Executives

Brett Villaume - Director of Investor Relations

Stephen Gordon - Founding Chairman, CEO & President

Michael Allison - Co-President & President of Commercial Bank

Nicole Carrillo - CFO

Analysts

Matthew Clark - Piper Jaffray

Preeti Dixit - JPMorgan

Julianna Balicka - KBW

James Ellman - Seacliff Capital

Operator

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Opus Bank First Investment Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Brett Villaume, Director of Investor Relations, you may begin your conference.

Brett Villaume

Thank you, Nicole. Good morning and welcome to Opus Bank's investor webcast and conference call. Today I'm joined by Stephen Gordon, Opus Bank's Founding Chairman, CEO and President, Michael Allison, Co-President and President of the Commercial Bank, and Nicole Carrillo, Chief Financial Officer.

Our discussion today will cover the company's performance during the first quarter of 2016 and information contained in the earnings press release issued earlier this morning. Additionally, we well discuss our acquisition of PENSCO Services LLC and its wholly-owned subsidiary PENSCO Trust Company, which closed on April 13, 2016. A slide show presentation that accompanies today's call is available on the Opus Bank Investor web page at investor.opusbank.com.

Today's discussion may entail forward-looking statements which are intended to be covered by the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. You'll find a discussion of these forward-looking statements in our recent FDIC filings and on page 7 of this morning's release. [Operator Instructions]

Now, I will turn the call over to Stephen Gordon, Chairman and CEO.

Stephen Gordon

Thank you, Brett. I'll now provide an overview of the results of the first quarter of 2016 and then call on Michael Allison, Co-President and President of the Commercial Bank and Nicole Carrillo, Chief Financial Officer, to go in to more detail on our financial performance. We will address questions at the end of our prepared remarks.

The first quarter of 2016 continued to demonstrate Opus' strong performance, as we executed on our mission of building a highly profitable, high growth, super regional bank that is entrepreneurial, solution-based and client centric in major metro markets up and down the West Coast.

Our first quarter results included record first quarter loan fundings and record first quarter new loan commitments compared to past year's Q1 levels. This demonstrates the continued ramping of Opus' strong growth rates, despite the seasonal slowness we typically experienced in our first quarter each year.

Moreover, the successful completion of our acquisition of PENSCO, which closed on April 13, and now operates as a separate wholly-owned subsidiary of Opus Bank, represents Opus' entry into wealth services, and has already resulted in significant benefits to Opus' profitability, balance sheet composition and revenue diversification, and we anticipate we'll continue to do so throughout 2016 and beyond.

These positive developments, as well as our continued strong profitability, balance sheet growth, and disciplined adherence to our stringent credit culture during the first quarter of 2016 leaves me confident in our ability to achieve even greater success this year.

For the first quarter if '16, we reported net income of $17.3 million, and diluted earnings per share of $0.51, compared to net income of $11 million and diluted earnings per share of $0.34 for the first quarter of last year, representing 56% and 50% year-over-year growth in earnings, and earnings per diluted share, respectively.

This quarter's earnings were impacted by $1.2 million of non-core acquisition and strategic initiative related expenses, including expenses related to the acquisition of PENSCO and severance associated with our expense reduction and efficiency improvement strategy, previously announced on January 11, 2016.

As well as $3.4 million of seasonal compensation and benefits expenses, which are typical during the first quarter of the year, and absolutely should not be assumed as part of Opus' go-forward expense run rate for the remainder of 2016.

Total assets reached nearly $7 billion - at $6.9 billion as of March 31, 2016, up 25% from the year ago period, and new loan fundings over the past 12 months totaled $2.5 billion. During the first quarter of '16, we funded $552 million in new loans, up 18% versus the prior year, and originated new loan commitments of $630 million, up 20% versus the prior year.

While both were first quarter record origination levels, new loan fundings decreased from $763 million in the fourth quarter of last year, as we typically experienced a ramp up in loan originations over the year with the last quarter being the highest funding quarter of the year.

Total loans held for investment, which includes the run-off we experienced from our shrinking acquired loan portfolio grew by $267 million or 5% from the prior quarter and 32% from the year ago period.

During the first quarter, our contractual net interest margin, which excludes the impact of accretion income received from the acquired loan portfolio expanded by 17 basis points to 359, driven primarily by growth within our originated loan portfolio, including commercial and specialty banking divisions, as well as the first quarter benefit from the Fed rate increase in December '15, while the cost of funds remained stable.

Return on assets measured 1.03% for the first quarter of '15, unchanged from 1.03% from the fourth quarter of '15, and an increase from 85 basis points for the first quarter of '15. Return on average tangible equity increased to 11.5% compared to 11.2% for the fourth quarter of '15 and 8.1% for the first quarter of '15.

Importantly, Opus is benefiting from the improved operating leverage that has resulted from our earlier efforts to build an infrastructure capable of supporting a much larger, more efficient organization.

Our efficiency ratio was 40.8% adjusted for the merger and strategic initiative related expenses, severance and seasonal expenses, compared to an adjusted efficiency ratio of 43.1% for the fourth quarter of last year and 54.1% for the first quarter of '15.

Our efficiency ratio remains well below the average of our West Coast regional peers, who are at 53% and our high growth national peers who are 54% as of March 31, '16.

Continued strong performance from our commercial and specialty banking divisions, which represented 54% of our new loan fundings during the quarter and 60% of loan commitments originated, helped drive an 11 basis point expansion in the yield on our originated loan portfolio from the fourth quarter of 2015. Further, the strong growth in these divisions has led to our originated C&I loan portfolio doubling in size over the past year.

Meanwhile, our industry leading income property banking division also continues to provide strong loan origination growth, as a dominant multi-family financing force in major West Coast metro markets.

In addition to new loan fundings, we continue to work the acquired loan portfolio to generate accelerated outsized return. Our current loan pipeline remains robust entering the second quarter with 61% contributed from our commercial and specialty banking divisions as of April 1, 2016.

As I mentioned earlier, we closed on the acquisition of PENSCO on April 13, and immediately began seeing the benefit to our balance sheet, as $739 million of PENSCO's ancillary custodial client cash balances had already transitioned to Opus as of April 22. These balances represented $802 million of $1.15 billion total as of April 22, putting Opus well ahead of our original transition plan.

As a result, a percentage of our total deposit base that is comprised of both non-interest bearing and interest bearing demand deposits increased to 46% from 40% as of March 31, and our loan to deposit ratio importantly decreased to 98% as of April 22.

Additionally, certain client - Opus client relationships withdrew just over $100 million of balances immediately prior to quarter end and subsequently immediately returned those balances at the start of this second quarter.

This activity is atypical of Opus' deposit growth patterns, therefore the March 31 deposit balance should not be mistakenly viewed as indicative of a trend. Average total deposits increased $131 million or 3% during the first quarter of 2016 to $5.3 billion.

Our cost of deposits increased 1 basis point during the first quarter of '16 to 48 basis points, but has subsequently already decreased to a weighted average rate of 42 basis points as of April 22, aided by the inflow of PENSCO ancillary custodial client cash balances.

Subsequent to quarter end, we paid off $220 million of the $750 million in Federal Home Loan Bank advances outstanding at March 31, '16, which has already served to reduce Opus' overall cost of funds here at the start of the second quarter.

Additionally, we plan to pay off an additional $465 million in maturing FHLB advances by the end of the second quarter of 2016, as we had readied our balance sheet to absorb the purchase of PENSCO and further reduced our cost of funds, and further benefit our contractual net interest margin.

Non-interest income increased to $5.3 million in the first quarter of '16 compared to $3.3 million during the first quarter of '15 with $1.6 million of fees contributed by our escrow and exchange divisions during the first quarter and $1.9 million of service charges on deposit accounts, primarily from our retail bank, which continues to be strong source of client deposits, in addition to functioning as a distribution network for our commercial bankers throughout the markets covered by our 58 locations up and down the West Coast.

Importantly with the acquisition of PENSCO as a wholly-owned subsidiary of Opus, we anticipate a significant increase in non-interest income to occur beginning in the second quarter and continue in future quarters, as a result of fee income received on PENSCO's approximately $11 billion in assets under custody.

Part of the decrease in non-interest income during the first quarter was also due to merchant bank fee income moving toward the second quarter and we anticipate based on the line of sight we have into the engagement pipeline of the merchant bank, we anticipate that there will be stronger contribution in the second quarter from the merchant bank.

While we're proud of Opus' industry-leading growth and the successes we're seeing in diversifying our revenue stream, we remain focused on profitability and maintaining our strong credit culture.

During the first quarter, our ratio of non-performing assets to total assets increased to 62 basis points. The result of one loan relationship that was placed on non-accrual during the first quarter of '16 for which we had previously allocated adequate reserves.

Despite the linked quarter increase, our non-performing asset ratio remains on par with our West Coast regional and high growth national peers.

As we continue to execute on our strategy, we anticipate further improvements in our contractual net interest margin, efficiency ratio and overall return metrics. We believe our scalable infrastructure will allow us to continue leveraging our operating platform and support our growth trajectory going forward.

The first quarter of '16 witnessed the continuing success of our commercial and specialty banking divisions, as well as our industry-leading income and property banking division, due to the client demand for a dynamic solutions-based advisory approach.

Our record levels of first quarter new loan fundings and commitments originated, our increasingly high quality deposit banks, continued conservative approach to credit, strong capital position, and scalable business give us confidence that 2016 will result in an even stronger performance than '15's results.

As we continue to successfully grow and improve efficiency, we're pleased to announce that the Board of Directors of Opus has approved increasing the quarterly cash dividend payable in the second quarter by 20% to $0.18 per share, which reflects the strength and maturation of our business, strong capital position and liquidity.

At this point, I'll turn it over to Nicole Carrillo to go into more detail on the financial results.

Nicole Carrillo

Thank you. Our first quarter performance resulted in net income of $17.3 million or $0.51 per diluted share, compared to $16.7 million or $0.50 for the fourth quarter of '15, and $11.1 million or $0.34 for the first quarter of '15.

Earnings per share increased by 2% from the fourth quarter and 50% from the first quarter of '15. Earnings during the first quarter were impacted by $1.2 million of merger and strategic initiative related expenses that Stephen previously mentioned, and $3.4 million of seasonal comp and benefits expenses, which included higher employer taxes, lower origination related deferred compensation for loan originations, and adjustments for our annual incentive compensation payouts.

Also affecting our first quarter earnings was a $3.4 million reduction in the amount of accretion income from sales of acquired loans compared to the prior quarter, which negatively impacted interest income, but was more than compensated for by higher interest income on our originated loan portfolio.

We also experienced a $3.1 million reduction in our provision for loan losses compared to the prior quarter, due to fewer specific reserves and lower provisioning for growth, as our new loan fundings decreased from the fourth quarter.

Interest income from originated loans was $58 million for the first quarter of '16, an increase of 11% from the fourth quarter, driven by higher average balances from quarterly new loan fundings of $552 million, and an increased yield on originated loans, as commercial and specialty banking loans continued to make up a greater percentage of our portfolio.

The yield on originated loans increased by 11 basis points to 437 during the first quarter, due mainly to one less day during the quarter, higher net benefits from higher – from pre-payment, and benefit from the Fed rate increase in December, and higher average balances of originated loans compared to the prior quarter.

Interest income from the acquired loan portfolio, including accretion income decreased to $7.3 million for the fourth quarter of '16 from $10.2 million in the prior quarter, primarily due to the lower accretion income from loan sales and closed loans.

During the first quarter of '16, we sold $13.2 million of acquired loans, which accelerated $1.2 million of accretion income. This compared to the sale of $8.4 million of acquired loans during the fourth quarter that accelerated $4.6 million of accretion income.

We currently have a remaining discount of $10.7 million on the acquired loan portfolio and we'll continue to opportunistically work the acquired loan portfolio to maximize returns and expect continued, but volatile income contribution to our total revenue. Accretion income increased our GAAP net interest margin by 25 basis points during the first quarter, as compared to 44 basis points in the prior quarter.

Interest expense on deposits increased slightly to $6.3 million during the first quarter of '16 from $6.1 million in the previous quarter, driven primarily by quarterly growth of $131 million in the average interest bearing deposit. Our total cost of deposits increased by 1 basis point to 48 basis points in the fourth quarter of 2015.

As Stephen mentioned earlier, we experienced a few large out flows from certain client deposit relationships during the latter part of the first quarter, that resulted in a linked quarter decrease in the period end balance of total deposits, with those funds immediately returning to Opus at the start of the second quarter.

Fee trends and interest income and interest expense resulted in net interest income of $59 million for the first quarter of 2016, compared to $56.7 million in the fourth quarter of '15.

Our contractual net interest margin, which excludes accretion income increased by 17 basis points to 359 during the first quarter, due to higher average balances and rates on originated loans, one less day during the quarter and higher net benefit from pre-payments during the quarter, partially offset by lower average balances on acquired loans.

Our GAAP net interest margin for the first quarter decreased by 2 basis points to 384 from the fourth quarter, largely due to that reduction in accretion income from the acquired loan portfolio, and partially offset by the positive impact of higher balances on our originated loans and higher rates, one less day in the quarter and the higher net benefit of pre-payments from the fourth quarter.

I'll now turn to non-interest income and non-interest expense. During the first quarter, non-interest income was $5.3 million compared to $6 million during the fourth quarter of '15 and $3.3 million during the first quarter of '15.

Non-interest income during the first quarter included $1.6 million from our escrow and exchange divisions, which was down slightly from the prior quarter, but in line with previous quarter's levels and $1.9 million of service charges on deposits, which was up 14% from the prior quarter.

Non-interest income decreased from $6 million during the fourth quarter of 2015, primarily due to $399,000 gain recorded last quarter on the sale of loans that was not repeated this quarter, lower gains on REO, lower BOLI income and lower merchant bank fee income.

Finally, there was a quarter-over-quarter benefit of $543,000 in the valuation of our equity warrant portfolio that was recorded during the first quarter. Non-interest expense for the quarter totaled $31 million, which was an increase from $28 million in the prior quarter.

The quarterly increase was primarily due to the $1.2 million of non-core merger and strategic initiative related expenses, as well as the $3.4 million of seasonal comp and benefits expenses.

Seasonal comp and benefits expenses included higher employer taxes due to the annual reset of employer tax rates, and taxes paid on annual bonuses and Q4 incentive comp that was paid in Q1, lower deferred compensation from loan originations, due to the seasonally lower Q1 fundings and adjustment for our annual incentive comp payouts.

Our stated efficiency ratio was 47.9% for the first quarter, an increase from 44.7% from the fourth quarter, and a decrease from 55.2% from the first quarter of 2015. Excluding the above mentioned $1.2 million of merger and strategic initiative related expenses, and the $3.4 million of seasonal comp and benefits expense, our efficiency ratio would have decreased to 40.8% for the first quarter, compared to an adjusted efficiency ratio of 43.1% in the fourth quarter.

Finally, tangible book value per as-converted share increased to $18.73 at quarter end from $18.28 at the year end, and increased from $17.08 at March 31, 2015. Our return on average assets was 1.03% for the first quarter, unchanged from the prior quarter, but an increase from 85 basis points in the first quarter of 2015.

Return on average tangible equity was 11.46 for the first quarter, compared to 11.19 during the fourth quarter of '15, and 8.06 in the fourth quarter of 2015. Our capital ratios continue to remain well in excess of regulatory requirements, under the Basel III calculations at quarter end.

I'd now like to turn the call over to Michael Allison for a discussion of our origination trend and credit metrics.

Michael Allison

Thank you, Nicole. As Stephen highlighted, we accomplished $552 million in new loan fundings during the first quarter, setting a record for Opus' first quarter loan origination volume. Furthermore, we originated new loan commitments of $630 million, which is also a record first quarter commitment level.

We think this is important evidence of our continued strong growth rates that demonstrates the ongoing ramping of both new loan fundings and commitments originated, which occurred in spite of the routine and anticipated seasonal slowdown in activity we experienced in the first quarter of each year.

We continue to be pleased with the successes in all of our divisions, and specifically in our commercial and specialty banking divisions, as we build commercial volumes to complement the ongoing success in our commercial real estate banking group.

We continue to expect origination levels to ramp over the course of the year, as we have experienced in years past and as we have previously guided would occur. Our new loan fundings during the quarter were driven by all of our banking divisions with $253 million from income property banking, $79 million from structured finance, $61 million from institutional syndications, $55 million from commercial banking, $49 million from corporate finance, $47 million from healthcare banking, and $4 million from technology banking.

We continue to deliver on our strategy to shift the mix within our loan portfolio towards a greater percentage of higher yielding non-multi-family loans, and our efforts have seen results, as our total loan portfolio has transitioned to 46% originated multi-family loans, down from 52% at the end of the first quarter in 2015.

The increasing percentage of commercial or C&I loans in our total portfolio, which now measures 26% compared to 16% in the prior year's first quarter is a key reason we have confidence in our ability to sustain our strong growth rates, while improving our net interest margin over time.

Also, during the first quarter, we announced the formation of our media and entertainment division within the commercial bank, which is responsible for providing capital financing and banking solutions to clients within the television, music, digital media, broadcasting, sports, and film industries, as well as its businesses that support them. We look forward to seeing contributed growth from this division in the second half of the year as we continue through 2016.

In spite of industry chatter about commercial and multi-family real estate, we have tremendous confidence in our ability to continue growing our leading multi-family lending platform, which continues to originate loans at attractive rates and experienced zero charge-offs and de minimis delinquency since inception.

Multi-family lending on the West Coast remains a more favorable market environment than comparable East Coast ultra competitive markets, which have experienced compressed pricing.

The weighted average rate on Opus' new multi-family loan fundings during the fist quarter decreased by only 3 basis points compared to the prior quarter and actually increased each quarter during 2015.

Additionally, credit metrics on our multi-family and CRE portfolios include attractive loan to value and debt coverage levels that have sustained over the past few years and during the first quarter of '16, aided by our markets that have rent control regulations, including the San Francisco Bay Area and certain sub-markets of the Los Angeles metro area.

Overall, our credit quality continues to perform consistent with our expectations, as our portfolio of multi-family, CRE and C&I loans continued to season. During the first quarter, we saw our ratio of non-performing assets to total assets increase to 62 basis points, as compared to 37 basis points last quarter.

The linked quarter increase in non-performing assets was attributable to one loan relationship in our tech portfolio that is current but was placed on non-accrual due to developments during the quarter, and did not result in a need for any additional allowance.

I do want to stress that this quarter's increase in the NPA ratio was not seen as an indication of a trend in our credit quality. We continue to maintain our focus on a disciplined approach to credit, that includes active portfolio management and may include quarter-to-quarter changes in risk rating or accrual status based on our stringent proactive underwriting standards.

The management of credit risk in the specialty banking portfolios that we originate is ongoing, and consistent with expectations, we continue to anticipate changes in risk ratings, as our entire portfolio seasons.

Despite this quarter's increase, our NPA ratio is on par with our West Coast and high growth national peers as of March 31, 2016. As mentioned earlier, our income property banking portfolio continues to reflect stellar credit metrics, including zero losses in the originated multi-family portfolio.

Our provision for loan losses on the originated portfolio during the quarter included $1.9 million for quarterly loan growth and $3.2 million for changes in specific reserves, individual risk ratings identified through our credit management process, and loss factors, compared to $3.7 million for quarterly growth and $4.7 million for changes in specific reserves, risk ratings and loss factors during the fourth quarter of '15.

Our ratio of the allowance to total loans increased to 85 basis points as of March 31, from 80 basis points at December 31, 2015, and 57 basis points in the year ago period. The linked quarter increase in the allowance ratio was driven by the quarterly growth in our C&I portfolio, which has occurred more quickly than our multi-family portfolio, and has therefore resulted in the need to allocate a greater percentage to our reserves, as well as quarterly changes in our individual loss factors.

We recorded a provision recapture of 151,000 on the acquired loan portfolio with the corresponding allowance for loan losses on the acquired loan portfolio decreasing to 930,000 at the end of the first quarter. The remaining discount on the acquired loan portfolio was $10.7 million as of March 31.

Our total coverage ratio, which includes this remaining discount on acquired loans, was 1.03% at the end of the third quarter, a decline from 1.08% last quarter, as the acquired loan portfolio continues to comprise a smaller percent of our total portfolio.

True to our effort to deliver the entire bank to our clients, along with the loan growth from our commercial and specialty banking divisions, we do continue to experience great contribution of deposits from these divisions, including our deposit focused fiduciary and correspondent banking groups.

Near the end of the first quarter, we saw a few sizable deposit outflows in fiduciary and correspondent banking divisions, which resulted in a decrease in our period end deposit balances, while average total deposits increased to $131 million during the quarter.

These deposits were returned at the beginning of the second quarter and we anticipate seeing continued strong growth in these divisions, as well as our retail bank and other commercial and specialty banking divisions in the second quarter, and the remainder of 2016.

I'll now turn the discussion back over to Stephen.

Stephen Gordon

Thank you, Michael. In summary, I'm pleased with the success we've seen from all divisions of Opus during the first quarter of '16, and look forward to continuing this through the remainder of the year. Thank you again for joining our conference call today, and we'll now take questions. Operator, if you would please open the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matthew Clark [Piper Jaffray]. Your line is open.

Matthew Clark

Just want to - maybe first question, just curious what the weighted average yield was on the new loans in the quarter?

Nicole Carrillo

Yes, the weighted average rate of new loan funding during Q1 was 4.26.

Matthew Clark

4.6?

Nicole Carrillo

4.26.

Matthew Clark

Oh, 26, thank you. Okay. And then as we look forward, thinking about the core margin, knowing you guys are – have come in to some liquidity here, and start to put that to work, also repaying some FHLB. Is it fair to assume that the core margin should continue to march higher here?

Stephen Gordon

I think that - hey, Matt. Good morning. I think that's fair to assume. If you look at our cost of funds came down meaningfully through the - the overall cost of funds comes down meaningfully through the – through our overall cost of deposits and the pay-down on the federal loan bank borrowings that were included in the quarter.

So you're seeing the federal home loan bank borrowings were a cost of anywhere from what's called 50, 60 basis points, so that's going to be eliminated greatly. Then the cost of deposits dropped down from roughly 48, 49 basis points, down to 42 basis points already and that doesn't even include all of the balances coming over. It's just a good solid amount of the balances on the PENSCO acquisition.

And then we're seeing for example, today the loan pipeline is at a higher rate than the 4.26 that where loans came on. And then just to clear up something in a note that you put out when in the first month or two of the quarter when there was a lot of noise out there about an impending deep dark recession that the US was heading into.

I think you took a lot of institutions down because rates were coming down, and you got to remember that at Opus we've got floors on all our loans, that the start rate on the loan is the floor and we're not seeing that impact on our loan yield.

We're not seeing the overall weighted average loan pipeline coming down and I think the balance sheet is very, very well positioned for regardless of what interest rates do to see especially also including because of our mix, our shift in the mix of our loan base, we're seeing contractual NIM increase regardless of what interest rates do out there.

I think what you see is if the Fed ever did something in here terms of increasing rates we would just see a greater acceleration to the expansion, but if rates decline in here we're not seeing an impact.

Matthew Clark

Okay. And then on the tech originations in the quarter looked a little light. I assume that's partly due to the disruption in the quarter. I assume that’s resumed, can you just give some color there?

Stephen Gordon

On that I would say it's really more an indication of kind of the volatility of the varying production quarters that we see. Sometimes healthcare has a big month, sometimes tech has a big month. This quarter just tended to be a shorter quarter for their result. Their pipeline is still relatively robust. So I wouldn't expect the following quarter to look like that.

Matthew Clark

Okay. And then on the credit size to total loan ratio just at the end of the quarter, an update on that, please?

Nicole Carrillo

The total credit size loans to total loans increased slightly to about 2% at the end of the quarter – at the end of first quarter from about 1.7 at Q4.

Stephen Gordon

Right, just slightly above 2%, Matt.

Matthew Clark

Okay. And then just maybe an update on capital, your thoughts on the leverage ratio here and it looked like you guys have some new debt ratings out there. I was just curious about your thoughts on common versus sub-debt?

Stephen Gordon

So we went in and got that rating just because we thought that would be prudent to do. You're talking about the crawl rating. And - but you can see our capital ratios are healthy at the end of the quarter and we have a lot of flexibility. So we'll make a determination if it's or something we want to do.

Some people out there thought we were going to do something in the first quarter and we had indicated that we didn't have a need to do that. And at this point we're always evaluating what our options are on the table and what makes sense for us to do.

And we're looking always at all of our capital ratios and as well as looking at the overall economy, local economies and risk inherent in our balance sheet and we make a decision as to if something makes sense to do. So we'll keep everyone posted if at some point we do decide to do something.

Matthew Clark

Okay. I'll step back for now. Thanks.

Operator

Your next question comes from the line of Preeti Dixit [JPMorgan] Your line is open.

Stephen Gordon

Good morning, Preeti.

Preeti Dixit

Hi. Good morning, everyone. Nicole, just to start with that $3.4 million in seasonal increase in comp, it seems like a much larger seasonal adjustment than we've seen in past first quarters.

I know you broke out the drivers, but can you help us understand why it was much higher this quarter than we've seen in the past? And then as Stephen alluded to, should all of that come out of the 2Q run rate?

Nicole Carrillo

So the FAS 91 – the change in the FAS 91 deferred cost on loan originations was the biggest driver. If you look at how much we funded in Q4 versus how much we funded in Q1, that delta drove almost a $1.8 million swing in the deferred compensation during the quarter, just like its helpful when we originate higher loan fundings, it defers more when we originate lower loan fundings we defer less.

So you're going to see that come out of the run rate as the loan originations ramp during the year. So that $1.8 million delta is going to be gone by the time that we reach the same funding levels as what we had in the fourth quarter.

Stephen Gordon

And going in to the second quarter we're feeling very good about our funding levels. We had our usual seasonal low first quarter. And in there was also an extremely low January and February, and a significant March.

And we have good feeling, good line of sight going in to the second quarter that we're going to see very, very different types of numbers in terms of new loan fundings, as well as you would see much more being deferred in the - related to that in the comp.

Nicole Carrillo

The other item that was the biggest driver was the employer taxes. There was about a $1 million swing in employer taxes from Q4 to Q1 as those employer taxes reset which in California we're a highly taxed state, and that drove about a $1 million.

Additionally when you're paying out bonuses and record levels of incentive comp for your record levels of originations in the fourth quarter and that’s getting paid in the first quarter, you're paying that higher tax rate on those additional payments that you are making during the first quarter as well.

So you're not going to see a portion of that occur during the second quarter, but the piece that's attributed to just the higher tax rate in general are normal salaries is going to run off probably usually during the second and third quarter. The other amount was just kind of a true up for our incentive compensation related to the record funding during Q4 that was paid in Q1.

Preeti Dixit

Okay. Got it. That's super helpful. And then I know the origination volumes impact how much hits the confine at any given quarter, but if we assume the $2.5 billion of originations you've talked about for the year of new loan fundings, how should we think about a typical annual increase in comp for the year given the hires that you've made?

Nicole Carrillo

Steve?

Stephen Gordon

I don't know that you're going to see a lot of that coming through, you know, that maybe…

Nicole Carrillo

I mean, you're going to see a much small - you're not going to see a run rate increase like what you saw from Q4 to Q1. I would expect it to be about half of that.

Preeti Dixit

As we think about the full year?

Nicole Carrillo

Yes.

Preeti Dixit

Okay. That's helpful. And then I appreciate the color on the fundings being higher year-on-year, but it looks like the net loan growth was a little bit lighter. Can you talk about what you saw in terms of repayment activity on both the multi-family and commercial sides? And then any color on how the pipeline compares to this time last year?

Nicole Carrillo

So I can talk about the prepayment activity. The prepayment activity overall was actually very consistent from Q1 – from Q4 to Q1. There really wasn't much change. It just shifted a little bit in that there was some - in the mix of loans that prepaid.

I believe it was more C&I that prepaid during this quarter than in last quarter which is why we got a few more prepaid fees as opposed to when it's more multifamily that's paying off.

So that's really what drove it. The dollar overall of total prepaid was very consistent Q4 to Q1. I think Michael can speak on pipeline.

Michael Allison

Yes, and I think pipeline results are pretty consistent with what you're seeing from a funding and commitment level increase. So again, first quarter is always a ramp for us and we're seeing that ramp at the same kind of percentage increases from a year ago, as you're seeing in the funding and commitment increases from a year ago.

The only change if you want to think about it this way is the mix continues to shift to more C&I, so you're going to see a higher increase in the commitment amounts relative to prior years and less so on the funding side, again because we will commit in C&I and not represent a 100% funding like we do on our real estate portfolios.

Preeti Dixit

Okay…

Stephen Gordon

I think it's also important to note that when we started the year coming off of that $760 million of new loan fundings in the fourth quarter, that the pipeline was probably about I'm going to say 30% to 40%, maybe about 40% lower than where the pipeline stands today.

Michael Allison

Yes.

Preeti Dixit

Okay. Very helpful. And then last one for me, Michael, the size of the relationship that moved into non-accrual this quarter, could you break that out? And I think you mentioned it was a technology credit.

Can you talk about what credit trends you're seeing in the technology portfolio specifically? I know you guys aren't doing early stage or anything, but are you seeing the volatility in the broader tech markets weighing on your customers at all?

Michael Allison

I would think in general we're not. The challenges that we've had and in fact broke and really its two relationships. So it's hardly indicative of across the entire portfolio. I'm not going to suggest that it's an industry issue in the space that we serve. And you're correct, it's not early stage, its later stage. And so we're not impacted by some of the capital requirements that seem to be driving the earlier stage tech entrance.

So I guess in a little more color we've got, probably 20-ish million in relationships in tech that are the cause of our focus right now and across the portfolio just for a little more color, we have four relationships out of the close to 3,000 that we think are troubled and are deserving our time.

So when we have confidence that we're not seeing trending, that's the reasons. We have a very select number of isolated incidents that you're seeing run through our risk rate migration into our NPA status.

Preeti Dixit

Okay. I know you're not very far from the 90 basis point coverage that you've talked about in the past, I mean, given what you're seeing in terms of risk rating migration is there any change to that outlook?

Michael Allison

I think right now I'm not prepared to suggest there will be. Again, such a small number of relationships that are impacting that level that a trending perspective, I don't think we're prepared to guess differently if you will.

And again, don't forget that when we projected that coverage, we did it expecting the mix to transition slower than it has. So we've accelerated the pace of getting to that, but not necessarily our expectation for the ultimate level.

Preeti Dixit

Okay. Got it. Thank you for all the color, everyone.

Michael Allison

You're welcome.

Stephen Gordon

Before another question comes in, I want to respond to a question that came in through our WebEx. We're being asked if the Department of Labor, recent changes to the Department of Labor fiduciary rules that take effect in the year affect Opus in any way with the acquisition of PENSCO?

First of all, they don’t give - PENSCO does not give advice - investment advice. They simply determine or make a determination that the investment being made by a custodial client does comply with IRA related requirements. But separate from that, the impact solidifies and validates PENSCO's place in the market in terms of the role they play as a custodian as the leading custodian on alternative asset, as an IRA custodian on alternative assets.

It is going to have an impact on those large firms out there, the brokered dealers, the wire houses, the brokerage firms that are also custodians in addition to playing a fiduciary role, in addition to being an advisor – an investment advisor.

So what we think we're going to see and we'll keep everyone apprized is a significant opportunity for bulk transference of those custodial clients that exist at a lot of the large firms out there over to the PENSCO platform. And we would anticipate that we're going to see great success and growth through that, which would result in more assets under custodian, which would result in greater fee income than we've already kind of indicated to everybody.

So I think that the role that PENSCO plays has been solidified even more strongly as a result of the Department of Labor changes that were made impacting fiduciaries. So let's continue on with questions.

Operator

Your next question comes from the line of Julianna Balicka [KBW] Your line is open.

Julianna Balicka

Good morning.

Stephen Gordon

Good morning, Juliana. Can we start out by saying we are going to miss you tremendously when you retire?

Julianna Balicka

And I'll miss you guys as well.

Stephen Gordon

So that means you won't be visiting us in San Diego anymore? Oh, I'm sorry, that was Irvine…

Julianna Balicka

No, I might figure out where Irvine is for once and take a real road trip.

Stephen Gordon

All right. So what do you have going on, Julianna?

Julianna Balicka

I have a few follow up questions. One, on the PENSCO deposits that you referenced had come already through April 22, what is your expectation of further deposit growth, A, just migration of deposits on you balance sheet integrate in the second quarter, and B, growth of this deposit vertical for the rest of the year and in to 2017?

Stephen Gordon

Okay. So I want to be clear that we intentionally are using terms like ancillary balances, the core primary purpose of PENSCO is those, you know, be that custodian holding the alternative assets in the IRAs that are being self-directed, selected by those IRA clients.

As a result of that business, an ancillary activity occurs which sometimes you end up with balances that are not invested into those alternative assets. And that sits at right now at $1.15 billion and our very much core non-volatile, very low rate there are going to cost Opus 2 basis points.

So we already had the numbers we indicated that we put into the press release and into our discussion here where we had some balances that were already here at Opus, roughly let's call it around $65 million of those.

We had those $65 million of balances moved from costing us 75 basis points to costing us 2 basis points and then in addition to that we had additional balances come over almost immediately after the close, transitioning over. Those are also now costing us 2 basis points.

Then we're anticipating somewhere around another $100 million to come in during the second quarter here. That will lower our cost of deposits even further and our overall cost of funds. And then we have what's called another couple hundred million, a little north of a couple hundred million that will come over later in the year.

And we may bring those over sooner depending on our thoughts around those maybe balances that were getting paid quite a bit of rate by other banks around country on those balances and they are a higher rate than we'd be earning if they were sitting in Fed funds or short-term investments.

The pace at which we'll bring them over will be determined based on our projected loan growth and actual loan growth over the course of the remainder of the year and versus what we're earning on those balances when they are sitting over at other banks.

Those balances still count ironically, all of these balances, ironically even though they are sitting on Opus' balance sheets or on other banks balance sheets, they are still sitting underneath the assets under custody and they still count toward fee income that Opus will be earning in terms of assets under custody.

So you kind of get that double advantage. So you're getting the benefit of the decreased cost of funds, decreased cost of deposits, the impact that that has on our contractual net interest margin, as well as the fee income on those balances that are held under custody, as well as the fee income on the remaining other invested assets that are held under custody through PENSCO as well.

So we do anticipate - we're ahead of our initial schedule that we have indicated to everybody in terms of balances that we brought over and we'll just make decisions as we go along as to whether we accelerate that further.

Julianna Balicka

Got it. Got it. And then further on PENSCO now that the acquisition is closed, what kind of fee income and expenses associated with position should we be thinking about?

Stephen Gordon

I think what we're going to do is since we're a couple of weeks into the month of April, so we're going to only have a half a month benefit in April, and then we're going to have the remainder of the quarter.

What we're going to do is at the end of the quarter we're going to give extraordinarily good detailed guidance on what you should expect through the remainder of the year and that will take into account assets under custody, the fee income of those assets under custody, the balances that were have been moved over to Opus will give extremely accurate color on that.

And then in addition to that we'll give color on what we're earning on those balances that are not at Opus, and we'll also give you a good solid expense run rate given that we'll have implemented a good amount of the expense reductions that we strategically have detailed through what you would see in the guidance that we've given you around our EPS accretion, et cetera. So when we get to the end of the quarter, we'll give really good detailed color around all of that.

Julianna Balicka

Very good. Very good. Okay, and then skipping over to deposit growth, the $2.5 billion deposit fundings for the year, two questions. One, on your fundings rate, you added entertainment group, but you're kind of keeping your kind of funding expectations unchanged.

So maybe you can update us as to what are the moving parts about which loan origination for the quarter are doing better right now in the current environment, which ones are you pulling back on, just to give us a little bit of more color on the growth side?

Stephen Gordon

Right. So let's start with - we haven't changed the guidance that we've given to everybody around that $2.5 billion of new loan fundings. That’s - we've still guided the exact same number and we've been saying that consistently in all of our investor meetings, et cetera.

The mix, I think we've given good color as to in the pipeline, the new – the non-multifamily banking division related loans now represent roughly 60%, 61% of those new loan fundings in the pipeline that we would project to come in over the course of next quarter, two quarters, et cetera.

And then what we wanted to be very clear on in speaking about the media and entertainment banking division is that just like every other division that we've started at Opus, right now we've started that with one great banker and we're going to bring on - we'll do what we need to do in terms of building the partnered credit apparatus to go with that.

But what we wanted to do and verbally I think we've done a good job of guiding that in this call is give color that it takes a little while for that banker to show up at Opus, to head up the division, to build the white paper so to speak in terms of defining what it is that we're going to be doing, what we're going to target, how we're going to go about it et cetera. And then that pipeline builds and it takes a good 90, 120 days to build that pipeline and then loans start funding.

So that's why we gave color that you'll see that benefit really in the latter, the second half of the year. You're not going to see that in the second quarter. So I wouldn't want you to bake anything in or assume anything in for media and entertainment until we get into the second half of the year and even then just like everything else we do, it's going to ramp up just like everything.

Michael Allison

So we've done the early diligence to know that there's an opportunity for us in the marketplace. And now we've gone out and acquired the banker that we think can drive that success.

We're building the internal capture of the kind of deal, the structures that are appropriate, the resource to dedicate and to Stephen's point, we're 90 to 120 days from being resolved around all those issues.

So you're not going to see production for a while, but we're confident we're doing it the right way, going about it the right way, and you'll see the results in the latter part of the year, first of the third quarter probably.

Stephen Gordon

And that process, by the way, is exactly how we built healthcare, exactly how we built tech, exactly how we built corporate finance and everything else that we do.

Julianna Balicka

Very good. And just to clarify the entertainment media group, that's not actually going to be real estate backed, so that's going to be a purely C&I style vertical for you?

Michael Allison

Correct. Correct.

Julianna Balicka

Okay…

Michael Allison

There may be the odd owner occupied as a part of the overall relationship, but it's meant to be a working capital predominantly.

Julianna Balicka

Got it. Very good. And then on the loan growth, that's looking to - from the – pardon me, looking from the funding growth to repayments, now that your balance sheet is much bigger than it was a couple years ago.

Do you have a sense of a run rate of repayments that we should start thinking about as your business continues to mature?

Nicole Carrillo

Honestly I would say that this quarter, the level that we've sought this quarter has been pretty typical for the past couple quarters. I think we are cautiously saying that we have started to see a trend in that repayment level.

Stephen Gordon

Right.

Julianna Balicka

Okay. Okay, and then on the prepayment, what was the dollar amount of prepayments this quarter or alternatively what was the basis point impact to your loan yield?

Nicole Carrillo

Yes. So for fees we had about $1.5 million of prepayment fees during the quarter and then the impact on our GAAP NIM and our contractual NIM was about 2 basis points when you consider the total net impact that we get from prepaid, so you not only get a prepaid fee but you accelerate any deferred costs or fees that are on the loans, et cetera. The impact on NIM was about 2 basis points.

Julianna Balicka

Okay. Got it. And then one more question and I'll step back. On your expense run rate, if I take out the seasonal compensation expense shifts which I suppose will come back next year, your expense run rate at this quarter was $26.3 million?

So [Technical Difficulty] expense run rate going forward, thinking about the impact from your expense initiatives et cetera. Should it be lower from here or is this kind of already expense initiatives?

Nicole Carrillo

I think what we have previously announced with the cost savings initiative is that we implemented that during Q1. You saw that severance expense, and the intent was not that you are going to see a drop of $7 million in our run rate, in our expenses.

It's that we are always are looking to identify areas of efficiency, so that we can continue to invest in revenue generating and revenue producing areas, things like starting our media and entertainment division, things like that.

So I think part of us achieving the efficiency ratio goals that we had set for the year of getting into the high 30s by the end of 2016, the last quarter, was part of implementing this efficiency ratio strategy - this kind of efficiency strategy during Q1, so that we would have that - those funds and that expense to reinvest in other revenue generating areas.

Julianna Balicka

Okay. That's makes sense. And one more housekeeping question. When you said that deposit – the demand deposit is a percentage of your total deposits, it’s now up to 46%, does that include the fiduciary and correspondent banking deposits that came back or is that just strictly from PENSCO?

Stephen Gordon

That's everything. At April 22.

Julianna Balicka

Okay. Very good. And finally, why did these deposits come out and come back within a span of a week?

Stephen Gordon

It was really - we've not had that occur before and it was really a window dressing thing. So for example, on the correspondent banking division there was a bank that had balances with us that moved balances to quarter end or just prior to quarter end over to the Feds, so that they could manage their risk-based capital ratio levels and then moved them right back in to us.

So – and now those balances are just sitting with us and they are going to continue sitting with us. So it was just kind of a bizarre blip that we've not had happen before and those balances, they are now right back with Opus and they are just sitting there as core balances.

Julianna Balicka

Got it. Okay. Very good. Thank you very much.

Stephen Gordon

So that's why I was saying nobody - I think it would be a big mistake if somebody took that to be some sort of a trend.

Julianna Balicka

Got it. Got it. Thank you.

Operator

Your next question comes from the line of James Ellman. Your line is open. Excuse me, James Ellman, your line is open.

James Ellman

Yes. Thanks for taking my question. Just a couple quick questions. One, could you comment on the…

Stephen Gordon

All right, James?

James Ellman

Yes.

Stephen Gordon

James, could you introduce yourself? We just don't know who you are.

James Ellman

Oh, sure. I think we've spoken once before. I am at Seacliff Capital.

Stephen Gordon

Okay, thank you.

James Ellman

Very good. Silicon Valley Bank comment the other day about some deterioration in the tech lending space. I know you commented earlier, but are they seeing something different in trends or is there a reason why the area that you're focusing upon is not seeing any weakness?

Michael Allison

Yes. I think it's not a contradiction to what we see and what we think and then Silicon Valley is typically a far earlier entrant in a client relationship than we are. So they do have greater reliance on equity capital, venture capital being available in the marketplace.

Our effort is focused on later stage where we do have positive EBITDA. We've got revenue, we've got some cash flow and we've got liquidity that sits on our balance sheet. So it's a different structure than Silicon Valley would typically have in their relationships.

James Ellman

Okay. Very good. Just one follow up question on PENSCO. Can you tell us approximately what percentage of the assets at PENSCO are coming in with the investor having assistance from an advisor and having secondary log-in for the advisor?

Stephen Gordon

Yes, we'll be able to give color on that very shortly. We're just not going to be doing that on this call. I think we're going to give guidance – we're going to color as to what type of growth we're seeing in the investor advisor network, what kind of growth we're seeing in new account openings, what kind of growth we're seeing in accounts that are opening using their Alt-Nav, industry leading Alt-Nav technology and without the need for a person to be involved in account opening and what's coming over as a result of relationships with the large wire houses. So we're going to be giving color on that in the upcoming weeks and months.

James Ellman

All right. Thank you. And one final question. When you have this one credit go on to non-performing status, did that lead to a net dollars of deferred expenses or deferred fees coming back on to the P&L this quarter?

Nicole Carrillo

No, that doesn't occur until the loan is actually either charged off or paid off. So we're not accreting anymore of those right now. It kind of gets put on hold until the loan is resolved.

James Ellman

I'm sorry, you're not accreting anymore of?

Nicole Carrillo

Any of like the deferred fees or amortizing the deferred cost that are sitting on that loan. It kind of gets put on hold and we're recognizing no interest income, no deferred cost fees on the loan until it's resolved.

James Ellman

All right. Very good. Thanks so much for the time today.

Stephen Gordon

Thank you.

Operator

Your next question comes from the line of Tim O'Brian. Your line is open.

Unidentified Analyst

Thanks, guys. Hey, Nicole, question for you on the December Fed rate hike, can you quantify basis point benefit or interest benefit that came from that?

Nicole Carrillo

Yes. We got about $353,000 more this quarter from loans that either reset into the higher rate or - yes, net of any impact we saw on the other side of the balance sheet which was minimal.

Stephen Gordon

Is that in addition to what we got in December, post rate hike?

Nicole Carrillo

This is just during the first quarter so yes, that’s just the first quarter alone.

Unidentified Analyst

And that's noting, but I mean, beyond that, it's all baked in. You've got a full quarter benefit from the Fed rate hike…

Nicole Carrillo

Yes.

Unidentified Analyst

So there we have it. And then do you happen to have 30 to 89 day past due at quarter end?

Nicole Carrillo

30 to 89 past due came down to about $9 million from $13.5 million last quarter.

Unidentified Analyst

And then another question, did you say that the delta on FAS deferred comp, it was higher by $1.8 million this quarter relative to 4Q based on production?

Nicole Carrillo

Yes. So we deferred less, which means comp and benefit went up by $1.8 million yes, due to the difference in the amount that we funded, between Q4 coming down in Q1.

Unidentified Analyst

And that $1.8 million hat – so I got a little bit confused in terms of what you were talking about. That wasn't considered part of the $3.4 million at seasonal stuff, that's a separate item, or was, okay.

Nicole Carrillo

It is part of the $3.4. Yes.

Unidentified Analyst

And it has to do, and what you are talking about there and what that's related to is the seasonality of production of loan fundings?

Nicole Carrillo

Yes.

Stephen Gordon

Right, even though it was a record first quarter for Opus in terms of loan production in our five and a half year history it was still lower than the $760 million that we originated…

Unidentified Analyst

In the record production…

Stephen Gordon

Exactly. So what I'm trying to give you color on there is that the ramp continues just like it does every year. We'd expect the second quarter to be meaningfully higher than the first quarter, third quarter higher than second, and fourth quarter higher than third, just like we traditionally have done in the past historically.

But we're starting from a higher level than we have in previous years and we'd anticipate that that deferred $1.8 million difference, that we'd see a lot less of that impact in the second quarter, and continuing through the year.

Unidentified Analyst

And then shifting gears as far as the downgraded relationship this quarter, that was two loans, did you say, Michael?

Michael Allison

One loan into NPA and then within the risk migration there was one asset.

Unidentified Analyst

All to the same borrower?

Michael Allison

No, separate relationships, Tim.

Unidentified Analyst

Separate relationships. And then the loan that went to NPA, that's with the work out group?

Michael Allison

Yes, it is.

Unidentified Analyst

Which means, work out means work out of the bank, right? That's what resolution will ultimately be, is that loan it’s getting worked out, there is no more rejuvenation there?

Michael Allison

No, that's the desired outcome is in its current form out of the bank.

Unidentified Analyst

And then as far as – and it's a tech relationship. What - can you give a little bit of color on what triggered that downgrade and what's behind it as far as - I don't know, what kind of collateral is behind it if anything?

Michael Allison

I think in fact that if you look at the amount of reserve impact, it tells you that there is adequacy around how we had reserved it before.

Unidentified Analyst

Yes.

Michael Allison

And so the deterioration had more to do with the timeliness of when why think resolution occurred.

Unidentified Analyst

Got it. I won't ask you what you reserved before because that's probably a negotiating point and this and that and other thing. So I'll leave that alone.

Stephen Gordon

Or just simply something we would never discuss on.

Unidentified Analyst

And then just a follow up on the comments Stephen made about providing additional - much greater detail and color about kind of how PENSCO is going to fold in, is that going to be something - do you feel it's warranted to host a call on that given how prominent this deal is and how impactful it could be to your business you are going forward that you might do a call with investors in June or whenever you decide to roll this thing out and you know, come to us, or how are we going to stay on top of that and how should investors expect to monitor that?

Stephen Gordon

We'll make sure we're giving very good color and guidance and we may do things press release related, et cetera. So, we'll make sure that investors are well on top of it.

Unidentified Analyst

And just one request. When you do that, if you can give any pro forma color at all on capital ratios and stuff I think would be highly valued by investors. So just keep that in mind.

Stephen Gordon

Sure. We'll make sure

Unidentified Analyst

All right. That's it from me. Thanks.

Michael Allison

Thanks, Tim.

Stephen Gordon

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Matthew Clark [Piper Jaffray] Your line is open.

Matthew Clark

Hey, just a follow up on coverage ratios, that has reserved the loan here has stepped out probably a little bit quicker than we might have thought. I know you guys talked about the C&I contribution is being part of that.

But thinking about specific reserves set aside this quarter over $3 million, given that you're dealing with only a handful of kind of problem situations, I mean, it seems like there should be some further relief here in provisioning assuming credit stabilizes here?

But just also want to get an update on kind of where the coverage ratio might shake out based on the mixed change here, are we still talking about 1%?

Michael Allison

I think ultimately, Matt, that number is about right. And so depending on the pace of how the shift and mix occurs, we'll ultimately be there. But on an interim basis you're going to see as we go through that growth, pluses and minuses, quarter-over-quarter as the portfolio seasons.

And I don't have a crystal ball to tell you precision around when we get there, but I think as you recognize we have more and more C&I exposure at better yields, we're going to have a lumpy contribution now and again to that overall coverage rate.

And when I say four, I'm meaning four sort of sizable. Obviously we have smaller relationships that might migrate up and down through our risk grades, but there is not more meaningful ones than those that I've spoken of.

Matthew Clark

Got it. Okay. And then just on the tax rate, just bounced around a little bit the last couple quarters. I guess, what should we assume going forward from here?

Nicole Carrillo

Yes, you saw it – its actually somewhat counter-intuitive, you saw go up a little bit in Q1 because our forecasted tax rate for the full year for the state is lower than what it was last year and when you have a lower state rate you have to revalue your deferred and you have to take a little hit for that in the quarter in which you're forecasting the lower rate for state taxes.

We're forecasting about 38.5% for the full year when you look at it on an annual basis, part of that is starting to recognize some of the benefits of some of the investments we've made in the past as we run through our NOLs and part of that is the PENSCO acquisition, many of their operations, most of their operations are in Colorado which is a lower tax state for us. So we'll be able to apportion more income now that say in California.

Matthew Clark

Okay. Thank you.

Nicole Carrillo

Yes.

Stephen Gordon

Before any other questions, I want to comment on a question or more of perhaps an incorrect observation that somebody made again through WebEx. Someone was assuming that the correspondent banking - this goes back to the little over $100 million of balances that moved out at the end of the quarter and came back in, they made the assumption that these were corresponding banking balances. That's incorrect.

Of the $100 million roughly $20 million, $25 million of that was correspondent banking and everything else was fiduciary banking related balances. So I just wanted to be clear on that. Any other questions?

Operator

Your next question comes from the line of Gary Lou [ph] Your line is open.

Unidentified Analyst

Hi. Just a question on expenses.

Stephen Gordon

Who is this?

Unidentified Analyst

It’s Gary Lou from Foresters Financial. We had a phone call, I spoke weeks ago.

Stephen Gordon

Okay. Yes.

Unidentified Analyst

On expenses, can you talk about it from a full year perspective because there was noise, seasonal impact, timing, defer comp, clusters in the first quarter, can you maybe talk about from full year perspective, especially given your $7 million cost save program , how should we think about expenses for full year 2016?

Stephen Gordon

So I think the better way to look at it at this point until we give detail color on PENSCO, et cetera, is we've guided that you should anticipate that our efficiency ratio is going to work its way in to the 30s over the course of the year and you can see that our adjusted efficiency ratio when you take out all the noise of the first quarter was roughly around 40%, 41%.

And so we anticipate that we're going to break into the 30s over the course of this year. So I think that's probably in addition to all the other color that was given on the call related to expenses during the first quarter, I think that would be a good way to give you color.

Unidentified Analyst

Thank you.

Operator

There are no further questions at this time.

Stephen Gordon

All right. Thank you, everybody, for joining us on the call. And we look forward to talking with you on the second quarter call. Thank you.

Operator

This concludes today's conference. You may now disconnect.

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