Banc of California - Earnings Call - Q1 2025
April 24, 2025
Transcript
Operator (participant)
Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. If you need operator assistance, please press star, then zero. I'll now turn the call over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.
Ann Marie DeVries (SVP and Head of Investor Relations)
Good morning, and thank you for joining Banc of California's First Quarter Earnings Call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goals, strategy, and outlook for 2025 and beyond, which are subject to risks, uncertainties, and other factors outside of our control, and actual results may differ materially.
For discussion of some of the risks that could affect our results, please see our Safe Harbor statement on forward-looking statements, including both the earnings release and the earnings presentation, as well as the risk factor section of our most recent 10-K. Joining me on today's call are Jared Wolff, President and Chief Executive Officer, and Joe Kauder, Chief Financial Officer. After our prepared remarks, we'll be taking questions from the analyst community. I would like to now turn the conference call over to Jared.
Jared Wolff (President and CEO)
Thanks, Ann. Good morning, everyone, and welcome to our First Quarter Earnings Call. Our first quarter results came in pretty much as we forecast, reflecting both strong execution by our team and our ability to capitalize on our attractive market position. During the quarter, we showed positive trends in our core earnings, including net interest margin expansion, strong loan growth, and prudent expense management. We achieved our second consecutive quarter of broad-based commercial loan production while continuing our steady growth and attracting new NIB deposit relationships. As a result, we built up capital during the quarter and increased both book value and tangible book value per share while maintaining strong liquidity levels. Given our healthy balance sheet and commitment to deploying capital in a way that benefits shareholders, we announced a $150 million share buyback program during the first quarter.
We benefited from the market volatility and opportunistically repurchased 6.8% of our shares and have completed the program. We announced yesterday that we are upsizing our buyback program with an additional $150 million to $300 million, and we will expand it to cover both common and preferred stock. We will be prudent with this program and use it opportunistically. While our outlook may change, currently, I do not expect us to deploy all of this remaining capacity immediately. In the first quarter, our loan production, including unfunded commitments, was $2.6 billion, up from $1.8 billion in the fourth quarter, resulting in loan portfolio growth of 6% on an annualized basis. Much of the loan growth came late in the quarter, and it has continued so far in Q2, which will provide a benefit to our net interest income in the second quarter.
Strong loan production volume was broad-based, but we saw our strongest growth in our warehouse, lender finance, and fund finance areas. Loan portfolio growth was also impacted by utilization rates, which have been trending up over the last year. Loan growth was partially offset by a decline in construction loans due to payoffs on completed projects, some of which moved to permanent financing in our multifamily portfolio. While our loan growth has been strong year to date, given the uncertainties that exist in the current environment around tariffs and the broader impacts of the economy, we are adjusting our 2025 outlook for loan growth to mid-single-digit growth. While we still strive to achieve high single-digit growth, this is merely a reflection of the unknown for the back half of the year, given the ongoing tariff noise.
Importantly, we are maintaining our disciplined pricing and underwriting criteria while growing our loan portfolio. Our average rate on new production was 7.2%, which helped our average loan yields and margin. Let me touch on credit for a moment. During the quarter, we showed an uptick in classifieds as well as MPAs. These changes reflect some of the guidance I provided during our last earnings call, when I shared that we've adopted a fairly conservative posture on risk-grading loans and that when we see signs of weakness in any credits, we are going to be quick to downgrade and careful to upgrade. This approach resulted in some additional credit downgrades during the quarter. The increase in NPLs was mainly driven by one CRE loan, a hotel property where we believe the risk is isolated specific to the borrower. The loan is full recourse, and we have adequate collateral coverage.
The increase to our classified loans this quarter was mostly driven by a migration of multifamily rate-sensitive loans that are still current, have strong collateral values, and are in attractive California markets. Despite these attributes, the impact of repricing risk in the current rate environment resulted in performance metric deterioration and subsequent downgrade. I believe this discipline is particularly important in an uncertain environment like the one we are in right now. It does not mean that such downgrades will result in losses. In fact, 84% of the inflows that are classified this quarter are current with no change in borrower behavior. Across all classified assets, 81% of all those loans are current. Furthermore, downgraded loans have strong collateral and low loan-to-values, which would also help to mitigate any potential losses. Historical performance of multifamily loans in California has been very strong, as we have discussed.
With regard to credit losses, our charge-offs in the quarter were mostly driven by a loan that we had previously partially charged off. We had full reserve for the remainder of the loan and decided to charge it off in the first quarter. Our headline reserve level is 1.1% of total loans, and our economic coverage ratio is substantially higher at 1.66% of loans, which incorporates the under-credit mark on the Banc of California loan portfolio acquired in the merger, as well as coverage from our credit-link notes. While uncertainties facing the macroeconomic environment have created volatility in the markets, we remain steadfast in our focus to help our customers through these turbulent times. Our strong balance sheet and attractive market positioning differentiate us and position us to perform well in a variety of outcomes.
We are confident in our ability to continue executing for our clients while maintaining healthy capital and liquidity positions. Now I'll hand it over to Joe, and as usual, I'll bring back with some closing remarks before opening up the line for questions. Joe.
Joseph Kauder (Executive VP and CFO)
Thank you, Jared. We reported first quarter net income of $43.6 million or $0.26 per share, which reflects continued momentum in our core earnings drivers. Net interest income of $232 million was slightly down from the prior quarter as the impact from lower day count, fewer loan prepayments, and lower market interest rates was partially offset by lower deposit cost. Our net interest margin in the quarter increased four basis points to 3.08% due to a 13 basis point decline in our cost of funds, partially offset by a nine basis point decrease in the yield of average earning assets. Our cost of deposits declined 14 basis points to 2.12% as we continue to successfully pass through rate reductions on our interest-bearing deposits. Our spot cost of deposits at 3/31 was 2.09%.
Our average interest-bearing deposits as a percentage of total deposits was steady at approximately 29% for the quarter. Regarding the yield on average earning assets, we saw an 11 basis point decline in our average loan yields to 5.90%, mainly due to the full quarter impact of December rate cuts on floating rate loans, along with a lower accretion resulting from slower loan prepayments. This was partially offset by higher rates on new loan production, which came in at 7.20% for the quarter, driven by growth in warehouse, lender finance, and fund finance. Our spot loan yield at the end of the quarter was 5.94%, and our spot net interest margin was approximately 3.12%. The interest rate sensitivity of our balance sheet for net interest income remains largely neutral as the current repricing gap is balanced when adjusted for repricing betas.
From a total earnings perspective, we are liability sensitive due to the impact of rate-sensitive ECR cost on HOA deposits, which are reflected in non-interest expense. Total non-interest income of $33.7 million was in line with our normalized run rate of $11 million to $12 million per month. Total non-interest expense was $183.7 million, an increase from the prior quarter due to seasonally higher compensation-related expenses, including annual resets for payroll taxes, 401(k) contributions, and incentive compensation, partially offset by lower rate-sensitive customer-related expenses and lower regulatory assessments. Note, our Q1 expenses included a $1 million donation to the Los Angeles Wildfire Relief and Recovery Fund, which we established to support our communities following the devastating fires. Our expenses benefited from a few non-recurring noteworthy items we referenced in our investor deck.
We expect our non-interest expense for Q2 to increase and return to normalized levels consistent with the low end of our outlook of $190 million to $195 million per quarter. We expect positive operating leverage in Q2 as the higher expense level should be more than offset by growth in net interest income, given the strength of loan production that came in late in the first quarter and that continued into the second quarter. However, we do have levers available to right-size our expenses if conditions would warrant. Regarding our growth in loans during the quarter, our credit reserve levels reflect the type of loans that are showing the most growth. Our portfolio mix is shifting towards a higher concentration of lower-risk and lower-duration loan categories such as warehouse, fund finance, lender finance, and purchased residential mortgages.
These lower-risk loan portfolios as a percentage of total loans have increased from 17% at the end of 2023 to 25% in Q1 2025. Under CECL accounting rules, these loans require very low reserves due to low historical loss content and short duration, and will have a more significant impact on overall reserve levels as they increase. Excluding these lower-risk loan categories and their respective reserves, the remaining loan portfolio would have an ACL coverage ratio of 1.43% versus the 1.1% ratio for the total portfolio. In addition and as Jared noted, our total economic coverage ratio is 1.66% when you consider the benefit of our credit-linked notes and purchase accounting marks.
We provided additional color in our investor presentation of the ACL by loan category, and we also believe the assumptions and economic scenario weightings included in our CECL models, which reflect a 40% base case and a 60% recession scenario, are conservative. Our results reflect the progress we have made strengthening our core earnings drivers, including high-quality loan growth, lower funding and deposit cost, net interest margin expansion, and prudent expense and risk management. As we look ahead for the rest of 2025, we expect our strong execution will continue to drive consistent and meaningful growth in our core profitability. At this time, I will turn the call back over to Jared.
Jared Wolff (President and CEO)
Thanks, Joe. This quarter, we saw the thesis for Banc of California and PacWest merger continue to be proven out. We are filling the void of banks that left the California market due to failure or acquisition, and we are becoming the go-to business bank in our markets. Yesterday's announcement of the Columbia-Pacific Premier merger is yet another example. It validates the attractive characteristic of our market and the further elimination of a good-sized competitor like Pacific Premier. As our results continue to demonstrate, we are capitalizing on our strong market position to add attractive commercial relationships, evidenced by the loan growth and new NIB business relationships we brought on during the quarter. At the same time, we continue to add banking talent throughout our markets that will contribute to our profitable growth.
We continue to monitor the economic environment, and while we did not observe a meaningful change in borrower behavior in the first quarter or early part of the second quarter, there is more dialogue now regarding potential slowdown and caution among clients. In light of this, we will remain cautious in our loan production in terms of both industry and structure. We have also evaluated our portfolio for direct tariff impacts, and for the most part, our exposure is both minimal and indirect. Where it is direct, our clients have or are in the process of diversifying their product sourcing and making arrangements for slowdown in activity. Our product and geographic diversity are serving us well. With our solid foundation of significant available excess liquidity, a strong deposit mix, healthy reserves, and capital, we are well positioned for the road ahead.
I want to thank our team here at Banc of California for all their hard work and efforts in this environment. They have worked relentlessly to support our clients, communities, and shareholders in these times which are becoming increasingly volatile. I'm proud to be part of this remarkable team. With that, let's go ahead and open up the line for questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ben Gerlinger with Citi. Please go ahead.
Benjamin Gerlinger (Vice President and Senior Analyst)
Hey. I'm sorry. Can you hear me now?
Jared Wolff (President and CEO)
Yeah, I can hear you, Ben.
Benjamin Gerlinger (Vice President and Senior Analyst)
Okay. At the risk of kind of rambling here, when I look at the bank, I mean, I see it in kind of two lenses. One is margin expansion, expense basis coming down, decent loan growth. I mean, those are positives. The negatives would be credits kind of ticking up in the classifieds, the ACLs getting a little bit lower on a ratio basis. I get the credit link notes. Additionally, the capital base is below peers. It's not too thin, but it's definitely not where you want to be if there is a recession on the lower half of the list. When you think about just the outlook over the next year to two years, given the uncertainty, I get you're buying back shares, but is it the degree of confidence in credit going forward? Is it the degree of profitability of ramping?
I'm just trying to understand the opportunistic approach you're taking to buybacks in a little bit of a volatile period with a thinner than peer capital stack.
Jared Wolff (President and CEO)
Sure. Thanks, Ben. It's a good question. I understand the buckets and kind of how you organized it. I think you laid out the positives correctly. We do expect the opportunity to continue to expand our loans and bring in new relationships. We will have margin expansion. Our spot rate at the end of the quarter was higher than the average for the quarter, and I think we're going to benefit this quarter from the loans that we brought on and continue to bring on a higher loan yield than the portfolio overall. Deposit costs should continue to improve over time.
The heavy moving that we did with kind of our brokered portfolio, as I mentioned, was kind of expiring at the end of this quarter, and our deposit costs are not going to move down as quickly, but they still should come down and our margin will still expand. The noise, as you pointed out, was credit. I think we've explained that pretty well, and it is worth reiterating that our coverage ratio for the non-lender finance, warehouse, and single-family and fund finance loans, which are very short duration and have no losses, is 1.43%. We also laid out in our deck the specific coverage ratios that we have by product, and so it is pretty healthy. I mean, we run a very conservative CECL model, as Joe pointed out. Our scenario is 40% baseline and 60% recession.
That is more conservative, I think, than what Moody's recommends, and it's conservative overall. I think that 1.43% for the majority of our portfolio, the 75% of our portfolio that's not these low-duration, no-loss loans, is very healthy on a peer basis. That's even before you take into account the CECL, the credit link notes, and the marks on the Banc of California portfolio. It's actually higher than that. We take a lot of comfort in that, and our board has looked at this carefully, and I feel very good about it. In terms of the migration, I don't want to see that trend continue. I think that we exercised a fair amount of discipline. I tried to tell people last quarter we were going to be doing this.
We kind of go through the portfolio with a heavy hand and look at it and say, "Okay, folks, let's start preparing for a downside scenario." I think that we are ahead of the curve. I think we're doing this. Maybe others will follow us. I don't know what others are going to do, but I think this was a prudent thing to do, and I just wasn't going to worry about the noise of the migration if I don't believe there's going to be losses. Like I said, I think our reserves are healthy. Addressing capital, this was opportunistic. You are correct that on a peer basis, I think our capital levels are not as healthy as some of the other ones, but they're not low. I mean, I think it's important to remember where well-capitalized is, and most banks got into an extra healthy position.
I think there's some expectation that the baseline capital levels are going to come down a little bit. That is also why I said I did not expect to use the excess buyback announcement that we made for another $150 million. We are going to be patient with that. We are building up capital pretty quickly as well. We have been growing. Our earnings are starting to migrate upward. After the transformation we did last year, we have really done a good job. I think our team's done a good job of steadily building our earnings, and we could expect that to continue. We think our capital is going to build pretty well as well. Let me pause there as an answer to your question. It was a little bit philosophical, but I agreed with your comments, and that is kind of how I see it.
Benjamin Gerlinger (Vice President and Senior Analyst)
Got you. No, that is really helpful. Like you said, there's another one to add to the list for California. You look over the past couple of years at Silicon Valley, First Republic, Union, Bank of the West, a whole bunch of little small deals. Do you think there's more opportunity today for free agency on lenders? The disruption obviously opens the door for new clients, but when you just kind of think through the noise on top of an economic potential headwind, are you looking to add new clients in that regard, knowing that the economic outlook is probably more uncertain now than it has been in a couple of years?
Jared Wolff (President and CEO)
Yeah. I will say this. Three months ago, the economic outlook, we all thought we were, you know, I would say the start of the year, so maybe it's four months ago, we were like, "Oh my God, we were dealt a great hand, new administration, lower taxes, good economy, favorable regulation. Look where we're going." I think that the economic cloudy outlook is self-induced, right? We were in a pretty good spot. I think this is relatively temporary, but we don't know if that temporary means through the end of the year or for the next couple of months.
There's obviously a lot of saber rattling going on right now. We just are going to be cautious, and we're going to take into account. We're not going to ignore it, but we are going to be prepared to move positively as the market relaxes and as things return to normal.
Yes, we will be hiring people and making inroads. Even in a slow economy, the Southern California market is doing very, very well, and there is so much business to take from the larger banks, given the removal and the elimination of so many competitors, as you pointed out. I keep that list on my desk, and I was happy to add PPBI to the list of banks that will no longer be competing with us. Umpqua is already here, and they're changing their name to Columbia. They're already in California. There are no new entrants in California. They're just going to be competing in a different way, and there will be one less competitor. I think it presents tremendous opportunity for us. We are in the fifth largest economy in the world in California, and L.A. is the engine that powers that economy.
We are excited to take market share and serve clients that are at banks that might not be serving them as well as we think we can serve them. There is a lot of competition to go around, though. There is a lot of clients to go around, and I think that it is just a validation of the quality of this market.
Benjamin Gerlinger (Vice President and Senior Analyst)
Got you. That's helpful, color. Thank you.
Jared Wolff (President and CEO)
Thank you.
Operator (participant)
The next question comes from Jared Shaw with Barclays Capital. Please go ahead.
Jared Shaw (Managing Director and Senior Research Analyst)
Hey, good afternoon.
Jared Wolff (President and CEO)
Hey there.
Jared Shaw (Managing Director and Senior Research Analyst)
I appreciate the comments about the allowance ratio and the migration of the positive migration of sort of the loan portfolio. When you look at the backdrop from what we've seen, we've seen more banks adding to the qualitative overlay or adding to the adverse scenario and growing the reserves. I think just looking at the allowance going down with that backdrop is what some people are focused on. I guess if everything stays the same and we continue to see this migration of the loan portfolio towards the higher quality stuff, should we think that the allowance continues to trend down from here, or is there an opportunity to maybe add to a qualitative overlay to actually see the allowance move higher or stay flat here?
Jared Wolff (President and CEO)
No, look, I don't want to be an outlier. First of all, I think it's important that we highlight that 143% coverage ratio for loans that are not in those low-risk categories. It's very healthy, and that is real. And that's before we include any extra resources from credit link notes or from the marks in the Banc of California portfolio, which is double counting in CECL. That money is movable to anywhere in our portfolio, so it's real coverage. I want to emphasize that point. You're asking the question of whether we would let our coverage ratio go down further, and I would prefer not to do that. We do have a model. We do apply subjective lenses to it. I would prefer to be increasing our ratio every chance we get, but we do have to follow our model and do it with discipline.
Jared, what I'm hoping to show in subsequent quarters is positive migration from a risk rating standpoint because we got ahead of it early. I think that will hopefully show that our coverage ratio is flat or growing if we can justify it under our model. That's what I would like to be able to do. It's kind of I'll know it when we get there, but I appreciate your question. We do not want to be seen as an outlier who's bringing it down, but I do think it's important to highlight how strong our coverage ratio is when you actually look at the numbers at 143% for kind of these non-low-risk portfolios.
Jared Shaw (Managing Director and Senior Research Analyst)
Yeah. No, appreciate that and understand that. You know how it is when people stack rank companies by ratios, that it's sometimes tough to be an outlier on.
Jared Wolff (President and CEO)
Yeah. I mean, you're asking the question about like so we're going to come up on a screen, and you're saying, "Well, somebody's not going to do the work. They're just going to look at the headline number," and you don't want to be somewhere where the headline number looks worse because they might not do the work to look at it more deeply. I think that's fair. I think that we have to be cognizant of that. There are certainly people that fall into that category. I think for the reasons I mentioned, we'd like to see our ratio improve, either because we're going to have positive migration or the ratio is going to improve or both. Let's just see what we can do, but hopefully, I answered your question.
Jared Shaw (Managing Director and Senior Research Analyst)
Yep. No, you did. Thanks. Maybe shifting to the goal or the target of 30% DDA, what sort of drives that? What's the timeline to get there? Once we see 30% or get to 30%, what's the percentage of that that is subject to ECR?
Jared Wolff (President and CEO)
Thank you. 30% is our near-term target, which is through the end of this year. We're striving to get to 30% non-disparity deposit percent of total deposits. We're currently at 28%. We had a little bit of outflow this quarter, but I think we held our ground pretty well when you look at relative to following some others and what the trends are. We are growing new business relationships, and we expect those to benefit us over time. But man, it's a big effort. I don't think it's an easy thing to do as you're growing the bank to also grow the numerator and the denominator together on NIB and have the numerator grow faster than the denominator. We're trying to do that, and it's a meaningful target.
Once we get to 30%, we'll set a new target at 35%, and we'll set some reasonable goals to get there. In terms of, I think your second question was what percent of NIB has ECR attached to it. We have approximately $3.7 billion or $3.8 billion of HOA deposits, and most of those deposits have ECR attached to them. What I would need to do is tell you what percent of those HOA deposits are technically NIB, and I don't have that number in front of me, but I'm asking Ann to just kind of look in the background, and we'll give that number out during this call. I just don't have it handy, but we can calculate it.
Jared Shaw (Managing Director and Senior Research Analyst)
Okay. Thank you.
Jared Wolff (President and CEO)
Yep. No problem.
Operator (participant)
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning.
Jared Wolff (President and CEO)
Good morning.
Gary Tenner (Managing Director and Senior Research Analyst)
Jared, the press release notes that the ACL declined because the economic forecast improved versus 4Q. That seems like it runs a little counter to what your commentary was around kind of where the outlook was around the turn of the year versus where we are today. Maybe I misunderstood something or misinterpreted something you said, but can you kind of talk about that? I was a bit surprised to read that.
Jared Wolff (President and CEO)
That is a misstatement. If it says that, that is a misstatement. I mean, the economic outlook did not and that is not why our ACL went down. You get the close reading award. Our ACL did not go down because the economic outlook improved. Our ACL went down because of all the reasons we mentioned. We started putting a more conservative readout for the economy back in the third quarter where we went to 40% baseline, 60% recession scenario. We started that back in the third quarter of last year. I think what we meant by that language is probably that when you run the model today, the economic outlook for Moody's is probably more favorable, and that model output ended up resulting in the reserve levels that we have, including all the overlays that we put in there.
I think it's probably a little bit more complicated than we stated there, but I understand your question.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. I appreciate that because it caught me off guard a bit. The second question is, in terms of the NIM guide for the year, which was not changed, I just wonder, obviously, starting at a lower point this quarter, partially impacted by lower accretion income versus the fourth quarter. Joe, I do not know if you could kind of update us on your expectations for accretion income for the year just to give us a baseline as far as what is in your range.
Jared Wolff (President and CEO)
Yeah. Before Joe, before you jump in, let me just add two things. One is there's both what we call scheduled accretion, which is just kind of the base that we have in our model, and then there's the accelerated accretion, which we never know what it's going to be. We're happy to address that. Before I forget, the question was how much NIB we had in HOA, and the answer is $1.2 billion. Joe, why don't you go ahead and address what we think our guide is for kind of accretion? Joe, you might be on mute.
Joseph Kauder (Executive VP and CFO)
I'm sorry. In the first quarter, we had a little bit over $16 million of total accretion. As Jared says, we generally have what we call baseline accretion and then accelerated. Because we had almost no accelerated accretion in the first quarter, it was a very abnormally low quarter after averaging about $3 million of accelerated per quarter in 2024. That baseline probably should not, since we did not have any prepayments, should stay pretty consistent as we look into the second quarter. Assuming we revert back to a normal level of loan prepayments, that should step down at approximately, I think we have told you before, about $1 million a quarter or so. The amount of accelerated prepayments is hard to predict, and we are not really dependent upon those as we look out to the rest of the year.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. To clarify, so the baseline is what's kind of embedded in your NIM guide?
Joseph Kauder (Executive VP and CFO)
Yep. Exactly.
Gary Tenner (Managing Director and Senior Research Analyst)
Yes. Okay. Okay. Fair enough. If I could just take one last question. Jared, as you kind of—I had a couple of questions earlier about the buyback and capital. As you kind of work through that kind of calculus around your comfort level on CET1, let's say, any thought to any risk-weighting relief on mortgage warehouse or anything like that that you're kind of thinking about that gives you extra comfort on being opportunistic here?
Jared Wolff (President and CEO)
I think we obviously want to keep our capital levels strong, and we like being 10% and above. We could dip down in a quarter if we're going to move past it pretty quickly with what we see for our earnings outlook. I think that's kind of a guide for us of where we are. I also want to be, you know, our buyback program that we announced, the timing could not have been better, obviously, given where stock prices went. We had a predetermined program through an investment bank that was a 10b5-1 program where we had given them ranges to buy within certain bands. It was the maximum per day if it ever got below this number, which it did. We were able to buy opportunistically. I do not expect it to return to those levels.
Normally, you would be exercising a little bit more caution and maybe patience with a buyback program. We will use it over time. Certainly, we can use it in a way that minimizes dilution from vesting of stock awards and things like that. I think that is kind of a common way that many banks use their buyback program. I think we can be a little bit more aggressive than that. Certainly, we have now the opportunity to look at the preferred, but I think if you do the math, given where stock prices are today, it makes a lot more sense to do common than preferred. That may change over time. We are just going to be opportunistic and look at it and do what makes sense under the given circumstances. Capital levels are something that we are keeping squarely in focus.
Gary Tenner (Managing Director and Senior Research Analyst)
Thank you.
Jared Wolff (President and CEO)
Thank you.
Operator (participant)
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark (Managing Director and Senior Research Analyst)
Hey. Good morning, everyone.
Jared Wolff (President and CEO)
Good morning.
Matthew Clark (Managing Director and Senior Research Analyst)
Jared, what are the, I know it's somewhat dependent on where your stock trades, but what's the probability of you tendering the preferred this year?
Jared Wolff (President and CEO)
Matthew, I can't put a number on that. It's so dependent upon other circumstances like the overall environment, as we just touched on, our perception that we need capital for other reasons that we wouldn't want to dilute if the economy sours. There is a ceiling on the preferred, right? The par value is $25, and it's trading at a discount currently. I have a hard time handicapping what that is. We're going to be smart, and if it makes sense, we would do it.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. I think during your prepared comments, you mentioned that you guys changed your methodology around risk ratings to be maybe more conservative. Can you just give us a sense for when that occurred and what changed?
Jared Wolff (President and CEO)
Sure. I would say that we applied more discipline starting in the first quarter and a little bit in the back half of the fourth quarter. We do portfolio reviews, and we had a lot going on last year. There are a lot of things that we can do with this company to continuously improve ourselves. I think our credit is very strong. I think our coverage ratios are healthy, as we talked about. I like the loan production that we're doing. There are certain things I think that we can improve on on the portfolio management side and just kind of being ahead of things and not waiting for them to get better but forcing them to get better.
The discipline that I've always exercised at all the banks that I've been at in terms of pushing things to a solution as opposed to waiting for a solution is just my preferred way of dealing with credit. I found it to be more effective. I'm kind of with our credit administrators and with our executive team here, we're training the company a little bit differently than we've operated in the past. I think that's a very positive change. It does not mean that you're going to have losses. It just means that you're looking at things through a different lens. That's just the way that we decided to do it. There was no outside influence that caused us to do this. It was our own decision and evaluation, and I feel good about it. We'll be monitoring it closely.
I hope, as I said, that this causes positive migration in the future, which it should as we move toward unlocking kind of some of these changes that we've made.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. Great. Last one for me, just around DCR deposit balances. They've been bouncing around $3.7 billion for the last few quarters. I wanted to get a sense for your outlook there, whether or not we should assume those balances remain relatively flat for the rest of the year. I'm just trying to get, again, a sense for volume versus rate, assuming we get a couple more rate cuts this year that would help.
Jared Wolff (President and CEO)
Yep. Yeah. As you know, we don't have any rate cuts in our forecasts. Our HOA business has been very stable, as you pointed out. I mean, you look at the last couple of quarters, it's been about the same. It started off in the 3.8, but we migrated out some more expensive customers. And our team is doing a phenomenal job in this space, and we love the business. We put in the deck enough information to calculate kind of our average cost, which is about 3.3% in terms of deposit cost for our HOA business overall. And as we mentioned, $1.2 billion of those deposits are in our NIB. We will benefit meaningfully if rates come down because the ECR is going to come down. Similarly, if rates go up, ECR will go up. I think we've managed kind of the program on the ECR side pretty well.
Are we going to grow HOA balances? That's our intent. We would like to. Absent a few of our larger customers, and we have some sizable customers in HOA that have the bulk of the cost, the overall cost of our deposits, excluding some of our larger customers, is much, much lower. When we do bring on new HOA clients, the average cost is much lower than our overall HOA average cost. It is a business that we would like to grow. It's very competitive. Our team does a great job. As you know, they're sticky balances, which is why they do not go down too much. Hopefully, we can grow them over the course of the year.
Matthew Clark (Managing Director and Senior Research Analyst)
Great. Thanks again.
Jared Wolff (President and CEO)
Thank you, Matthew.
Operator (participant)
The next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster (Managing Director)
Hi. Good morning, everybody.
Jared Wolff (President and CEO)
Morning.
I just wanted to get a pulse of your client base. Obviously, there's a lot of volatility in the market. We got the trade wars. You got those. You got all sorts of kind of things. I'm curious, I guess, first, how the pipeline's shaping up, and then where you're seeing opportunities today. Do you still expect to see growth primarily concentrated within lender and fund finance? Just kind of curious, again, the pulse of your clients, the pipeline, and just is there any risk to more falling out of the pipeline just given this uncertainty?
Thank you for the question. Our growth in the first quarter, as we mentioned, was fairly broad-based, and we see the same thing in the second quarter. We did point out kind of areas that were growing a little bit faster: warehouse, lender, and fund finance. I do not know that we are going to expect the same volume of growth in those areas, but our commercial and community bank is growing really well as we bring over new relationships. We saw a downturn in construction, some payoffs of some larger LIHTC loans, Low-Income Housing Tax Credit, and general construction. Some of those loans converted to multifamily permanent loans, which is what you saw in the uptick in multifamily, was just the conversion of some of those, but more paid off than stuck with us, which is why overall construction, overall, we had a downturn there on the construction side, it was a pretty big drop..
We have some construction loans that are in the pipeline, although they take a while to fund because the equity of the borrower goes in first. Generally, we're seeing some good pickup in C&I, but we're being careful, right, because of the cloudiness that we see out there. We are taking a long view, and we're banking companies that are solid in that local sourcing, good manufacturing, and distribution companies that provide products that are needed, that are generally sourced locally. We're being careful on things that need to come through the ports. The Port of Long Beach in Los Angeles and San Pedro, one of the largest ports in the world, has tons of volume that comes through it. Obviously, it's impacted by tariffs, so we look at that. Generally, David, I'm very optimistic.
Our desire to reduce our forecast from high single digits to mid-single digits is not a huge move on my part, just a little bit of a nod to that we're seeing some clouds. There is plenty of good business for us to pick up in these markets because of our position and who we are competing with, which is increasingly the large banks.
David Feaster (Managing Director)
Okay. That's good color. Maybe on the other side, I mean, deposit performance, you guys have done a great job. I mean, you saw nice growth, nice decline in deposit costs. Could you touch on the competitive landscape for deposits today? Where are you seeing growth opportunities coming from? Is it the commercial side? Is it the specialty lines or even the retail side of the business? Just how you think about growth and even opportunity to further cut deposit costs, even exclusive of Fed cuts.
Jared Wolff (President and CEO)
It is very, very competitive. I was just on a call earlier with our team. It is very competitive. We are starting to see pricing demands come back in at certain times, right? People start managing their books a little bit more tightly. They start looking at their numbers a little bit more closely, and they are like, "Hey, maybe we need to get more on our excess deposits." That is one of the things that happens when people start getting nervous, is they start focusing on the minutia again, which is, by the way, what we do on the credit side, right? We start focusing on and exercising that discipline. We really should have it at all times. Maybe clients get a little bit more finicky about different things. I would say that the deposit landscape is very competitive.
Where we're winning is, number one, we will not do loans without deposits. People have to bring over their relationship to us for us to be willing to do a loan. That's where we're bringing in. As we bring in new clients, we're bringing in deposits. Second is we are winning deposits generally from people that just want to bring over that might not have any borrowing needs today but are just unhappy. Their relationship manager left. They were at First Republic, and now they're at Chase, and they can't get the same attention. We're doing that. We do not have much of a retail presence. We do have branches. We have 80 branches. Historically, some of them have been more retail-oriented in terms of consumer-oriented than others. Our fundamental approach and outreach is really on the business side versus the consumer side.
We don't launch consumer campaigns. We're not pushing that the same way that many other banks are that might have a wealth management platform or might be a home mortgage lender. We don't have the tools to serve consumers the way others do. My belief is that you really need to have a fairly large footprint to serve consumers well because they want the branches, and they want to be in the branch talking to people. It's just a different client base than what we're set up for. That doesn't mean that we don't have them and that we're not serving them as well as we can with what we have. It's not a growth area for us. It's not a focus for us today. It might become in the future, but today, it's not.
David Feaster (Managing Director)
Okay. We have touched on this a bit. Just you talked about just kind of giving the volatility and conservatism, tweaking the approach to risk ratings. I am curious, has there been any changes to underwriting at all, or have you tightened the credit box? I mean, is there anything that you are avoiding or de-emphasizing or maybe watching a bit more closely?
Jared Wolff (President and CEO)
Yes. I would not say we have tightened our credit box. I think the discipline that we are exercising now on the management side of credits should be in place at all times. Similarly, on the credit side, you might say, "Look, I do not want to go longer in industrial storage around the port right now. I do not want to go longer in deals that are really dependent upon sole or double-source products out of the country right now." Those are the ways that I think you tweak your underwriting. It is really more of a selection process of what credits you feel comfortable with. On construction loans, we have a big construction loan that we are looking at right now.
I said, "Look, I want it to be full recourse." There got to be this trend where construction projects somehow got to be partial guarantees or burn-off guarantees or, "We'll pay you through getting it vertical, but we're not going to guarantee the product after that." That's never been my approach, is I'm not a I don't know how to operate an apartment building. I don't want to own it and rely on the value. I want somebody to commit to me that they're going to stand behind it. I think going back to just kind of core principles is the way you operate in all markets. I think when things are cloudy, it reminds you of all the things that you need to emphasize.
David Feaster (Managing Director)
Okay. That's helpful. Thanks.
Jared Wolff (President and CEO)
Thank you.
Operator (participant)
The next question comes from Anthony Elian with J.P. Morgan. Please go ahead.
Anthony Elian (Equity Analyst)
Hi everyone. I'd like to start on the expense outlook. You're still guiding to the low end of $190 million to $195 million per quarter. Joe, you mentioned that there may be levers available to right-size expenses if conditions warrant. I'm wondering if you could outline some of those opportunities that will be available to beat your expense number.
Joseph Kauder (Executive VP and CFO)
Yeah. Thanks for the question. There's always a couple of things that levers that management has in their backpocket in terms of incentive levels, projects, and project spend that you can either accelerate or slow down as appropriate, or other expense items all throughout the expense space that if in a very difficult situation, you could take action to slow down.
Jared Wolff (President and CEO)
Yeah. It's well said, Joe. I mean, Anthony, the first thing that comes to mind is just accruals for bonuses, right? If things are slow and you don't see that you're going to achieve your goals, then you can bring down your accrual. You really don't want to do that at the beginning of the year because it's really hard to make up at the end of the year. That tends to be a tool that you would use later in the year. As Joe mentioned, CapEx and just kind of slowing down projects we have. We actually put in the deck this time, which Ann put together, which I thought was a nice slide that showed kind of the spending that we have on projects because we get that question from time to time.
In our supplemental information, we have a list of our projects that are underway and what the breakout is. It is on page 26 of our deck and how those projects break down in terms of what they are supporting. Those are two things that are pretty meaningful.
Anthony Elian (Equity Analyst)
Thank you. On loan growth, you reduced the outlook to mid-single digits. Jared, you've outlined before in your prepared remarks the strength of Southern California and the exits of other banks. I'm just wondering how I marry up the reduction in loan growth outlook with the level of optimism you still have for Southern California. Thank you.
Jared Wolff (President and CEO)
Yeah. Yeah. Tony, you're right. I mean, we're being conservative here. So far, second quarter is strong. The reason why we're tempering it is because I really don't know what's going to happen the back half of the year. Things could shut down, and then we end up with because the guidance we gave was mid to high single digits for the year is what we were going to average. So far, 6% in the first quarter. Let's assume we do 6% or 7% in the second quarter. That means that we're there, but the back half has to hold that up to hold it up there. That's why we brought it down.
We're still optimistic, but if it ends up being 3% or 4% in the back half of the year versus 7% in the front half of the year, we're not going to hit the high end. We're only going to hit the mid end. That was what was behind that. It's not that we don't believe in this market, but to maintain that level, a lot of things have to go right. We're trying to be prudent and not overly aggressive if we see storm clouds.
Anthony Elian (Equity Analyst)
Thank you.
Jared Wolff (President and CEO)
Thank you.
Operator (participant)
The next question comes from Chris McGratty with KBW. Please go ahead.
Christopher McGratty (Head of U.S. Bank Research)
Hey, Jared. Hey, Joe. I just want to zero in on NII. A lot of discussion on margins and balance sheets, but just dollar NII, right? In the quarter, it was down about $3 million. You talked about the accretion moderating. How do I think about, based on the late quarter growth and the pipeline that's pulling through in Q2, help us frame how much NII should be up in the second quarter?
Jared Wolff (President and CEO)
Good question. Joe, you want to take that one?
Joseph Kauder (Executive VP and CFO)
Yeah. You start off with there was a $5 million impact in net interest income just from day count. I think we have that called out on one of our slides in the investor deck. You can start with that. If you look at our loan growth as we continue to grow at the levels that Jared has said, we will continue to expand our net interest income. I think you could probably think about it as somewhat consistent with our loan growth, mid-single digit increase in.
Christopher McGratty (Head of U.S. Bank Research)
NII could be up 5% in the second quarter just from the factors that you laid out. Okay.
Joseph Kauder (Executive VP and CFO)
Yeah. I would say anywhere from, yeah, it's reasonable.
I think that's reasonable. Yep.
Christopher McGratty (Head of U.S. Bank Research)
Okay. That's actually all I had. Thank you.
Jared Wolff (President and CEO)
Thanks, Chris.
Operator (participant)
The next question comes from Timur Braziler with Wells Fargo. Please go ahead.
Timur Braziler (Director)
Hi. Good morning.
Jared Wolff (President and CEO)
Morning.
Timur Braziler (Director)
I want to start just on the loan growth outlook. I'm wondering if you're growing loans more slowly or more cautiously, and the focus here is to bring over the whole client relationship. Slower loan growth projection at all impacting your ability on the deposit side? As a corollary, just how much of that expected DDA growth is needed in order for you guys to hit that 320 to 330 NIM guide that was unchanged?
Jared Wolff (President and CEO)
Yeah. That's a good question. First of all, I think loan growth in the second quarter, as of now, it's very strong. Like I said, our guide for the year was we brought it down to mid-single digits for the year because it's just hard to know what's going to happen the back half of the year. At the end of the second quarter, we'll tell you where we'll update it again if necessary. What we're trying to do is just tell people what we see today. If we see a change, then we'll update. I didn't think it was that significant a change. The larger question of how does deposit growth need to keep pace with loan growth to affect the margin is exactly what we think about.
Obviously, for every dollar of NIB that we bring in, it's much cheaper than having to fund loans with broker deposits. It's rare that a borrower will have enough deposits to cover the cost of their loan, right? You're going to need to fund the loans somehow. We factor that into our pricing and everything in. We don't bring over necessarily a full banking relationship. We require deposits that are substantial for us to bank somebody. It doesn't mean that they've eliminated every other banking relationship that they have. In most cases, we try to be their primary banking relationship and bring over the relationship. It is a circumstantial thing. Most borrowers have multiple banks. Certainly, real estate borrowers do. Real estate borrowers tend to have the lowest level of cash available. Timur, it's a balancing act. You're right.
If we only required full relationships, that would certainly slow loan growth. I think we require substantial relationships, and so far, it's been fine.
Timur Braziler (Director)
Okay. I guess more specific on DDA pipelines, obviously a key objective for you guys. Those balances have been flat or down now for four straight quarters. I guess as you're looking out, how do those pipelines look? Just maybe remind us if there's any kind of seasonal cadence to the DDA growth that you're expecting.
Jared Wolff (President and CEO)
Yeah. It's hard to say that there is a seasonal cadence. You could say that first quarter has tax payments and all that stuff. As you point out, it's been flat to down. I would say that what we're seeing, and I think this bears out when we look at some of our peers, although you're probably a bigger student of all that data than I am, although I try to absorb as much as possible, is that generally balances are flowing out of the economy. I've been talking about that. Where we're able to stay flat or even grow is because we are bringing over new relationships. Those are offsetting what might be otherwise larger outflows. Most balances of most businesses are flat to down because they're reinvesting it, and their cash balances aren't growing. It's just what's been happening.
We had all this money that was in the economy from what we all know for many reasons that inflated balances, and now it's being pulled out. Our ability to stay flat, which is why our 30% NIB growth, that's a really meaningful goal. We're trying hard to get there. We might be successful, we might not, but we're putting it out there because that is our goal. We will get there eventually. Once we get there, we'll go to 35%. I think that the discipline that our teams are practicing in the way that we track things, the way we monitor them, and the relationship building that they're doing is exactly the right discipline that's necessary to be successful here. It's what we did at Banc of California over many years and saw steady growth.
It's not a straight line, but the activity levels I see are very, very solid. I don't know that I can predict for you what's going to happen quarter-over-quarter other than I don't know that this quarter is going to be worse than last quarter. It's just hopefully it'll be better. I thought last quarter was fine. I think we're exercising the right muscles, and I think the results will play out over time.
Timur Braziler (Director)
Okay. Fair enough. Thanks for that. Lastly for me, a couple-part question just on payoff activity. Really high in 1Q. I guess, A, what was the driver there? Was there any pull forward from 2Q? Second part of that question is, what is your appetite to continue maybe taking some of that payoff activity and putting it onto your own balance sheet as permanent loans? The third part of the question, you had mentioned that the payoff activity on the multifamily side of some of the higher migration into the classifieds on the repricing risk. I'm just wondering if that payoff activity remains kind of at this existing pace. Is there incremental risk to classified migration as that further continues?
Jared Wolff (President and CEO)
Yeah. I do not think that they are connected. The payoffs came in a couple of different areas. One was we had a lot of, as we mentioned, construction loan paydowns of larger loans. Second is we had a lot of cycling in our warehouse business that cycled through. I mean, I think it is pretty amazing when you look at the chart on page 13, the amount of production that our team did, really proud of the work that they did, a really strong loan production, including supporting our clients with line utilization. Line utilization rates are moving up, as you can see. I would not say they are peaking, but we do not really see it much above the mid-60s. We are kind of getting there. We would expect some paydowns there.
The payoff balances were kind of, as we mentioned, we took some of the construction balances and put them into multifamily. I think the multifamily that we're seeing, these have been on the portfolio for a while. Maybe they were part of a broker portfolio. There is a discipline of managing what happens when something is at a historical 3.5% rate and you know it's going to go to 6% and getting the financials from the borrower, confirming the amount of equity in the property, making sure that you have a plan. You've talked about it with the borrower and what the plan is. Are they going to put in more equity? Are they going to take us out? What is the plan? Are they going to Fannie or Freddie?
That is the discipline that I want documented for those loans. We do not see losses because you look at multifamily in California, I mean, there is a huge shortage. There is a discipline that is necessary for us to do this the right way. I think we are doing more of that. The recent loans that we are putting on are obviously in a current rate environment, which is very different than the stuff that kind of migrated in the quarter. Did that answer your question, Timur?
Timur Braziler (Director)
It did. Yes. Thank you.
Jared Wolff (President and CEO)
Okay. Thank you.
Operator (participant)
The next question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell (Managing Director and Senior Research Analyst)
Hey, good morning.
Jared Wolff (President and CEO)
Morning.
Andrew Terrell (Managing Director and Senior Research Analyst)
If I could just pick on the multifamily point, and Jared, appreciate the color on kind of the classified moves. If I just look at page 20 of the presentation, there's a couple of billion dollars of multifamily maturing or repricing over the next two years or so. I'm just hoping you could maybe give us some color on how much of that was reviewed and resulted in kind of the classified move this quarter. Where I'm going is, is it fair to think that we could see continued moves up in classified as these loans go up for maturity, or do you feel like you've gotten ahead of that?
Jared Wolff (President and CEO)
No, I think we've gotten ahead of it. This was a specific group of stuff that we looked at. We have a project called Project Reset where we're taking, I mean, just to give you some color, we have a fairly large brokered multifamily book, loans that are 3.5% or 4% that in the current environment are repricing around 6%. They fully carry, they fully debt service, and they can, in fact, we are actively talking to those borrowers and trying to get them to stay on our balance sheet at 6% versus going to Fannie or Freddie at 5.5%. Our experience, and we've had success with $150 million-$200 million worth of loans. Some of those borrowers, they floated up into the 8s, and they were just waiting for certainty on rates before they fixed it.
Overall, the portfolio is solid, and that's the experience with most borrowers. There is a handful where they're currently in their interest-only periods. Even if the interest-only periods are going to extend for another year, we've got to be monitoring it. They're fully current, they're paying now, and they've got a ton of equity in the property. You've got to look at this and say, "Okay, what is the plan?" I think it's more of a documentation question. I don't think that we should expect to see some sort of large uptick in migration. Our experience is different than that. I don't have a problem being disciplined about it now.
I think with this, the other thing, Andrew, is I think what this page shows and your question is a good one, like, "What are the impacts?" This page does show that we have a lot of loans that are going to reprice higher. One question is, "Well, from a credit perspective, can they absorb that?" The answer is yes. That's the experience that we have today. The second question is, "What does this mean for our income?" It's definitely a positive tailwind that will come in over the next two years.
Andrew Terrell (Managing Director and Senior Research Analyst)
Yeah. Yeah. That is exactly where I was going, whether or not you had the kind of potential downgrades out of the way. Now we can just more focus on the spread pickup as those loans reprice. Thank you for addressing.
Jared Wolff (President and CEO)
Yeah. Look, I hope we can. I think we were pretty aggressive this quarter, and we have a plan to kind of migrate stuff. It will take a couple of quarters. We expect the trends to get better after this. Hopefully, that will not get in the way of the spread pickup that we are expecting.
Andrew Terrell (Managing Director and Senior Research Analyst)
Thank you.
Jared Wolff (President and CEO)
Thank you.
Operator (participant)
This concludes our question and answer session and Banc of California's First Quarter Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.