Banc Of California, Inc. Q1 FY2024 Earnings Call

Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. Today's call is being recorded, and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release on the company's Investor Relations website. The reference presentation is also available there. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.

Good morning. Welcome to Banc of California's first quarter earnings call. Joining me on today's call are Joe Kauder, CFO, and Will Black, our Head of Strategy. We executed the first full quarter as a combined company. For those of you who have followed Banc of California for the past several years, you have heard us talk about our commitment to demonstrating success methodically by making continuous progress on key initiatives and consistently moving the ball down the field. That's what we did in the first quarter, and we made solid progress on the initiatives that will lead to us achieving the profitability targets that we have set for the fourth quarter of 2024. In the first quarter, we realized the benefits of the balance sheet repositioning we executed following the closing of the merger. As a reminder, after closing on November 30, we executed on the sale of more than $6 billion of assets and paid down nearly $9 billion in borrowings. This resulted in significantly higher levels of net interest income in Q1 and an expansion in our net interest margin. The first quarter also demonstrated initial progress on the deposit gathering engine we have built, adding meaningful new business account relationships and absolute growth in noninterest-bearing deposit balances, much of which came from the new relationships. The increase in NIB deposits, along with the benefits of the balance sheet repositioning, resulted in our cost of deposits declining 28 basis points and contributed to the significant increase we had in our average margin. In terms of operating expenses, we are also making solid progress on realizing the cost savings from the merger, and operating expenses are trending lower at a faster pace than we initially expected. With our higher level of profitability and prudent balance sheet management, we generated an increase in our tangible book value per share in this quarter as well. As we've indicated, profitability is our primary focus this year rather than growth. As a result, our total assets declined during the quarter, primarily due to our use of cash to pay down a bit over $1 billion of the Bank Term Funding Program as well as running off higher cost deposits and borrowings. Our loan balances remained relatively flat. As we anticipated, core loan production, which grew at a 4% annualized pace in Q1, was offset by runoff in our discontinued loan portfolio, particularly those with lower yields, such as our premium finance portfolio, which declined $77 million or 10.5% non-annualized report. The runoff of those loans had a positive impact on our results, given that the premium finance portfolio has an average yield of 3.34%. Despite the muted economic backdrop and what we perceive to be slow loan demand, we had good core production in a variety of our portfolios, which reflects the strength of our team and our market position. This is true while we are also remaining conservative to ensure that loans meet our disciplined underwriting and pricing criteria. But with loans coming on the books at higher rates than what is running off, we are seeing an increase in our average loan yield, which was 41 basis points higher than the prior quarter. On the credit side, as we had previewed, we remain appropriately proactive and conservative with respect to credit and downgraded various CRE credits. Four CRE credits drove the majority of the increase in nonperforming loans during the quarter, which includes three office properties and one retail property. We took specific reserves against two of the office credits that we believe are sufficient to protect against potential future losses and recorded a $10 million overall provision. Additionally, the legacy CIVIC portfolio contributed to an uptick in both delinquencies and nonperforming loans. So we see minimal potential losses in that portfolio. We continue to feel very good about the credit profile of our overall loan portfolio. The four CRE properties represent approximately 60% of the NPL increase. CIVIC loans accounted for approximately 29% of the increase. SFR consumer loans represented approximately 7%, and various loans contributed to the remainder. During the quarter, we also sold some of the CIVIC loans we had held for sale for approximately carrying value. While we continue to be pleased with the credit profile of the portfolio, consistent with our conservative approach to credit management, these actions increased our level of loan loss reserves and raised our ACL to total loans to 1.26%. As we have previously mentioned, this ACL does not include the first loss position Legacy PacWest sold via credit-linked notes on the SFR portfolio, and it also does not reflect the credit marks taken on the legacy Banc of California portfolio at the closing of the merger. When these are factored in, our ACL to total loans is well north of 1.8%. Now I'll hand it over to Joe, who will provide some additional financial information, and I'll have some closing remarks before we open up the line for questions.

Thank you, Jared. Again, the prior quarter only included 1 month of combined operations and had a number of significant one-time items. I'm going to limit the quarter comparisons and review our year for financial results. Starting with the income statement, we generated $239.1 million in net interest income, which reflects the favorable change in our mix of interest-earning assets and a lower amount of high-cost wholesale funding resulting from our balance sheet repositioning actions. Our net interest margin in the quarter increased to 2.78% versus 1.69% in 4Q 2023, and it increased to 2.82% for the month of March 2024 versus 2.15% for the month of December 2023. Both increases were driven by improvement in our average yield on interest-earning assets and a decline in our average cost of funds. The average yield on interest-earning assets increased 45 basis points from the fourth quarter of 2023, largely due to the full quarter inclusion of generally higher rate Banc of California loans, along with the origination of higher-yielding loans in our core portfolio and an increase in yield associated with purchase accounting marks. The average cost of interest-bearing liabilities decreased 59 basis points from the fourth quarter of 2023 and 81 basis points from December 2023, reflecting a full quarter of benefits of the balance sheet restructuring action taken post-merger, the use of excess liquidity to continue to pay down high-cost wholesale funding sources in Q1 of 2024, the lower cost of core deposits driven by an increase in our noninterest-bearing deposit ratio, and targeted actions to lower the cost of our interest-bearing core deposit portfolio. As we have shared previously, we expect to improve our cost of deposits and cost of funds through specific strategies for both core and wholesale funding. While our model anticipates two rate cuts in 2024, both in the second half of the year, even in a static rate environment, we expect to continue to move our deposit costs down. Accordingly, we expect to see improvement in our net interest margin as we move through the year as new loan production originates yields in excess of the yields on loans rolling off, and we execute on our cost of fund strategy of reducing our reliance on high-cost wholesale funding and growing our low-cost core deposits. We are also finding that even in a flat rate environment, we are often able to reprice maturing deposits at lower prices than when they were originated, given that PacWest needed to pay high rates for deposits a year ago. During the first quarter, we paid down $1.1 billion of our outstanding balances on the Bank Term Funding Program. We chose to retain the remaining $1.5 billion in order to hold higher liquidity as we continue to run off expensive noncore deposits. At this point, it is likely that we will repay the remaining balance during the second quarter, but we could choose to retain it for a longer period of time based upon the deposit flows and the loan funding trends that we see. Our noninterest income was $33.8 million, with all of our major areas of recurring noninterest income coming in relatively close to the expected level. This amount was consistent with the fourth quarter of 2023 when the fourth quarter number is adjusted for various one-off items, including a legal settlement. Our noninterest expense was $210.5 million, down $73 million versus the December 2023 quarterly run rate. We are starting to see the lower FDIC assessment rate that we expected. However, in the first quarter, we also recorded an additional $4.8 million related to the FDIC special assessment. We continue to expect our assessment to decrease through the year, although the pace and timing of the reduction will be determined by the FDIC. Our other expense initiatives are gaining traction and deliver results in excess of expectations for the quarter. Turning to the balance sheet, as Jared indicated, our total loans were essentially flat. However, our core portfolio grew at 4% annualized, primarily in commercial loans, offset by lower civic loans and other discontinued portfolio loans. Our noninterest-bearing deposits increased during the quarter, primarily as a result of new client relationships. Our balance sheet management strategy allowed us to reduce total deposits approximately $1.5 billion during the quarter as we utilized our excess liquidity to pay down high-cost legacy PacWest broker deposit products. This resulted in a favorable shift in our deposit mix with noninterest-bearing deposits increasing from 25.6% to 27.1% of total deposits. In addition, our wholesale funding percentage dropped 2% to 16.9%, and our cash level was rightsized to approximately 8.5%, consistent with our original merger targets. Note, we continue to retain robust liquidity with our total primary and secondary liquidity being 2.4x our total uninsured and uncollateralized deposits. At this time, I will turn the call back over to Jared.

Thanks, Joe. Looking ahead to the remainder of the year, our primary focus will be on continuing to execute well on the initiatives that will enable us to meet our stated profitability targets, most notably in reducing both interest expense and operating expense. Based on the progress we are making, we continue to expect to generate ROA of approximately 1.1% and ROTC of approximately 13% in the fourth quarter of this year. While continuing to be conservative in our new loan production, based on the current loan pipeline, we expect to be able to largely offset the runoff we have in noncore portfolios with new fundings, which should keep our total loans relatively flat. But the new loans are expected to average higher rates than what is running off, so production should continue to be accretive to our margins and improve our level of profitability. We also have a good deposit pipeline, and we expect to continue to grow NIB, which will further improve our deposit mix and reduce our cost of deposits. Our ability to drive down our cost of deposits, increase NIB, and expand our margin are the result of solid execution by our team at a time when others are finding it hard to achieve those same objectives. We have a very strong balance sheet with high levels of capital, liquidity, loan loss reserves, and solid credit quality. And our strong market position in California enables us to add attractive new client relationships at a time when many competing banks are not able to meet the needs of their clients due to capital and funding constraints or credit concerns. While meeting our profitability targets remains our primary goal for 2024, we will continue to operate with a long-term approach and add new client relationships that we believe will lead to further profitable growth of our franchise and additional value being created for shareholders in the coming years. And most importantly, Banc of California continues to benefit from having the best team in our markets, very talented bankers and professionals who know how to deliver on our goals and show up every day looking to deliver for our clients and communities in a way that separates us from our competitors. We continue to add talent to our workforce, and I believe that will remain a differentiator for Banc of California in the years to come. As I said at the outset, I am very pleased with our progress to date and expect to continue methodically moving the ball down the field to our specific targets in the coming quarters. With that, operator, let's go ahead and open up for questions.

The first question comes from Jared Shaw with Barclays.

Maybe just starting on the margin and on spread. When you go back to the January call and the expectation for yield pickup and funding cost improvement coming from the end of the year, it feels like maybe that didn't come through quite as quickly or fully as you had expected. Is that the right way to look at it? And it's just sort of being pushed into the second quarter? Or are there other dynamics there? And then, I guess, a corollary to that, just looking at accretion, accretion $32.5 million was much higher than, I guess, sort of the run rate expectation. How should we be thinking about accretion in the scheme of margin and spread income for the rest of the year?

Thanks, Jared. Let me start, and then I'll turn it over to Joe. As we've said in prior quarters, our margin is definitely an output. And while we have a sense for where it's going to be, we don't manage to it. We achieved our objectives for the quarter. We are right on top of our budget on almost every measure. And so we're able to get there. As we've said, we have a lot of levers to pull. So we're going to do our best to give guidance, but if it comes in a little light, we're still going to find another way to hit our earnings targets, and that's what we did this quarter. Again, we are right on top of our budget. It was a little lighter than we thought it would be, but we were able to get there anyway, which is one of the things that we've said from the beginning of the year, which is we've got a lot of levers to pull and a lot of ways to get where we need to go. And so I'll let Joe explain why it was a little bit lighter than we thought.

Yes. So as Jared said, I do want to echo, for our internal plan, we did come in right on top of our plan for the quarter. We have appropriately been conservative in that estimate. During the quarter, as you guys all know, interest rates at a lot of the tenors, especially the shorter tenors, increased quite a bit versus probably what people were expecting at the beginning of the year. So as we went to refinance some of the broker deposits that were coming due from PacWest, they refinanced at significant net savings to the bank, but at slightly higher rates than we might have anticipated. And so those are just market factors, and we make up for that by what we can control, which is on our core book, growing noninterest-bearing and bringing down the cost of our interest-bearing core deposits and also originating new loans at higher spreads.

Joe, do you want to touch on the accretion?

The accretion is not something we have publicly disclosed, so I am uncertain about the source of that figure. However, the accretion aligned closely with our expectations. While it is a meaningful part of our results, it did not constitute a major element of our results for the quarter.

Okay. All right. And then just on the operating expenses, where should we be seeing savings there to bring that ratio more down into the middle of the range?

There are many areas where we anticipate seeing reductions. First, we expect the FDIC expense to decrease. In normal circumstances, PacWest's quarterly FDIC assessment ranged from $8 million to $10 million. At the peak, just before the merger, it was approximately $36 million per quarter. This indicates significant potential savings as the FDIC expense normalizes, which we project will happen throughout the year. We are maintaining close communication with our regulators and monitoring the situation, so we are optimistic about this normalization occurring over time. Additionally, our system conversion, which should be completed by the end of the third quarter, will also contribute to savings. We have numerous facilities that will help reduce costs, as there is some overlap in various locations that we are consolidating. Furthermore, there are many other traditional operating expenses we expect to change over time. As we mentioned, the savings will likely be realized more towards the latter part of the year.

The next question comes from Matthew Clark with Piper Sandler.

Maybe for Joe to start, could you give us the spot rates on earning assets and either the cost of deposits or cost of funds? Probably the cost of funds would be more helpful just to give us some line of sight into 2Q.

So we decided after last quarter that we were no longer going to give spot rates. I think I gave you the monthly average in my speech, and I can go back over that. At the end of the year, we found that the step-off number that we provided included a very large amount of one-time accretion due to a high volume of payoff activity and, in retrospect, was probably not an appropriate indicator of our 1Q '24 normalized NIM run rate. So going forward, we're only going to speak to the monthly averages, as we feel that's the most appropriate indicator of our kind of future run rates. Does that make sense?

Yes. Understood. And then just...

And Matthew, to that point, on Page 5 of our investor deck, we wanted to highlight the significant progress we've made. If you look at the monthly figures, September was 1.43%, December was 2.15%, and March was 2.82%. We continue to see that increase. Instead of just showing one day at the end of the month, we are providing the monthly margin to illustrate the trend. So hopefully, that is helpful. You can consider that 2.82% as the baseline for Q2, and we will aim to improve from there.

Okay. Got it. And then just maybe, Jared, on interest expense, maybe between you and Joe. I know you're very much focused on it and reducing that interest expense. But can you just remind us of kind of what the plans are from here to reduce that materially, both on the wholesale side and core deposit side?

Well, there's a couple of things. I mean the chart on Page 9, I think, shows the reduction that we've had to date in terms of our cost of deposits and the cost of liabilities overall. So there's a couple of levers. One is, obviously, NIB has a big impact on it because every dollar we bring in NIB is basically saving 5% of brokered money or whatever other cost of deposits we want to get rid of. And our teams have done an exceptional job in a very short amount of time of bringing in NIB, and I was very pleased with the progress we made in the quarter. As we bring in deposits of all pipes, we can reduce the more expensive deposits. And the brokered deposits that we have are kind of moving down. So when you see a decline in overall deposits, that's because we're releasing deposits that we don't need. We're also doing this while balancing our loan-to-deposit ratio. We've said that we want to stay at around 90% or below, and we're trying to be very careful with that and just kind of be good risk managers as we think about our overall loan-to-deposit ratio. There are some other things that we can do, including hedging, to guarantee that we lock in the forward curve if it doesn't materialize. And we're being very strategic in making sure that we're going to benefit from potential rate reductions in the future, which is why we said that even if the rate curve doesn't materialize the way people think it will, in terms of two rate cuts, there are things that we can do to kind of protect ourselves and make sure that we benefit from that anyway, as we're trying to be strategic there as well.

Okay. And then last one for me just on the preferred. Is there any appetite to maybe pull that forward and redeem it in 4Q to help you get to your goals? And should we assume that it will happen in '25?

Yes. No. No, you should not. We will get to our goals without redeeming the preferred. One of the things that we think we need to do is show stable and a buildup of capital before we can start redeeming capital. So we think that we want to get through this full year and show that we are good stewards of capital and been building up capital. And then we'll figure out what we're going to do with our excess capital. That's not to say we would never do it. It's not to say that it's not a possibility. I just wouldn't plan for it. And then if we're able to do it, it will be something extra.

The next question comes from Chris McGratty with KBW.

Jared, the fourth quarter goals, the 1.1% approximate and 13%. As you stand here today, what do you think the biggest either risk or opportunity to those are? I think you talked about the expense cadence. You also talked about the rates moving up a little bit on the repricing. But what's changed, if anything?

There's not much to report. Since we set our goals, we've remained aligned with our budget and are very focused on meeting those targets. We have several strategies in place, although realistically, there are about five solid approaches we can take. We're closely monitoring our progress. As it stands, we appear to be on track, but potential obstacles include rising rates, which many consider unlikely. However, if rates do increase, there could be more significant issues to contend with that might overshadow our profitability targets. Any substantial economic disruption could generally impact the markets. That said, we believe we can effectively manage our operational expenses and have a reasonable grasp on how to address interest expenses. Revenues typically take care of themselves, as our loan origination is going well, and I was pleased with our core production this quarter despite a challenging environment. Overall, things seem to be operating smoothly. I don’t want to speculate too much, but right now, I feel optimistic about meeting our goals. If we fall short, it will likely be due to unforeseen changes in interest rates.

Okay. I guess, maybe what else might be on the table? You're accountable to the Street in the fourth quarter, but you got a couple of quarters in between. What else might be on the table for either balance sheet repositioning, kind of an acceleration to get to those goals?

Sure. Yes, we've talked about CIVIC and our appetite to potentially sell pieces of the portfolio that are noncore, whether it's CIVIC or something else. We have some loans that were held for sale that were CIVIC that we moved off the balance sheet, that we had for sale, that were sold. As I mentioned in my comments, that were sold for approximately carrying value. We have a little bit more that's probably going to follow this quarter. And then looking at that portfolio overall, we would be open to doing that. We haven't made the decision that we're going to do it for sure, but we're open to doing it, and we certainly have had people inbound inquiries on it. So I think something like that could be pretty interesting. If we did move it, we've modeled it, and it looks pretty interesting if we're able to do it. So that might be an example of something which could accelerate some of our progress.

That's great. And then just one housekeeping for Joe. The accretion income, I guess, to put a finer point on the 32.5%, I guess, what's the scheduled accretion, or what's the pool from which to draw over the next several quarters?

Well, that number is the total accretion. And if you look back at PacWest's financial statements, they had accretion on purchased loans that predated the accounting acquisition of Banc of California. So that's a total number. And so there's a portion of that that relates to the Banc of California loan portfolio. That's a number we haven't disclosed yet publicly, but that number is not a super meaningful number for the quarter.

Okay. So totally get the 2 different parts, but generally, stable accretion is kind of the message near term or maybe downward bias?

I think you should think about stable accretion going forward.

The next question comes from Timur Braziler with Wells Fargo.

Well, not trying to belabor the topic here. But just back on accretion, I think the scheduled accretion number was $63 million for the year. More than half of that was booked in 1Q. Was there a lot of accelerated accretion in that number? Is that delta entirely from the dynamic that you're talking about from kind of the carryforward on PacWest side? And Joe, did I hear you correctly that part of why you're not giving the spot rates was because you had some accelerated accretion kind of inflate that initial number? Just trying to get a better sense on the $30-some-odd million versus the scheduled accretion of $63 million that we were told earlier.

The $32 million includes accretion related to the Banc of California portfolio. This amount represents the total accretion on all loan portfolios acquired since PacWest was the accounting acquirer in this transaction, which encompasses accretions on loan portfolios beyond just the Banc of California. There was excess accretion noted. In the fourth quarter, significant payoff activity occurred towards the end of the year, making it difficult to isolate specific figures. While we could observe interest income numbers, it was challenging to determine how to interpret the accretion we were experiencing. In hindsight, the figure we shared may not have been the most accurate representation, but there was indeed excess accretion in the fourth quarter. In the first quarter, there may have been a minor catch-up adjustment of about $1 million or $2 million, but aside from that, the accretion related to the Banc of California numbers was stable and aligned with the expectations, in addition to the accretions on the other portfolios previously acquired by PacWest.

Okay. Got it. And then maybe looking at the transformation of the deposit base. So the cost for the quarter was 2.63%. The spot rate at the end of the quarter was 2.54%. I think you had mentioned that you're going to continue working that lower. I guess, just as we think about the restructuring of the deposit base, maybe excluding some of the things that you're doing to bring in more noninterest-bearing deposits. But how close are we to reaching a level of stability in that deposit cost? I mean is that 2.54% a pretty indicative number of working sub-3%? How much lower could that go as you continue to report in that book?

My perspective is that we will continue to reduce it. This largely depends on how effectively we can attract noninterest-bearing deposits. Anyone familiar with Banc of California's history knows we excelled in that area, and we're following the same strategy. We have a strong team with the right expertise, and it's just a matter of time before we rebuild. Historically, PacWest operated with noninterest-bearing deposits of over 30%, typically between 35% and 40%, while Banc of California was around 40%. Given the history of both organizations, I believe we can achieve that again. It will take time, but I'm very satisfied with how our teams are actively working towards this goal right now.

Okay. And then it looks like there was some usage of cash towards the end of the quarter. I think last quarter, it was kind of 8% to 10%. We're getting close to that 8% bogey. I guess, should we assume that cash balances are more or less flat here? And then just the remix at quarter end, are we assuming a pretty meaningful bump up in margin once again in 2Q as that average effect is fully baked in?

Yes. I think the cash levels you can assume will be fairly stable. I mean, they may move a little bit just because of the dynamic nature of our balance sheet, but right around the levels we're currently at. And then I think we would, as we've said in this call a couple of different points, we do expect to continue to see margin improvement and net interest income improvement throughout the year.

Great. And then just last for me on the three office loans that had migration into nonperformers. Can you provide geography and any other kind of maybe tying threads between those three credits.

I think they were all California. And I would look at the credit migration, of course, as fairly normal. We were being, I think, appropriately conservative. We obviously have the capital and the ability to take the provision we wanted to take. I think running with really, really low NPLs at 26 basis points or whatever we had in the first quarter was probably a little bit abnormal for just historically and for markets generally, and now we're close to 60 basis points, which is probably a more normal level to be below 1% and still very, very healthy. And I don't know what other banks are going to do, but for me, it just felt like it was a normalization of credit, and we were taking the marks that we thought were appropriate at the time. So I don't know that there's more color to provide on these loans. I mean I think we were just doing what we thought was right, and I think we're well reserved.

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

Just a quick follow-up on the last question. Were those credits, were the Legacy Banc of California or legacy PacWest?

They were a mix.

I wanted to ask about the year-end targets and asset size. You mentioned you expect it to stabilize at 36%, but it might range between 34% and 36%. Considering the expected BTFP repayment likely in the second quarter, should we expect a temporary dip followed by a return to around 36% by year-end? Can you share your outlook on balance sheet trends on a quarterly basis for the remainder of the year?

Gary, I don't know the exact answer to your question. However, I can share some possibilities. If we do not sell a large portfolio, we will pay down Bank Term Funding, which will reduce our balance sheet by that amount. After addressing Bank Term Funding, we should be relatively stable. If we consider CIVIC, the impact could be more significant, potentially around $2 billion. That's why I'm uncertain. We have received many inquiries regarding various discontinued portfolios, including student loans and lender finance. We are open to exiting these loans if the pricing aligns with our interests and if it is beneficial for the company going forward. Our focus is on profitability rather than a specific size. These factors could affect the balance sheet. Nevertheless, if we avoid any drastic changes, we can anticipate Bank Term Funding decreasing by that amount and then reaching stability from there.

Okay. I appreciate that. And then if I could just ask one last question. There was a question earlier about the cash balance relative to the size of the balance sheet overall. With that in mind, is BTFP effectively replaced? I mean, it sounds like what we're just saying, it's paid off the balance sheet to contract. So those cash balances by definition, and are they lower than that 8% range that I think, Joe, you referenced from a prior question?

Joe, what do you think?

I'm sorry, I didn't quite understand the question. Can you keep it more...

Yes. Sorry, I mean, effectively, I was just trying to clarify if BTFP repayment is done out of existing cash based on what your comments were about the current cash level being kind of relatively where you'd want it as a percentage of overall balance sheet?

Yes, the subsequent paydown of BTFP will not significantly reduce our cash balance. That's why I mentioned that we need to consider deposit inflows and other outflows before making a final decision on whether to proceed with the paydown. However, you should not anticipate a decrease in cash.

The next question comes from Andrew Terrell with Stephens.

Jared, if I could just start on the noninterest-bearing deposits, pretty nice build kind of into quarter end. I was curious if you could give any color on how the NIB deposits have trended so far in the second quarter? Have you seen continued growth or any kind of moderation there?

We have seen continued growth. I received an update this morning, and we get reports regularly. I'm cautious about making predictions because things can change rapidly and pipelines depend on actual bookings. However, I appreciate the momentum and progress we're making. It's hard to predict quarter-to-quarter, but over the year, noninterest-bearing deposits are expected to grow. The growth may not be linear. I hope it remains steady and consistent. Right now, it appears it will be consistent. We'll have a clearer picture at the end of the quarter, but the outlook looks positive.

Okay. I appreciate it. And then sorry to go back to just the margin question, but last quarter, I mean, we talked about 15 basis points of earning asset yield improvement in the first quarter. And I understand it sounds like that maybe the base was a little too high to start because of the purchase accounting. But now that that's behind us, would you still expect 15 basis points of earning asset yield expansion per quarter just from booking loans at higher yields and replacing the lower yielding loans? I guess 15% is still a good number?

I don't think it's unreasonable. It's a clear output for us regarding where we end up. We have various options available to us, which allows us to achieve our targets even if the margin is affected. We can compensate with volume and utilize other strategies to manage expenses and align our numbers with what we believe is sustainable. If the interest rate curve doesn't work in our favor initially, we can reduce expenses sooner, and later we can adjust to the interest rate curve as the NIB improves and other factors come into play. Is 15 basis points of improvement a reasonable target for the quarter? Yes, I believe so. Will we reach that figure completely? Will it be 10%? Will it be 15%? I'm not sure, but it seems achievable. What do you think, Joe?

Yes. I would echo what Jared said. I think there's a lot of moving pieces. It depends upon what loans we originate in the quarter. Also, what loans sort of maybe pay down ahead of plan. But just to give you a sense of what we're looking at in the first quarter, our new loan production yield was north of 8%, getting up towards 8.5%. So as you imagine, a lot of the loans that are rolling off are much lower than that. So we have a good trajectory there, a good glide path, and we'll see how it comes out.

Yes. One of the things that Joe and I talked about was on the spot rate. That's really just a moment in time on the margin, and there's a lot of pieces to it. And so we just feel like giving the margin for the month is probably a better thing to do going forward, which is why we laid out that chart in the deck.

Yes, I understand. It's helpful, and I appreciate it. Regarding the question about preferred and potential redemption, it seems that your preference is to continue building capital, at least in the short term. Could you remind us about your capital goals? I can't recall which metric is your main focus, but could you refresh us on your capital targets?

Yes. I think Q1 getting that closer to 11% is probably when we feel like we'll have excess capital. And so from there, I think it will be an easy conversation to have about how we're going to deploy it.

Got it. Okay. If I could sneak one more in. I appreciate the color you guys gave around the delinquencies on the nonperformers, but the classified loans, what drove the step-up in classified this quarter?

Joe, do you want to touch on that?

I was going to say, I think it's a lot of the same drivers that impacted delinquencies and NPLs, but Jared, I'm not sure if you had further color.

No, it was the same group.

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.