Earnings Call
Banc Of California, Inc. (BANC)
Earnings Call Transcript - BANC Q1 2025
Operator, Operator
Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. I'll now turn the call over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.
Ann DeVries, 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 the Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information are 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 included in both the earnings release and the earnings presentation as well as the Risk Factors section of our most recent 10-Ks. 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. Thanks, Ann.
Jared Wolff, President and CEO
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. Benefited from the market volatility, and opportunistically repurchased 6.8% of our shares and have completed the program. Announced yesterday that we are upsizing our buyback program with an additional $150 million to $300 million and will expand it to cover both common and preferred stock. We will be prudent with this program and use it opportunistically, and 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 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 and 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.
Joe Kauder, Chief Financial Officer
During the quarter, we showed an uptick in classified assets as well as NPAs.
Jared Wolff, President and CEO
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 rating loans. And that when we see signs of weakness in any credits, we're 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 the 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 to classify this quarter are current with no change in borrower behavior. And 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-off this quarter was mostly driven by a loan that we had previously partially charged off. We'd fully reserved 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 unearned credit mark on the Banc of California loan portfolio acquired in the merger as well as coverage from our CreditLink notes.
Joe Kauder, Chief Financial Officer
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.
Jared Wolff, President and CEO
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, maintaining healthy capital liquidity positions. I'll hand it over to Joe, and as usual, I'll bring back with some closing remarks before opening the line for questions.
Joe Kauder, Chief Financial Officer
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 costs. 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 03/31 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 5.9% 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 costs on HOA deposits, which are reflected in noninterest expenses. Total noninterest income of $33.7 million was in line with our normalized run rate of $11 to $12 million per month. Total noninterest expense was $183.7 million, an increase in the prior quarter due to seasonally higher compensation-related expenses, including annual resets for payroll taxes, 401(k) contributions, 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. And our expenses benefited from a few nonrecurring noteworthy items referenced in our investor day. We expect our noninterest 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 rightsize our expenses if conditions 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 purchase 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. They 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 costs, 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.
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.
Joe Kauder, Chief Financial Officer
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.
Jared Wolff, President and CEO
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.
Joe Kauder, Chief Financial Officer
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 a slowdown in activity. Our product and geographic diversity are serving us well.
Jared Wolff, President and CEO
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.
Joe Kauder, Chief Financial Officer
I want to thank our team here at Banc of California for all their hard work and efforts in this environment.
Jared Wolff, President and CEO
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, Operator
We will now begin the question and answer session. To ask a question, you may press star then 1 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Ben Gerlinger with Citi. Please go ahead.
Ben Gerlinger, Analyst
Hey. I'm sorry. Can you hear me now?
Jared Wolff, President and CEO
Yeah. I can hear you, Ben.
Ben Gerlinger, Analyst
Okay. So at the risk of kinda rambling here, when I look at the bank, I mean, I see it in kinda two lenses. One is margin expansion, expense base is coming down, decent loan growth. So, I mean, those are positives. The negatives would be credits kinda ticking up in the classifieds. The ACL is getting a little bit lower on a ratio basis. So I get the credit link notes. So right initially, the capital base is below peers. It's not too thin, but it definitely not where you wanna be if there is a recession on the lower half of the list. So when you think about just the outlook over the next year to two years, given the uncertainty, and I get you're buying back shares, but is it the degree of confidence in credit going forward? Is it the degree of profitability 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. Well, thanks, Ben. It's a good question. I understand the buckets and kind of how you organized it. So I think you laid out the positives correctly. You know, we do expect the opportunity to continue to expand our loans. And bring in new relationships 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 gonna benefit this quarter from the loans that we brought on and continue to bring on at a higher loan yield than the portfolio overall. Deposit costs should continue to improve over time. We're we the heavy movement that we did with kind of our brokered portfolio as I mentioned, was kind of expiring at the end of this quarter. And so deposit costs aren't gonna move down as quickly. But they still should come down and our margin will still expand. And then the noise, as you pointed out, was credit. I think we've explained that pretty well, and it's 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's pretty healthy. I mean, you know, we run a very conservative CECL model, as Joe pointed out. Our baseline scenario is 40% baseline and 60% recession. That is more conservative, I think, than what Moody's recommends, and it's conservative overall. And I think that 1.43% for the majority of our portfolio, the 75% of our portfolio, that's not these low-duration, you know, no loss loans is very healthy on a peer basis. And that's even before you take into account the CECL re the CreditLink notes and the marks on the Banc of California portfolio. So it's actually higher than that. So we take a lot of comfort in that, and our board has looked at it carefully, and I feel very good about it. In terms of the migration, I don't wanna see that trend continue. I think that we exercised a fair amount of I tried to tell people last quarter we were gonna be doing this. You know, we kinda go through the portfolio with it with a heavy hand. And look at it and say, okay, folks. Let's start preparing for a downside scenario. So I think that we are ahead of the curve I think we're doing this. You know, maybe others will follow us. I don't know what others are gonna do, but I think this was a prudent thing to do. And I just wasn't gonna worry about the noise of the migration if I don't believe there's gonna be losses. And like I said, I think our reserves are healthy. Addressing capital, this was opportunistic. You are correct that on a pure basis, I think our capital levels are not as healthy as some of the other ones, but they're not low. I think it's important to remember that we are well-capitalized. Most banks got into an extra healthy position. I think there's some expectation that the baseline capital level gonna come down a little bit. And that's also why I said I didn't expect to use the excess buyback announcement that we made for another $150 million. We're gonna be patient with that. And we are building up capital pretty quickly as well. You know, we've been growing our earnings or starting to migrate upward. And after the transformation we did last year, we really had done a good job. I think our team's done a good job of steadily building earnings. And we could expect that to continue. So we think our capital is gonna build pretty well as well. So let me pause there as an answer to your question. It's a you know, it was a little bit philosophical, but I agree with your comments, and that's kind of how I would how I see it.
Ben Gerlinger, Analyst
Gotcha. No. That that is really helpful. And then like you said, there's another one to add to the list for California. So if you look over the past couple of years, it's Silicon Valley, First Republic, Union, Bank of the West, a whole bunch of little small deals. Do you think more opportunity today for free agency on lenders? I guess the disruption obviously opens the door for new clients. But when you just kinda 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
So will say this. You know, 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, you know, good economy, favorable regulation. Look where we're going. I think that the economic cloudy outlook is self-induced. Right? It's you know, we were in a pretty good spot. So I think this is relatively temporary. And but we don't know if that temporary means through the end of the year or for the next couple of months. You know, there's obviously a lot of saber rattling going on right now. And we're gonna be cautious, and we're gonna take into account. We're not gonna ignore but we are gonna be prepared to move positively as the market relaxes and as things return to normal. So yes, we will be hiring people and making inroads even in a slow economy. The Southern California market is doing 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. And I keep that list on my desk, and I was happy to know, add PPBI to the list of banks that will no longer be competing with us. Umpqua's already here, and they're changing their name to Columbia. They're already in California. So there's no new entrants in California. They're just gonna be competing in a different way, and one less there'll be one less competitor. I think it presents tremendous opportunity for us. You know, we are in the fifth largest economy in the world. In California, and LA 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's a lot of competition to go around, though. There's a lot of clients to go around, and I think that it's just a validation of the quality of this market.
Ben Gerlinger, Analyst
Gotcha. That's helpful color. Thank you.
Operator, Operator
The next question comes from Jared Shaw with Barclays Capital. Please go ahead.
Jared Shaw, Analyst
Hey, good afternoon.
Jared Wolff, President and CEO
Hey there.
Jared Shaw, Analyst
So I appreciate the comments about the allowance ratio and the migration, you know, of the positive migration of the loan portfolio. But know, when you look at the backdrop from what we've seen, we've seen know, more banks adding to the qualitative overlay or adding to the adverse scenario and growing the reserves. So you know, I think just looking at the allowance going down with that backdrop is you know, what some people are focused on I guess, if everything stays the same and we continue to see this migration, of you know, 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, you know, maybe add to a qualitative overlay to actually see the allowance move higher or stay flat here.
Jared Wolff, President and CEO
No. I look. I don't I don't want to be an outlier. I first of all, I think it's important that we highlight that one forty-three coverage ratio for loans that are not in those low risk categories. It's just it's it's very healthy. And that is real. And that's before we include any extra resources from CreditLink notes or from, you know, 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. So I I wanna 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 we do have to follow our model and do it with discipline. So, 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. And I think that we'll, you know, hopefully show that our coverage ratio is flat or growing. We can justify it under our model. That's what I would like to be able to do. And, it's kind of I'll know it when we get there, but I appreciate your question. We don't wanna 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 one forty-three for, you know, kind of these non-low-risk portfolios.
Jared Shaw, Analyst
Yeah. No. Appreciate that and understand that. But you know, you know how it is when people stack rank companies by ratios. It it's it's sometimes tough to be an outlier.
Jared Wolff, President and CEO
On yeah. So, I mean, you're asking the question about, like, so we're gonna come up on a screen and you're saying, well, if somebody's not gonna do the work, they're just gonna look at the headline number, and you don't wanna be somewhere where the headline number looks worse. But you know? Because they might not do the work to look at it more deeply, and I think that's fair. And I think that we have to be cognizant of that. There's certainly people that that fall into that category, and I think for the reasons I mentioned, we'd like to see our ratio improve either because we're gonna have positive migration or the ratio is gonna improve or both. And so let let's just see what we can do. But hopefully, I answered your question.
Jared Shaw, Analyst
Yep. No. You did. Thanks. And then maybe shifting, to the to the goal or the target of 30% DDA. What what sort of drives that? You know, what what's the timeline to to get there? And once we, you know, once we see 30% or, you know, get to 30%, what's the percentage of that that is subject to ECR?
Jared Wolff, President and CEO
Thank you. So 30% is our near-term target, which is through the end of this year. We're striving to get to 30% nondiscriminatory nondespring 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, you know, relative to following some others and, you know, 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, you know, and the denominator together on NIB and have the numerator grow faster than the denominator. So we're trying to do that, and it's a meaningful target. And once we get to thirty, 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.
Jared Shaw, Analyst
is in the has ECR attached to it.
Jared Wolff, President and CEO
So we have approximately 3.7 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 look in the background. And we'll give that number out during this call. Just don't have it handy, but we can calculate.
Joe Kauder, Chief Financial Officer
Okay. Thank you.
Jared Wolff, President and CEO
No problem. The next question comes from Gary Tenner with D. A. Davidson. Please go ahead.
Gary Tenner, Analyst
Thanks. Good morning. 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, you know, around turn of the year versus where we are today. So maybe I misunderstood something or misinterpreted something you said, but can kinda talk about that? Because I was a bit surprised to read that.
Jared Wolff, President and CEO
That's a misstatement. If it says that, that's a misstatement. I mean, the economic outlook did not, that's not why our ACL went down. Our ACL went down because of all the reasons we mentioned. And started putting a more conservative readout for the economy back in the third quarter. Where we went to a 40% baseline, 60% recession scenario. We started that back in the third quarter of last year. So I think what we meant by that language is probably that 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. So I think it's probably a little bit more complicated than we stated there, but I understand your question.
Gary Tenner, Analyst
Okay. I appreciate that because it caught me off guard a bit. And then the second question is in terms of the NIM guide for the year, which which wasn't changed, I just wonder, obviously, starting at a lower point this quarter, partially impacted by lower accretion income versus the fourth quarter. So Joe, I know if you could kind of update us on kind of your expectations for accretion income for the year just to give us kind of a baseline as far as what's kind of 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 gonna be. And so we're happy to address that. And then before I forget, the question was how much NIV we had in HOA and the answer is $1.2 billion.
Joe Kauder, Chief Financial Officer
So in the first quarter, we had a little bit over $16 million of total accretion. And as Jared says, we generally have what we call a base accretion and then accelerated. Because we had almost no accelerated accretion in the first quarter, it was very abnormally low quarter after averaging about $3 million of accelerated per quarter in the in 2024. So the baseline probably since we didn't have any prepayments, should stay pretty consistent as we look into the second quarter. And then assuming we revert back to a normal level of loan prepayments, that should step down at approximately I think we've told you before about a million a quarter or so. But, you know, the amount of accelerated prepayments is hard to predict, so we're not really dependent upon those as we look out to the rest of the year.
Gary Tenner, Analyst
Okay. But to clarify, so the baseline is what kinda embedded in your NIM? Got it.
Joe Kauder, Chief Financial Officer
Yep. Exactly.
Gary Tenner, Analyst
Yes. Okay. Okay. Fair enough. And if I just need one last question and just Jared, as you kinda you 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 CET one, let's say, any any thought to any risk waiting relief on word warehouse or anything like that that you're kind of thinking about that gives you extra comfort on being opportunistic?
Jared Wolff, President and CEO
I think, you know, we obviously wanna keep our capital levels strong. And, you know, we like being 10% and above. We could dip down in a quarter if we're gonna move past it pretty quickly with, you know, what we see for our earnings outlook. But I think that's a kind of a guide for us of you know, where we are. I also wanna be, you know, we were our buyback program that we announced the timing couldn't have been better, obviously, given where stock prices went. And so we had a predetermined program through investment bank that was a 10b-5-1 program where we had given them ranges to buy within certain bands. Then it was, you know, the maximum per day if it ever got below this number, which it did. And so we were able to buy opportunistically. I don't expect it to return to those levels. And so, normally, you would be exercising a little bit more caution and maybe patience with the buyback program. And so we'll use it, you know, over time. Certainly, we can use it in a way that, you know, keeps minimizes dilution from, you know, vesting of stock awards and things like that. I think that's kind of a common way that many banks use their buyback programs. 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, you know, given where stock prices are today, it makes a lot more sense to do common than preferred. But that may change over time. So, we're just gonna be opportunistic and and look at it and you know, do what makes sense under the given circumstances. But capital levels are something that we're keeping squarely in focus.
Gary Tenner, Analyst
Thank you.
Operator, Operator
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark, Analyst
Hey, good morning, everyone.
Jared Wolff, President and CEO
Good morning.
Matthew Clark, Analyst
Jared, what's the what are the I know it's somewhat dependent on where your stock trades, but it you know, what's the probability of you tendering the preferred this year?
Jared Wolff, President and CEO
Matthew, I I can't put a number on that. It's so upon other circumstances. Like, you know, the overall environment. As we just touched on, you know, our perception that we need capital, for other reasons that we wouldn't wanna dilute, if the economy sours. There is a ceiling on the preferred. Right? It's know, there's the par value is 25, and it's trading at a discount currently. So I have a hard time handicapping what that is. But, you know, we're gonna be smart. And, if it makes sense, we would do it.
Matthew Clark, Analyst
And then 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. So I would say that we applied more discipline in starting in the first quarter a little bit in the back half of the fourth quarter, But we do portfolio reviews. And we had a lot going on last year, and there's 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 are healthy. As we've talked about. And I like the loan production that we're doing. There were certain things I think that we can improve on on the portfolio management side and just kind of, you know, being ahead of things and not waiting for them to get better but forcing them to get better. And 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. It's just my preferred way of dealing with credit. And it's I found it to be more effective. And so 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. And I think that's a very positive change. It does not mean that you're gonna have losses. It does it just means that you're looking at things through a different lens. And that's just the way that we decide to do it. There is no outside influence that caused us to do this. It was our own decision and evaluation, and I feel good about it. But we'll be monitoring it closely, and I hope, as I said, that this causes positive migration in the future. Which it should if as we move toward you know, unlocking kind of some of these views that changes we've made.
Matthew Clark, Analyst
Okay. Great. And then last one for me. Just around DCR. Deposit balances, they've been bouncing around $3.7 billion for the last few quarters. Wanted to get a sense for your outlook there, whether or 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
Yeah. As you know, we don't have any rate cuts in our forecast. Our HOA business has been very stable as you pointed out. I mean, if you look at the last couple quarters, it's been about the same. It started off in the three eights, 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 people to calculate kind of our average cost, which is about 3.3%. Of our, terms of deposit costs for our HOA business. Overall. And as we mentioned, $1.2 billion of those deposits are in are NIB. We will benefit meaningfully if rates come down because the ECR is gonna come down. Similarly, if rates go up, ECR will go up. But we think we've managed kind of the program on the ECR side pretty well. Are we gonna grow HOA balances? That's our intent. We would like to. Absent a few of our larger customers, 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. So when we do bring on new HOA clients, the average cost is much lower than our overall HOA average cost. So it is a business that we would like to grow. It's very competitive. And our team does a great job. And, you know, they're but as you know, they're sticky balances, which is why don't go down too much. And, hopefully, we can grow them over the course of the year.
Matthew Clark, Analyst
Great. Thanks again.
Jared Wolff, President and CEO
Thank you, Matthew. The next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster, Analyst
Hi. Good morning, everybody.
Jared Wolff, President and CEO
Morning.
David Feaster, Analyst
I just wanted to get pulse of your client base. Obviously, there's a lot of volatility in the market. You know, we got the trade wars. You got all sorts of kind of things. I'm curious, I guess, first, how the pipeline's shaping up and then, you know, where you're seeing opportunities today? Do you still expect to see growth primarily concentrated within, you know, lender and fund finance? Kinda curious you know, again, the pulse of your clients, the pipeline, and and just is there any risk to to more falling out of the pipeline just given this uncertainty?
Jared Wolff, President and CEO
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 don't know that we're gonna 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 LITECH loans, low-income housing tax credit, and general construction. And 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 projects, but more paid off than stuck with us, which is why, you know, overall construction had a downturn there. And 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 and I, but we're being careful, right, because of the cloudiness that we see out there. But we are taking a long view, and we're banking companies that are solid and that, you know, 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. You know, the Port of Long Beach in Los Angeles and, you know, San Pedro, one of the largest ports in the world. Has tons of volume that comes through it, and, obviously, it's impacted by tariffs, so we look at that. Generally, David, I'm very optimistic. And 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, you know, that we're seeing some clouds. But there's plenty of good business for us to pick up in these markets because of our position and who we're competing with, which is increasingly the large banks.
David Feaster, Analyst
Okay.
Jared Wolff, President and CEO
That's good color. And and 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 or even the retail side of the business? So just how you think about growth in and even opportunity to further cut deposit costs even exclusive of Fed cuts. So it's very, very competitive. I was just on a call earlier with our team. It's it's very competitive. And we are starting to see pricing demands come back in uncertain 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're like, hey. We need to get more on our excess deposits. And so that's one of the things that happens. When people start getting nervous is they start focusing on the minutiae again. Which is, by the way, what we do on the credit side. Right? We start focusing on exercising that discipline. We really should have it at all times. And maybe you know? But clients get a little bit more finicky about different things. So would say that the deposit landscape is very competitive. Where we're winning is number one, you know, we will not do loans without deposits. And so 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. And 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. You know, 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. But 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 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. And my belief is that you really need to have a fairly large footprint to serve consumers well because they want the branches and they wanna be in the branch talking to people. And it's just a different client base than what we're set up for. 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. But 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, Analyst
Okay.
Jared Wolff, President and CEO
And then, you know, we touched on this a bit. You know, just you talked about just kinda given the volatility and conservatism, tweaking the approach to risk ratings. I'm curious, has there been any changes to underwriting at all, or have you tightened the credit box? And then, I mean, is there anything that you're avoiding or deemphasizing or maybe watching a bit more closely? Yes. So I wouldn't say we've tightened our credit box. I think the discipline that we're exercising now on the management side of credits, you know, should be in place at all times. And similarly, on the credit side, you might say, look. I don't wanna go longer in industrial storage around the port right now. I don't wanna go longer in deals that you know, are really dependent upon you know, one sole or double source products you know, out of the country right now. So those are the ways that I think you tweak your underwriting and it's really more of a selection process of what credits you feel comfortable with. You know, we had on construction loans, we have we have a big construction loan that we're looking at now, and I said, look. I want it to be full recourse. Got to be this trend where construction projects somehow got to be partial guarantees or burn-off guarantees or, you know, we'll pay you through getting it vertical, but, you know, we're like we're not gonna guarantee the product after that. And I just that's never been my approach, is I'm not a know how to operate an apartment building. I don't wanna own it and rely on the value. I want somebody to commit to me that they're gonna stand behind it. So I think going back to just kind of core principles is the way you operate in all markets, and I think when things are cloudy, it reminds you of all the things that you need to emphasize.
David Feaster, Analyst
Okay. That's helpful.
Operator, Operator
Thank you. The next question comes from Anthony Elan with JPMorgan. Please go ahead.
Anthony Elan, Analyst
Hi, everyone. I'd like to start on the expense outlook. You're you're still guiding to the low end of $190 to $195 million per quarter. But Joe, you mentioned that there may be levers available to rightsize expenses if conditions warrant. I'm wondering if you could outline some of those opportunities that will be available to beat your expense number.
Joe Kauder, Chief Financial Officer
Yeah. Thanks for the question. You know, there's always a couple of things that levers that you know, management has in their back pocket 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 this expense space. That is in a very difficult situation. You could take action to slow down. It's well said, Joe. I mean, Anthony, the first thing that comes to mind is just accruals for bonuses. Right? You really don't wanna 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 of the spending that we have on projects because we get that question from time to time. And in our supplemental information, we have a list of our projects that are underway. And, you know, what the breakout is. So it's on page 26 of our deck.
Anthony Elan, Analyst
Thank you. And then and then on loan growth, you reduced the the outlook to mid single digits. But Jared, you've outlined before in earlier in your prepared remarks the strength of Southern California and the exits of other banks. So I'm just wondering how I marry up 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, like, we're we're being conservative here. So far, the second quarter is strong. The reason why we're tempering it is because I really don't know what's gonna happen in the back half of the year. So things could shut down and then, you know, we end up with because what we gave was was mid to high single digits for the year. What we were gonna average. And so so far, 6% in the first quarter. Let's assume we do, you know, six 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. So 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 gonna hit the high end. We're only gonna hit the mid end. So 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. And we're trying to be prudent and not overly aggressive if we see storm clouds.
Anthony Elan, Analyst
Thank you.
Operator, Operator
The next question comes from Chris McGratty with KBW. Please go ahead.
Chris McGratty, Analyst
Hey, Jared. Hey, Joe. I just wanna zero in on NII. A lot of discussion on margins and balance sheet, but just our NII. Right? In the quarter, 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, like, help us frame how much NII should be up in the second quarter.
Joe Kauder, Chief Financial Officer
Yeah. So you know, you start off with that was, you know, 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. And then know, if you look at our loan growth as we continue to grow, at the levels that Jared has said, The you know, we will continue to expand our net interest income. And, you know, it's I I think you could probably think about it as somewhat consistent with, you know, consistent with our loan growth, you know, mid-single digit increase in that NII.
Jared Wolff, President and CEO
So NII could be a, you know, 5% in the second quarter just from the factors that you laid out.
Chris McGratty, Analyst
Okay. That's actually all I had. Thank you.
Jared Wolff, President and CEO
Thanks, Chris. The next question comes from Timur Braziler with Wells Fargo. Please go ahead.
Timur Braziler, Analyst
Hi, good morning.
Jared Wolff, President and CEO
Morning.
Timur Braziler, Analyst
I want to starting just on the loan growth outlook, I'm wondering if you're growing loans more slowly or more cautious and the focus here is to bring over the whole client react. Relationship slower loan growth projection at all impacting your ability on the deposit side. Then as a corollary, just how much of that expected DDA growth is needed in order for you guys to hit that three-twenty to three-thirty NIM guide that was unchanged?
Jared Wolff, President and CEO
Yeah. That's a good question. So first of all, I think loan growth in the second quarter as of now is very strong. And 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 gonna happen in the back half of the year. And, you know, at the end of the second quarter, we'll tell you where we will update it again if necessary. What we're trying to do is just tell people what we see today. And if we see a change, then we'll do. But I didn't think it was that significant a change. So 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 their cost of their loan. Right? And so they're, you know, you're you're gonna need to fund the loans somehow. And so 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. But it is a circumstantial thing. You know, most borrowers have multiple banks. Certainly, real estate borrowers do. And real estate borrowers tend to have the lowest level of cash available. So Timur, it's a balancing act. And 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, Analyst
And then I guess more specific on DDA pipelines, obviously, a key objective for you guys. Now those balances have been flat or down now for four straight quarters. I guess as you're looking out, how do those pipelines look? And then 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. But 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 it 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, and I've been talking about that. So where we were able to stay flat or even grow is because we are bringing over new relationships. And so 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. And, you know, we had all this money that was in the economy from what we all know for many reasons that, you know, inflated balances and now it's being pulled out. So our ability to stay flat, which is why our 30% NIB growth is a really meaningful goal, and we're trying hard to get there. And it might be successful. We might not, but we're putting it out there because that is our goal. And we will get there eventually. And once we get there, we'll go to 35. And 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. And so I don't know that I can predict for you what's gonna happen quarter over quarter other than I don't know that this quarter is gonna be worse than last quarter. It's just hopefully, it'll be better. And I thought last quarter was fine. So I think we're exercising the right muscles and I think the results will play out over time.
Timur Braziler, Analyst
Okay. Fair enough. Thanks for that. And then just lastly for me, couple part question just on payoff activity. Really high in 1Q. I guess, a, was what was the driver there? Was there any pull forward from February? 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? Then the third part of the question, you had mentioned that the payoff activity on the multifamily side, 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
I don't think that they're connected. The payoffs came in a couple different areas. One was we had a lot of, as we mentioned, construction loan paydowns of, you know, larger loans. Second is we had a lot of cycling in our warehouse business. That cycled through. I mean, I think it's 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, really strong loan production, including supporting our clients with line utilization. And, you know, line utilization rates are moving up as you can see. And so I wouldn't say they're peaking. We don't really see it much above the mid sixties. And so we're we're kinda getting there. And so we would expect some paydowns there. The payoff balances were kind of we as we mentioned, we took some of the construction balances and put them into multifamily. But I think the multifamily that we're seeing, these are a lot of, you know, been on the portfolio for a while. Maybe they were part of a broker portfolio and kind of there's a discipline of of managing what happens when something is at, you know, a historical three and a half percent rate. And, you know, you know it's gonna go to six, 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 gonna put in more equity? Are they gonna take us out? Are they going to, you know, what is the plan? Are they going to Fannie or Freddie? That's the discipline that I want documented for those loans. We don't see losses. You look at multifamily in California. I mean, there's a huge shortage. But there is a discipline that's necessary for us to do this the right way, and I think we're doing more of that. So but the recent loans that we're putting on are obviously in a current rate environment, which is very different than the stuff that kinda migrated in the quarter. That that answer your question, Timur?
Timur Braziler, Analyst
It did. Yes. Thank you.
Operator, Operator
The next question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell, Analyst
Good morning.
Jared Wolff, President and CEO
Good morning.
Andrew Terrell, Analyst
If I could just stick on the multifamily point, and Jared, appreciate the color on kind of the classified moves. Now if I just look at page 20 of the presentation, you know, there's a couple of billion dollars 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? And kinda where I'm going is, you know, is it is it fair to think that we could see continued moves up in classified as these loans go up for maturity, or do do you feel like you've gotten ahead of that?
Jared Wolff, President and CEO
No. I think I think we've gotten ahead of it. And this was a specific group of stuff that we looked at. We have a project called project reset where we're taking I mean, I'll just to give you some color, we have a fairly large brokered multifamily book. Loans that are, you know, three and a half or 4% that in the current environment are repricing around 6%. They fully carry. They fully debt service. And they commit. 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 five and a half percent. And so I the our experience we've had success with, you know, a hundred and five, two hundred million dollars worth of loans. And some of those borrowers, they floated up into the eights. And they were just waiting for certainty on rates before they fixed it. So overall, the portfolio is solid. And that's the experience with most borrowers. But you know, there's a handful where they're currently in their interest-only periods. And even if the interest-only periods are gonna extend for another year, we've gotta be monitoring it. And they're fully current. They're paying now and got a ton of equity in the property. But you gotta look at this and say, okay. What is the plan? I think it's more of a documentation question. So I don't think that we should expect to see some sort of large uptick in migration. Our experience is is different than that, but I don't have a problem, you know, being disciplined about it now. I think with this the other thing, Andrew, is I think what this page shows and your question's a good one, like, you know, what are the impacts? This page does show that we have a lot of loans that are gonna reprice higher. And so one question is, well, can they absorb that? And the answer is yes. That's the experience that we have today. The second question is, how what does this mean for our income? And it's definitely a positive tailwind that will come in over the next, you know, two years.
Andrew Terrell, Analyst
Yep. Yeah. And that's exactly where I was going was whether or not you had the the kinda potential downgrades out of the way, and so now we can just more focus on the the spread pickup as those loans reprice. So thank you for addressing.
Jared Wolff, President and CEO
Yes. I hope we can. I think we were pretty aggressive this quarter, and we have a plan to kind of migrate stuff. But it will take a couple quarters, but we expect that the trends will get better after this. And, hopefully, that will not get in the way of the spread pickup that we are expecting.
Operator, Operator
Thank you. 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.