Earnings Call Transcript - BANC Q2 2025

Operator, Operator

Good day, and welcome to the Banc of California's Second Quarter 2025 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.

Ann Park DeVries, Head of Investor Relations

Good morning, and thank you for joining Banc of California's Second Quarter Earnings Call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goals, strategies, 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 a 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-K. Joining me on today's call are Jared Wolff, President and Chief Executive Officer, and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared.

Jared M. Wolff, President and CEO

Thanks, Ann. Good morning, everyone, and welcome to our second quarter call. We delivered a strong second quarter with meaningful growth in core profitability. Pretax pre-provision income grew 6% quarter-over-quarter as solid revenue growth outpaced a slight increase in expenses. Our core earnings drivers, which included loan growth, net interest margin expansion, and disciplined expense management, all remain firmly on track with our strategy. We achieved our third consecutive quarter of robust broad-based commercial loan production, which helped drive total annualized loan growth of 9%. Our team also continued to make steady progress in attracting new business deposit relationships. During the quarter, we opportunistically engaged in the sales process for approximately $507 million of commercial real estate loans, which we have transferred to held for sale with expected proceeds net of reserve release of 95%. We expect the strategic sales of these loans will further optimize our balance sheet and contribute to delivering high-quality, consistent, sustainable earnings growth for our shareholders. This move also helped to drive improvement across our credit quality metrics in the quarter. Our strong second quarter earnings helped us achieve our fifth consecutive quarter of growing tangible book value per share to $16.46. Our balance sheet remains strong with capital and liquidity at healthy levels. As mentioned on our first quarter call, we opportunistically repurchased $150 million of common stock or about 6.8% of our shares early in the second quarter. We have $150 million remaining in our buyback program, which can be used towards both common and preferred stock. We will continue to be prudent with the remainder of this program and use it opportunistically. And while our outlook may change, we do not expect to deploy all this remaining capacity in the near future. Our second quarter loan production, including unfunded commitments, was $2.2 billion and included our highest level of originations of $1.2 billion since the closing of our merger. Strong production levels drove 9% annualized growth in our total loan portfolio, while core held-for-sale loans were up 12% annualized. Growth was broad-based, led by continued momentum in lender finance and funder finance originations and complemented by expansion in our purchase single-family residential portfolio. Our loan origination volumes reflect strong execution by our team and our ability to capitalize on our attractive market position. Partially offsetting this growth was a decline in construction loans due to payoffs and completed projects, some of which moved to permanent financing in our CRE portfolio and some of which were included in the loan sale. We have remained disciplined in our pricing and underwriting standards. The rate on new production averaged 7.29%, which was up from 7.2% in Q1, and that helped drive expansion in our average loan yields and our margin. You've heard us emphasize many times now that proactively managing credit risk and quickly identifying any credit concerns is a key priority for us. In accordance with that philosophy, we took decisive action during the quarter to opportunistically sell the commercial real estate loans that I mentioned earlier. While many of these loans are money good and well collateralized, they exhibited characteristics that contributed to credit migration that were not guaranteed to resolve in the near term. Rather than have the potential overhang while we continue to work through the credits, we took the opportunity to reset and align our balance sheet with our focus on growing high-quality, consistent, and sustainable earnings. Our second quarter credit quality metrics improved meaningfully from Q1, mainly driven by the loan sale process. But otherwise, our credit was stable. Nonperforming loans, classified loans, and special mention loans as a percentage of total loans declined by 19, 46, and 115 basis points, respectively, from Q1. Second quarter net charge-offs, excluding the impact from the loan sale actions, were just 12 basis points of loans. Proactive credit risk management will remain a top priority as we strive to maintain strong credit quality metrics. Our headline reserve levels at 1.07% of total loans and our economic coverage ratio were substantially higher at 1.61% 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 credit-linked notes. Our investor deck does a good job of laying out how our loan portfolio has changed over the last 12 to 18 months, and how our coverage ratios reflect that migration to a much higher percentage of loans with short duration and no historical losses in warehouse, lender finance and fund finance. Along with SFR, these loans now account for almost 30% of our loan book. While some uncertainties remain in the broader macroeconomic environment, we have been encouraged by the resiliency of the market and continued strong demand from our clients for our products and services. We remain confident that the great work of our team members, our continued execution, strong balance sheet, and differentiated market position will drive growth, profitability, tangible book value per share, and long-term value for our shareholders. Now I'll hand it over to Joe, who will provide some additional information, and then I'll have some closing remarks before opening up the line for questions.

Joseph Kauder, Chief Financial Officer

Thank you, Jared. For the second quarter, we reported net income of $18.4 million or $0.12 per share and adjusted net income of $48.4 million or $0.31 per share. Adjustments this quarter included $20.2 million after-tax provision expense related to the sales process of $507 million of commercial real estate loans with expected proceeds net of reserve release of 95%. During the quarter, we completed sales totaling $30.4 million, with the remaining $476.2 million transferred to held for sale. The loss we took during the quarter through the provision line item is the net mark on the loans that were either sold or transferred to held for sale and reflects our estimate of market value based on either active bids or other market inputs. We anticipate $243 million of loan sales to close in 3Q and expect the remaining $233 million of loans to be sold over the next several quarters. We also recorded a one-time noncash income tax expense of $9.8 million, primarily related to the revaluation of deferred tax assets following changes to California state tax apportionment methodology. This change in methodology positively impacts our tax rate going forward and retrospective to the beginning of 2025. However, the day one impact of the lower tax rate on our deferred tax asset position resulted in the negative charge. Going forward, we expect our effective tax rate to be approximately 25%. Moving to our core results. Net interest income of $240 million was up 3.4% from the prior quarter, driven by strong growth in loan balances and higher loan yields. Net interest margin expanded in the quarter to 3.10%, driven by a 3 basis point increase in average loan yields to 5.93%. The increase in loan yields was due to the full quarter impact of strong growth in higher-yielding loan categories. The rates on new loan production averaged 7.29% and total loans grew by 9% annualized, led by growth in lender finance, fund finance, and purchase single-family residential loans. As of quarter end, our spot loan yield was 5.94%. Total cost of funds of 2.42% remained flat quarter-over-quarter as a 41 basis point decline in average cost to borrowings to 4.93% was offset by a one basis point increase in cost of deposits to 2.13%. The decline in borrowing costs was driven by the redemption of $174 million of 5.25% senior notes which we replaced with lower-cost long-term FHLB borrowings. Average core deposits were up 5% annualized, and the average cost of deposits increased slightly as the need to fund strong loan growth drove a mix shift towards interest-bearing deposits. While we continue to steadily grow the number of new NIB business relationships, the average balance per account has been under pressure which we believe is attributable to both seasonal and macroeconomic factors. As of June 30, our spot cost of deposits was 2.12% and our spot net interest margin was approximately 3.11%. 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, however, we remain liability sensitive due to the impact of rate-sensitive ECR costs on HOA deposits, which are reflected in noninterest expense. We expect fixed-rate asset repricing to continue to benefit NIM as we remix the balance sheet with high-quality and higher-yielding loans. We have $1.8 billion of total loans maturing or resetting through the end of 2025, with a weighted average coupon rate of 5%, offering good repricing upside. Our multifamily portfolio, which represents 26% of our loan portfolio, has approximately $3.2 billion repricing or maturing over the next 2.5 years at a weighted average rate that will offer significant repricing upside. Total noninterest income was $32.6 million, down 3% from the prior quarter, primarily due to mark-to-market fluctuations on CRA-related equity investments and credit-linked notes. Noninterest income remains in line with our normalized run rate of $10 million to $12 million per month. Noninterest expense of $185.9 million increased $2.2 million from Q1 or remaining below our target range of $190 million to $195 million per quarter. The quarter-over-quarter increase was primarily driven by a $2.1 million increase in insurance and assessments, and a $1.9 million increase in compensation expense, which were lower in Q1 due to a one-time FDIC expense reversal related to prior periods and Q1 compensation expense reversals related to some staff exits. Looking ahead, we expect our quarterly expenses in the back half of 2025 to settle into the low end of the aforementioned range of $190 million to $195 million as we increase comp expense and invest in our infrastructure to support growth. However, we do expect positive operating leverage to continue as higher expenses are expected to be more than offset by continued revenue growth. Excluding the impact of loan sales actions, our core provision for credit losses totaled $12.3 million, an increase of $3 million quarter-over-quarter. We added to the quantitative reserve to reflect updates to our economic forecast and also increased the quality of reserves related to our office loan portfolio. As our loan portfolio continues to expand, our credit reserves remain well aligned with the risk profile of that growth. As Jared mentioned, we've seen meaningful shifts towards loan categories with historically lower losses, including warehouse, fund finance, lender finance, and residential mortgages. These lower loss loan portfolios as a percentage of our total loans increased to 29% of total loans, up from 26% in Q1 and 20% a year ago. Under CECL, these portfolios require lower reserves due to the historically low loss content and shorter duration, and their growing share will continue to influence overall reserve levels. Excluding these lower-risk categories, the remaining portfolio would carry an ACL coverage ratio of 1.44% compared to 1.07% for the total portfolio. Including the impact of credit-linked notes and purchased accounting marks, our total economic coverage ratio stands at 1.61%. And we believe the assumptions and economic scenarios embedded in our ACL models remain appropriately conservative. Our second quarter results reflect the substantial progress we have made in successfully growing core profitability through our consistent and strong execution. We have continued to strengthen core earnings drivers, including high-quality loan growth, stable funding and deposit cost, net interest margin expansion, and prudent expense and risk management. We remain on track with our 2025 guidance with tweaks to our outlook for margin and NIB percentage. We see good balance sheet and earnings growth continuing with mid-single-digit growth in average earning assets for the back half of the year. We also expect mid-single-digit increases in quarterly net interest income in the back half of 2025 and achieving our margin target range in Q4. As we look forward to the second half of 2025, we expect to continue to drive consistent and meaningful growth in our core profitability. And at this time, I'll turn the call back over to Jared.

Jared M. Wolff, President and CEO

Thanks, Joe. Our second quarter results clearly demonstrate our success in pivoting our business towards profitable growth, following our substantial transformation last year. We are growing adjusted EPS at a double-digit rate quarter-over-quarter. Our loan engine is working, and we are moving our credits to try to eliminate noise for the benefit of future earnings. We're expanding our lending relationships in areas that have historically lower areas of loss where we have some great niches, and we are bringing new relationships to the bank. Our loan-to-deposit ratio has remained very comfortable. We have been opportunistically growing all types of deposits to fund our loan growth. NIB did not expand this past quarter, but as I've shared in the past, it's not necessarily a straight line. We are doing the right things, the right way for the long term, and we have confidence that our results will pay off over time. To that end, we've continued to expand market share in key attractive markets, particularly California, which is now the fourth largest economy in the world. We're continuing to capitalize on the dislocation in California's banking landscape and are the go-to business bank for people, including clients who want to bank with us and talented individuals who want to join our team. Our teams execute with consistency and discipline, bringing in new deposit relationships and originating high-quality loans while maintaining prudent operating and risk management practices. We continue to move the ball down the field every day, growing our profitability, scaling our business, and providing high-quality, reliable earnings growth. We are optimistic about our growth trajectory for the remainder of 2025. And indeed, our estimates for 2026 are only growing higher. I want to take a moment to thank our exceptional team at Banc of California. Their unwavering commitment to our clients, communities, and our shareholders is remarkable. I'm very proud to work alongside such a dedicated and talented team. Thank you. And with that, let's open up the line for questions.

Operator, Operator

And your first question comes from Matthew Clark with Piper Sandler.

Matthew Timothy Clark, Analyst

Just on the loan sales, the loans sitting in held for sale, it looks like they're kind of range in that 5.3% to 6% yield range. I guess what's the plan on the other side of the balance sheet? What do you plan to unwind and at what rate?

Jared M. Wolff, President and CEO

Matthew, I don't fully understand your question regarding the other side of the balance sheet. Are you referring to the deposits we intend to manage? Could you please clarify a bit more?

Matthew Timothy Clark, Analyst

No, with the loan sales, I assume you're going to unwind some wholesale funding as well.

Jared M. Wolff, President and CEO

We have been experiencing significant growth, but I’m not sure we funded it in that manner. We're also offering some leverage on the loans we are selling, so there isn’t a direct one-to-one relationship. I’ll let Joe provide additional insights. Regarding the loans we sold, I received several questions about whether there was a rate mark or a credit mark. We were quite satisfied with achieving a 95 price for the loans, which I believe reflects the buyer's discretion regarding their pricing purpose. From our standpoint, it was more about the rate than the credit. As I mentioned earlier, we didn’t want to keep the loans on our balance sheet for an extended period. Many of these, close to $300 million, were construction projects that had been completed, and our appraisals were significantly higher than the loan values, but they were taking longer to lease up. There are private credit options available that have longer durations and are willing to work with these loans, and we provided them some leverage. The rates on the underlying notes enabled them to achieve a good return, so we feel positive about obtaining 95%. Specifically, regarding your question about funding that $500 million, Joe, do you have any specific details about what we're letting go related to that amount?

Joseph Kauder, Chief Financial Officer

No, I think you made an excellent point. We plan to provide leverage on these transactions, which will help mitigate some of the impact on our balance sheet. For instance, one deal we closed by June 30 was a $30 million tranche, and we provided leverage in the 80% to 85% range, just to illustrate.

Matthew Timothy Clark, Analyst

Got it. Okay. That's helpful. And so your loan growth guide, is that kind of all in? Or is that just HFI?

Jared M. Wolff, President and CEO

That is held for investment.

Matthew Timothy Clark, Analyst

Okay. Okay. And then on the expense run rate guide, the kind of low end of the range of $190 million to $195 million came in well below that this quarter. Sounds like you continue to make investments. But on the ECR side, I know you're not assuming any rate cuts in your outlook, which obviously would help. But it did look like the rate on those ECRs did come down. I guess, can you speak to what you did there? And what your plan is going forward?

Jared M. Wolff, President and CEO

We are putting in a lot of effort to manage our costs effectively. You're correct that our forecasts do not include any cuts. However, each 25 basis point reduction contributes approximately $6 million to $7 million in annual pretax income due to the decrease in ECR. The full impact of the ECR reduction is typically realized in the quarter following the announcement, meaning we won’t see the complete benefits immediately. If we fully incorporate two cuts in our projections, we would anticipate a reduction in ECR costs of about $3 million per quarter. This presents a significant opportunity for us if interest rates are lowered, even though we haven't factored that possibility into our forecasts.

Joseph Kauder, Chief Financial Officer

Yes. And Matthew, the decrease, we do work it hard. Jared is exactly right, but some of that decrease was just the timing of the way the rate cuts that happened at the end of '24 flowed through the way some of the contracts work, there's a little bit of a delay. Do we get the benefit? And so that was just full quarter benefit of some of those rate cuts in 2Q.

Operator, Operator

And your next question comes from Ben Gerlinger with Citi.

Benjamin Tyson Gerlinger, Analyst

I don't want to go over old ground. Regarding the loan sale, I know you provided a lot of information, and it seems to be spread out across the remaining $233 million over the next few quarters. Do you have a buyer lined up and a timeline for this, or is it just on the market waiting for a buyer?

Jared M. Wolff, President and CEO

We have not identified buyers for everything, but we had bids on all of it. Some items we chose to sell rather than directly to an individual buyer, and we have contracted for some, with the contract currently being drafted. We know who the buyer is, and we will proceed with the sale. However, we wanted to give ourselves more time to sell some other items. We believe our market valuation, set at 95%, is conservative. We might end up at 96% or possibly at 94%, but we feel the range will be around there.

Benjamin Tyson Gerlinger, Analyst

Got you. Okay. And then it looks like a majority was construction. Were these bank loans or potentially PacWest loans? I'm just kind of curious who underwrote them originally?

Jared M. Wolff, President and CEO

Yes. The reason I don't want to differentiate is that as a company, we've worked really hard to ensure we all take ownership of everything today. These were larger loans, and I'm not sure we would take on loans of this size again. Two of the loans were for industrial construction in California, backed by significant sponsors. We have appraisals showing values well above our loan amounts. There's a lot of equity in the projects, but they are in competition for lease-up and it will take some time. While we weren't expecting to lose any money, these loans were going to be classified as such, so we decided to take the opportunity to move them off our balance sheet. We figured it was best to free up the capital and invest it elsewhere. This has been a common strategy with many of the loans we've let go.

Benjamin Tyson Gerlinger, Analyst

Got you. That's helpful. And then if I could sneak one more in. Expenses came in under guide again. You guys kind of reiterated the range. Should we expect to tick up? Or is it conservatism? I'm just kind of curious like you're beating your own guide, but are you previewing expenses going up?

Jared M. Wolff, President and CEO

Yes. Joe, you want to address that?

Joseph Kauder, Chief Financial Officer

Yes. As I mentioned in my remarks, we do expect to settle at the lower end of the $190 million to $195 million range. We're making investments in both compensation and infrastructure to support our growth moving forward. We were quite disciplined in the first half of the year regarding the timing of these investments, but the plan was always slightly back-end loaded. Therefore, I anticipate a modest increase in the second half, while still maintaining positive operating leverage.

Jared M. Wolff, President and CEO

David, I’ll provide a bit more detail. Last year, I approved every single hire in the company because I wanted to ensure each one was necessary and to challenge our teams. This year, we have allowed our business unit leaders and function leaders their own budgets, giving them the freedom to hire as they see fit, provided they stay within that budget. If a team is growing quickly, they can incur more expenses; if their growth is slower, we expect lower expenses. The teams are managing their budgets effectively. Our revenues are up, and while expenses are also increasing, some of that is due to timing and some is due to discipline. The reason we are coming in lower isn't by design; it's that our teams are managing well, and that involves some timing factors.

Operator, Operator

And your next question comes from Jared Shaw with Barclays.

Jared David Wesley Shaw, Analyst

So should we assume that there's no more sort of loan restructurings coming out of the portfolio and that you're focused on growth opportunities from here almost exclusively?

Jared M. Wolff, President and CEO

I think that's right, Jared. We certainly tried to take as much as possible in the quarter. What I don't want to say is kind of we've cleared the deck, because stuff always comes up, right? That's just going to bite you. So we have to leave space for the idea that something else could pop up somewhere, but we certainly try to take the opportunity to make this a one-time event, and hopefully, it is.

Jared David Wesley Shaw, Analyst

Okay. All right. Regarding the growth, you are now recognized as one of the hometown banks in a robust, large economy. Is your growth optimism driven by capturing market share, or are you observing that your customers are becoming more optimistic and engaging in more business? What is really fueling that growth optimism?

Jared M. Wolff, President and CEO

It appears that the growth is evenly split between our existing customers and new relationships. Our teams are diligently working to establish new connections, while our current customers are also engaging in more activities. In the lender finance sector, we are currently seeing all new customers, although they are based on longstanding relationships our lender finance team has developed. Both fund finance and warehouse sectors are on the rise, attracting new clients and experiencing growth among existing ones as well. In our commercial and community banking platform, which includes over 80 branches in California, along with locations in Colorado and North Carolina, everything is progressing well, and our teams are putting in significant effort. This quarter, we have seen a substantial increase in deposits. When I mention timing, I refer to this situation: we are witnessing loan growth, which may not align perfectly with deposits; we are financing it with a different mix, relying on wholesale funding temporarily. Once more stable deposits arrive, we can adjust and reduce costs. Our goal is to support loan growth while managing our loan-to-deposit ratios. Historically, our wholesale funding levels have been lower, providing us with necessary flexibility. Specifically in California, it seems we are making significant strides in increasing our market share, which is quite exciting for our team.

Jared David Wesley Shaw, Analyst

And then if I could just sneak one more in. I mean, with that backdrop, so you've improved the credit profile with this loan sale, you feel good about growth. Yes, with your stock at these valuations and below tangible book, why wouldn't you just be buying more stock here? It sounds like you got a good price earlier on, but I mean, why not be a little more aggressive with the buyback in the near term?

Jared M. Wolff, President and CEO

We might consider that. I certainly don't anticipate the stock remaining at these levels. We are experiencing strong growth in pretax pre-provision on an annualized basis. Core EPS is increasing by double digits quarter-over-quarter, and we expect our earnings to continue to grow. Our net interest margin guidance has decreased slightly, but that's only because we're expanding and recognizing the shift in our mix, without any rate cuts included. Our internal projections for earnings are consistently being raised, which we feel very positive about, and we believe 2026 will be an excellent year. Additionally, our momentum for 2025 is very strong, and loan volumes are robust. While I don't expect our stock to stay at these levels, should it do so, we would not hesitate to take the necessary actions while being mindful of our capital levels. We need to ensure that our capital remains within an appropriate range, and if it does, we would be willing to be active buyers.

Operator, Operator

And your next question comes from Andrew Terrell with Stephens.

Robert Andrew Terrell, Analyst

I wanted to ask a question about the growth in single-family residential this quarter. In the prepared remarks, you mentioned that some was purchased as single-family. Do you have the dollar amount that was purchased? Also, could you explain what is driving the strategy of purchasing single-family properties, given that growth is also strong in other areas?

Jared M. Wolff, President and CEO

First of all, as I have mentioned before, we only purchase single-family homes. We do not have a single-family origination platform but access single-family through our role as a significant mortgage warehouse lender. We lend to nonbank mortgage lenders and are secured by the individual mortgages on those lines. For instance, we might have lines of $150 million or $75 million where they're issuing mortgages of $800,000 or $3 million. We are secured by each of those individual mortgages and typically exit those arrangements via securitization or a forward purchase contract, ensuring that they are all hedged. We can monitor these mortgages and occasionally buy them off the lines. We already appreciate the credit quality, and when we purchase these credits, we grant our warehouse borrower additional capacity on their line without counting that purchase against them. This arrangement provides them with more flexibility, which they value, while also allowing us to secure favorable loan deals. Currently, the coupons on the single-family loans we are acquiring are appealing, falling around 7. The loans are predominantly 30-year fixed, high credit quality with mid-700 FICOs, primarily located in California, and have low debt-to-income ratios. Importantly, these are owner-occupied loans with a minimal percentage of second homes or investment properties, which tend to carry higher risks and usually do not offer competitive coupon rates. We appreciate this profile since we do not have much exposure to consumers as a business bank. Hence, we believed it would be prudent to gain some consumer exposure this way. We have a strong history with these mortgages and understand their performance, which has been robust, providing us with a desirable risk-adjusted return. We also acquire these loans from our partners, which could include large national banks that originate them. Occasionally, we evaluate loan pools as well. This strategy helps us balance our portfolio. Additionally, the warehouse aspect can fluctuate, though less so now given our size, but it has in the past. Therefore, having single-family loans with a longer duration serves as a hedge against fluctuations in the warehouse portfolio. Regarding the volume of single-family loans this quarter, the production yield for the residential production portfolio was $759 million, which exceeds the conservative figure I initially considered. I believe the amount was around $450 million for the quarter.

Joseph Kauder, Chief Financial Officer

400 million.

Jared M. Wolff, President and CEO

Around 400. Okay. Thanks, Joe.

Joseph Kauder, Chief Financial Officer

Yes, just over 400. It was approximately 400 in the quarter. Andrew, residential mortgages make up about 13% of our portfolio. We could see that increase slightly, to 14% or 15%. We wouldn't mind if it went up to 15%.

Jared M. Wolff, President and CEO

Yes. excluding the purchases, which were higher this quarter than prior quarters, we were still north of $700 million of production. I mean we had a very, very strong production quarter. Our teams just did a great job.

Robert Andrew Terrell, Analyst

I appreciate it. Regarding the loans transferred to HFS, the $507 million, do you know how much of that was previously classified as credit size? I'm noticing the decline in credit size sequentially, which was slightly below the $507 million figure. I'm just curious if you have the amount for credit size that was transferred to HFS.

Jared M. Wolff, President and CEO

We can get you that. I don't have it off the top of my head. Ann or Joe, would you just look that up.

Operator, Operator

And your next question comes from Gary Tenner with D.A. Davidson.

Gary Peter Tenner, Analyst

I wanted to revisit some points regarding deposits and the costs this quarter compared to last quarter. I appreciate the insights about the need to fund growth and the timing of deposits in relation to loan growth. However, the rates paid on interest checking and money market accounts increased quarter-over-quarter. As we consider the latter half of the year, it's clear that we could manage these rates while still offering loans that are beneficial to the overall margin. Given this, do you believe these rates will continue to rise in the latter half of the year? Is there a competitive factor that has led to some stabilization?

Jared M. Wolff, President and CEO

No, it's a good question. Interest-bearing checking increased nearly 9 basis points in the quarter, while money markets rose about 2 basis points. Surprisingly, CDs fell by 13 basis points and savings went down approximately 7 basis points. Overall, we observed a slight increase in the cost of deposits, which is very competitive right now. I am involved in approving pricing exceptions on deposits for relationships, especially when there’s a lending relationship. I’m aware of the requests coming in, and our teams are performing well. The competition is tougher than it has been in a long time, driven by a demand for liquidity. There is less liquidity available and a high demand for loans, so all banks are seeking the same resources. We believe we are securing our share of loans better than others due to our effective solutions. Deposits will not grow as fast as loans unless we’re in a slow growth environment, which we anticipated last year and prepared for. We think the current pressure on deposits will ease when rates fall, although it is not in our forecast. Right now, the competitive dynamics are intense, and we typically benefit from rates. Our teams are working hard to retain deposits. We are seeing an increase in deposits, especially as those in money markets realize their rates are at 2%, while they could be at 3.5%. We are trying to maintain rates below 4%, which some banks are offering, and keep them within the 3s to mid-3s for clients with rate-sensitive relationships. Not every deposit is an operating account. Our teams are focusing on this, and they’re doing an excellent job. However, as Joe mentioned, we are monitoring average balances, which have actually decreased in accounts. If we manage to keep them flat, we are doing well, and any growth is a bonus. But average account balances are declining, and people are closing their accounts. Liquidity seems to be flowing out of the system for some reason, and we hope it will return.

Gary Peter Tenner, Analyst

Appreciate that. And then as it relates to the loan sale and your comment about offering or providing back leverage for private credit buyers, et cetera, how much of the amount that you have scheduled to sell in the third quarter? How much of that do you think comes back to HFI just in a different part of the loan portfolio?

Jared M. Wolff, President and CEO

I think you could assume 50% to 60% is probably fair. Could be 70%. But I don't know that it's going to be much above that. Hard to tell because some of the stuff is just going to go without leverage. But we have relationships with private credit with nonbank lenders through our lender finance group. And our team, our Chief Credit Officer and our Head of Lender Finance, and people on the lender finance team have great relationships, and they were able to suggest and bring in the stuff, which I thought was good. We have it modeled that we're going to have more leverage than that, but I don't know that we're going to get there. So to be conservative, I would say it's less.

Gary Peter Tenner, Analyst

Okay. And then last question. In terms of that loan tranche, you've talked about...

Jared M. Wolff, President and CEO

Gary, just on that point, we don't need it because we're growing loans fast otherwise. And so it doesn't really matter to me either way. It's only a couple of hundred million dollars, but to be conservative, that's why we're saying it's less. But we certainly would be willing to offer it to the right buyer. Sorry to interrupt you.

Operator, Operator

And your next question comes from Timur Braziler with Wells Fargo.

Timur Felixovich Braziler, Analyst

Looking at the margin outlook in that kind of 3.20% to 3.30% 4Q, that assumes some level of acceleration here in the back end of the year. Can you just talk me through what the driver is? Is that mostly on the fixed asset repricing side? Are you assuming some mix shift benefit with just the deposit growth earlier in the quarter? And I'm just wondering if we do get some rate cuts, is that going to be beneficial at this point? Or is that going to be maybe a little detrimental towards that guide?

Jared M. Wolff, President and CEO

Rate cuts would be advantageous as they would immediately lower deposit costs. I believe this change will happen relatively quickly since we're originating loans at a rapid pace. Loans typically don't decrease as quickly from my perspective, but I think we'll manage fine in that area. Regarding the details of our margin expansion, I'll let Joe elaborate on that. However, one aspect we haven't observed this year, which we anticipated, is accelerated accretion. This could significantly affect our margin, but so far, we haven't seen much of that despite having experienced a decent amount last year. If we do receive rate cuts, we can expect to see accelerated accretion, which would also benefit our margin, though that isn’t currently in our plans. Joe, could you explain how you perceive the sources of our margin expansion?

Joseph Kauder, Chief Financial Officer

Yes. The margin expansion is mainly coming from the loan segment. As we highlighted in our comments and presentation, we are issuing substantial amounts of loans at excellent rates. We also have information on how many loans are maturing. All of those are maturing at lower rates. The transition of loans rolling on and off will significantly benefit us. Regarding the cost of deposits, we are quite conservative in our forecasting. We expect it to remain relatively stable. I agree with Jared that we have removed any instances of accelerated depreciation or accretion from our forecast. Additionally, we are not anticipating any rate cuts, which would further benefit us if they do occur.

Timur Felixovich Braziler, Analyst

Okay. And just looking again at the loan transfer, I'm just wondering how much this accelerates the asset quality trends at the bank. And as you're looking ahead, can you just give us a level of internal expectations for provisioning and charge-offs going forward?

Jared M. Wolff, President and CEO

Yes. Well, so this quarter, on a normalized basis, we provisioned a little over $12 million. And I think at the level of loan growth that we had, that's probably a fair estimate going forward. But the difficulty is that it really matters what type of loans that we're growing. I don't think fund finance is going to continue growing at the same pace. I think we're going to get more kind of traditional commercial loans out of the commercial and community bank. And so those are going to carry a weighting that's a little bit higher. And therefore, I think that $12 million is probably, Joe, is that kind of where we're guiding to $10 million to $12 million a quarter on the provision?

Joseph Kauder, Chief Financial Officer

Yes, a little bit at the low end of that. I think we're right in the middle of that range.

Jared M. Wolff, President and CEO

Okay. So $10 million to $12 million is kind of the fair estimate there. We certainly feel good about the opportunity that we have ahead of us on the loan side, things seem to be working right now, and our teams are doing a great job.

Timur Felixovich Braziler, Analyst

Okay. And then just last for me. We've seen a frenzy of kind of M&A conversation reenter the regional bank sector here in recent weeks. I'm just wondering, you guys are now really the only game left in town in Southern California. I'm just wondering how you guys are thinking about maintaining independence here? And maybe what considerations would be needed in order for you guys to consider partnering with a larger institution?

Jared M. Wolff, President and CEO

I am really proud of how hard our teams are working to grow the bank organically, and we have a significant opportunity ahead of us to continue this growth. We are demonstrating that progress. The expectations are high for us as a public company and I believe it will be interesting to see how these dynamics evolve in the upcoming quarters and over the next year. There is a lot of noise in the market right now, and the environment feels quite active. The regulatory landscape is becoming more favorable for mergers and acquisitions, which has generated excitement. I anticipate that we will have the chance to acquire another company once our stock reaches a normalized multiple, reflecting our steady earnings growth. We're also rapidly increasing our tangible book value. As mentioned, we possess a valuable franchise in California, currently holding $35 billion in assets, making us the largest independent bank in the state that is not focused on a specific niche. While East West Bank has a more niche focus, they are an excellent institution, but they may not suit every type of partner. We are very satisfied with our position and plan to stay focused and keep working hard, confident that things will fall into place.

Operator, Operator

Our next question comes from Christopher McGratty with KBW.

Christopher Edward McGratty, Analyst

Jared, I have a broader question for you. Regarding the 13% ROE that has been mentioned and its future timing, I would like to hear your thoughts on how you plan to achieve that and what the environment might look like. Clearly, there will be impacts from both the numerator and the denominator. Any updates you can provide would be appreciated.

Jared M. Wolff, President and CEO

I don't have a specific date to share, but I believe our current growth in core earnings is likely to lead to that happening sooner rather than later. We continue to grow tangible book value, but our earnings are increasing even faster, and we are focused on being efficient with our capital to ensure we maintain an appropriate amount and generate a good return for our shareholders. I'm not sure if there's anything specific you’re looking for, Chris, but our earnings forecast continues to rise quarter-over-quarter and year-over-year because our strategies seem to be effective. I anticipate our growth pace will accelerate significantly, as our earnings are expanding quickly. We’re experiencing real operating leverage, with earnings outpacing revenue growth because we are managing our expenses well, and I expect this trend to continue.

Operator, Operator

And your next question comes from David Feaster with Raymond James.

David Pipkin Feaster, Analyst

I just wanted to follow up maybe on the growth side in some of your comments there. I mean, obviously, the...

Jared M. Wolff, President and CEO

David, can I pause you just for one second? I apologize. Yes. Chris, if you're still on, I don't know if you got cut off too early and if you had another question, so please just jump back in the queue if you're still on, and we'll come back to you after David, but maybe you were done. Sorry to interrupt you, David.

David Pipkin Feaster, Analyst

All right. It's okay. Shifting gears back to kind of the growth side. I mean the increase in production is extremely encouraging and especially with the rates that you guys are getting. And first of all, I'm kind of curious how the pipeline is shaping up heading into the third quarter and how the complexion of the pipeline is? You touched on maybe a bit less opportunity in the fund finance side. Just kind of curious how the complexion of the pipeline is shifting as well.

Jared M. Wolff, President and CEO

Yes, in the quarter we saw that multifamily lending was about half of what it was in the first quarter. However, bridge lending in commercial real estate increased, while construction lending remained stable. There was a significant rise in residential lending, and venture lending also improved quarter-over-quarter. Warehouse lending remained flat, while equipment lending doubled compared to the previous quarter. Fund finance and lender finance both showed strong production. I anticipate that lender finance will continue its upward trend, but fund finance might be reaching its peak, which could result in a slight decrease. Warehouse lending has potential for growth, and I expect general commercial lending, especially from our commercial and community bank, to increase. We're observing some traditional mini-perm loans gaining traction now. If interest rates go down, we could see even more lending as some people are waiting. Overall, the situation is quite broad-based, and I'm very pleased with our teams' performance.

David Pipkin Feaster, Analyst

That's great. Shifting back to deposits, I'm interested in where you see the most potential for core deposit growth. Are there specific segments that present greater opportunities? I know you're continuously focused on increasing non-interest bearing and core deposits. We've previously discussed the possibility of expanding ECR deposits. I'm eager to know where your current focus lies and where you identify the greatest opportunities.

Jared M. Wolff, President and CEO

Our teams across the bank are dedicated to establishing business relationships where we can offer superior service compared to their current providers. There remains a significant opportunity to attract clients who have transitioned to U.S. Bank or JPMorgan as a result of bank acquisitions or failures. These clients represent important targets for us, and we have noted that many midsized clients are not fully satisfied with their move to JPMorgan. While they are a strong competitor and a suitable choice for many, they cannot meet everyone's needs. We continue to see substantial potential for growth in this area. Additionally, every one of our business units is concentrating on increasing deposits, even those that may not have focused on this previously. We are set to launch a new digital platform for onboarding deposits digitally and via Salesforce this quarter. Once this digital account opening is operational, it will enhance our ability to attract deposits nationwide from clients seeking our services. Traditionally, when working with an SBA client, we have utilized a nationwide platform and sought deposits, which is simpler when branches are accessible. However, the new digital account opening feature will significantly expedite our efforts. We are genuinely excited about this development and anticipate great success.

David Pipkin Feaster, Analyst

That's great. And then maybe just last one, touching on the credit side. Exclusive of the loan transfer, look, the past couple of quarters have been a bit noisy. You guys have been very proactive managing and addressing potential issues. I'm just curious, exclusive of the transfer, like is there anything on the credit side that you're seeing that you're cautious on? Or do you think the kind of the active management is like the worst is behind us and we should see pretty solid credit leverage going forward?

Jared M. Wolff, President and CEO

I really believe that, David. I think that we got ahead of it, as I suggested we would, and we proactively moved this stuff out. I don't see any big warning signs for me. These are some pretty large credits that we were sitting on our balance sheet that we were able to move away. And I give our team all the credit for proactively coming up with this solution, working through it. It was a lot of work in the quarter, and they did a phenomenal job with a phenomenal result. And so I feel really good about where we are. Stuff pops up, though, it does. but I feel like the things that we were most concerned about we've had now the opportunity to move. And that feels really good. Our charge-off rate was 12 basis points, I think, excluding all this stuff, which was low. And I think our ratios now are pretty healthy, and I certainly feel good about our coverage from a reserve standpoint. So I feel really good about where we are.

Operator, Operator

This concludes our question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.