Participants

Ann DeVries; Head of Investor Relations; Banc of California Inc

Jared Wolff; President, Chief Executive Officer, Vice Chairman of the Board; Banc of California Inc

Joseph Kauder; Chief Financial Officer, Executive Vice President; Banc of California Inc

Ben Gerlinger; Analyst; Citigroup Inc

Jared Shaw; Analyst; Barclays Capital Inc

Gary Tenner; Analyst; D.A. Davidson & Company

Matthew Clark; Analyst; Piper Sandler Companies

David Feaster; Analyst; Raymond James

Anthony Ellen; Analyst; JPMorgan Chase & Co

Chris McGratty; Analyst; KBW

Timur Braziler; Analyst; Wells Fargo Securities LLC

Andrew Terrell; Analyst; Stephens Inc

Presentation

Operator

Hello, and welcome to Banc of California's first quarter earnings conference call. (Operator Instructions) I'll now turn the call over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead.

Ann DeVries

Good morning, and thank you for joining Banc of California's first quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website.
Before we begin, we would also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goal, 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 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'll be taking questions from the analyst community.
I would like to now turn the conference call over to Jared.

Jared Wolff

Thanks, Ann. Good morning, everyone, and welcome to our first quarter earnings call. Our first quarter results came in pretty much as we forecast, reflecting both strong execution by our team, and our ability to capitalize on our attractive market position. During the quarter, we showed positive trends in our core earnings, including net interest margin expansion, strong loan growth and prudent expense management. We achieved our second consecutive quarter of broad-based commercial loan production, while continuing our steady growth in attracting new NIB deposit relationships.
As a result, we built up capital during the quarter and increase 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 $150 million share buyback program during the first quarter.
We benefited from the market volatility and opportunistically repurchased 6.8% of our shares and have completed the program. We announced yesterday that we are upsizing our buyback program with an additional $150 million to $300 million and 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 it has continued so far in Q2, which will provide a benefit to our net interest income in the second quarter. Strong loan production volume was broad-based, but we saw our strongest growth in our warehouse, lender finance and fund finance areas. Loan portfolio growth was also impacted by utilization rates, which have been trending up over the last year.
Loan growth was partially offset by a decline in construction loans due to payoffs on completed projects, some of which moved to permanent financing in our multifamily portfolio. While our loan growth has been strong year-to-date, given the uncertainties that exist in the current environment around tariffs and the broader impact to the economy, we are adjusting our 2025 outlook for loan growth to mid-single-digit growth. While we still strive to achieve high single-digit growth, this is merely a reflection of the unknown for the back half of the year given the ongoing tariff noise. Importantly, we are maintaining our disciplined pricing and underwriting criteria while growing our loan portfolio. Our average rate on new production was 7.2%, which helped our average loan yields and margin.
Let me touch on credit for a moment. During the quarter, we showed an uptick in classifieds as well as NPAs. 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-weighted loans, and that when we see signs of weakness in any credits, we are going to be quick to downgrade and careful to upgrade. This approach resulted in some additional credit downgrades during the quarter. The increase in NPLs was mainly driven by 1 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 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-offs in the quarter were mostly driven by a loan that we had previously partially charged off. We had 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 was substantially higher at 1.66% of loans, which incorporates the under credit mark on the Banc of California loan portfolio acquired in the merger as well as coverage from our credit linked notes.
While uncertainties facing the macroeconomic environment have created volatility in the markets, we remain steadfast in our focus to help our customers through these turbulent times. Our strong balance sheet and attractive market positioning differentiate us and position us to perform well in a variety of outcomes. We are confident in our ability to continue executing for our clients while maintaining healthy capital and liquidity positions.
Now I'll hand it over to Joe, and as usual, I'll bring back with some closing remarks before opening the line for questions. Joe?

Joseph Kauder

Thank you, Jared. We reported first quarter net income of $43.6 million or $0.26 per share, which reflects continued momentum in our core earnings drivers. Net interest income of $232 million was slightly down from the prior quarter as the impact from lower day count, fewer loan prepayments and lower market interest rates was partially offset by lower deposit cost. Our net interest margin in the quarter increased 4 basis points to 3.08% due to a 13-basis-point decline in our cost of funds, partially offset by a 9-basis-point decrease in the yield of average earning assets. Our cost of deposits declined 14 basis points to 2.12%, as we continue to successfully pass through rate reductions on our interest-bearing deposits.
Our spot cost of deposits at [3.31] was 2.09%. Our average interest-bearing deposits as a percentage of total deposits was steady at approximately 29% for the quarter. Regarding the yield on average earning assets, we saw an 11-basis-point decline in our average loan yields to 5.90% mainly due to the full quarter impact of December rate cuts on floating rate loans, along with a lower accretion resulting from slower loan prepayments. This was partially offset by higher rates on new loan production, which came in at 7.2% for the quarter, driven by growth in warehouse, lender, finance and fund finance. Our spot loan yield at the end of the quarter was 5.94%, and our spot net interest margin was approximately 3.12%.
The interest rate sensitivity of our balance sheet for net interest income remains largely neutral as the current repricing gap is balanced when adjusted for repricing betas. From a total earnings perspective, we are liability sensitive due to the impact of rate-sensitive ECR cost on HOA deposits, which are reflected in noninterest expense. Total noninterest income of $33.7 million was in line with our normalized run rate of $11 million 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, 401K contributions and incentive compensation, partially offset by lower rate-sensitive customer-related expenses and lower regulatory assessments. Note, our Q1 expenses included a $1 million donation to the Los Angeles Wildfire Relief and Recovery Fund, which we established to support our communities following the devastating fires.
And our expenses benefited from a few nonrecurring noteworthy items we referenced in our Investor Day. We expect our noninterest expense for 2Q to increase in 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 2Q 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 have -- 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 '23 to 25% in Q1 '25.
Under CECL accounting rules, these loans require very low reserves due to low historical loss content and short duration and will have a more significant impact on overall reserve levels as they increase. Excluding these lower risk loan categories and their respective reserves, the remaining loan portfolio would have an ACL coverage ratio of 1.43% versus the 1.1% ratio for the total portfolio.
In addition, and as Jared noted, our total economic coverage ratio is 1.66% when you consider the benefit of our credit-linked notes and purchase accounting marks. We provided additional color in our investor presentation of the ACL by loan category, and we also believe the assumptions and economic scenario weightings included in our CECL models, which reflect a 40% base case and a 60% recession scenario, are conservative.
Our results reflect the progress we have made strengthening our core earnings drivers, including high-quality loan growth, lower funding and deposit 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.
At this time, I will turn the call back over to Jared.

Jared Wolff

Thanks, Joe. This quarter, we saw the thesis for Banc of California and PacWest merger continue to be proven out. We are filling the void of banks that left the California market due to failure or acquisition, and we are becoming the go-to business bank in our markets. Yesterday's announcement of the Columbia Pacific Premier merger is yet another example. It validates the attractive characteristic of our market and the further elimination of a good-sized competitor like Pacific Premier.
As our results continue to demonstrate, we are capitalizing on our strong market position to add attractive commercial relationships, evidenced by the loan growth and new NIB business relationships we brought on during the quarter. At the same time, we continue to add banking talent throughout our markets that will contribute to our profitable growth.
We continue to monitor the economic environment, and while we did not observe a meaningful change in borrower behavior in the first quarter or early part of the second quarter, there is more dialogue now regarding potential slowdown and caution among clients. In light of this, we will remain cautious in our loan production in terms of both industry and structure. We have also evaluated our portfolio for direct tariff impacts. And for the most part, our exposure is both minimal and indirect. Where it is direct, our clients have or are in the process of diversifying their product sourcing and making arrangements for slowdown in activity.
Our product and geographic diversity are serving us well. With our solid foundation of significant available excess liquidity, a strong deposit mix, healthy reserves and capital, we are well positioned for the road ahead. I want to thank our team here at Banc of California for all their hard work and efforts in this environment. They have worked relentlessly to support our clients, communities and shareholders in these times, which are becoming increasingly volatile. I'm proud to be part of this remarkable team.
With that, let's go ahead and open up the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Ben Gerlinger, Citi.

Ben Gerlinger

Can you hear me now?

Jared Wolff

Yes, I can hear you, Ben.

Ben Gerlinger

Okay. So at the risk of kind of rambling here. So when I look at bank, I mean I see it in kind of two lenses. One is margin expansion, expense basis coming down, decent loan growth, so I mean those are positives. The negatives would be credits kind of ticking up in the classifieds, but ACL is getting a little bit lower on a ratio basis.
So I get the credit linked notes. So -- and additionally, the capital base is below peers. It's not too thin, but it's definitely not where you want to be if there is a recession on the lower half of the list. So when you think about just the outlook over the next year to two years given the uncertainty -- and then you're buying back shares, but is there a degree of confidence in credit going forward? Is there a 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

Sure. Well, thanks, Ben. It's a good question. I understand the buckets and kind of how you organize it. So I think you laid out the positives correctly. We do expect the opportunity to continue to expand our loans and bring in new relationships we will have margin expansion. Our spot rate at the end of the quarter was higher than the average for the quarter, and I think we're going to benefit this quarter from the loans that we brought on and continue to bring on a higher loan yield than the portfolio overall.
Deposit costs should continue to improve over time. The heavy moving that we did with kind of our brokered portfolio, as I mentioned, was kind of expiring at the end of this quarter. And so our deposit costs aren't going to move down as quickly, but there still should come down and our margin will still expand.
And then the noise that you pointed out was credit. I think we've explained that pretty well, and it is worth reiterating that our coverage ratio for the non-lender finance warehouse and single-family and fund finance loans, which are very short duration and 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 we run a very conservative CECL model, as Joe pointed out. Our baseline -- our 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, no-loss loans is very healthy on a peer basis, and that's even before you take into account the credit-linked 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 this carefully and I feel very good about it.
In terms of the migration, I don't want to see that trend continue. I think that we exercised a fair amount of discipline. I tried to tell people last quarter we were going to be doing this. We kind of go through the portfolio with a heavy hand and look at it and say, okay, folks, let's start preparing for a downside scenario. So I think that we are ahead of the curve. I think we're doing this. Maybe others will follow us. I don't know what others are going to do, but I think this was a prudent thing to do. And I just wasn't going to worry about the noise of the migration if I don't believe there's going to be losses. 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 mean I think it's important to remember where well capitalized is and most banks got into an extra healthy position. I think there's some expectation that the baseline capital levels are going to come down a little bit. 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 going to be patient with that.
And we are building up capital pretty quickly as well. We've been growing our earnings or are starting to migrate upward. And after the transformation we did last year, we've really had done a good job. I think our team has done a good job of steadily building earnings, and we could expect that to continue. So we think our capital is going to build pretty well as well. So let me pause there as an answer to your question. It was a little bit philosophical, but I agree with your comments, and that's kind of how I see it.

Ben Gerlinger

Got you. No, that is really helpful. And then, like you said, there is another one to add to the list for California. So if you look over the past couple of years at Silicon Valley, First Republic, Union Bank of the West, a whole bunch of little small deals. Do you think there's more opportunity today for free agency and lenders? I guess the disruption obviously opens the door for new clients. But when you just kind of think through the noise, on top of an economic potential headwind, are you looking to add new clients in that regard, knowing that the economic outlook is probably more uncertain now than it has been in a couple of years?

Jared Wolff

Yes. So I will say this, three months ago, the economic outlook, we all thought we were -- I would say the start of the year, so maybe it's four months ago, we were like, oh my God, we were dealt a great hand. New administration, lower taxes, good economy, favorable regulation, look where we're going. I think that the economic cloudy outlook is self-induced. It's -- 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. There's obviously a lot of saber rattling going on right now. And we just are going to be cautious, and we're going to take into account. We're not going to ignore it, but we are going to be prepared to move positively as the market relaxes and as things return to normal. So yes, we will be hiring people and making inroads.
Even in a slow economy, the Southern California market is doing very, very well. And there is so much business to take from the larger banks given the removal or the elimination of so many competitors, as you pointed out. And I keep that list on my desk, and I was happy to add PPBI to the list of banks that will no longer be competing with us. [Umpqua's] is already here, and they're changing their name to Colombia. They're already in California.
So there's no new entrants in California that're just going to be competing in a different way and there'll be one less competitor. I think it presents tremendous opportunity for us. We are in the fifth largest economy in the world in California and L.A. is the engine that powers that economy. We are excited to take market share and serve clients that are at banks that might not be serving them as well as we think we can serve them. There'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.

Operator

Jared Shaw, Barclays Capital.

Jared Shaw

So I appreciate the comments about the allowance ratio and the migration of -- the positive migration of sort of the loan portfolio. But when you look at the backdrop of what we've seen, we've seen more banks adding to the qualitative overlay or adding to the adverse scenario and growing the reserves. So I think just looking at the allowance going down with that backdrop is what some people are focused on. I guess, if everything stays the same and we continue to see this migration of the loan portfolio towards the higher quality stuff, should we think that the allowance continues to trend down from here? Or is there an opportunity to maybe add to a qualitative overlay to actually see the allowance move higher or stay flat here?

Jared Wolff

No, look, I don't want to be an outlier. First of all, I think it's important that we highlight that [1.43%] coverage ratio for loans that are not in those low risk categories. It's just -- it's very healthy, and that is real. And that's before we include any extra resources from credit linked notes or from the marks on the Banc of California portfolio, which is double counting and CECL. That money is movable to anywhere in our portfolio, so it's real coverage.
So I want to emphasize that point. You're asking the question of whether we would let our coverage ratio go down further. And I would prefer not to do that. We do have a model. We do apply subjective lenses to it. I would prefer to be increasing our ratio every chance we get, but we do have to follow our model and do it with discipline.
So Jared, what I'm hoping to show in subsequent quarters is positive migration from a risk weighting standpoint because we got ahead of it early. And I think that will hopefully show that our coverage ratio is flat or growing. If we can justify it under our model, that's what I would like to be able to do. And it's kind of -- I'll know it when we get there, but I appreciate your question. We don't want to be seen as an outlier who's bringing it down. But I do think it's important to highlight how strong our coverage ratio is when you actually look at the numbers at [1.43%] for kind of these non-loss portfolios?

Jared Shaw

Yes. No, I appreciate that and understand that. But you know how it is and people stack rank companies by ratios. It's sometimes tough to be an outlier on --

Jared Wolff

Yes. So I mean you're asking a question about like so we're going to come up on the screen and you're saying, well, if somebody is not going to do the work, they're just going to look at the headline number, and you don't want to be somewhere where the headline number looks worse, but -- 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're certainly people 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 going to have positive migration or the ratio is going to improve for both. And so let's just see what we can do, but hopefully I answered your question.

Jared Shaw

Yes. No, you did. And then maybe shifting to the to the goal or the target of 30% DDA. What sort of drives that? What's the timeline to get there? And once we see 30% or get to 30%, what's the percentage of that, that is subject to ECR?

Jared Wolff

So 30% is our near-term target, which is through the end of this year. We're striving to get to 30% noninterest bearing deposits as a percent of total deposits. We're currently at 28%. We had a little bit of outflow this quarter, but I think we held our ground pretty well when you look at relative -- just following some others and what the trends are. We are growing new business relationships, and we expect those to benefit us over time.
But man, it's a big effort. I don't think it's an easy thing to do as you're growing the bank to also grow the numerator and 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 30%, we'll set a new target at 35%, and we'll set some reasonable goals to get there. In terms of -- I think your second question was what percent of NIB is -- has ECR attached to it.
So we have approximately $3.7 billion or $3.8 billion of HOA deposits. And most of those deposits have ECR attached to them. What I would need to do is tell you what percent of those HOA deposits are, technically NIB, and I don't have that number in front of me, but I'm asking Ann to just kind of look in the background, and we'll give that number out during this call. I just don't have it handy, but we can calculate it.

Operator

Gary Tenner, D.A. Davidson.

Gary Tenner

So 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 in around turn of the year versus where we are today. So maybe I misunderstood something or misinterpreted something you said, but can you kind of talk about that because I was a bit surprised to --

Jared Wolff

That's a misstatement. If it says that, that's a statement. I mean, the economic outlook did not -- that's not why our ACL went down. So you get the close reading award. Our ACL did not go down because the economic outlook improved.
Our ACL went down because of all the reasons we mentioned. And we started putting a more conservative readout for the economy back in the third quarter, where we went to 40% baseline, 60% recession scenario. We started that back in the third quarter of last year. So I think what we meant by that language is probably that when you run the model today, the economic outlook for Moody's is probably more favorable and that model output ended up resulting in the reserve levels that we have, including all the overlays that we put in there. So I think it's probably a little bit more complicated than we stated there, but I understand your question.

Gary Tenner

Okay. I appreciate that because it caught me off quite a bit. And then the second question is, in terms of the NIM guide for the year, 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 don't 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

Yes. 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 a mall and then there's the accelerated accretion, which we never know what it's going to be. And so we're happy to address that. And then before I forget, the question was how much NIB we had in HOA, and the answer is $1.2 billion. So Joe, why don't you go ahead and address what we think -- what our guide is for kind of accretion. Joe, you might be on mute.

Joseph Kauder

I'm sorry. So in the First quarter, we had a little bit over $16 million of total accretion. And as Jared said, we generally have what we call baseline accretion and then accelerated. Because we had -- we had almost no accelerated accretion in the first quarter, it was a very abnormally low quarter after averaging about $3 million of accelerated per quarter in 2024. So that baseline you probably shouldn't -- 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 $1 million a quarter or so. But the amount of accelerated prepayments is hard to predict. And so we're not really dependent upon those as we look out to the rest of the year.

Gary Tenner

Okay. But to clarify, so the baseline is what's kind of embedded in your NIM guide?

Jared Wolff

Yes. Exactly.

Gary Tenner

Okay. Fair enough. And if I could sneak one last question. And just, Jared, as you kind of -- 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 CET1, let's say, any thoughts of any risk waiting a relief on mortgage warehouse or anything like that, that you're kind of thinking about that gives you extra comfort being opportunistic here?

Jared Wolff

I think we are -- we obviously want to keep our capital levels strong. And we like being 10% and above. We could dip down in a quarter if we're going to move past it pretty quickly with what we see for our earnings outlook. But I think that's kind of a guide for us of where we are. I also want to be -- 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 an investment bank that was a 10b5-1 program where we had given them ranges to buy within certain bands. And then it was 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 patients with a buyback program.
And so we'll use it over time. Certainly, we can use it in a way that keeps -- minimizes dilution from vesting of stock awards and things like that. I think that's kind of a common way that many banks use their buyback program. I think we can be a little bit more aggressive than that. And certainly, we have now the opportunity to look at the preferred, but I think if you do the math, given where stock prices are today, it makes a lot more sense to do common than preferred, but that may change over time. So we're just going to be opportunistic and look at it and do what makes sense under the given circumstances, but capital levels are something that we're keeping squarely focused.

Operator

Matthew Clark, Piper Sandler.

Matthew Clark

Jared, what's the -- what are the -- I know it's somewhat dependent on where your stock trades, but what's the probability of the tendering the preferred this year?

Jared Wolff

Matthew, I can't put a number on that. It's so dependent upon other circumstances like the overall environment. As we just touched on, our perception that we need capital for other reasons that we wouldn't want to dilute if the economy sours. There is a ceiling on the preferred, right? 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 we're going to be smart. And if it makes sense, we would do it.

Matthew Clark

Okay. 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

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 healthy as we 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 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 is 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 going to have losses. 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 was 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, as we move toward unlocking kind of some of these views changes that we've made.

Matthew Clark

Okay. Great. And then last one for me just around ECR deposit balances. They've been bouncing around $3.7 billion for the last few quarters. I wanted to get a sense for your outlook there, whether or not we should assume those balances remain relatively flat for the rest of the year? I'm just trying to get, again, a sense for volume versus rate assuming we get a couple more rate cuts this year that would help.

Jared Wolff

Yes. As you know, we don't have any rate cuts in our forecasts. Our HOA business has been very stable, as you pointed out. I mean, if you look at the last couple of quarters, it's been about the same. It started off in the threes, 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 -- in terms of deposit costs for our HOA business overall. And as we mentioned, $1.2 billion of those deposits are NIB. We will benefit meaningfully if rates come down because the ECR is going to come down. Similarly, if rates go up, the ECR will go up.
But we -- I think we've managed kind of the program on the ECR side pretty well. Are we going to grow HOA balances? That's our intent. We would like to. Absent a few of our larger customers, and we have some sizable customers in HOA that have the bulk of the cost, the overall cost of our deposits, excluding some of our larger customers is much, much lower.
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 -- but as you know, there are sticky balances, which is why they don't go down too much. And hopefully, we can grow them over the course of the year.

Operator

David Feaster, Raymond James.

David Feaster

I just wanted to get a pulse of your client base Obviously, there's a lot of volatility in the market. We've got the trade wars, you got those, you've got all sorts of kind of things. I'm curious, I guess, first, how the pipeline shaping up? And then where you're seeing opportunities today? Do you still expect to see growth primarily concentrated within lender and fund finance? Just kind of curious, again, the pulse of your clients, the pipeline and just -- is there any risk to more falling out of the pipeline just given this uncertainty?

Jared Wolff

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 going to expect the same volume of growth in those areas. But our commercial and community bank is growing really well as we bring over new relationships.
We saw a downturn in construction, some payoffs of some larger LIHTC loans, 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, but more paid off than stuck with us, which is why overall construction -- overall, we had a downturn there on the construction side. It was a pretty big drop. We have some construction loans that are in the pipeline, although they take a while to fund because the equity of the borrower goes in first.
Generally, we're seeing some good pickup in C&I, but we're being careful, right, because of the cloudiness that we see out there. But we are taking a long view, and we're banking companies that are solid in that local sourcing, good manufacturing and distribution companies that provide products that are needed that are generally sourced locally. We're being careful on things that need to come through the ports. The Port of Long Beach and Los Angeles and San Pedro are 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 in my part, just a little bit of a nod to 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

Okay. SP1 That's good color. And maybe on the other side, I mean, deposit performance, you guys have done a great job. I mean it's a nice growth, nice decline in deposit costs. Could you touch on the competitive landscape for deposits today? Where are you seeing growth opportunities coming from? Is it the commercial side? Is it the specialty lines or even the retail side of the business? So just how you think about growth and even opportunity to further cut deposit costs even exclusive of Fed cuts?

Jared Wolff

So it's very, very competitive. I was just on a call earlier with our team, 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 are like, hey, maybe we need to get more on our excess deposits. And so that's one of the things that happens when people start getting nervous if they start focusing on the minutia again, which is, by the way, what we do on the credit side, right, where we start focusing on and exercising that discipline.
We really should have it at all times. And maybe -- but clients get a little bit more finicky about different things. So I would say that the deposit landscape is very competitive. Where we're winning is, number one, 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 lone. And that's what 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. They were at First Republic and now they're at Chase, and they can't get the same attention and 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 the same way that many other banks are that might have a wealth management platform or might be a home mortgage lender. We don't have the tools to serve consumers the way others do. 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 want to be in the branch talking to people. And it's just a different client base than what we're set up for.
That doesn't mean that we don't have them and that we're not serving them as well as we can with what we have. 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

Okay. And then we've touched on this a bit. Just you talked about just kind of 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?

Jared Wolff

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 should be in place at all times. And similarly, on the credit side, you might say, look, I don't want to go longer in industrial storage around the port right now. I don't want to go longer in deals that are really dependent upon one source or double sourced products 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 credit you feel comfortable with. We had -- on construction loans, we have a big construction loan that we're looking at right now and I said, look, I want it to be full recourse. There got to be this trend where construction projects somehow got to be partial guarantees or burn-off guarantees or we'll pay you through getting a vertical, but we're not going to guarantee the product after that.
And I just -- that's never been -- my approach is I'm not a -- I don't know how to operate an apartment building. And I don't want to own it and rely on to value. I want somebody to commit to me that they're going to 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.

Operator

Anthony Ellen, JPMorgan.

Anthony Ellen

I'd like to start on the expense outlook. You're still guiding to the low end of $190 million to $195 million per quarter. 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?

Joseph Kauder

Yes, thanks for the question. There's always a couple of things and levers that 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 the expense base that, if in a very difficult situation, you could take action to slow down.

Jared Wolff

It's well said, Joe. I mean, Anthony, the first thing that comes to mind is just accruals for bonuses, right? You got -- if things are slow and you don't see that you're going to achieve your goals, then you can bring down your accrual. You really don't want to do that at the beginning of the year because it's really hard to make up at the end of the year. So that tends to be a tool that you would use later in the year.
As Joe mentioned, CapEx and just kind of slowing down projects we have -- we actually put in the deck this time, which Ann put together, which I thought was a nice slide that showed kind of the spending that we have on projects because we get that question from time to time. And in our supplemental information, we have a list of our projects that are underway and what the breakout is. So it's on page 26 of our deck and how those projects break out in terms of what they're supporting. And so those are two things that are pretty meaningful.

Anthony Ellen

And then on loan growth, you reduced the outlook to mid-single digits. But Jared, you've outlined before and 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 the reduction in the loan growth outlook with the level of optimism you still have for Southern California?

Jared Wolff

Tony, you're right. I mean, like we're being conservative here. So far, second quarter is strong. The reason why we're tempering it is because I really don't know what's going to happen in the back half of the year. So things could shut down and then we end up with -- because what we -- the guidance we gave was mid- to high single digits for the year is what we were going to average.
And so, so far 6% in the first quarter. Let's assume we do 6% or 7% in the second quarter, that means that we're there, but the back half has to hold that up to hold it up there. 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 going to hit the high end, we're only going to 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.

Operator

Chris McGratty, KBW.

Chris McGratty

I just want to zero in on NII, a lot of discussion on margins and balance sheet, but just dollar NII, right? In the quarter, it was down about $3 million, you talked about their moderate. 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.

Jared Wolff

Good question. Joe, do you want to take that one?

Joseph Kauder

Yes. So you start off with -- there was a $5 million impact to net interest income just from day count. I think we have that called out in one of our slides in the investor deck. So you can start with that. And then if you look at our loan growth, as we continue to grow at the levels that Jared has said, the -- we will continue to expand our net interest income. And I think you could probably think about it as somewhat consistent with consistent with our loan growth, mid-single-digit increase in that in --

Chris McGratty

So NII could be up 5% in the second quarter just from the factors that you laid out? Okay.

Joseph Kauder

I would say anywhere from --

Operator

Timur Braziler. Wells Fargo.

Timur Braziler

I want to -- starting just on the loan growth outlook, I'm wondering if you're growing loans more slowly or more cautiously and the focus here is to bring over the whole client relationship, slower loan growth projection at all impacting your ability on the deposit side? And then as a corollary, just how much of that expected DDA growth is needed in order for you guys to hit that [320 to 330] NIM guide that was unchanged?

Jared Wolff

Yes. That's a good question. So first of all, I think loan growth in the second quarter, as of now, it's 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 going to happen in the back half of the year. And at the end of the second quarter, we'll tell you where -- we'll update it again if necessary.
What we're trying to do is just tell people what we see today. And if we see a change, then we'll, but I didn't think it was that significant of 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're going to 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. Most borrowers have multiple banks, certainly real estate borrowers do and real estate borrowers tend to have the lowest level of cash available. So two words, it's a balancing act. And you're right, if we only require full relationships that would certainly slow loan growth, I think we require substantial relationships. And so far, it's been fine.

Timur Braziler

Okay. And then I guess, more specifically on DDA pipelines, obviously, a key objective for you guys. Those balances have been flat or down now for four straight quarters. I guess, as you're looking out, how do those pipelines look? And then just maybe remind us if there's any kind of seasonal cadence to the DDA growth that you're expecting?

Jared Wolff

Yes. 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 pointed out, it's been flat to down. I would say that what we're seeing, and I think this bears out when we look at some of our peers, although you're probably a bigger student of all that data than I am, although I try to absorb as much as possible is that, generally, balances are flowing out of the economy 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 we had all this money that was in the economy from what we all know for many reasons that inflated balances and now it's being pulled out.
So our ability to stay flat, which is why our 30% NIB growth, that's a really meaningful goal, and we're trying hard to get there. And we 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 going to happen quarter-over-quarter other than I don't know that this quarter is going to be worse than last quarter. It's just -- hopefully, it will 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

Okay. Fair enough. And then just lastly for me, a couple part question just on payoff activity. Really high in 1Q. I guess, a, what was the driver there? Was there any pull forward from 2Q? Second part of that question is, what is your appetite to continue maybe taking some of that payoff activity and putting it on to your own balance sheet as permanent loans?
And then the third part of the question, you had mentioned that the payoff activity on the multifamily side of some of the higher migration of 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

Yes. I don't think that they're connected. So the payoffs came in a couple of different areas. One was we had a lot of, as we mentioned, construction loan paydowns of larger loans. Second is, we had a lot of cycling in our warehouse business. That cycle 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 line utilization rates are moving up, as you can see. And so I wouldn't say they're peaking, but we don't really see it much above the mid-60s. And so we're kind of getting there.
And so we would expect some pay downs there. The payoff balances were kind of -- 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 -- been on the portfolio for a while. Maybe they were part of a broker portfolio and just kind of there's a discipline of managing what happens when something is that historical 3.5% rate.
And you know it's going to go to 6%. And getting the financials from the borrower, confirming the amount of equity in the property making sure that you have a plan, you've talked about it with the borrower and what the plan is. Are they going to put in more equity? Are they going to take us out? Are they going to -- what is the plan? Are they going to Fannie or Freddie?
And that's the discipline that I want documented for those loans. We don't see losses because if 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 kind of migrated in the quarter. Does that answer your question, Timur?

Timur Braziler

It did.

Operator

Andrew Terrell, Stephens.

Andrew Terrell

If I could just stick on the multifamily point. And Jared, I appreciate the color on kind of the classified moves. If I just look at page 20 of the presentation, there's a couple of billion dollars of multifamily maturing or repricing over the next two years or so. I'm just hoping you could maybe give us some color on how much of that was reviewed and resulted in kind of the classified move this quarter? And kind of where I'm going is, is it fair to think that we could see continued moves up in classified as these loans come up for maturity? Or do you feel like you've gotten ahead of that?

Jared Wolff

No. 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, just to give you some color. We have a fairly large brokered multifamily book, loans that are 3.5% or 4% that in the current environment or repricing around 6%.
They fully carry, they fully debt service and they can make -- in fact, we are actively talking to those borrowers and trying to get them to stay on our balance sheet at 6% versus going to Fannie or Freddie at 5.5%. And so I -- we've had success with $150 million, $200 million worth of loans. And some of those borrowers, they floated up into the 8s 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 there's a handful where they're currently in their interest-only periods and even if the interest-only periods are going to extend for another year, we've got to be monitoring it. And they're fully current, they're paying now, and they've got a ton of equity in the property, but you got to look at this and say, okay, what is the plan? And 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 different than that, but I don't have a problem being disciplined about it now. I think with this said -- the other thing you Andrew is, I think what this page shows, and your question is a good one, like what are the impacts. This page does show that we have a lot of loans that are going to reprice higher. And so one question is, well, from a credit perspective, can they absorb that? And the answer is yes. That's the experience that we have today. And the second question is, what does this mean for our income? And it's definitely a positive tailwind that will come in over the next two years.

Andrew Terrell

Yes. And that's exactly where I was going was whether or not you had the kind of potential downgrades out of the way. And so now we can just more focus on the spread pickup as those loans reprice.

Jared Wolff

Yes. Look, 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 of quarters. But we expect the trends to get better after this. And hopefully, that will not get in the way of the spread pickup that we are expecting.

Operator

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.