Banc of California, Inc.

Hello and welcome to Bank of California's first quarter earnings conference call. If you need operator assistance, please press star then zero. I'll now turn the call over to Anne DeVries, head of investor relations at Bank of California. Please go ahead.

Anne DeVries Good morning and thank you for joining Bank of California's first quarter earnings call. Today's call is being recorded and a copy of the recording will be available later today on our investor relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goals, strategy, and outlook for 2025 and beyond. which are subject to risk, uncertainties, and other factors outside of our control, and actual results may differ materially. For discussion of some of the risk factor results, please see our safe harbor statement on four looking statements included in both the earnings release and the earnings presentation, as well as the risk factor section of our most recent 10-K. Joining me on today's call are Jared Wolf, President and Chief Executive Officer, and Joe Cowder, Chief Financial Officer. After our prepared remarks, we'll be taking questions from the analyst community. I would like to now turn the conference call over to Jared.

Thanks, Anne. Good morning, everyone, and welcome to our first quarter earnings call. Our first quarter results came in pretty much as we forecast, reflecting both strong execution by our team and our ability to capitalize on our attractive market position. During the quarter, we showed positive trends in our core earnings, including net interest margin expansion, strong loan growth, and prudent expense management. We achieved our second consecutive quarter of broad-based commercial loan production while continuing our steady growth and attracting new NIB deposit relationships. As a result, we built up capital during the quarter and increased both book value and tangible book value per share while maintaining strong liquidity levels. Given our healthy balance sheet and commitment to deploying capital in a way that benefits shareholders, we announced $150 million share buyback program during the first quarter. We benefited from the market volatility and opportunistically repurchased 6.8% of our shares and have completed the program. We announced yesterday that we are upsizing our buyback program with an additional $150 million to $300 million, and we'll 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 unfunding commitments, was $2.6 billion, up from $1.8 billion in the fourth quarter, resulting in loan portfolio growth of 6% on an annualized basis. Much of the loan growth came late in the quarter and has continued so far in Q2, which will provide a benefit to our net interest income in the second quarter. Strong loan production volume was broad-based, but we saw our strongest growth in our warehouse, lender finance, and fund finance areas. Loan portfolio growth was also impacted by utilization rates, which have been trending up over the last year. Loan growth was partially offset by a decline in construction loans due to payoffs 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 discipline pricing and underwriting criteria while growing our loan portfolio. Our average rate on new production was 7.2%, which helped our average loan yields and margin. Let me touch on credit for a moment. During the quarter, we showed an uptick in classifieds as well as MPAs. These changes reflect some of the guidance I provided during our last earnings call when I shared that we've adopted a fairly conservative posture on risk-grading loans and that when we see signs of weakness in any credits, we are going to be quick to downgrade and careful to upgrade. This approach resulted in some additional credit downgrades during the quarter. The increase in NPLs was mainly driven by one CRE loan, a hotel property where we believe the risk is isolated specific to the borrower, The loan is full recourse, and we have adequate collateral coverage. The increase to our classified loans this quarter is 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 full reserve for the remainder of the loan and decided to charge it off in the first quarter. Our headline reserve level is 1.1% of total loans, and our economic coverage ratio is substantially higher at 1.66% of loans, which incorporates the unearned credit mark on the Bank of California loan portfolio acquired in the merger, as well as coverage from our credit link notes. While uncertainties facing the macroeconomic environment have created volatility in the markets, we remain steadfast in our focus to help our customers through these turbulent times. Our strong balance sheet and attractive market positioning differentiate us and position us to perform well in a variety of outcomes. We are confident in our ability to continue executing for our clients, while maintaining healthy capital and liquidity positions. Now I'll hand it over to Joe, and as usual, I'll bring back with some closing remarks before opening the line for questions. Joe.

Thank you, Jared. We reported first quarter net income of $43.6 million, or $0.26 per share, which reflects continued momentum in our core earnings drivers. Net interest income of $232 million was slightly down from the prior quarter as the impact from lower day count fewer loan prepayments, and lower market interest rates was partially offset by lower deposit costs. Our net interest margin in the quarter increased four basis points to 3.08% due to a 13 basis point decline in our cost of funds, partially offset by a nine basis point decrease in the yield of average earning assets. Our cost of deposits declined 14 basis points to 2.12%, as we continue to successfully pass through rate reductions on our interest-bearing deposits. Our spot cost of deposits at 331 was 2.09%. Our average interest-bearing deposits as a percentage of total deposits was steady at approximately 29% for the quarter. Regarding the yield on average earning assets, we saw an 11 basis point decline in our average loan yields to 5.90%. mainly due to the full quarter impact of December rate cuts on floating rate loans, along with a lower accretion resulting from slower loan prepayments. This was partially offset by higher rates on new loan production, which came in at 7.20% for the quarter, driven by growth in warehouse, lender, finance, and fund finance. Our spot loan yield at the end of the quarter was 5.94% and our spot net interest margin was approximately 3.12%. The interest rate sensitivity of our balance sheet for net interest income remains largely neutral as the current repricing gap is balanced when adjusted for repricing betas. From a total earnings perspective, We are liability sensitive due to the impact of rate-sensitive ECR costs on HOA deposits, which are reflected in non-interest expense. Total non-interest income of $33.7 million was in line with our normalized run rate of $11 to $12 million per month. Total non-interest 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 non-recurring noteworthy items we referenced in our investor deck. We expect our non-interest expense for 2Q to increase and return to normalized levels consistent with the low end of our outlook of $190 to $195 million per quarter. We expect positive operating leverage in 2Q to as the higher expense level should be more than offset by growth in net interest income given the strength of loan production that came in late in the first quarter and that continued into the second quarter. However, we do have levers available to right-size our expenses if conditions warrant. Regarding our growth in loans during the quarter, our credit reserve levels reflect the type of loans that are showing the most growth. Our portfolio mix is shifting towards a higher concentration of lower-risk and lower-duration loan categories, such as warehouse, fund finance, lender finance, and purchased residential mortgages. These lower-risk loan portfolios as a percentage of total loans have increased from 17% at the end of 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 link 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.

Thanks, Joe.

This quarter, we saw the thesis for Bank 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 Bank 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 am proud to be part of this remarkable team. With that, Let's go ahead and open up the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question, comes from Ben Gerlinger with Citi.

Please go ahead. Hey, sorry, can you hear me now? Yeah, I can hear you, Ben.

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. The ACL is getting a little bit lower on a ratio basis. So I get the credit link notes. So 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 get your buying back shares. But is it the degree of confidence in credit going forward? Is it the degree of profitability ramping? I'm just trying to understand the opportunistic approach you're taking to buybacks in a little bit of a volatile period with a thinner than pure capital stack.

Sure. Well, thanks, Ben. It's a good question. I understand the buckets and kind of how you organized it. So I think you laid out the positives correctly. 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 it. you know, 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 they still should come down and our margin will still expand. And then the noise, as you pointed out, was credit. I think we've explained that pretty well. And It is worth reiterating that our coverage ratio for the non-lender finance warehouse and single family and fund finance loans, which are very short duration and have no losses, is 1.43%. We also laid out in our deck the specific coverage ratios that we have by product. And so it's pretty healthy. I mean, you know, we run a very conservative CECL model, as Joe pointed out. Our baseline, our scenario is 40% baseline and 60% recessions. 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 lost loans, is very healthy on a peer basis. And that's even before you take into account the credit link notes and the marks on the Bank 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 are starting to migrate upward. And after the transformation we did last year, we We've really done a good job. I think our team's done a good job of steadily building earnings, and we can 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.

No, that is really helpful. And then, like you said, there's another one to add to the list for California. So you look over the past couple of years at Silicon Valley, First Republic, Union, Bank of the West, a whole bunch of little small deals. Do you think there's more opportunity today for free agency on lenders? I guess a 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? Yeah.

So I will say this, you know, three months ago, the economic outlook, we all thought we were, you know, I would say the start of the year. So maybe it's four months ago. We're all like, oh, my God, we were dealt a great hand. New administration, lower taxes, you know, good economy, favorable regulation. Look where we're going. I think that the economic cloudy outlook is self-induced. We were in a pretty good spot. So I think this is relatively temporary. But we don't know if that temporary means through the end of the year or for the next couple 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's so much business to take from the larger banks, given the removal and the elimination of so many competitors, as you pointed out. And I keep that list on my desk, and I was happy to add PPBI to the list of banks that will no longer be competing with us. Umpqua is already here, and they're changing their name to Columbia. They're already in California. So There's no new entrance in California. They're just going to be competing in a different way, and there will be one less competitor. I think it presents tremendous opportunity for us. We are in the fifth largest economy in the world in California, and LA is the engine that powers that economy. We are excited to take market share and serve clients that are at banks that might not be serving them as well as we think we can serve them. There's a lot of competition to go around, though. There's a lot of clients to go around, and I think that it's just a validation of the quality of this market.

Thank you.

The next question comes from Jared Shaw with Barclays Capital. Please go ahead.

Hey, good afternoon. Hey there. So I appreciate the comments about the allowance ratio and the migration of the positive migration of sort of the loan portfolio, but You know, when you look at the backdrop from what we've seen, we've seen, you know, more banks adding to the qualitative overlay or adding to the adverse scenario and growing the reserves. So, you know, I think just looking at the allowance going down with that backdrop is, you know, what some people are focused on. I guess if everything stays the same and we continue to see this migration of banks 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?

No, look, I don't want to be an outlier. First of all, I think it's important that we highlight that 143 coverage ratio for loans that are not in those low risk categories. It's just, it's just, it's, it's very healthy. And that is, that is real. And that's before we include any extra resources from credit link notes or from, uh, you know, the, the marks in the bank of California portfolio, which is double counting and see, so that money is movable to anywhere in our portfolio. So it's real, 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 rating standpoint because we got ahead of it early. I think that will hopefully show that our coverage ratio is flat or growing if we can justify it under our model. That's what I would like to be able to do. 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 143 for these non-low-risk portfolios.

I appreciate that and understand that, but you know, you know how it is when people stack rank, uh, companies by, by ratios that, um, it's, it's sometimes tough to be an outlier on.

Yeah. So, I mean, you're asking the question about like, so we're going to come up on a 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 you know, because they might not do the work to look at it more deeply. And I think that's fair. And I think that we have to be cognizant of that. There's certainly people that, that fall into that category. And I, I think for the reasons I mentioned, we'd like to see our ratio, you know, improve either because we're going to have positive migration or the ratio is going to improve or both. And so let's just see what we can do. But hopefully I answered your question.

Yep. No, you did. Thanks. And then maybe shifting to the goal or the target of 30% DDA, what sort of drives that? You know, 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?

Thank you. So 30% is our near-term target, which is through the end of this year. We're striving to get to 30% non-disciplinary deposits, percent of total deposits. We're currently at 28%. We had a little bit of outflow this quarter, but I think we held our ground pretty well when you look at relative to following some others and what the trends are. We are growing new business relationships, and we expect those to benefit us over time. But, man, it's a big effort. I don't think it's an easy thing to do as you're growing the bank to also grow the numerator and the denominator together on NIB and have the numerator grow faster than the denominator. 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 has ECR attached to it? So we have approximately 3.7 or 3.8 billion of HOA deposits. And most of those deposits have ECR attached to them. What I would need to do is tell you what percent of those HOA deposits are technically NIB, and I don't have that number in front of me, but I'm asking Ann to 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.

Okay, thank you.

Yep, no problem.

The next question comes from Gary Tenner with DA Davidson. Please go ahead.

Thanks, good morning. 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, you know, around the turn of the year versus where we are today. So maybe I misunderstood something or misinterpreted something you said, but can you Can I talk about that? Because I was a bit surprised to read that.

That's a misstatement. If it says that, that's a misstatement. I mean, the economic outlook did not – that's not why our ACL went down. 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.

Okay. I appreciate that because it caught me off guard a bit. And then the second question is, in terms of the NIM guide for the year, which 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, in your range.

Yeah, before Joe, before you jump in, let me just add two things. One is there's both what we call scheduled accretion, which is just kind of the base that we have in our model. And then there's the accelerated accretion, which we never know what it's going to be. And so we'll 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.

I'm sorry. So in the first quarter, we had a little bit over $16 million of total accretion, and as Jared says, we generally have what we call baseline accretion and then accelerated accretion. Because we had almost no accelerated accretion in the first quarter, it was very abnormally low quarter after averaging about $3 million of accelerated per quarter in 2024. So that baseline 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 of loan prepayments, that should step down at approximately, I think we've told you before, about a million and a quarter or so. But, you know, the amount of accelerated prepayments is hard to predict, and so we're not really dependent upon those as we look out for the rest of the year.

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

Yep, exactly.

Yes. Okay, fair enough. And if I could sneak one last question, and just, Jared, as you kind of, you know, I had a couple questions earlier about the buyback and capital. As you kind of work through that kind of calculus around your comfort level on CET1, let's say, any thought to any risk weighting relief on mortgage warehouse or anything like that that you're kind of thinking about that gives you extra comfort being opportunistic here?

I think, you know, we obviously want to keep our capital levels strong. And you know, we like being 10% and above. We could dip down in a quarter if we're going to move past it pretty quickly with, you know, what we see for our earnings outlook. But I think that's kind of a guide for us of, you know, where we are. I also want to be, you know, 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 10B51 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 patience with a buyback program. And so we'll use it over time. Certainly we can use it in a way that, you know, keeps, minimizes dilution from, you know, vesting of stock awards and things like that. I think that's kind of a common way that many banks use their buyback 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, you know, given where stock prices are today, it makes a lot more sense to do common than preferred, but that may change over time. So we're just going to, be opportunistic and look at it and, you know, do what makes sense under the given circumstances. But capital levels are something that we're keeping squarely in focus.

Thank you. Thank you.

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Hey, good morning, everyone. Good morning. Jared, what are the I know it's somewhat dependent on where your stock trades, but what's the probability of you tendering the preferred this year?

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 There is a ceiling on the preferred, right? 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.

Okay. And 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?

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 are certain things I think that we can improve on on the portfolio management side and just kind of being ahead of things and not waiting for them to get better but forcing them to get better. 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. 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 some of these changes that we've made.

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

Yep. Yeah, as you know, we don't have any rate cuts in our forecast. Our HOA business has been very stable, as you pointed out. I mean, if you look at the last couple quarters, it's been about the same. It started off in the 3s, 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% 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, ECR will go up. But 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, 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 cost. average cost. So it is a business that we would like to grow. It's very competitive. And our team does a great job. But as you know, they're sticky balances, which is why they don't go down too much. And hopefully we can grow them over the course of the year.

Great. Thanks again. Thank you, Matthew.

The next question comes from David Feaster with Raymond James. Please go ahead.

Hi. Morning, everybody. Morning. I just wanted to get a pulse of your client base. Obviously, there's a lot of volatility in the market. You know, we've got the trade wars. You've got those. You've got all sorts of kind of things. I'm curious, I guess, first, how the pipeline is shaping up and then, you know, where you're seeing opportunities today. Do you still expect to see, you know, growth primarily concentrated within, you know, lender and fund finance? Just kind of curious. you know, 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?

So, 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 and warehouse lender and fund finance um 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 litech loans low income housing tax credit and general construction and some of those loans converted to multi-family 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 we had a downturn there, and on the construction side it was a pretty big drop. We have some construction loans that are in the pipeline, although they take a while to fund because the equity of the borrower goes in first. Generally, we're seeing some good pickup in CNI. but we're being careful 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 in Los Angeles and San Pedro are one of the largest ports in the world. It 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, not a huge move in my part, just a little bit of a nod to, you know, that we're seeing some clouds. But there's plenty of good business for us to pick up in these markets because of our position and who we're competing with, which is increasingly the large banks.

Okay, that's good color. And maybe on the other side, I mean, deposit performance, you guys have done a great job. I mean, you saw nice growth, nice decline in deposit costs. Could you touch on the competitive landscape for deposits today? Where are you seeing growth opportunities coming from? Is it the commercial side? Is it the specialty lines or 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 FedCuts?

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 in uncertain times, right? People start managing their books a little bit more tightly. They start looking at their numbers a little bit more closely. And they're like, hey, 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 about is they start focusing on the minutiae again, which is, by the way, what we do on the credit side, right? We start focusing on and exercising that discipline. We really should have it at all times. 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 loan. And that's where we're bringing in. And as we bring in new clients, we're bringing in deposits. Second is we are winning deposits generally from people that just want to bring over that might not have any borrowing needs today, but are just unhappy. Their relationship manager left, you know, they were at first Republic and now they're at chase and they can't get the same attention. 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 a branch talking to people. It's just a different client base than what we're set up for. That doesn't mean that we don't have them and that we're not serving them as well as we can with what we have, 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.

We've touched on this a bit. You talked about giving 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 de-emphasizing or maybe watching a bit more closely?

Yes. So I wouldn't say we've tightened our credit box. I think the discipline that we're exercising now on the management side of credits, you know, should be in place at all times. And similarly on the credit side, you might say, look, I don't 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 sole or double source 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 credits you feel comfortable with. 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 it vertical, but we're not going to guarantee the product after that. That's never been my approach. I don't know how to operate an apartment building. And I don't want to own it and rely on the value. I want somebody to commit to me that they're going to stand behind it. 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.

Okay. That's helpful. Thanks.

Thank you.

The next question comes from Anthony Elan with JP Morgan. Please go ahead.

Hi, everyone. I'd like to start on the expense outlook. You're still guiding to the low end of 190 to 195 million per quarter. But, Joey, you mentioned that there may be levers available to right-size expenses if conditions warrant. I'm wondering if you could outline some of those opportunities that will be available to beat your expense number.

Yeah, thanks for the question.

You know, there's always a couple of things that 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 space that if in a very difficult situation, you can take action to slow down.

It's well said, Joe. I mean, Anthony, the first thing that comes to mind is just accruals for bonuses, right? 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. And we actually put in the deck this time, which Anne 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.

Thank you. And then on loan growth, you reduce the outlook to mid-single digits. 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 loan growth outlook with the level of optimism you still have for Southern California. Thank you.

Yeah. Tony, you're right. I mean, we're being conservative here. So far, second quarter is strong. The reason why we're tempering it is because I really don't know what's going to happen the back half of the year. So things could shut down and then we end up with – because the guidance we gave was mid to high single digits for the year is what we were going to average. 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.

Thank you. Thank you.

The next question comes from Chris McGrady with KBW. Please go ahead. Hey, Jared.

I just want to zero in on NII. A lot of discussion on margins and balances, but just NII. The quarter was down about $3 million. You talked about the accretion moderating. How do I think about, based on the late quarter growth and the pipeline that's pulling through in Q2, help us frame how much NII should be up in the second quarter? Yeah.

good question joe you want to you want to take that one yeah so you know you start off with that was um you know there was a five million dollar impact in that interest income just from day count i think we have that called out on one of our slides in the investor deck so you can start with that and then you know if you look at our loan growth as we continue to grow um at the levels that that jared has said the you know, we will continue to expand our net interest income. And, you know, it's, I think you could probably think about it as somewhat, you know, consistent with, you know, consistent with our loan growth, you know, mid single digit increase in that.

So, and I actually could be up, you know, 5% in the second quarter, just from the factors that you laid out. Okay. Yeah, I would say, you know, anywhere from, yeah, it's reasonable.

I think that's reasonable.

Yep. Okay. That's actually all I had. Thank you.

Thanks, Chris.

The next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Hi, good morning. Morning. 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-reaction 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?

Yeah, 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 the back half of the year. And You know, at the end of the second quarter, we'll tell you where we will update it again if necessary. What we're trying to do is just tell people what we see today. And if we see a change, then we'll update. But I didn't think it was that significant a change. So the larger question of how does deposit growth need to keep pace with loan growth to affect the margin is exactly what we think about. Obviously, for every dollar of NIB that we bring in, it's much cheaper than having to fund loans with broker deposits. It's rare that a borrower will have enough deposits to cover their cost of their loan, right? And so 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, a, a circumstantial thing. You know, most borrowers have multiple banks, certainly real estate borrowers do and real estate borrowers tend to have the lowest level of cash available. Um, so Timur, it's, it's a balancing act and you're right. If we only required full relationships, that would certainly slow loan growth. Um, I think we require substantial relationships, and so far it's been fine.

Okay, and then I guess more specific on DDA pipelines, obviously a key objective for you guys. Those balances have been flattered 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.

Yeah, it's hard to say that there is... seasonal cadence you could say that first quarter has tax payments and all that stuff but as you point out it's been flat to down I would say that what we're seeing and I think this bears out when we look at 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 And so those are offsetting what might be otherwise larger outflows. Most balances of most businesses are flat to down because they're reinvesting it and their cash balances aren't growing. It's just what's been happening. And, you know, we had all this money that was in the economy from what we all know for many reasons that, you know, inflated balances and now it's being pulled out. So our ability to stay flat, which is why our 30% NIB growth, that's a, 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, um, we'll go to 35. And I think that the discipline that our teams are practicing in the way that we track things and 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 bank 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'll be better. And I thought last quarter was fine. So I think we're exercising the right muscles, and I think the results will play out over time.

Okay, fair enough. Thanks for that. And then just lastly for me, a couple part questions just on payoff activity. really high in 1Q. I guess, A, what was the driver there? Was there any pull forward from 2Q? Second part of that question is, what is your appetite to continue maybe taking some of that payoff activity and putting it onto your own balance sheet as permanent loans? And then the third part of the question, you had mentioned that the payoff activity on the multifamily side, some of the higher migration into the classifieds on the repricing risk, I'm just wondering if that payoff activity remains kind of at this existing pace. Is there incremental risk to classified migration as that further continues?

Yeah, I don't think that they're connected. So the payoffs came in a couple different areas. One was we had a lot of, as we mentioned, construction loan paydowns of larger loans. Second is we had a lot of cycling in our warehouse business. that cycled through I mean I think it's pretty amazing when you look at the chart on page 13 the amount of production that our team did really proud of the work that they did really strong loan production including supporting our clients with line utilization and you know line utilization rates are moving up as you can see and so I wouldn't say they're peaking 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 paydowns 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, you know, 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 at, you know, a historical 3.5% rate. And, you know, you know it's going to go to 6% and getting the financials from the borrower, confirming the amount of equity in the property, making sure that you have a plan. You've talked about it with the borrower and what the plan is. Are they going to put in more equity? Are they going to take us out? What is the plan? Are they going to Fannie or Freddie? And that's the discipline that I want documented for those loans. We don't see losses because 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.

Did that answer your question, Timur? It did, yes. Thank you. Okay. Thank you.

The next question comes from Andrew Terrell with Stevens. Please go ahead.

Hey, good morning. Morning. Good morning. If I could just stick on the multifamily point, and Jared, I appreciate the color on 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 the classified move this quarter and where I'm going as You know, 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?

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, you know, 3.5% or 4%. that in the current environment are repricing around 6%. They fully carry, they fully debt service. 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%. We've had success with $150-$200 million worth of loans. Some of those borrowers, they floated up into the eights, and they were just waiting for certainty on rates before they fixed it. So overall, the portfolio is solid, and that's the experience with most borrowers. But 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, and they're paying now, and they've got a ton of equity in the property, but you've got to look at this and say, okay, what is the plan here? 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, you know, being disciplined about it now. I think with this, the other thing, Andrew, is I think what this page shows, and your question is a good one, like, you know, 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.

Yeah, 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. So thank you for addressing.

Yeah, 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 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.

Thank you.

Thank you.

This concludes our question and answer session. and Bank of California's First Quarter Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.