Q1 2025 Banc of California Inc Earnings Call
Speaker Change: Hello and welcome to Bank of California's first quarter earnings conference call. If you need operator assistance please press star than zero.
Speaker Change: I'll now turn the call over to Anda Vries, Head of Investor Relations at Bank of California. Please go ahead.
Ann DeVries: Good morning, and thank you for joining Banc of California's Q1 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 risks, uncertainties, and other factors outside of our control, and actual results may differ materially.
Speaker Change: 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.
Speaker Change: Today's presentation will also include non-gat measures. The reconciliation for these measures and additional required information is available in the earnings press release and earnings presentation, which are available online, that's your relations website.
Speaker Change: 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 of 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.
Ann DeVries: 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 Joseph Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared.
Speaker Change: For discussion of some of the respective factor results, please see our State Department statement on four different statements, including both the earnings release and the earnings presentation, as well as the risk factor section of our most recent M.K.
Speaker Change: Joining me on today's call, are Jared Wolff, President and Chief Executive Officer and Joe Calder, 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, Anne. Good morning, everyone, and welcome to our Q1 earnings call. Our Q1 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 increased both book value and tangible book value per share while maintaining strong liquidity levels. Given our healthy balance sheet and commitment to deploying capital in a way that benefits shareholders, we announced a $150 million share buyback program during the Q1.
Jared Wolf: Thanks, Anne. Good morning, everyone, and welcome to our first quarter in a
Jared Wolf: Our first quarter results came in pretty much as we forecast, reflecting the strong execution by our team.
and our ability to capitalize on our attractive market position.
Thank you.
Jared Wolf: During the quarter, we should positive trends in our court earnings.
Jared Wolf: including that interest margin expansion, strong loan growth and prudent expense management.
Jared Wolf: We achieved our second consecutive quarter of broad-based commercial loan production, while continuing our steady growth in attracting new and IB deposit relationships.
Jared Wolf: As a result, we built up capital during the quarter and increased both book value and tangible value per share while maintaining strong liquidity levels.
Jared Wolf: Given our healthy balance sheet, a commitment to deploying capital in a way that benefits shareholders.
Jared Wolf: We announced a 150 million share buy back program during the first quarter.
Jared Wolff: 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. While our outlook may change, currently I do not expect us to deploy all of this remaining capacity immediately. In Q1, our loan production, including unfunded commitments, was $2.6 billion, up from $1.8 billion in Q4, 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 Q2.
Jared Wolf: We benefited from the market volatility and opportunistically we purchased 6.8% of our shares and have completed the program.
Jared Wolf: We announced yesterday that we are upsizing our buyback program with an additional 150 million to 300 million.
Jared Wolf: and we'll expand it to cover both common and preferred stock.
Jared Wolf: We will be prudent with this program and use it opportunistically.
And while our outlook may change [inaudible]
Jared Wolf: Currently, I do not expect us to deploy all of this remaining capacity immediately.
Jared Wolf: In the first quarter, our loan production, including unfunded commitments, was 2.6 billion up from 1.8 billion and fourth in the fourth quarter.
Jared Wolf: resulting in a loan portfolio growth of 6% on an annualized basis.
Jared Wolf: 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.
Jared Wolff: 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.
Jared Wolf: Strong loan production volume was broad based, but we saw our strongest growth in our warehouse, lender, finance and fund finance areas [inaudible]
Loan Portfolio Growth was also impacted by utilization rates.
which have been trending up over the last year.
Jared Wolf: Longbrook was partially offset by decline in construction loans due to payoffs and completed projects.
Jared Wolf: Some of which move to permanent financing in our multifamily portfolio.
While our long growth has been strong year to date.
Jared Wolf: Given the uncertainties that exist in the current environment around tariffs and the broader impacts of the economy,
Jared Wolf: We are adjusting our 2025 Outlook for Lone Road to Mid-Single Digit Road.
While we still strive to achieve high single-digit growth,
Jared Wolf: This is merely a reflection of the unknown for the back half of the year, given the ongoing
Jared Wolff: 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 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-rating 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.
Jared Wolf: Importantly, we are maintaining our discipline pricing and underwriting criteria while growing our loan portfolio.
Jared Wolf: 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.
Jared Wolf: During the quarter, we showed an uptick in classifieds as well as MPAs.
Jared Wolf: These changes reflect some of the guidance I provided during our last earnings call. When I share 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.
Jared Wolf: This approach resulted in some additional credit downgrades during the quarter.
Jared Wolf: The increase in end kills was mainly driven by one seary 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.
Jared Wolff: The increase to our classified loans this quarter was mostly driven by a 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 classified this quarter are current with no change in borrower behavior. 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.
Jared Wolf: The increase to our classified loans, this quarter, is mostly driven by migration of multi-family rate-sensitive loans that are still current, have strong collateral values and are in attractive California markets.
Jared Wolf: Despite these attributes, the impact of reprising risk in the current rate environment resulted in performance metric deterioration and subsequent downgrade.
Jared Wolf: I believe this discipline is particularly important in an uncertain environment like the one we are in right now.
Jared Wolf: It does not mean that such downgrades will result in losses.
Jared Wolf: 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
Jared Wolf: for the more downgraded loans have strong collateral and low loaned of values which will also help to mitigate any potential losses.
Jared Wolf: Historical Performance of Multifamily Loans in California has been very strong as we have discussed.
Jared Wolff: 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'd fully reserved for the remainder of the loan and decided to charge it off into Q1. 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 undearned 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.
Jared Wolf: With regard to credit losses, our charge drops in the quarter were mostly driven by a loan that we had previously partially charged off.
Jared Wolf: We've fully reserved for the remainder of the loan and decided to charge it off into the first quarter.
Jared Wolf: 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 under-accredit mark on the Bank of California loan portfolio acquired in the merger, as well as coverage from our credit link notes.
Jared Wolf: While uncertainty is facing the macroeconomic environment have creative volatility in the markets.
Jared Wolf: We remain steadfast in our focus to help our customers through these turbulent times.
Jared Wolf: Our strong balance sheet and attractive market positioning differentiate us and position us to perform well in a variety of outcomes.
Jared Wolff: 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 it back with some closing remarks before opening up the line for questions. Joe?
Jared Wolf: We are confident in our ability to continue executing for our clients while maintaining healthy capital and equity positions.
Jared Wolf: 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.
Joseph Kauder: Thank you, Jared. We reported Q1 net income of $43.6 million or $0.26 per share, which reflects continued momentum in our core earnings drivers. NII 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 NIM 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 31 March was 2.09%.
Thank you, Jared.
Joe Cowder: We reported first quarter net income of 43.6 million or 26 cents per share which reflects continued momentum in our core earnings drivers.
Joe Cowder: That interesting come 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.
Joe Cowder: 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.
Joe Cowder: Our cost of the pod is to climb 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%
Joseph Kauder: 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.
Joe Cowder: Our average interest bearing deposit as a percentage of total deposit was steady at approximately 29% for the quarter.
Joe Cowder: 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
Along with a lower accretion resulting from slower loan prepayments.
Joe Cowder: This was partially offset by higher rates on new loan production which came in at 7.20% for the quarter, Jim by Growth and Warehouse, Lender.
. . . . . . .
Bonayant and Fun Bonayant [inaudible]
Joe Cowder: Our spot loan yield at the end of the quarter was 5.94% and our spot net interest margin was approximately 3.12%.
Joe Cowder: 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.
Joseph Kauder: 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 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, 401(k) 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. Our expenses benefited from a few non-recurring noteworthy items we referenced in our investor deck.
Joe Cowder: From a total earnings perspective, we are liability sensitive to the impact of rate-sensitive ECR cost on HOA deposits, which are reflected in non-interest expense.
Joe Cowder: Total non-interest income of $33.7 million was in line with our normalized run rate of about 11 to 12 million per month.
Joe Cowder: 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 for a 1K contribution to an incentive compensation.
Joe Cowder: Partially offset by lower rate sensitive customer-related expenses and lower regulatory assessments.
Joe Cowder: Note our Q1 expenses include a $1 million donation to the Los Angeles Wall Fire Relief and Recovery Fund, which we established to support our communities following the devastating fires.
Joe Cowder: and our expenses benefited from a few non-recurring noteworthy items we reference in our investor
Joseph Kauder: We expect our non-interest expense for Q2 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 Q2 as the higher expense levels should be more than offset by growth in net interest income given the strength of loan production that came in late in Q1 and that continued into Q2. 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 purchase residential mortgages.
Joe Cowder: We expect our non-interest expense for QQ to increase and return to normalized levels, consistent with the low end of our outlook of 190 to 195 million per quarter.
Joe Cowder: We expect positive operating leveraging to Q as the higher expense level should be more than offset by growth and net interest income, given the strength of loan production that came in late in the first quarter and that continued into the second quarter.
Joe Cowder: However, we do have levers available to right size our expenses if conditions weren't.
regarding our growth and loans during the quarter.
Joe Cowder: Our credit reserve levels reflect the type of loans that are showing the most growth.
Joe Cowder: Our portfolio mix is shifting toward a higher concentration of lower risk and lower duration loan categories such as warehouse, fund finance, lender finance, and purchase residential mortgages.
Joseph Kauder: These lower risk loan portfolios as a percentage of total loans have increased from 17% at the end of 2023 to 25% in Q1 2025. Under CECL accounting rules, these loans require very low reserves due to low historical loss content and short duration 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.
Joe Cowder: 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.
Joe Cowder: Under seasonal 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.
Joe Cowder: The remaining loan portfolio would have an ACO coverage ratio of 1.43%.
versus the 1.1% ratio for the total portfolio.
Jared Wolf: 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.
Joseph Kauder: 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 cost, net interest margin expansion, and improved 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 Wolf: We provided additional color in our investor presentation of the ACL by Lone Category.
Jared Wolf: and we also believe the assumptions and economic scenario weightings included in our seasonal models which reflect the 40% base case and a 60% recession scenario are conservative.
Jared Wolf: Our results reflect the progress we have made strengthening our core earnings drivers, including high quality loan growth, lower funding and deposit cost, that interest margin expansion, and prudent expense and risk management.
Jared Wolf: As we look ahead for the rest of 2025, we expect our strong execution will continue to drive consistent and meaningful growth in our core profitability.
Jared Wolf: 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 a 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.
Thanks, Joe.
This Quarter
We saw the thesis for Bank of California
and Pac-West merger continue to be proven out.
Jared Wolf: We are filling the void of banks that left the California market due to failure or acquisition.
Jared Wolf: and we are becoming the go-to business bank in our markets.
Jared Wolf: Yesterday's announcement of the Columbia Pacific Premier Merger is yet another example.
Jared Wolf: It validates the attractive characteristic of our market and a further elimination of a good-sized competitor like the Civic Premier.
As our results continue to demonstrate.
Jared Wolf: We are capitalizing on our strong market position to add attractive commercial relationships.
Jared Wolf: Evidence by the Lone Growth and new NIB business relationships we brought on during the quarter.
Jared Wolf: At the same time, we continue to add banking talent throughout our markets that will contribute to our profitable growth.
Jared Wolff: We continue to monitor the economic environment, and while we did not observe a meaningful change in borrower behavior in the Q1 or early part of the Q2, 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. 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.
Jared Wolf: We continue to monitor the economic environment and while we did not observe a meaningful change in borrow behavior in the first quarter or early part of the second quarter.
Jared Wolf: There is more dialogue now regarding potential slowdown and caution among clients.
Jared Wolf: In light of this, we will remain cautious in our loan production in terms of both industry and structure.
Thank you.
Jared Wolf: We have also evaluated our portfolio for direct hair of impacts and for the most part our exposure is both minimal and indirect.
Jared Wolf: Where it is direct, our clients have or are in the process of diversifying their product like sourcing and making arrangements for slowdown and activity.
Our product and geographic diversity are serving us well.
Jared Wolf: with our solid foundation of significant available access to equity, a strong deposit mix, help to reserves in capital. We are well positioned for the road ahead.
Jared Wolff: 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 am proud to be part of this remarkable team. With that, let's go ahead and open up the line for questions.
Jared Wolf: I want to thank our team here at Bank of California for all their hard work and efforts in this environment.
Jared Wolf: 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.
Operator 2: The first question comes from Ben Gerlinger with Citi. Please go ahead.
Jared Wolf: With that, let's go ahead and open up the line for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star than one on your telephone keypad. If you're using a speaker phone, please pick up your hand set before pressing the keys.
Jared Wolf: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Ben Girlinger with City. Please go ahead.
Ben Gerlinger: Hey. I'm sorry. Can you hear me now?
Jared Wolff: Yeah, I can hear you, Ben.
I'm sorry, can you hear me now?
Ben Gerlinger: Okay. At the risk of kind of rambling here, when I look at bank, I see it in kind of two lenses. One is margin expansion, expense base is coming down, decent loan growth. 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. I get the credit-linked notes. 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. When you think about just the outlook over the next year to two years, given the uncertainty, and I get you're buying back shares, but is it the degree of confidence in credit going forward? Is it degree of profitability ramping?
Yeah, I can hear you, Ben.
Okay, um
Speaker Change: So at the risk of kind of rambling here, so when I look at bank, I mean, I see it in kind of two to one is art and expansion.
Expense base is coming down.
Speaker Change: Decent long-grown, so I mean those are positives. The negatives of the credits
Speaker Change: kind of ticking up in the class of tribes, the ATL is getting a little bit lower on a ratio basis, so I get the credit link notes so right, additionally the capital base is below peers, it's not too thin but it's definitely not
Speaker Change: where you want to be if there is a recession on the lower half of the list.
Speaker Change: So what do you think about just the outlook over the next year to two years given the uncertainty?
and get your buying back shares. [inaudible]
Speaker Change: The degree of confidence and credit going forward is a degree of profitability of ramping. I'm just trying to
Ben Gerlinger: 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.
I understand the
Speaker Change: Opportunistic Approach are taking to 5X in a little bit of a involved period with a thin Erlin-Pierre Capital Stack.
Jared Wolff: Well, thanks, Ben. It's a good question. I understand the buckets and kind of how you organized it. 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 at a higher loan yield than the portfolio overall. Deposit costs should continue to improve over time. The heavy moving that we did with our brokered portfolio, as I mentioned, was expiring at the end of this quarter. Our deposit costs aren't going to move down as quickly, but they still should come down, and our margin will still expand.
Sure.
Well, thanks Ben. It's a good question.
Speaker Change: I understand the buckets and kind of how you organized it.
Speaker Change: So, I think you laid out the positives correctly. You know, we do expect the opportunity to continue expand our loans.
Speaker Change: 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. [inaudible]
Speaker Change: Deposit costs should continue to improve over time. The heavy moving that we did with kind of our broker 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.
Jared Wolff: 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. It's pretty healthy. We run a very conservative CECL model, as Joe pointed out. Our scenario is 40% baseline and 60% recession. That is more conservative, I think, than what Moody's recommends, and it's conservative overall. 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 then the noise as you point out was was credit.
Speaker Change: 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%.
Speaker Change: 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 Cecil model as Joe pointed out. Our baseline, our scenario is 40% baseline and 60% recession.
Speaker Change: That is more conservative, I think, than what Moody's recommends. And it's conservative overall. And I think that 1.43% for the majority of our portfolio, the 75% of our portfolio that's not these low duration, you know, no lost loans.
Jared Wolff: That's even before you take into account the credit-linked notes and the marks on the Banc of California portfolio. It's actually higher than that. 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 go through the portfolio with a heavy hand and look at it and say, Okay, folks, let's start preparing for a downside scenario. I think that we are ahead of the curve. I think we're doing this. Maybe others will follow us.
Speaker Change: is very healthy on a peer basis, and that's even before you take into account.
Speaker Change: 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.
Bye.
Speaker Change: 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.
Speaker Change: You know, we kind of go through the portfolio with it with a heavy hand and look at it and say okay folks, let's let's let's start preparing for a Downside scenario. So I think that we are
Speaker Change: Ahead of the curve, I think we're doing this, you know, 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 the like I said I think our reserves are healthy addressing capital.
Jared Wolff: 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. Like I said, I think our reserves are healthy. Addressing capital, this was opportunistic. You are correct that on a peer basis, I think our capital levels are not as healthy as some of the other ones, but they're not low. I think it's important to remember we're well-capitalized. 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. 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.
. . .
This was opportunistic.
Hi.
Speaker Change: 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 capitalizes is.
Speaker Change: 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 Access [inaudible]
Speaker Change: You know, 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. You know, we've been growing our earnings are starting to migrate upward and after the transformation we did last year we.
Jared Wolff: We are building up capital pretty quickly as well. We've been growing. Our earnings are starting to migrate upward. After the transformation we did last year, we've really done a good job. I think our team's done a good job of steadily building earnings, and we could expect that to continue. We think our capital's going to build pretty well as well. 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.
Speaker Change: We've really had it 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 cap will is going to build pretty well as well So let me pause there as an answer to your question. It's a little bit philosophical but I I agree with your comments and that's kind of how I would how I see it.
Ben Gerlinger: Got you. No, that is really helpful. Like you said, there's another one to add to the list for California. 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 on lenders? I guess the disruption obviously opens the door for new clients. 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?
Gosh, no, that is really helpful. And then...
Speaker Change: Like you said, there's another one to add to the list for California so you look over the past
Speaker Change: a 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 Wenders? I guess the disruption obviously opened the door for new clients.
Speaker Change: 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: Yeah. I will say this. 3 months ago, the economic outlook, we all thought. I would say the start of the year, maybe it's 4 months ago. We were all 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. Right. We were in a pretty good spot. I think this is relatively temporary. 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. We just are going to be cautious, and we're going to take it into account. We're not going to ignore it.
So, I will say this.
You know three months ago
Speaker Change: 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.
Speaker Change: Right, we were in a pretty good spot, so I think this is relatively temporary.
Speaker Change: and we don't know if that temporary means through the end of the year or for the next couple months.
Speaker Change: You know, there's obviously a lot of saber-rattle 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.
Jared Wolff: We are going to be prepared to move positively as the market relaxes and as things return to normal. Yes, we will be hiring people and making inroads. Even in a slow economy, the Southern California market is doing very well. There is so much business to take from the larger banks, given the removal and the elimination of so many competitors as you pointed out. 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. There's no new entrants in California. They'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.
even in a slow economy.
The Southern California market is doing.
Speaker Change: very, very well, and there is so much business to take from the larger banks.
Speaker Change: 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 PPPI to the list of banks that will no longer be competing with us.
Speaker Change: I'm close already here and they're changing their name to Columbia. They're already in California so there's no new entrance in California There just can be competing in a different way and one less there'll be one less competitor I think it presents tremendous opportunity for us [inaudible]
Jared Wolff: 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.
Speaker Change: You know, we are in the fifth largest economy in the world in California and LA is the engine that powers that economy we are excited to take market share and serve clients that are at banks that might not be serving them as well as we think we can serve them.
Speaker Change: There's a lot of competition to go around. There's a lot of clients to go around and I think that, you know, it's just a validation of the quality of this market.
Ben Gerlinger: Got you. That's helpful, Colin. Thank you.
Jared Wolff: Thank you.
Jackson, the sample call. Thank you.
Operator 2: The next question comes from Jared Shaw with Barclays Capital. Please go ahead.
Thank you.
Speaker Change: The next question comes from Jared Shaw with Parklee's Capitol. Please go ahead.
Jared Shaw: Hey, good afternoon.
Jared Wolff: Hey there.
Hey, good afternoon.
Jared Shaw: I appreciate the comments about the allowance ratio and the positive migration of sort of the loan portfolio. When you look at the backdrop from what we've seen, we've seen more banks adding to the qualitative overlay or adding to the adverse scenario and growing the reserves. 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? Is there an opportunity to maybe add to a qualitative overlay to actually see the allowance move higher or stay flat here?
Hey there.
Speaker Change: Um, so I appreciate the comments about the allowance ratio and the migration, you know, of
Speaker Change: The positive migration of sort of the loan portfolio, but you know when you look at the backdrop of what we've seen we've seen you know more banks adding to the qualitative overlay [inaudible]
Speaker Change: or adding to the adverse scenario and growing the reserves. I think just looking at the the allowance going down if that backdrop is.
You know, what some people are focused on, I guess?
Speaker Change: If everything stays the same and we continue to see this migration of, you know, the low portfolio towards the higher quality stuff, should we think that the allowance continues to trend down from here, or is there an opportunity to, you know, maybe add to a qualitative of a relate to, um...
Speaker Change: 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 143 coverage ratio for loans that are not in those low-risk categories. It's very healthy, that is real. That's before we include any extra resources from credit-linked notes or from the marks in the Banc of California portfolio, which is double counting in CECL. That money is movable to anywhere in our portfolio, it's real coverage. I want to emphasize that point. You're asking the question of whether we would let our coverage ratio go down further, 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, we do have to follow our model and do it with discipline.
Thank you.
Speaker Change: No, 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...
Speaker Change: It's just it's very healthy and that is that is real and that's before we include
Speaker Change: Any extra resources from credit link notes or from, you know, the marks in the Bank of California Portfolio, which is double counting and seesaw that money is moveable to anywhere in our portfolio, so it's real, real coverage.
Speaker Change: So I want to emphasize that point. You're asking a 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.
Speaker Change: 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.
Jared Wolff: 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, 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. I do think it's important to highlight how strong our coverage ratio is when you actually look at the numbers at 143 for kind of these non-low risk portfolios.
Joe Cowder: 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.
Joe Cowder: and I think that will hopefully show that our coverage ratio is flat or growing.
Joe Cowder: 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.
Joe Cowder: 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, you know, kind of these non-level report portfolios.
Jared Shaw: Yeah. No, appreciate that and understand that. You know how it is when people stack rank companies by ratios, it's sometimes tough to be an outlier on something like that.
Joe Cowder: Yeah, no, appreciate that and understand that, but you know how it is in people stack rank companies by by ratios it um
Jared Wolff: Yeah. You're asking the question about, so we're going to come up on a screen and you're saying, well, somebody's 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, because they might not do the work to look at it more deeply. I think that's fair, and I think that we have to be cognizant of that. There's certainly people that fall into that category, 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 or both. Let's just see what we can do. Hopefully, I answered your question.
Joe Cowder: It's sometimes tough to be an outlier on so I mean you're asking a question about like so we're gonna come up on a screen and you're saying well somebody's not gonna do the work they're just gonna look at the headline number and you don't want to be somewhere where the headline number looks worse.
Joe Cowder: 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 would like to see our ratio Um
Joe Cowder: You know, 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 answer your question.
Jared Shaw: Yep. No, you did. Thanks. Maybe shifting to the goal or the target of 30% DDA. What sort of drives that? What's the timeline to get there? Once we see 30% or get to 30%, what's the percentage of that that is subject to ECR?
Speaker Change: Yep, now you did. Thanks. And then maybe shifting to the goal or the target of 30% DDA.
Speaker Change: What sort drives that? What's the timeline to get there and once we see 30% get to 30%, what's the percentage of that that is subject to ECR?
Jared Wolff: Thank you. 30% is our near term target, which is through the end of this year. We're striving to get to 30% non-share deposits % 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. 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. We're trying to do that, and it's a meaningful target.
Thank you. So.
30%.
Speaker Change: is our near-term target, which is through the end of this year.
Speaker Change: We're striving to get to 30% non-stripping deposits, a percent of toll deposits.
Speaker Change: We're currently at 28%, we had a little bit of outflow this quarter, but I think we held the ground, our ground pretty well when you look at, you know, relative to following some others and you know, what the trends are. We are growing new business relationships and we expect those to benefit us over time.
Bye.
Speaker Change: Man, it's a big effort. I don't think it's an easy thing to do as you're growing the bank to also grow the numerator, you know, and the denominator together on NIB and have the numerator grow faster than the denominator, so we're trying to do that.
Jared Wolff: 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. We have approximately $3.7 or $3.8 billion of HOA deposits. 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.
Speaker Change: It's a meaningful target and once we get to 30, we'll set into target at 35 and we'll we'll set some some reasonable goals to get there.
in terms of-
Speaker Change: I think your second question was what percent of NIB has ECR attached to it?
Speaker Change: So, we have approximately 3.7 or 3.8 billion of HWA deposits.
Most of those deposits have ECR attached to them.
. . .
Speaker Change: What I would need to do is tell you what percent of those HUA deposits are
Speaker Change: Technically, N.I.B., 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.
Jared Shaw: Okay. Thank you.
Jared Wolff: Yep, no problem.
Operator 2: The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Okay, thank you.
Yep, you're from.
Speaker Change: The next question comes from Gary Tenner with DA Davidson. Please go ahead.
Gary Tenner: Thanks. Good morning.
Jared Wolff: Good morning.
Gary Tenner: Jared, the press release notes that the ACL declined because the economic forecast improved versus Q4. That seems like it runs a little counter to what your commentary was around kind of where the outlook was around the turn of the year versus where we are today. Maybe I misunderstood something or misinterpreted something you said, but can you kind of talk about that? Because I was a bit surprised to read that.
Thanks, good morning.
Gary Tenor: 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, in
Gary Tenor: We are in turn the year versus where we are today. So maybe I misunderstood something or misunderstood something you say but can you kind of talk about that because I was a bit surprised to read that that's a that's a misstatement. If it says that that's a misstatement, I mean the the economic outlook to not it that's not why our racial went.
Jared Wolff: Well, that's a misstatement. If it says that's a misstatement. I mean, the economic outlook, that's not why our ACL went down. 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. We started putting a more conservative readout for the economy back in Q3, where we went to 40% baseline, 60% recession scenario. We started that back in Q3 of last year. 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.
Gary Tenor: went down, so you get the close reading award. Our ACL did not go down because the economic outlook approved. Our ACL went down.
Gary Tenor: because of all the reasons we mentioned and we started putting a...
more conservative I
Read out.
Gary Tenor: for the economy back in the third quarter, where we went to 40% baseline.
Gary Tenor: 60% recession scenario. We started that back in the third quarter of last year.
Gary Tenor: So, I think what we meant by that language is probably that when you run the model today.
Gary Tenor: The economic outlook for Moody's is probably more favorable and that model output ended up resulting in
Gary Tenor: You know the reserve levels that we have including all the overlays that we put in there so I think it's it's probably a little bit more complicated than we stated there but I understand your question.
Jared Wolff: 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 guard a bit.
Jared Wolff: Yeah.
Gary Tenner: 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 Q4. Joe, I don't know if you could kind of update us on your expectations for accretion income for the year just to give us a baseline as far as what's in your range.
Speaker Change: Okay, I appreciate that because it caught me off guard a bit.
And then the second question is What is it?
Speaker Change: In terms of the NIM Guide for the Year, which wasn't changed [inaudible]
Speaker Change: You know, 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. [inaudible]
Jared Wolff: Yeah, Joe, before you jump in, let me just add 2 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. We're happy to address that. Before I forget, the question was how much NIB we had in HOA, and the answer is $1.2 billion. Joe, why don't you go ahead and address what we think our guide is for kind of accretion. Joe, you might be on mute.
Indoor Range
Speaker Change: Yeah, before Joe, before you jump in, let me just add two things. One is [inaudible]
Speaker Change: 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.
Speaker Change: So Joe, Joe, why don't you go ahead and address what we think what our guide is for kind of a creation?
to your might be on mute.
Joseph Kauder: I'm sorry. In Q1, we had a little bit over $16 million of total accretion. As Jared says, we generally have what we call baseline accretion and then accelerated. Because we had almost no accelerated accretion in Q1, it was a very abnormally low quarter after averaging about $3 million of accelerated per quarter in 2024. That baseline probably shouldn't, since we didn't have any prepayments, should stay pretty consistent as we look into Q2. 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. 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.
Sorry. So in the...
Jared Wolf: First quarter, we had a little bit over 16 million of total accretion and as Jared says we
Speaker Change: We generally have what we call baseline accretion and then accelerated.
Jared Wolf: Because we had almost no accelerated creation in the first quarter, it was very abnormally low quarter after averaging about 3 million of accelerated per quarter in 2024.
Jared Wolf: Um, 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 [inaudible]
Jared Wolf: of loan prepayments. That should step down at approximately. I think we've told you before about a million or quarter or so, but the amount of celebrated 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. To clarify, the baseline is what's kind of embedded in your NIM guide?
Speaker Change: Okay, but the clarify. So the baseline is what's kind of embedded in your name. Got it.
Jared Wolff: Yep. Exactly.
Joseph Kauder: Yes.
Gary Tenner: Okay. Fair enough. If I can sneak one last question in. Jared, we 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 thoughts of 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?
Speaker Change: Yes. Okay. Fair enough. And if I could sneak one last question and just, Jared, as you kind of, you know, 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 CT1, let's say any any thought to any risk.
Speaker Change: Waiting relief on word warehouse or anything like that that you're kind of thinking about that gives you extra comfort on a big opportunist sticker.
Jared Wolff: I think we obviously want to keep our capital levels strong. 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. I think that's kind of a guide for us of where we are. Our buyback program that we announced, the timing couldn't have been better, obviously, given where stock prices went. 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. Then it was the maximum per day if it ever got below this number, which it did. We were able to buy opportunistically. I don't expect it to return to those levels.
Bye.
I think, you know, we obviously want to keep our capital levels.
Strong and...
Speaker Change: 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 a that's kind of a guide for us of you know where we are. I also want to be you know we were we.
our buyback program.
Speaker Change: that we announced the timing couldn't have been better, obviously, given where stock prices went.
Speaker Change: and so we had a pre-determined program through an investment bank that was a 10-by-5-1 program where we had given them ranges to buy within certain bands and then it was, you know, the maximum per day if it ever got below this number, which it did.
Speaker Change: 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.
Jared Wolff: Normally you would be exercising a little bit more caution and maybe patience with a buyback program. We'll use it over time. Certainly, we can use it in a way that 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. 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. That may change over time. We're just going to be opportunistic and look at it and do what makes sense under the given circumstances. Capital levels are something that we're keeping squarely in focus.
and so we'll use it, you know, over time.
Speaker Change: Certainly we can use it in a way that, you know, keeps-
Speaker Change: Minimize this 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.
Speaker Change: 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 and preferred but that may change over time.
Speaker Change: 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 focused.
Gary Tenner: Thank you.
Jared Wolff: Thank you.
Operator 2: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Thank you.
Thank you.
Speaker Change: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Hey, good morning, everyone.
Jared Wolff: Morning.
Matthew Clark: Jared, I know it's somewhat dependent on where your stock trades, but what's the probability of you tendering the preferred this year?
Good morning, everyone.
Speaker Change: Good morning. Good morning. Good morning. Jared, what's the – what are the –
Speaker Change: I know it's somewhat dependent on where your stock trades but what's the probability of detendering 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? The par value's $25, and it's trading at a discount currently. I have a hard time handicapping what that is. We're going to be smart, and if it makes sense, we would do it.
Speaker Change: Matthew, I can't put a number on that. It's so dependent upon other circumstances like
Matthew Clark: Okay. 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?
Speaker Change: 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. I would say that we applied more discipline starting in Q1. A little bit in the back half of Q4. 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. I like the loan production that we're doing. There are certain things I think that we can improve 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.
Sure. So, I would say that we applied more discipline.
and starting in the first quarter.
Speaker Change: Um a little bit in the back half of the fourth quarter . . .
But we do portfolio reviews.
Speaker Change: 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.
Speaker Change: There were certain things I think that we can improve on on the portfolio management side and just kind of
Speaker Change: You know being ahead of things and not waiting for them to get better but forcing them to get better and the discipline that I've always exercised at all the banks that I've been at in terms of pushing things to a solution as opposed to waiting for a solution is just my preferred way of dealing with with credit.
Jared Wolff: 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. That's just the way that we decided 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.
Speaker Change: I've 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.
Speaker 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.
Speaker Change: And that's just the way that we decided to do it. There was no outside influence that caused us to do this. It was our own.
Jared Wolff: 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 changes that we've made.
Speaker Change: 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.
Matthew Clark: Okay, great. Last one from me, just around ECR 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. I'm just trying to get, again, a sense for volume versus rate, assuming we get a couple.
Speaker Change: Okay, great. And then last one from me, just around DCR.
Speaker Change: Deposit balances. They've been bouncing around 3.7 billion to the last few quarters.
Speaker Change: Wanted to get a sense for your outlook there whether that we should assume those balances remain relatively flat for the rest of the year I'm just trying to get it You know again a sense for volume versus rate assuming we get a couple more rate cuts this year that would help
Jared Wolff: Yes
Matthew Clark: more rate cuts this year, that would help.
Jared Wolff: Yep. Yeah, as you know, we don't have any rate cuts in our forecasts. Our HOA business has been very stable, as you pointed out. If you look at the last couple of quarters, it's been about the same. It started off in the 3.8s, 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. As we mentioned, 1.2 billion of those deposits are in 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.
Speaker Change: Yeah, as you know, we don't have any rate cuts in our forecasts. Our H way business has been very stable as you pointed out. I mean, you look at Alaska, of course, it's been about the same.
Speaker Change: It started off in the race but we migrated out some more expensive customers.
Speaker Change: and our team is doing a phenomenal job in this space and we love the business.
Speaker Change: We put in that in the deck enough information that people to calculate kind of our average cost, which is about 3.3% of our in terms of deposit costs for our HWA business overall. And as we mentioned, 1.2 billion of those deposits are in our NIB.
Speaker Change: We will benefit, meaningfully, if rates come down because the UCR is going to come down. Similarly, if rates go up, the UCR will go up, but I think we've managed the program on the UCR side pretty well. Are we going to grow HOA balances? That's our intent. We would like to.
Jared Wolff: 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. When we do bring on new HOA clients, the average cost is much lower than our overall HOA average cost. It is a business that we would like to grow. It's very competitive. Our team does a great job. As you know, they're sticky balances, which is why they don't go down too much. Hopefully we can grow them over the course of the year.
Absent a few of our larger customers.
Speaker Change: We have some sizeable customers in H.O.A. that have the bulk of the cost.
Speaker Change: The overall cost of our deposits, excluding some of our larger customers is
Speaker Change: is much, much lower. So when we do bring on new H.O.A. clients, the average cost is much lower than our overall inchway average cost. So it is a business that we would like to grow. It's very competitive.
Speaker Change: and our team does a great job. 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.
Matthew Clark: Great. Thanks again.
Jared Wolff: Thank you, Matthew.
Operator 2: The next question comes from David Feaster with Raymond James. Please go ahead.
Great things against you. Thank you, Matthew.
Speaker Change: The next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster: Hi. Good morning, everybody.
Jared Wolff: Morning.
David Feaster: I just wanted to get a pulse of your client base. Obviously, there's a lot of volatility in the market. We got the trade wars, you got those, you got all sorts of kind of things. I'm curious, I guess first, how the pipeline's 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?
Morning.
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. We've got those. We've got all sorts of things. I'm curious, I guess first, how the pipeline's shaping up and then, you know,
David Feaster: Where, where you're seeing opportunities today, do you still expect to see, you know, growth primarily concentrated within, you know, lender and fund finance? Um, just kind of curious, you know, again, the pulse of your, 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 Q1, as we mentioned, was fairly broad-based, and we see the same thing in Q2. 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. 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, low-income housing tax credit, and general construction. Some of those loans converted to multifamily permanent loans, which is what you saw in the uptick in multifamily, was just a conversion of some of those.
So, thank you for the question.
Growth in the First Quarter [inaudible]
David Feaster: As we mentioned was fairly broad-based and we see the same thing in the second quarter.
David Feaster: We did point out kind of areas that were growing a little bit faster, warehouse, lender, and fund finance.
David Feaster: I don't know that we're going to expect the same volume of growth in those areas this.
David Feaster: But our commercial and community bank is growing really well as we bring over new relationships.
We saw a downturn in construction.
David Feaster: Some payoffs of some larger lie-tech loans along with housing tax credit and general construction.
David Feaster: and some of those loans converted to multi-family permanent loans, which is what you saw in the uptake and multi-family was just a conversion of some of those. But more paid off, then stuck with us, which is why
Jared Wolff: More paid off than stuck with us, which is why overall we had a downturn there and on the construction side, it was 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. We are taking the long view and we're banking companies that are solid and 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.
You know, overall construction.
David Feaster: Overall, we had a downturn there and on the construction side it was a pretty big drop.
David Feaster: We have some construction loans that are in the pipeline, although they take a wild
because the equity of the borrower goes in first.
Generally, we're seeing some good pickup in C&I.
David Feaster: But we're being careful, right because of the cloudiness that we see out there, but
David Feaster: We are taking a long view and we're banking companies that are that are solid and that you know local sourcing [inaudible]
David Feaster: Good manufacturing and distribution companies that provide products that are needed that are generally sourced locally We're being careful on things that need to come through the ports, you know the port of Long Beach in Los Angeles and you know
Jared Wolff: The Port of Long Beach in Los Angeles and San Pedro, one of the largest ports in the world, has tons of volume that comes through it, and obviously it's impacted by tariffs, so we look at that. Generally, David, I'm very optimistic, and our desire to reduce our forecast from high single digits to mid-single digits, not a huge move in my part, just a little bit of a nod to that we're seeing some clouds. 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: San Pedro, 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.
David Feaster: Generally, David, I'm very optimistic, and our desire to link to reduce our forecast from high single digits to mid single digits.
David Feaster: 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.
David Feaster: Okay. That's good color. Maybe on the other side, deposit performance, you guys have done a great job. 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? Just how you think about growth and even opportunity to further cut deposit costs, even exclusive of Fed cuts.
Speaker Change: Okay, that's good color and maybe on the other side, I mean deposit performance you guys have done a great job. I mean son nice growth, nice decline of deposit cost.
Speaker Change: Could you 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?
Speaker Change: So just just how you think about growth and and even opportunity to further cut deposit costs even exclusive of Fed cuts
Jared Wolff: It's very competitive. I was just on a call earlier with our team. It's very competitive, 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, they're like, hey, maybe we need to get more on our excess deposits. That's one of the things that happens when people start getting nervous, is they start focusing on the minutiae again. Which is, by the way, what we do on the credit side, right? We start focusing on and exercising that discipline. We really should have it at all times. Clients get a little bit more finicky about different things. I would say that the deposit landscape is very competitive.
Speaker Change: So it's very, very competitive. I was just on a call earlier with our team. It's, it's very competitive and we are starting to see pricing
Demands.
Speaker Change: Come back in uncertain times, right? People start managing their books a little bit more tightly, they start looking at their numbers a little bit more closely and they're like, hey, maybe we need to get more on our access deposits. And so that's that's one of the things that happens when people start getting nervous is they start focusing on the on the minutiae again.
Speaker Change: Which is, by the way, what we do on the credit side, right? We start focusing on an exercise in that discipline We really should have it at all times and maybe, you know, but clients get a little bit more finicky about. So I would say that the. Deposit landscape is very competitive where we're winning is number one. [inaudible]
Jared Wolff: Where we're winning is, number one, we will not do loans without deposits. People have to bring over their relationship to us for us to be willing to do a loan. That's where we're bringing in. 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, and historically, some of them have been more retail-oriented in terms of consumer-oriented than others. Our fundamental approach and outreach is really on the business side versus the consumer side.
Speaker Change: You know, we will not do loans without deposits and so people have to bring over their relationship to us for us to be willing to do a loan and that's where we're bringing in and as we bring in new clients, we're bringing in deposits
Speaker Change: Second is we are winning deposits generally from people that just want to bring over that might not have any borrowing needs today
Speaker Change: But are just unhappy. They're really should manage her left. You know, they were at first republic and now they're at chase and they can't get the same attention
Speaker Change: and we're doing that. We do not have much of a retail presence, we do have branches, we have 80 branches and 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 watch consumer campaigns.
Jared Wolff: 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. 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. 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. 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.
Speaker Change: 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.
Speaker Change: 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, you know, 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. We've touched on this a bit. 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? Is there anything that you're avoiding or de-emphasizing or maybe watching a bit more closely?
Got it.
Speaker Change: And then, you know, we've touched on this a bit, you know, just
Speaker Change: 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 tight in 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. 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. 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 sole or double-source products out of the country right now. 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.
Speaker Change: 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.
Speaker Change: 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 and industrial storage around the port right now
I don't want to go longer in deals that...
You know are really dependent upon
You know, one solar or double source products.
Speaker Change: You know out of the country right now. So those are the ways that I think you tweak your your underwriting and it's really more of a selection process of what credits you feel comfortable with
Jared Wolff: On construction loans, we have a big construction loan that we're looking at right now, 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 is 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. 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.
Speaker Change: You know we had on construction loans we have we have a big construction loan that that we're looking at right now And I said like I want it to be full recourse There got to be this trend where construction projects somehow got to be partial partial guarantees or burn off guarantees or you know we'll pay you through
Getting it vertical, but you know
Speaker Change: We're not going to guarantee the product after that and I just that's never been my 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
Speaker Change: Reliant of 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.
David Feaster: Okay. That's helpful. Thanks.
Jared Wolff: Thank you.
Okay, that's helpful. Thanks.
Operator 2: The next question comes from Anthony Elian with JPMorgan. Please go ahead.
Thank you.
The next question comes from Anthony, Ilan with JP Morgan. Please go ahead.
Anthony Elian: 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. Joseph, 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.
Anthony: 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. Thank you very much.
Joseph Kauder: Yeah, thanks for the question. There's always a couple of things, 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. Other expense items all throughout this expense space that if in a very difficult situation, you could take action to slow down.
Anthony: Yeah, thanks for the question. You know, there's always a couple of things that levers that, you know, management has in their back pocket in terms of incentive, incentive levels.
Anthony: 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 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? If things are slow and you don't see that you're going to achieve your goals, 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. 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 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.
Speaker Change: It's well said, Joe. I mean, Anthony, the first thing that comes to mind is just a cruel for for bonuses.
Anthony: If things are slow and you don't see that you're going to achieve your goals, then you can bring down your accrual.
Anthony: 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.
Speaker Change: as Joe mentioned CapEx and just kind of slowing down projects we have and we actually put in the deck this time which I hand 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
Jared Wolff: In our supplemental information, we have a list of our projects that are underway and what the breakout is. It's on page 26 of our deck, and how those projects break out in terms of what they're supporting. Those are two things that are pretty meaningful.
Speaker Change: Projects that are underway and you know what the breakout is so it's on page 26 of our deck you know and how those projects break out in terms of what they're supporting and so those are two things that are pretty meaningful.
Anthony Elian: Thank you. On loan growth, you reduced 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. 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.
Speaker Change: Thank you. And then on Long Road, 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 Long Road Outlook.
Speaker Change: with the level of optimism you still have for Southern California. Thank you. Yeah. Yeah, Tony, you're right. I mean, like we're being conservative here. I so far second quarter strong. The reason why we're tempering it.
Jared Wolff: Yeah. Tony, you're right. I mean, we're being conservative here. So far, Q2's strong. The reason why we're tempering it is because I really don't know what's going to happen the H2. Things could shut down, because the guidance we gave was mid to high single digits for the year is what we were going to average. So far, 6% in Q1. Let's assume we do 6% or 7% in Q2. That means that we're there, but the H2 has to hold that up to hold it up there. That's why we brought it down. We're still optimistic, but if it ends up being 3% or 4% in the H2 versus 7% in the H1, we're not going to hit the high end.
Speaker Change: 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, you know, we end up with because what we, the guidance we gave was, was mid high single digits for the year is what we were going to average.
Speaker Change: And so, so far 6% in the first quarter, let's assume we do 6% or 7% in the second quarter.
Jared Wolff: We're only going to hit the mid end. 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. We're trying to be prudent and not overly aggressive if we see storm clouds.
Speaker Change: to maintain that level, a lot of things have to go right, and we're trying to be prudent and not overly aggressive if we see storm clouds.
Anthony Elian: Thank you.
Jared Wolff: Thank you.
Thank you [inaudible]
Operator 2: The next question comes from Chris McGratty with KBW. Please go ahead.
Thank you.
The next question comes from Chris McGratty with KBW. Please go ahead.
Chris McGratty: Hey, Jared. Hey, Joe. Morning. I just want to zero in on NII. A lot of discussion on margins and balance sheet, just dollar NII. Right? In the quarter was down about $3 million. You talked about the accretion moderating. How do I think about based on the late quarter growth and the pipeline that's pulling through in Q2? Help us frame how much NII should be up in Q2.
Chris: I just want to zero in an NII, a lot of discussion on margins and bad balance, but just out of NII, right, the quarter was down about 3 million bucks to talk about the accretion.
Chris: Moderating. How do I think about based on the late quarter growth and the pipeline that's pointing through in Q2? Like, help us frame how much NII should be up in the second quarter?
Jared Wolff: Good question. Joe, you want to take that one?
All right. Good question, Joe. You want to you want to take that one?
Joseph Kauder: Yeah. You start off with there was a $5 million impact in net interest income just from day count. I think we have that called out in one of our slides in the investor deck. You can start with that. If you look at our loan growth as we continue to grow at the levels that Jared has said, we will continue to expand our net interest income. I think you could probably think about it as somewhat consistent with our loan growth. Mid-single digit increase in.
Joe: Yeah, so, you know, you start off with there was, you know, there was a $5 million impact in that interesting income just from day count, that we have that called out on one of our slides in the investor deck.
Joe: So you can start with that. And then, you know, if you look at our loan growth as we continue to grow At the levels that that Jared has said the You know, we will continue to expand our net interest income
Joe: and I think you could probably think about it as somewhat consistent with our loan process, you know, mid-single digit.
Chris McGratty: NII actually could be up 5% in Q2 just from the factors that you laid out? Okay.
Increasing that in.
Joe: So NIH could be up 5% in a second quarter, just from the factors that you light up.
Joseph Kauder: Yeah. I would say anywhere from-- yeah, it's reasonable.
Joe: Yeah, that would say, you know, anywhere, anywhere from, yeah, see you.
Jared Wolff: I think that's reasonable. Yep.
Chris McGratty: Okay. That's actually all I had. Thank you.
I think that's reasonable.
Jared Wolff: Thanks, Chris.
Okay. That's actually all ahead. Thank you.
Operator 2: The next question comes from Timur Braziler with Wells Fargo. Please go ahead.
Thanks, Chris.
The next question comes from Team War Resilert with Wells Fargo. Please go ahead.
Timur Braziler: Hi. Good morning.
Jared Wolff: Morning.
Hi, good morning.
Timur Braziler: 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. Is slower loan growth projection at all impacting your ability on the deposit side? 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?
Joe: Good morning. I want to start just on the long growth outlook. I'm wondering if you're
Joe: Growing loans more slowly or more cautiously and the focus here is to bring over the whole client reaction to our relationship.
Joe: The 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 the 330 NIM Guide that was unchanged.
Jared Wolff: Yeah. That's a good question. First of all, I think loan growth in Q2 as of now, it's very strong. 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 H2. At the end of Q2, 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 update. I didn't think it was that significant a change. 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.
Yeah, that's a good question so
Joe: 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.
Joe: 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 up the year and you know at the end of the second quarter we'll tell you where we updated again if necessary what we're trying to do is just tell people what we see today.
Joe: and if we see a change, then we're dead, but I didn't think it was that significant a change.
Joe: So, the larger question of how does deposit growth need to keep pace with long growth to affect the margin is exactly what we think about?
Jared Wolff: 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? You're going to need to fund the loans somehow. 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. 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. Timur, it's a balancing act, and you're right.
Obviously, for every dollar of NIB that we bring in.
It's much cheaper than having to fund loans.
with Broker Deposit
Joe: It's rare that a borrower will have enough deposits to cover their cost of their loan.
Right, and so they're
Joe: You know, you're going to need to fund the loans somehow.
Joe: and so we factored that into our pricing and everything in.
Joe: 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.
Joe: In most cases, we try to be their primary banking relationship and bring over the relationship But it is a circumstantial thing, you know, most borrowers have multiple banks.
Joe: Certainly real estate borrowers do and real estate borrowers tend to have the lowest levels cash available.
Joe: So, Timor, it's a Balancing Act and you're right, if we only required full relationships that would certainly slow long growth, I think we require substantial relationships and so far it's been fine.
Jared Wolff: If we only required full relationships, that would certainly slow loan growth. I think we require substantial relationships, and so far it's been fine.
Timur Braziler: Okay, I guess more specific on DDA pipelines. Obviously a key objective for you guys. Those balances have been flatter down now for 4 straight quarters. I guess as you're looking out, how do those pipelines look? Just maybe remind us if there's any kind of seasonal cadence to the DDA growth that you're expecting.
Okay, and then I guess more specific.
Joe: on DDA Pipelines. Obviously a key objective for you guys. Now, those balances have been flat or down now for four straight quarters. I guess as you're looking out, how do those pipelines look and then just maybe remind us of there's any kind of seasonal cadence to the DDA growth that you're expecting?
Jared Wolff: It's hard to say that there is a seasonal cadence. You could say that first quarter has tax payments and all that stuff, but as you point out, it's been flat to down. I would say that what we're seeing, and I think this bears out when we look at 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. Where we're able to stay flat or even grow is because we are bringing over new relationships. 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.
Yeah, it's hard to say that there is [inaudible]
Joe: A seasonal cadence. You could say that first quarter has tax payments and all that stuff, but as you point out it's been flat to down.
Speaker Change: I would say that what we're seeing and I think there's out when we look at it some of our peers.
Speaker Change: 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.
Speaker Change: Generally, balances are flowing out of the economy and I've been talking about that. So, where we were able to stay flat?
Speaker Change: 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.
Jared Wolff: 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. 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. 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. Once we get there, we'll go to 35. 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.
Speaker Change: Just what's been happening and you know we had all this money that was in the economy from
Speaker Change: What we all know for many reasons that inflated balances and now it's being pulled out.
Speaker Change: 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
Speaker Change: We'll go to 35 and I think that the discipline that our teams are practicing [inaudible]
Speaker Change: in the way that we track things and 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.
Jared Wolff: It's not a straight line, but the activity levels I see are very solid. 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. I thought last quarter was fine. I think we're exercising the right muscles, and I think the results will play out over time.
Speaker Change: 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
Speaker Change: What's gonna happen quarter over quarter other than I don't know that this quarter is gonna be worse than last quarter. It's just
Speaker Change: 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. Thanks for that. Just lastly from me, a couple-part question just on payoff activity. Really high in Q1.
Speaker Change: Okay, fair enough. Thanks for that. And then just lastly for me, a couple part question just on payoff activity. Really high in one cue. I guess a.
Jared Wolff: Yeah
Timur Braziler: What was the driver there? Was there any pull forward from Q2? 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? The third part of the question, you had mentioned that the payoff activity on the multifamily side of 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?
Speaker Change: What was the driver there? Was there any pull-forward from 2Q?
Speaker Change: 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 of permanent loans?
Speaker Change: And then the third part of the question, you had mentioned that the payoff activity on the multifamily side goes some of the higher migration into the classifies on the repricing risk. I'm just wondering if that payoff activity.
Speaker Change: Remains kind of at this existing case is their incremental risk to classified migration as that further continues.
Jared Wolff: Yeah. I don't think that they're connected. The payoffs came in a couple different areas. One was we had a lot of, as we mentioned, construction loan pay downs of larger loans. Second is we had a lot of cycling in our warehouse business that cycled through. 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 of really strong loan production, including supporting our clients with line utilization. Line utilization rates are moving up, as you can see. 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. We would expect some pay downs there.
Yeah, I don't think that they're connected, so
The payoffs came in a couple different areas.
Speaker Change: One was we had a lot of, as we mentioned, construction loan pay downs of larger loans.
Speaker Change: 2nd is we had a lot of cycling in our warehouse business [inaudible]
Speaker Change: that cycle through. I mean, I think it's pretty amazing when you look at the chart on page 13, the amount of production.
Speaker Change: that our team did, really proud of the work that they did, a 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 see their 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.
Jared Wolff: The payoff balances were kind of, as we mentioned, we took some of the construction balances and put them into multifamily. 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 brokered portfolio and just kind of there's a discipline of managing what happens when something is at a historical 3.5% rate and you know it's going to go to 6. 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?
some pay downs there. The payoff balances were kind of
Thank you.
Speaker Change: As we mentioned we took some of the construction balances and put them into multi-family but I think the multi-family that we're seeing these are a lot of
Speaker Change: You know, been on the portfolio for a while, maybe they were part of the broker portfolio and just kind of there's a discipline of managing what happens when something is that you know a historical 3.5% rate and you know it's going to go to 6.
and getting the financials from the borrower.
Speaker Change: Confirming the amount of equity in the property, making sure that you have a plan. You've talked about it with a barn and what the plan is. Are they going to put in more equity? Are they going to take us out? Are they going to?
Jared Wolff: That's the discipline that I want documented for those loans. We don't see losses because you look at multifamily in California, there's a huge shortage. There is a discipline that's necessary for us to do this the right way, and I think we're doing more of that. 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?
Speaker Change: You know, what is the plan? Are they going to fan you or Freddie? And that's the discipline that I want documented for those loans [inaudible]
Speaker Change: We don't see losses because you look at multi-family 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...
Speaker Change: I think we're 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 court.
Timur Braziler: It did. Yes. Thank you.
That answer your question to her?
Jared Wolff: Okay. Thank you.
Operator 2: The next question comes from Andrew Terrell with Stephens. Please go ahead.
Adidas, thank you.
Okay. Thank you.
The next question comes from Andrew Terrell with Stevens. Please go ahead.
Andrew Terrell: Hey, good morning.
Jared Wolff: Morning.
Andrew Terrell: If I could just stick on the multifamily point, and Jared, 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 2 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. Kind of where I'm going 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?
Thank you, good morning. Good morning.
Speaker Change: If I could just stick on the multi-family point and Jared 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 multi-family maturing or repricing.
Speaker Change: over the next two years or so. I'm just hoping you could maybe give us some color on, you know, how much of that was reviewed and and and resulted in kind of the classified move this quarter and kind of where I'm going is.
Speaker Change: You know, is it fair to think that we could see continued moves up and classified as these loans come from a charity or do you feel like you've gotten out of that?
Jared Wolff: No, I think we've gotten ahead of it. This was a specific group of stuff that we looked at. We have a project called Project Reset, 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 are repricing around 6%. They fully carry, they fully debt service, and 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. Overall, the portfolio is solid, and that's the experience with most borrowers.
Speaker Change: No, I think we've gotten ahead of it. And this was a specific group of stuff that we looked at.
Speaker Change: We have a project called Project Reset where we're taking, I mean, just to give you some color, we have a fairly large broker multi-family book.
Speaker Change: Loans that are, you know, three and a half or four percent.
that in the current environment are repricing.
Around 6%
Speaker Change: They fully carry, they fully debt service and they can in fact we are actively talking to those borrowers.
Speaker Change: and trying to get them to stay on our balance sheet at 6% versus going to Fannie or Freddie at 5.5%.
And.
Speaker Change: So, I, they are experienced. We've had success with, you know, $152 million worth of loans.
Speaker Change: and some of those borrowers they floated up into the eighths.
Speaker Change: and they were just waiting for certain deon rates before they fixed it.
So, overall the portfolio was solid.
Jared Wolff: There's a handful where they're currently in their interest-only periods, and that even if the interest-only periods are going to extend for another year, we've got to be monitoring it. They're fully current, they're paying now, and they've got ton of equity in the property. You got to look at this and say, "Okay, what is the plan?" I think it's more of a documentation question. 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. The other thing, 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 that's the experience with most borrowers.
Speaker Change: But, you know, there's a handful where they're there currently in their interest only periods and that even if the interest only periods are going to extend for another year there.
Speaker Change: 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 and I think it's more of a documentation question so.
Speaker Change: 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.
Speaker Change: I think with this uh the other thing Andrews, I think with this page shows [inaudible]
Andrew: and your question is a good one. Where are the impacts?
Jared Wolff: One question is, well, from a credit perspective, can they absorb that? The answer is yes. That's the experience that we have today. The second question is, what does this mean for our income? It's definitely a positive tailwind that will come in over the next 2 years.
Andrew: This page does show that we have a lot of loans that are going to reprise higher.
Andrew: and so one question is, well, from a credit perspective, can they absorb that? 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: Yeah. 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. Thank you for addressing.
Speaker Change: 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 pick up as those loans reprice. So thank you for addressing.
Jared Wolff: Yeah. Look, I hope we can. I think we were pretty aggressive this quarter, and we have a plan to kind of migrate stuff. It will take a couple of quarters. 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.
Speaker Change: Yeah, I, you know, look, I hope we can. I think we were pretty, 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.
Speaker Change: Hopefully, that will not get in the way of the spread pickup that we are expecting.
Andrew Terrell: Thank you.
Jared Wolff: Thank you.
Operator 2: This concludes our question and answer session and Banc of California's Q1 earnings conference call. Thank you for attending today's presentation. You may now disconnect.
Thank you.
Thank you [inaudible]
Speaker Change: 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.
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Gary Tenner, Jared Shaw, Jared Wolff, Unknown Attendee