Banc of California, Inc. — 2023 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2023. Banc of California is a relationship-focused commercial bank serving businesses and other clients, primarily in California. On November 30, 2023, it completed its all-stock merger with PacWest Bancorp and raised $400 million in equity. The merger was accounted for as a reverse merger: reported results before November 30 reflect PacWest standalone results, and 2023 includes combined-company results only for December. Accordingly, the annual comparison is not a full-year comparison of the combined company.
Financial and operating metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets, year-end | $38.5 billion | $41.2 billion |
| Loans and leases held for investment, net of deferred fees, year-end | $25.5 billion | $28.6 billion |
| Deposits, year-end | $30.4 billion | $33.9 billion |
| Net interest income | $747.1 million | $1.291 billion |
| Net interest margin, tax-equivalent | 1.98% | 3.49% |
| Net income (loss) | $(1.899) billion | $423.6 million |
| Diluted earnings (loss) per share | $(22.71) | $5.14 |
| Net cash provided by operating activities | $135.8 million | $702.0 million |
| Stockholders’ equity, year-end | $3.39 billion | $3.95 billion |
- Revenue and expenses: Interest income was $1.971 billion and interest expense was $1.224 billion. Noninterest income was a loss of $448.3 million, principally reflecting $442.4 million of securities-sale losses and $161.3 million of loan-sale losses. Noninterest expense totaled $2.458 billion, including a $1.377 billion goodwill impairment charge and $142.6 million of acquisition, integration, and reorganization costs.
- Cash and liquidity: Year-end cash and cash equivalents were $5.38 billion. Primary liquidity was $5.71 billion, or 18.8% of deposits; available secondary borrowing capacity was $11.97 billion. The Bank had borrowed $2.62 billion under the Bank Term Funding Program at year-end. Investing cash flow was $12.61 billion, mainly reflecting loan and securities sales; financing cash flow was a $9.61 billion outflow.
- Funding and debt: Year-end borrowings were $2.91 billion and subordinated debt was $936.6 million. Deposits included $7.77 billion noninterest-bearing and $22.63 billion interest-bearing balances. The filing says approximately 23% of deposits were uninsured and uncollateralized; FDIC-insured deposits were approximately 76%.
- Credit and capital: Provision for credit losses was $52.0 million; net charge-offs were $58.2 million, up from $4.8 million in 2022. The allowance for credit losses was $311.3 million, or 1.22% of loans. Nonaccrual loans were $62.5 million; classified loans increased to $228.4 million from $118.3 million. At year-end, consolidated CET1, Tier 1, total capital, and leverage ratios were 10.14%, 12.44%, 16.43%, and 9.00%, respectively. The Bank was classified as well capitalized.
Material changes versus the prior comparable period
- Net interest income declined $543.6 million and tax-equivalent NIM fell 151 basis points. Higher market rates, sharply higher deposit and borrowing costs, deposit mix changes, and liquidity actions contributed. Average total deposit cost rose to 2.61% from 0.59%; average noninterest-bearing deposits fell to 25% of average deposits from 40%.
- Total deposits declined $3.5 billion, including a $3.4 billion decrease in noninterest-bearing deposits. Management attributed deposit pressure to industry volatility following regional bank failures.
- Loans declined $3.1 billion year over year despite loans acquired in the merger. The company sold approximately $5.2 billion of loans in the second quarter and executed further balance-sheet repositioning; $6.1 billion of assets were sold and $8.6 billion of high-cost liabilities were paid down from the merger announcement through year-end.
- The $1.377 billion goodwill impairment followed the decline in the company’s stock price amid 2023 banking-sector volatility. It was a noncash charge. A further $442.4 million securities-sale loss arose mainly from strategic fourth-quarter sales to reduce high-cost funding and reposition the balance sheet.
- Available-for-sale securities fell to $2.35 billion from $4.84 billion. Remaining unrealized losses on those securities were $352.5 million, which management attributed primarily to interest rates and market conditions, rather than credit losses; management stated it did not intend, and was not likely required, to sell them before recovery.
Outlook, management commentary, risks and unusual items
Management emphasizes merger integration, balance-sheet repositioning, stable deposit gathering, liquidity, and improved funding mix. It describes anticipated operating cost savings and other merger synergies but provides no quantified earnings, margin, expense, or growth guidance in the supplied filing text. Management said the company had sufficient parent-company cash and expected Bank dividends to meet holding-company cash needs over the next 12 months; Bank dividends to the parent require regulatory approval for the foreseeable future because of the Bank’s accumulated deficit.
- Key risks include deposit competition and outflows, reliance on uninsured deposits and wholesale funding, elevated funding costs, and sensitivity of earnings and securities values to interest rates.
- Credit risks include commercial real estate, particularly office exposure; residential property values; venture-backed borrowers; and borrower refinancing capacity. Real estate loans were 75% of year-end loans, and 64% of real estate loans were secured by California properties.
- Integration, operational, vendor, cybersecurity, regulatory, and payment-processing risks could affect results. Management reported no known cybersecurity threat that had materially affected the company.
- Material unusual items include merger-related costs, asset-sale losses, the goodwill impairment, and a $32.7 million accrued FDIC special assessment.
- Management and KPMG reported effective internal control over financial reporting; KPMG issued an unqualified opinion on the financial statements and controls. The audit identified critical audit matters involving the credit-loss allowance, goodwill valuation, accounting acquirer determination, and acquired-loan and core-deposit-intangible valuations.
Important facts for investors to verify
- How merger integration, planned cost savings, and balance-sheet repositioning progress, including any further asset sales or associated losses.
- Whether deposits stabilize and funding costs and NIM improve; assess uninsured deposit levels, brokered funding, and the $2.62 billion BTFP borrowing that matured in March 2024.
- Credit trends in commercial real estate and other higher-risk portfolios, including classified loans, charge-offs, loan maturities, and allowance adequacy.
- The final merger purchase-price allocation: acquired asset and liability fair values were preliminary and subject to adjustment for up to one year after the merger date.
- Regulatory capital and liquidity, restrictions on Bank-to-parent dividends, and the sustainability of common and preferred dividends. The filing reports a February 2024 declaration of a $0.10-per-share common dividend and a $0.4845-per-depositary-share preferred dividend.