Banc of California, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The interim financial statements are unaudited. Banc of California is a California-focused bank holding company operating through 29 full-service branches.
Financial performance
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Net interest income | $79.4 million | Up $1.1 million from Q2 2022 and $16.4 million from Q3 2021 |
| Net interest margin | 3.58% | Unchanged from Q2; up 30 basis points year over year |
| Net income | $24.2 million | Down from $26.7 million in Q2; up from $23.2 million in Q3 2021 |
| Diluted EPS | $0.40 | Compared with $0.43 in Q2 and $0.42 in Q3 2021 |
| Noninterest income / expense | $5.7 million / $51.0 million | Q3 expense included $2.1 million of Deepstack acquisition costs |
For the first nine months, net income was $99.4 million and diluted EPS was $1.53, compared with $56.6 million and $0.91 in 2021. Results included a $31.3 million recovery on a loan charged off in 2019, which drove most of the $31.5 million reversal of credit-loss provision. Management’s non-GAAP adjusted diluted EPS was $0.44 for Q3 and $1.65 for the nine months.
Balance sheet, funding and capital
- Total assets were $9.37 billion at September 30, versus $9.39 billion at December 31, 2021. Loans were $7.29 billion, up 0.5%; growth in multifamily and single-family residential loans was largely offset by a decline in commercial and industrial, including warehouse, and SBA/PPP balances.
- Deposits were $7.28 billion, down 2.1% from year-end. Noninterest-bearing deposits were $2.94 billion, or 40.4% of deposits, while brokered deposits increased to $332.4 million from $10.0 million.
- FHLB advances rose to $727.0 million from $476.1 million. Long-term debt was $274.7 million; the company also had $10.0 million drawn on its $50 million holding-company credit line, which matured December 19, 2022. The filing reports compliance with debt covenants.
- Cash and cash equivalents were $256.1 million. The Bank reported unused secured borrowing capacity of $1.21 billion at the FHLB and $733.5 million through Federal Reserve programs, plus other available funding sources. Management considered liquidity adequate.
- Regulatory capital ratios at the Bank were 14.56% CET1, 14.56% Tier 1 risk-based capital and 15.70% total risk-based capital. Consolidated stockholders’ equity was $952.0 million, down from $1.07 billion at year-end, including a shift to $47.6 million of accumulated other comprehensive loss.
Cash flow and material period changes
For the nine months, operating activities provided $110.5 million, investing activities provided $10.8 million and financing activities used $93.4 million. Cash increased $27.9 million to $256.1 million. Financing outflows included the $98.7 million preferred-stock redemption, $56.2 million of share repurchases and common and preferred dividends; these were partly offset by increased FHLB borrowing.
Interest income rose with higher asset yields and loan balances, while deposit and other funding costs accelerated as market rates increased. Q3 average total funding cost rose to 0.79% from 0.49% in Q2, leaving the margin flat quarter over quarter. Versus year-end, securities available-for-sale declined to $847.6 million, while $328.8 million of securities were classified held-to-maturity. Available-for-sale securities had $50.8 million of net unrealized losses and held-to-maturity securities had a $65.4 million fair-value shortfall; management attributed the losses primarily to market-rate and spread changes, not credit deterioration.
Acquisition, outlook and risks
- The company acquired Deepstack, a payments technology business, on September 15 for $24 million in total consideration, including cash, shares and deferred cash consideration. The acquisition added $18.2 million of provisional goodwill and $3.8 million of intangibles; Q3 included $2.1 million of related costs.
- Management expected some net interest margin expansion as short-term rates rose, based on an asset-sensitive interest-rate profile. Its model estimated that an immediate +200-basis-point shock would increase next-12-month net interest income 3.6%; a -200-basis-point shock would reduce it 7.1%. Actual results may differ from modeled outcomes.
- Management estimated a 28% effective tax rate for full-year 2022. The filing provides no specific earnings or revenue guidance.
- Key risks include deposit competition and funding costs, rate sensitivity and securities valuation, recession and real-estate conditions, credit losses, acquisition integration, litigation, regulatory constraints and operational/cybersecurity risks. The company noted that further available-for-sale securities losses could reduce equity.
- Credit indicators were mixed: nonperforming loans declined to $42.7 million, or 0.59% of loans, while TDR balances increased to $30.8 million from $16.7 million at year-end. The allowance for credit losses was $98.8 million, or 1.36% of loans, and 232% of nonperforming loans. Non-traditional mortgages increased to $870.0 million, or 11.9% of loans; weighted-average LTV on the first-lien NTM portfolio was about 59%.
- Common-stock repurchases totaled $56.2 million through September. The company reported $18.9 million remaining under its $75 million authorization at quarter-end; subsequent repurchases brought cumulative purchases to $73.4 million through November 4.
Management said pending legal matters were not expected to have a material adverse effect, and reported no material changes to previously disclosed risk factors. The Bank’s near-term dividend to the holding company requires OCC approval, according to the filing. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of nine-month earnings and the credit-provision reversal reflects the one-time $31.3 million recovery, and how recurring earnings compare after that item.
- Whether deposit balances, mix and pricing remain stable as brokered deposits and wholesale funding rise and interest expense reprices.
- How market rates affect net interest margin, securities marks, tangible equity and liquidity; confirm actual results against management’s sensitivity assumptions.
- Credit trends in commercial/warehouse, multifamily and residential lending, including TDRs, nonaccruals, NTM loans and reserve adequacy.
- Deepstack integration, provisional purchase accounting, acquisition-related costs and the remaining share-repurchase authorization; also verify the holding company credit line’s post-maturity status.