Banc of California, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet figures are as of March 31, 2024. The company is a relationship-focused business bank operating across California and in Colorado and North Carolina. The November 2023 PacWest merger makes comparisons with Q1 2023 less directly comparable: pre-merger periods reflect PacWest on a standalone basis, while Q1 2024 reflects the combined company.
Financial results and position
- Earnings and revenue: Net interest income was $229.1 million; noninterest income was $33.8 million; total revenue was $262.9 million. Net earnings were $30.9 million, or $0.12 per diluted share; earnings available to common and equivalent stockholders were $20.9 million after preferred dividends. Adjusted diluted EPS, a non-GAAP measure, was $0.15.
- Margins: Tax-equivalent net interest margin was 2.66%, versus 1.69% in Q4 2023 and 2.89% in Q1 2023. Average total deposit cost was 2.66%, down from 2.94% in Q4 2023 but up from 1.98% a year earlier.
- Credit costs: Provision for credit losses was $10.0 million. Net charge-offs were $1.2 million, or 0.02% annualized of average loans. Total allowance for credit losses was $320.1 million, 1.26% of loans and leases held for investment.
- Cash flow: Operating activities used $88.4 million; investing activities provided $107.4 million; financing activities used $2.31 billion. Cash, cash equivalents and restricted cash fell $2.29 billion to $3.09 billion, primarily reflecting deposit outflows and borrowing repayments.
- Balance sheet and funding: Total assets were $36.1 billion, loans and leases held for investment were $25.5 billion before allowance, and deposits were $28.9 billion. Deposits fell $1.51 billion and borrowings fell $771.8 million from year-end. Borrowings were $2.14 billion, including $1.545 billion under the Bank Term Funding Program and $300 million in FHLB advances.
- Liquidity and capital: Management reported $16.8 billion of available liquidity, compared with $7.1 billion of uninsured and uncollateralized deposits (238% coverage). Consolidated CET1, Tier 1 and total capital ratios were 10.09%, 12.38% and 16.40%, respectively. Tangible common equity to tangible assets was 7.11% (non-GAAP).
Changes versus comparable periods
- Versus Q4 2023, net earnings available to common stockholders improved by $513.8 million, mainly because Q4 included $442.4 million of securities-sale losses, $111.8 million of merger-related costs and a $32.7 million FDIC special assessment. Q1 2024 net interest income rose $78.1 million, supported by lower borrowing balances and costs and lower deposit costs.
- Versus Q1 2023, the company moved from a $1.205 billion common-stockholder loss to earnings of $20.9 million. The comparison is dominated by a $1.377 billion goodwill impairment in Q1 2023. Net interest income declined $50.2 million year over year, and noninterest income declined $2.6 million.
- Credit indicators weakened from year-end: nonaccrual loans and leases rose to $145.8 million from $62.5 million; classified loans increased to $366.7 million from $228.4 million; and nonperforming assets rose to $158.3 million from $81.7 million.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or margin guidance. Management identifies customer-deposit growth, replacement of brokered funding, disciplined lending and integration of the PacWest merger as priorities.
- Management cited higher reserves related to office-property lending and increases in nonaccrual and classified loans. Real estate exposure is concentrated: 75% of loans and leases held for investment were real estate, and 63% of real estate loans were in California. Management also highlights uncertainty in office-property values and ongoing remote-work impacts.
- Other stated risks include interest-rate changes, deposit withdrawals and funding costs, recession and borrower deterioration, securities valuation, regulatory actions, merger integration, litigation, cyber incidents and possible goodwill impairment. The bank reported $16.8 billion of available liquidity, but $1.5 billion of BTFP borrowing remained outstanding and deposits declined during the quarter.
- Material correction: The company amended its April 23 earnings release after finding a loan-servicing data-boarding issue affecting acquired loans with terminal balloon payments. Q1 net loan discount accretion was revised from $32.5 million to $22.4 million; net earnings from $38.1 million to $30.9 million; diluted EPS from $0.17 to $0.12; and adjusted diluted EPS from $0.19 to $0.15. The 10-Q supersedes the release.
- Management said disclosure controls were effective and reported no material Q1 changes in internal control over financial reporting. It stated that ordinary-course legal matters are not expected to have a material adverse effect.
Key facts for investors to verify
- Confirm the corrected loan-discount accretion calculation and any subsequent remediation of the loan-servicing data issue.
- Track whether rising nonaccrual, classified and office-related exposures lead to further credit provisions or charge-offs.
- Monitor deposit trends, brokered funding, borrowing repayments and the composition and accessibility of reported liquidity.
- Assess whether net interest margin improvement is sustainable without elevated acquired-loan discount accretion, and account for the merger-related comparability limitations.