Banc of California, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The company is a California-focused bank holding company operating 31 full-service Southern California branches. This unaudited filing covers the quarter and six months ended June 30, 2020. Management describes its strategy as transitioning toward a relationship-focused community bank, lowering deposit costs, reshaping the balance sheet and controlling expenses.
Financial performance and position
Amounts below are in millions except per-share data, ratios and where noted.
| Metric | Q2 2020 | Comparable / context |
|---|---|---|
| Net interest income | $55.3 | $64.8 in Q2 2019; up from $51.9 in Q1 2020 |
| Net interest margin | 3.09% | 2.86% in Q2 2019; 2.97% in Q1 2020 |
| Provision for credit losses | $11.8 | $15.8 in Q1 2020; reversal of $1.9 in Q2 2019 |
| Noninterest income | $5.5 | $(2.3) in Q2 2019; included $2.0 securities-sale gain |
| Noninterest expense | $72.8 | $43.5 in Q2 2019; includes $26.8 LAFC termination charge |
| Net income (loss) | $(18.4) | $16.6 in Q2 2019; loss available to common shareholders was $21.9, or $(0.44) per diluted share |
- For the first half, net loss was $25.0 million and net loss available to common shareholders was $31.6 million, or $(0.63) per diluted share. Net interest income was $107.2 million; the credit-loss provision was $27.6 million.
- At June 30, total assets were $7.77 billion; deposits were $6.04 billion, up $610 million from year-end 2019. Noninterest-bearing deposits were $1.39 billion, or 23% of deposits.
- Gross loans were $5.63 billion, down $324 million from year-end. PPP loans accounted for $240.7 million of the SBA portfolio. Securities available-for-sale totaled $1.18 billion.
- Cash and cash equivalents were $420.6 million. First-half operating cash flow was negative $2.5 million; investing activities provided $49.9 million and financing activities used $0.1 million.
- FHLB advances were $617.2 million, down from $1.20 billion at year-end; long-term debt was $173.5 million net carrying value, consisting of $175 million of 5.25% senior notes due 2025. The company reported compliance with note covenants.
- The allowance for credit losses was $94.6 million, or 1.68% of loans, compared with $61.7 million and 1.04% at year-end. Nonperforming loans were $72.7 million, 1.29% of loans, versus $43.4 million and 0.73% at year-end.
- Company regulatory capital ratios included 11.68% common equity Tier 1 and 16.35% total risk-based capital. The bank’s corresponding ratios were 16.92% and 18.17%.
Material changes versus prior periods
- Compared with Q2 2019, net interest income fell 14.6%, primarily as average interest-earning assets declined following prior-period loan and securities sales; the higher margin partly offset this reduction. Lower funding costs helped lift Q2 margin 12 basis points sequentially.
- Credit costs rose sharply year over year, reflecting CECL adoption, COVID-related economic forecasts and specific reserves. Nonperforming loans increased 67.7% from December 31, 2019; management attributed much of the quarterly increase to loans newly placed on nonaccrual.
- Deposits increased while FHLB advances declined. Loans contracted overall, with declines in C&I and single-family residential balances partly offset by PPP lending.
- The company adopted CECL on January 1, 2020. Adoption increased the allowance by $6.4 million and reduced retained earnings after tax by $4.5 million.
Outlook, commentary, risks and unusual items
- LAFC agreement: The company agreed to end its stadium naming-rights arrangement and restructure its partnership. It recorded a one-time $26.8 million pretax charge, including a prepaid advertising asset write-off, and estimated approximately $89.1 million in pretax savings over the remaining 12.5 years, or about $7.1 million annually. No continuing payments are expected after termination, subject to specified circumstances that could require up to $2.8 million during the remainder of 2020.
- COVID-19 and borrower relief: At June 30, 298 loans totaling $604.2 million were reported as receiving deferment or forbearance under the filing’s stated exclusions. Management was assessing extension requests as initial 90-day relief periods expired. It noted economic uncertainty and the possibility of further credit deterioration.
- PPP: The company reported $262 million in PPP approvals and $240.7 million funded at quarter-end. It collected $7.5 million in Q2 fees, to be recognized over an estimated nine-month loan life; management expected forgiveness processing to be completed early in 2021.
- Liquidity and capital actions: Available unused borrowing capacity was reported as $1.06 billion from the FHLB, $370.4 million from the Federal Reserve and $185 million in unsecured federal funds lines. Common-stock repurchases were suspended for the immediate future. Dividends are subject to regulatory consultation/non-objection, and near-term bank dividends require OCC approval.
- Debt refinancing and costs: The company repaid a $100 million FHLB advance and incurred a $2.5 million extinguishment fee. It refinanced $111 million of advances, lowering their effective rate from 2.81% to 2.02% while extending weighted-average life.
- Portfolio and estimate risks: CLOs were $668.4 million, with $35.3 million of unrealized losses; management reported all CLO holdings were rated AAA or AA and said it did not intend, and was not likely to be required, to sell securities in unrealized-loss positions before recovery. Expected credit-loss estimates depend on uncertain economic forecasts and model assumptions.
- Management gave no earnings or revenue guidance. It estimated a 2020 effective tax rate of approximately 23%. It identified COVID-19 impacts, credit quality, interest-rate changes, funding costs, securities valuations, regulatory constraints, litigation, and execution of its strategy as risks. It reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deferrals and forbearances roll off successfully, and whether extensions lead to additional delinquencies, nonaccrual loans or reserve needs.
- Trends in nonperforming loans and the adequacy of the $94.6 million allowance, including the specific reserve associated with a shared national credit and the sensitivity of CECL estimates to economic forecasts.
- Realized credit performance and valuation risk in the CLO portfolio, including the $35.3 million unrealized loss position.
- Whether deposit growth and lower funding costs persist, and how liquidity changes as PPP loans are forgiven and pandemic-related customer balances are used.
- Realization of the projected LAFC savings, final termination obligations, and the treatment of the one-time charge when assessing ongoing earnings.
- Regulatory approvals and capacity for bank dividends, parent-company dividends and any resumption of share repurchases.
- Status and potential exposure of the disclosed shareholder derivative litigation; the filing states the company intends to contest the actions and does not consider pending matters likely to be material.