Banc of California, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Banc of California operates as a California-focused community bank through 31 full-service branches. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions.
Financial results and condition
| Metric | Q1 2020 | Comparison |
|---|---|---|
| Net interest income | $51.9 | $67.8 in Q1 2019; down 23.5% |
| Net interest margin | 2.97% | 2.81% in Q1 2019; 3.04% in Q4 2019 |
| Provision for credit losses | $15.8 | $2.1 in Q1 2019; $3.0 reversal in Q4 2019 |
| Noninterest income | $2.1 | $6.3 in Q1 2019 |
| Noninterest expense | $46.9 | $62.2 in Q1 2019 |
| Net loss | $(6.6) | Net income of $7.0 in Q1 2019 |
| Loss available to common stockholders | $(9.7); $(0.19) per diluted share | Net income available to common stockholders of $2.5; $0.05 per diluted share in Q1 2019 |
| Operating cash flow | $7.0 | $18.5 in Q1 2019 |
The earnings decline reflected lower interest income as the loan and securities portfolios contracted, lower market rates reduced yields, and credit-loss provisioning increased. Lower operating expenses partly offset these pressures. Q1 2020 included a $1.6 million fair-value loss on loans held for sale and a $1.9 million loss on alternative-energy partnership investments.
At March 31, 2020, total assets were $7.66 billion, down $165.8 million from year-end 2019. Gross loans were $5.67 billion, down 4.8% from year-end; deposits were $5.56 billion, up 2.5%. Cash and cash equivalents totaled $436.0 million. Cash increased $62.5 million during the quarter; investing activities provided $157.3 million and financing activities used $101.8 million.
Total stockholders’ equity was $835.0 million, down from $907.2 million at December 31, 2019, including a $42.2 million after-tax other comprehensive loss, primarily reflecting securities valuation changes. FHLB advances were $978.0 million and long-term debt had a carrying value of $173.5 million; the $175 million senior notes mature in 2025. The company reported compliance with their covenants.
Deposit composition improved toward lower-cost funding: noninterest-bearing deposits rose $167.6 million to $1.26 billion, or 22.6% of deposits. Average total deposit cost fell to 1.11%; period-end deposit cost was 0.89%. FHLB advances declined $217 million from year-end. Reported parent-company common equity Tier 1 capital was 11.58%; the Bank’s was 16.96%. The Bank paid no dividend to the holding company during the quarter, and near-term Bank dividends require OCC approval.
Material changes and credit quality
- On January 1, 2020, the company adopted CECL. Adoption increased the allowance for credit losses by $6.4 million and reduced retained earnings, after tax, by $4.5 million. The quarter’s $15.8 million provision included management’s estimate of the pandemic’s expected effect on lifetime credit losses.
- Total allowance for credit losses, including unfunded commitments, reached $82.1 million, or 1.45% of loans, compared with $61.7 million, or 1.04%, at year-end. Net charge-offs were $1.7 million.
- Nonperforming loans increased 30.3% from year-end to $56.5 million, or 1.00% of loans. Nonaccrual loans were $56.5 million; none were 90 days past due and still accruing. Management attributed the increase primarily to new nonaccrual placements, partly offset by cures and payoffs.
- Available-for-sale securities were $969.4 million. Their net unrealized loss increased to $76.8 million from $16.9 million at year-end, largely due to CLO valuation declines amid market volatility. CLOs totaled $623.6 million and were reported as AAA- and AA-rated; management recorded no securities credit impairment and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- The company continued its strategic shift away from certain non-core assets and single-family mortgage origination, while emphasizing relationship banking. Loans fell across major categories, including C&I and single-family mortgages. Average total assets were substantially lower year over year, partly reflecting prior-year loan and securities sales.
Outlook, management commentary, risks and unusual items
- Management gave no specific earnings or margin guidance. It expects credit allowances to remain sensitive to economic volatility, forecasts and CECL assumptions; actual losses may be better or worse than current estimates.
- COVID-19 was identified as a major source of uncertainty, with potential effects on borrower repayment, loan demand, credit losses, liquidity, capital, operations and securities values. Management anticipated continued pressure on new loan production, possible increased credit-line draws, reduced lending revenue and higher credit losses. More than 80% of employees were working remotely; 25 of 31 branches remained in operation with reduced hours or temporary consolidation.
- As of May 8, 2020, after quarter-end, the company reported more than $235 million of PPP lending intended to help clients preserve over 22,000 jobs. It expected fees just under 3% of amounts ultimately funded, with most expected to be earned in Q2 and Q3. The filing reported no PPP loans outstanding at March 31.
- The company offered qualifying borrowers 90-day payment deferrals and waived certain fees. Relief measures may reduce revenue; unsuccessful mitigation or a prolonged recession could increase defaults and losses. CARES Act and regulatory TDR relief may affect how modified loans are classified and reported.
- Common-stock repurchases totaled $12.0 million in the quarter under a $45 million authorization, but were suspended for the immediate future to preserve capital and liquidity. The common dividend was $0.06 per share for the quarter.
- The securities class-action settlement received final court approval on March 16, 2020. Insurers are to pay $19.75 million, with no company cash contribution expected; the company recorded a matching insurance receivable. Separate shareholder derivative litigation remained pending, with damages unspecified.
- Unusual items included an $850,000 charge to settle a legacy loan-sale claim and the $1.6 million loans-held-for-sale fair-value loss. The filing also describes a $100 million stadium naming-rights commitment payable over 15 years through 2032; $22.1 million had been paid by quarter-end.
- Management described liquidity sources as adequate at quarter-end, citing $436.0 million of cash, $929.5 million of unpledged available-for-sale securities, $921.4 million of additional FHLB borrowing capacity, $15.9 million of Federal Reserve Discount Window capacity and $185.0 million of unused unsecured federal-funds lines. These sources do not eliminate pandemic-related liquidity risk.
Most important facts for investors to verify
- How subsequent economic conditions, borrower deferrals and PPP activity affected loan performance, provisions and CECL reserves after March 31.
- Whether nonperforming loans and criticized loan categories rose further, particularly in C&I, real estate and multifamily exposures.
- The credit performance and recoverability of the $623.6 million CLO portfolio and the effect of securities marks on equity and capital.
- Whether deposit growth and lower funding costs were sustained, and whether liquidity and borrowing capacity remained available under stress.
- How the Bank’s capital position, OCC dividend restrictions and suspended repurchases affect holding-company liquidity and capital allocation.
- Developments in pending derivative litigation, other contingencies, and the expected timing and collection of the insurer-funded settlement.
- PPP amounts ultimately funded, forgiveness outcomes, fee recognition and any resulting operational or credit exposure.