Business Context and Reporting Period
Banc of California, Inc. (BANC) filed its Quarterly Report on Form 10-Q for the period ended September 30, 2024. The Company is a Maryland corporation serving as the holding company for Banc of California, a California state-chartered bank. The reporting period reflects the post-merger operations following the November 30, 2023, reverse merger with PacWest Bancorp. The Company operates 80 full-service branches primarily in California, with additional locations in Colorado and North Carolina, focusing on relationship-based business banking for small, middle-market, and venture-backed businesses.
Key Financial Metrics
| Metric | Q3 2024 (Three Months) | Q3 2023 (Three Months) | YTD 2024 (Nine Months) | YTD 2023 (Nine Months) |
|---|---|---|---|---|
| Total Assets | $33.43 billion | $38.53 billion (Dec 31, 2023) | $33.43 billion | $38.53 billion (Dec 31, 2023) |
| Net Interest Income | $232.2 million | $130.7 million | $690.8 million | $596.1 million |
| Net Earnings (Loss) | $8.8 million | ($23.3 million) | $70.0 million | ($1.42 billion) |
| Net Earnings Available to Common | ($1.2 million) | ($33.3 million) | $40.1 million | ($1.45 billion) |
| Diluted EPS | ($0.01) | ($0.42) | $0.24 | ($18.61) |
| Net Interest Margin | 2.93% | 2.07% | 2.79% | 2.07% |
| Provision for Credit Losses | $9.0 million | $0 | $30.0 million | $5.0 million |
| Noninterest Expense | $196.2 million | $201.1 million | $610.4 million | $2.09 billion |
| Total Deposits | $26.83 billion | $30.40 billion (Dec 31, 2023) | $26.83 billion | $30.40 billion (Dec 31, 2023) |
| Allowance for Credit Losses | $281.9 million | $251.9 million (Sep 30, 2023) | $281.9 million | $251.9 million (Sep 30, 2023) |
| CET1 Capital Ratio | 10.46% | N/A | 10.46% | N/A |
Material Changes vs. Prior Period
- Profitability Improvement: The Company returned to profitability in Q3 2024 with net earnings of $8.8 million, compared to a net loss of $23.3 million in Q3 2023. Year-to-date 2024 net earnings of $70.0 million represent a significant turnaround from the $1.42 billion loss in the same period of 2023, which was heavily impacted by a $1.38 billion goodwill impairment charge.
- Balance Sheet Repositioning: Total assets decreased by $5.1 billion from year-end 2023 to $33.4 billion. This reduction was driven by a strategic repositioning strategy involving the sale of $1.95 billion in Civic loans and $742 million in securities, alongside the paydown of $1.85 billion in brokered deposits and the remaining Bank Term Funding Program balance.
- Net Interest Income Growth: Net interest income increased by $101.5 million in Q3 2024 compared to Q3 2023, and by $94.7 million on a year-to-date basis. This was primarily due to a lower cost of funds resulting from the reduction of higher-cost borrowings and brokered deposits.
- Noninterest Income Volatility: Q3 2024 noninterest income was a loss of $15.5 million, driven by a $59.9 million pre-tax loss on the sale of securities. This contrasts with a noninterest income loss of $47.9 million in Q3 2023, which was driven by a $157.8 million loss on the sale of loans.
- Expense Reduction: Noninterest expense for the nine months ended September 30, 2024, was $610.4 million, a decrease of $1.48 billion compared to the prior year period, largely excluding the one-time goodwill impairment charge recorded in 2023.
Guidance, Outlook, and Risks
- Balance Sheet Strategy: Management indicated that the balance sheet repositioning contemplated as a result of the PacWest merger has been largely completed. The strategy focused on replacing higher-cost brokered deposits and borrowings with lower-cost core deposits and optimizing the securities portfolio.
- Interest Rate Risk: As of September 30, 2024, the Company's interest rate risk profile is "liability sensitive," though less so than at year-end 2023. This shift is attributed to the paydown of Bank Term Funding Program balances. The Company monitors Net Interest Income (NII) and Economic Value of Equity (EVE) under various rate shock scenarios.
- Credit Quality Concerns: Nonaccrual loans increased to $168.3 million (0.72% of loans) from $62.5 million at year-end 2023. Classified loans increased to $533.6 million. Management noted increased qualitative reserves for loans secured by office properties due to market conditions and hybrid work trends.
- Liquidity: Available liquidity totaled $16.2 billion, exceeding uninsured and uncollateralized deposits by a coverage ratio of 241%. The Company maintains significant unused borrowing capacity with the FHLB ($4.98 billion) and FRBSF ($6.74 billion).
- Dividends: The Board declared a quarterly cash dividend of $0.10 per common share and $0.4845 per Depositary Share of Series F Preferred Stock.
Investor Verification Checklist
- Security Sale Losses: Verify the impact of the $59.9 million loss on the sale of securities in Q3 2024 and the rationale for selling assets at a loss to reposition the balance sheet.
- Office Loan Exposure: Review the specific concentration and reserve adequacy for commercial real estate loans secured by office properties, which represent 7.5% of the total loan portfolio.
- Deposit Composition: Analyze the shift in deposit mix, specifically the reduction in brokered time deposits from $3.5 billion to $2.0 billion, and the stability of the remaining core deposit base.
- Nonaccrual Migration: Monitor the trend of nonaccrual loans, which more than doubled from year-end 2023, and the specific drivers (e.g., legacy Civic loans, commercial loans).
- Capital Ratios: Confirm that the Company remains "well capitalized" under Basel III standards, with a CET1 ratio of 10.46% and Total Capital ratio of 17.00%.