Banc of California, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2023. Banc of California is a California-based bank holding company operating through 28 branches in Southern California; it also acquired payment-processing company Deepstack in 2022. Figures below are in U.S. dollars; financial statement amounts are generally converted from thousands to millions.
Key financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net interest income | $73.1 million | Down 9% year over year and 9% sequentially |
| Net interest margin | 3.41% | Down 10 bps year over year and 28 bps sequentially |
| Total revenue (net interest income plus noninterest income) | $80.9 million | $82.4 million in Q1 2022; $78.8 million in Q4 2022 |
| Net income / diluted EPS | $20.3 million / $0.34 | $48.5 million / $0.69 in Q1 2022; $21.5 million / $0.36 in Q4 2022 |
| Adjusted net income / adjusted diluted EPS (non-GAAP) | $21.7 million / $0.37 | $48.5 million / $0.75 in Q1 2022; $26.8 million / $0.45 in Q4 2022 |
| Total assets | $10.04 billion | $9.20 billion at December 31, 2022 |
| Total loans / deposits | $7.05 billion / $6.95 billion | Loans down 0.9%; deposits down 2.4% from year-end |
| Cash and cash equivalents | $1.01 billion | Up from $228.9 million at year-end |
| FHLB advances and FRB borrowings | $1.73 billion | Up from $727.3 million at year-end |
| Shareholders’ equity | $958.9 million | $959.6 million at year-end; tangible common equity ratio was 8.44% (non-GAAP) |
Net cash provided by operating activities was $11.1 million; investing activities used $54.4 million and financing activities provided $825.4 million. The financing inflow primarily reflected increased FHLB and Federal Reserve borrowing, alongside a net decline in deposits.
Material changes and management commentary
- Higher market rates lifted asset yields, but funding costs rose faster. Average funding cost increased to 1.68% from 1.17% in Q4 2022; average interest-bearing deposit cost rose to 1.98% from 1.34%.
- Management said deposits were largely stable following banking-sector disruptions, while reporting a 2% net deposit outflow for the quarter. Noninterest-bearing deposits were 36% of period-end deposits, down from 39% at year-end. Brokered deposits increased to $1.01 billion from $614.9 million.
- Management reported $4.03 billion of primary and secondary liquidity, including $1.01 billion cash, unpledged available-for-sale securities and unused borrowing capacity. This equaled 2.2 times uninsured and uncollateralized deposits of $1.87 billion. The bank drew $600 million overnight from Federal Reserve facilities and had no Bank Term Funding Program borrowings at quarter-end.
- Regulatory capital ratios remained above stated well-capitalized thresholds: company total risk-based capital 14.22%, CET1 11.79% and Tier 1 leverage 9.65%; bank ratios were higher. These reported ratios do not remove the effect of securities valuation losses.
- Credit quality indicators were mixed: classified assets and delinquent loans declined from the prior quarter, but nonperforming loans edged up to $56.5 million. Net charge-offs were $3.9 million, or 0.22% of average loans annualized. The allowance for credit losses was $89.4 million, 1.27% of loans and 158% of nonperforming loans.
- Unrealized losses were $46.8 million on available-for-sale securities and $55.6 million on held-to-maturity securities. Management attributed declines to market rates and credit-market volatility, said all securities in unrealized-loss positions were investment grade, and stated it did not intend or expect to be required to sell them before recovery.
- The 2022 Q1 comparison includes a $31.3 million pre-tax recovery on a previously charged-off loan; Q1 2023 instead recorded a $2.0 million credit-loss provision. This largely explains the sharp year-over-year decline in reported net income.
Outlook, risks and unusual items
No formal earnings or balance-sheet guidance is provided. Management estimated a 2023 effective tax rate of 27%–28% and described the quarter-end interest-rate risk position as neutral. In its disclosed rate scenarios, an immediate 200-basis-point increase was projected to raise next-12-month net interest income by 0.5%; an immediate 200-basis-point decrease was projected to reduce it by 3.2%. These are model estimates, not forecasts, and management cautioned actual results may differ.
Principal disclosed risks include deposit competition and rapid deposit outflows, interest-rate changes and funding costs, recession and inflation, loan and commercial-real-estate credit risk, securities valuation, liquidity access, regulatory actions, and acquisition-related risks. The company said there were no material changes to its previously disclosed risk factors. Management considered goodwill impairment indicators amid banking-sector volatility and identified no impairment. Pending litigation was not expected by management to have a material effect.
The company repurchased 410,946 shares under its $35 million authorization during Q1, with $29.8 million remaining at quarter-end. After quarter-end, it repurchased an additional 652,672 shares for $7.7 million; cumulative repurchases since the program announcement were $12.8 million as of May 4, 2023.
Important facts for investors to verify
- Deposit stability, uninsured and uncollateralized balances, brokered-deposit use, and the cost and availability of liquidity as market conditions evolve.
- Whether deposit pricing and wholesale funding costs continue to pressure net interest margin and earnings.
- Loan delinquencies, criticized/classified assets, nonperforming loans, charge-offs, and reserve adequacy—especially in commercial real estate and residential mortgage exposures.
- Realized effects of securities losses, including the distinction between available-for-sale and held-to-maturity portfolios and the capacity to avoid forced sales.
- Capital, regulatory constraints on bank-to-holding-company dividends, and the pace of share repurchases and dividends.
- How reported results compare after accounting for the unusual Q1 2022 loan recovery and other non-GAAP adjustments.