BANC OF CALIFORNIA, INC. quarterly report, Q3 FY2021

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Banc of California, Inc. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021. The company is a California-focused bank holding company operating 33 full-service branches. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Financial performance

  • Q3 earnings: Net income was $23.2 million, versus $15.9 million in Q3 2020 and $19.1 million in Q2 2021. Net income available to common shareholders was $21.4 million; diluted EPS was $0.42.
  • Nine-month earnings: Net income was $56.6 million, compared with a net loss of $9.1 million in the prior-year period. Common-shareholder earnings were $46.5 million versus a loss of $19.3 million; diluted EPS was $0.91 versus a loss of $0.38.
  • Interest income and margin: Q3 net interest income was $63.0 million, up $7.1 million year over year and $3.1 million sequentially. Net interest margin was 3.28%, up from 3.09% a year earlier and 3.27% in Q2. For the first nine months, net interest income was $180.7 million versus $163.0 million and net interest margin was 3.25% versus 3.05%.
  • Expenses and credit costs: Q3 noninterest expense was $37.8 million, down $2.6 million year over year; income before taxes was $31.8 million. The quarter included a $1.0 million merger-related cost and an $841,000 branch sale-leaseback gain in noninterest income. Credit-loss provision was a $1.1 million reversal in Q3 and a $4.4 million reversal year to date, versus a $28.7 million provision in the first nine months of 2020. Management cites improved economic forecasts and credit trends as drivers. The Q3 GAAP efficiency ratio was 55.20%; the company-reported adjusted ratio was 59.63% (non-GAAP).
  • Cash flow: In the first nine months, operating activities provided $75.7 million, investing activities used $417.0 million, and financing activities provided $306.3 million. Cash and cash equivalents fell $35.0 million to $185.8 million.

Financial position, funding and capital

  • Total assets were $8.28 billion at September 30, up from $7.88 billion at year-end 2020. Loans were $6.23 billion, up 5.6%; securities available for sale were $1.30 billion.
  • Total deposits rose 7.5% to $6.54 billion. Noninterest-bearing deposits grew to $2.11 billion, or 32.2% of deposits, from $1.56 billion and 25.6% at year-end. The quarter-end total deposit cost was 0.08%; average Q3 deposit cost was 0.15%.
  • FHLB advances, net, were $405.7 million; other borrowings were $100.0 million; and long-term debt, net, was $256.7 million. The company reported compliance with long-term debt covenants. Available borrowing capacity included $894.9 million from the FHLB and $349.3 million from the Federal Reserve, plus $210.0 million in unsecured federal funds lines. These facilities and securities provide liquidity, but availability can be conditional or fluctuate.
  • Company Common Equity Tier 1 capital was 10.86%; the bank’s CET1 ratio was 15.22%. Total stockholders’ equity was $844.8 million, down from $897.2 million at year-end, partly reflecting redemption of all Series D preferred stock for $93.3 million during Q1.

Material changes and asset quality

  • Loan growth was concentrated in commercial and industrial, commercial real estate, and single-family residential lending. SBA loans declined as PPP forgiveness offset new originations. Warehouse lending was $1.52 billion, or 66% of C&I loans.
  • Nonperforming loans rose to $45.6 million, or 0.73% of loans, from $36.6 million at year-end. Nonaccrual loans were $45.6 million; there were no loans 90 days or more past due and still accruing. The allowance for credit losses was $78.8 million, or 1.26% of loans, covering 173% of nonperforming loans, down from 230% at year-end.
  • Loans rated special mention increased to $164.9 million from $75.4 million at year-end; substandard loans declined to $74.0 million from $90.3 million. Management attributed the special-mention increase mainly to downgrades in certain multifamily and C&I loans.
  • Borrower deferrals and forbearances declined to $54.2 million at September 30 from $86.6 million at June 30. PPP loans outstanding were $116.5 million, net of fees.
  • Unrealized losses in the available-for-sale securities portfolio totaled $5.8 million. Management reported that securities in unrealized loss positions were investment grade, it did not intend to sell them, and it did not expect to be required to sell before recovery.

Outlook, notable events and risks

  • Management said strong loan production offset runoff in legacy portfolio areas and that the loan pipeline was building, which it expected to support further loan and earning-asset growth through year-end if economic trends continued to improve. The filing gives no formal earnings or revenue guidance.
  • On October 18, 2021, after quarter-end, Banc of California completed its acquisition of Pacific Mercantile Bancorp. Consideration was approximately $225.4 million, primarily 11.86 million BANC shares valued at $222.2 million plus $3.2 million cash for awards. PMBC had $1.49 billion in assets, $982.4 million in gross loans and $1.29 billion in deposits at September 30. Pro forma combined assets were estimated at approximately $9.8 billion, before purchase accounting adjustments; acquired-asset and intangible valuations were still under evaluation.
  • Management identified continued COVID-19 uncertainty, inflation, variants, supply-chain disruption and the pace of recovery as relevant to credit assumptions and operations. Other disclosed exposures include interest-rate risk, borrower and real-estate credit risk, deposit funding, regulatory restrictions, litigation, cybersecurity and integration risks.
  • The bank described its interest-rate position as asset sensitive. Its model projected that an immediate +100 basis-point parallel rate shock would increase next-12-month net interest income by 2.8%; a -100 basis-point shock would reduce it by 3.0%. Actual results may differ because of modeling assumptions, repricing behavior and prepayments.
  • A consolidated shareholder derivative action had preliminary settlement approval; the proposed settlement provides governance changes and no monetary payment other than potential attorneys’ fees expected to be covered by insurance. Final approval was scheduled for December 17, 2021. The company said risk factors were unchanged from its 2020 Form 10-K.

Key facts for investors to verify

  • PMBC integration progress, realization of expected benefits, and final purchase-price allocation and acquired-asset valuations.
  • Whether rising nonperforming loans and special-mention balances lead to higher charge-offs, credit-loss provisions or reserve needs.
  • Loan concentration and risk, particularly warehouse lending, nontraditional mortgages, commercial real estate and the remaining PPP portfolio.
  • Deposit retention, funding costs and liquidity after acquisition, including reliance on contingent borrowing capacity and regulatory limits on bank dividends to the holding company.
  • Capital and earnings effects of acquisition consideration, preferred-stock redemption, interest-rate movements and any litigation or other contingencies.