Banc of California, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are primarily with Q3 2022 and December 31, 2022. The company is a California-focused bank holding company.
Financial performance and position
- Profit: Q3 net income was $42.6 million, or $0.74 per diluted share, versus $24.2 million, or $0.40, a year earlier. Adjusted net income, a non-GAAP measure, was $17.1 million, or $0.30 per diluted share, versus $26.7 million, or $0.44. For the first nine months, net income was $80.7 million versus $99.4 million; adjusted net income was $57.1 million versus $103.0 million.
- Revenue and margins: Q3 net interest income was $69.2 million, down 12.8% year over year. Net interest margin was 3.19%, up 8 basis points from Q2 but down 39 basis points year over year. Higher asset yields were outweighed year over year by a sharp rise in funding costs. Total noninterest income of $50.8 million included a $46.2 million pre-tax merger-related derivative mark-to-market gain.
- Costs and credit: Q3 noninterest expense was $56.2 million, including $9.3 million of merger-related acquisition, integration and transaction costs. Provision for credit losses was $5.0 million. Net charge-offs were $11.5 million, primarily in commercial and industrial and SBA loans.
- Loans and asset quality: Total loans were $6.96 billion, down 2.2% from year-end 2022. Nonperforming loans were $60.6 million, or 0.87% of loans, versus $55.3 million, or 0.78%, at year-end. The allowance for credit losses was $78.4 million, equal to 1.13% of loans; coverage of nonperforming loans was 129%, down from 165%.
- Deposits and liquidity: Deposits were $6.64 billion, down 6.7% from year-end. Noninterest-bearing deposits were $2.37 billion, or 35.6% of deposits, versus 39.5% at year-end. Management reported $3.67 billion of primary and secondary available liquidity, 2.1 times uninsured and uncollateralized deposits of $1.76 billion. Brokered deposits rose to $1.03 billion from $614.9 million at year-end.
- Debt and capital: At September 30, FHLB advances and FRB borrowings totaled $1.01 billion; other borrowings were $185.8 million; long-term debt, net, was $274.3 million. The company reported a 12.53% CET1 ratio and 14.83% total risk-based capital ratio. Book value per share was $17.44 and tangible book value per share was $15.34; both are reported by the company as of quarter-end.
- Cash flow: For the first nine months, operating cash flow was $94.0 million, investing cash flow was $43.7 million and financing cash flow was negative $55.6 million. Cash and cash equivalents increased $82.1 million to $311.0 million.
Material changes and unusual items
- Q3 earnings were materially affected by the $46.2 million derivative gain related to the proposed PacWest merger: $34.9 million from the contingent forward sale agreement on the single-family residential portfolio and $11.3 million from interest-rate swaptions. The gain was partly offset by $9.3 million of merger costs.
- Net interest margin improved sequentially as higher yields on loans and securities outpaced the quarterly increase in funding costs. Year over year, however, net interest income and margin declined as deposit and borrowing costs rose.
- Deposits declined from year-end while certificates of deposit and brokered funding increased. The company said it had used FHLB and Federal Reserve facilities to bolster liquidity earlier in 2023.
- Net charge-offs increased substantially from Q3 2022. Nine-month 2022 results included a $31.3 million recovery on a previously charged-off loan, making year-over-year credit expense and earnings comparisons less comparable.
- Available-for-sale securities had $51.9 million of pre-tax unrealized losses; available-for-sale and held-to-maturity securities combined had $129.9 million of pre-tax unrealized losses. Management attributed most declines to rates and market conditions and said it did not expect to have to sell the securities before recovery.
Merger, outlook and risks
- The proposed all-stock merger with PacWest remained pending at quarter-end. Subsequent to quarter-end, the Federal Reserve and California regulator approved the transaction. Stockholder votes were scheduled for November 22, 2023, and closing was expected on or about November 30, subject to stockholder approval, a concurrent $400 million equity raise and other closing conditions.
- The equity raise is expected to involve Warburg Pincus- and Centerbridge-affiliated investors. Management described plans, contingent on closing, to sell assets and use proceeds and excess cash to repay approximately $13 billion of combined-company wholesale borrowings and high-cost deposits. The company and PacWest planned approximately $7 billion of aggregate asset sales. The company’s contemplated sales include a $1.8 billion SFR loan portfolio, a $1.6 billion multifamily portfolio and $1.2 billion of securities; completion and proceeds are not assured.
- Management said it was not aware of material changes to the merger Investor Presentation’s projected 2024 EPS range or combined-company CET1 levels. It cautioned that higher longer-term rates and PacWest’s lower-than-forecast Q3 income could reduce combined-company opening tangible book value; PacWest’s lower noninterest-bearing deposit share could also affect projected deposit mix. The filing does not provide a standalone earnings guidance range for Banc of California.
- Key risks include interest-rate and funding-cost changes, deposit outflows and competition for deposits, credit deterioration—particularly in real estate and borrower exposures—market value changes in securities, merger execution and integration, and the contingent nature of planned asset sales. Interest-rate sensitivity estimates show modeled 12-month net interest income increasing 22.1% under an immediate +200-basis-point shock and decreasing 3.9% under a -200-basis-point shock; management cautioned that actual results may differ materially.
- The company reported no material change in risk factors from its prior filings. It said pending legal matters were not expected to have a material adverse effect. Disclosure controls were concluded effective as of September 30, 2023.
Important facts for investors to verify
- Whether both companies’ stockholders approved the merger, the $400 million capital raise closed, and the merger completed on the expected terms and timing.
- Actual pricing, timing and completion of planned loan and securities sales, and the resulting reduction in wholesale borrowings and high-cost deposits.
- Whether deposit trends, funding costs and net interest margin stabilize, including the level and cost of brokered deposits and other borrowings.
- Subsequent credit performance, especially C&I charge-offs, nonperforming SFR loans, criticized assets and allowance coverage.
- Changes in unrealized securities losses and tangible book value as interest rates and credit spreads move.