Business Context and Reporting Period
This Form 8-K Current Report was filed by Banc of California, Inc. on September 10, 2019. The filing discloses a material event involving a specific loan loss provision and charge-off related to a line of credit originated in November 2017 to a borrower involved in financing California liquor licenses. The borrower's guarantor, ANI Development, LLC, and its principal, Gina Champion-Cain, were the subject of an SEC complaint and asset freeze on August 29, 2019, alleging a $300 million fraud scheme.
Key Financial Metrics and Impact
- Loan Loss Provision and Charge-off: $35 million specific provision and related charge-off.
- Swap Cancellation Charge: $1.1 million expected charge associated with the loan.
- Total Pre-Tax Impact: $36.1 million ($35 million + $1.1 million).
- After-Tax Impact (Q3 2019): Estimated at $27.9 million based on a 22% effective tax rate.
- Impact on Earnings Per Share: $0.54 per diluted common share.
- Portfolio Context: The $35 million charge-off represents approximately 0.52% of the $6.7 billion gross loan portfolio as of June 30, 2019.
Material Changes and Regulatory Capital Impact
The filing details the pro forma impact of the $35 million charge-off on regulatory capital ratios as of June 30, 2019. While the filing does not provide comparative period financial statements, the variance between actual and pro forma ratios is as follows:
| Capital Ratio (Banc of California, Inc.) | Actual (June 30, 2019) | Pro Forma | Variance |
|---|---|---|---|
| Total risk-based capital ratio | 15.00% | 14.65% | (0.35)% |
| Tier 1 risk-based capital ratio | 14.03% | 13.68% | (0.35)% |
| Common equity tier 1 capital ratio | 10.50% | 10.13% | (0.37)% |
| Tier 1 leverage ratio | 9.62% | 9.33% | (0.29)% |
Similar pro forma reductions were noted for Banc of California, N.A., with the Total risk-based capital ratio decreasing from 16.70% to 16.36%.
Outlook, Risks, and Contingencies
The Bank is continuing to investigate the matter and has contacted the SEC. Management plans to pursue available sources of collection and other means to mitigate the loss; however, the filing explicitly states that no assurance can be given regarding the success of these efforts. The loss stems from alleged misrepresentation and forgery of escrow account agreements and statements by the guarantor, as well as the misappropriation of funds intended for escrow.
Key Facts for Investor Verification
- Verify the status of the SEC investigation and asset freeze against ANI Development, LLC and Gina Champion-Cain.
- Confirm the Bank's progress in pursuing collection efforts and potential recovery of the $35 million charge-off.
- Review the Q3 2019 earnings release to confirm the final after-tax impact of $27.9 million and the $0.54 per share reduction.
- Assess whether the pro forma capital ratios remain well above regulatory minimums following the charge-off.
- Investigate if there are other exposures to the borrower, guarantor, or the broader liquor license financing scheme.