Banc of California, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter ended June 30, 2023; filed August 7, 2023. The company is a California-focused bank holding company operating through Banc of California, N.A. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparison |
|---|---|---|
| Net interest income | $69.6 million | Down 4.7% from Q1 2023 and 11.1% from Q2 2022 |
| Net interest margin | 3.11% | Down 30 basis points from Q1 and 47 basis points year over year |
| Net income; diluted EPS | $17.9 million; $0.31 | Q1: $20.3 million; $0.34. Q2 2022: $26.7 million; $0.43 |
| Adjusted net income; adjusted diluted EPS (non-GAAP) | $18.4 million; $0.32 | Q1: $21.7 million; $0.37. Q2 2022: $27.8 million; $0.45 |
| Noninterest income; expense | $6.0 million; $49.1 million | Income down $1.8 million quarter over quarter; expense down $2.1 million |
| Total assets; total deposits | $9.37 billion; $6.87 billion | Since Dec. 31, 2022: assets up $173.2 million; deposits down $249.8 million, or 3.5% |
| Loans; allowance for loan losses | $7.16 billion; $80.9 million | Loans up 0.6% since year-end; allowance down from $86.0 million |
| Nonperforming loans; nonperforming assets | $67.3 million; $68.2 million | Nonperforming loans up 21.8% and assets up 23.4% since year-end |
| Cash and cash equivalents | $283.7 million | Up $54.8 million since year-end; down $727.2 million from Q1-end as excess liquidity was reduced |
| FHLB advances and FRB borrowings | $1.15 billion | Compared with $727.3 million of FHLB advances at year-end; Q2-end includes $340 million in FRB borrowings |
| Stockholders’ equity; tangible common equity ratio (non-GAAP) | $957.1 million; 9.04% | Equity was $959.6 million and tangible common equity ratio 9.23% at year-end |
For the six months ended June 30, operating cash flow was $50.4 million, investing cash outflow was $130.4 million, and financing cash inflow was $134.8 million. Cash increased $54.8 million to $283.7 million. These cash flows reflect, among other items, a $249.8 million net deposit decline and increased borrowings.
At June 30, total risk-based capital was 14.26% for the company and 15.64% for the bank; CET1 was 11.88% and 14.60%, respectively. Management reported $3.93 billion of primary and secondary available liquidity, equal to 2.2 times uninsured and uncollateralized deposits. The bank had $1.16 billion of additional FHLB capacity and $1.11 billion of FRB capacity reported as unused.
Material changes and credit indicators
- Higher asset yields did not offset sharply higher funding costs. Q2 interest expense was $46.5 million versus $33.9 million in Q1 and $10.1 million in Q2 2022. Management attributed margin pressure to deposit repricing, balance-sheet mix, and liquidity-related short-term borrowings.
- Noninterest-bearing deposits were $2.45 billion, or 35.6% of deposits, versus $2.81 billion, or 39.5%, at year-end. Brokered deposits rose to $1.08 billion from $614.9 million. Management said it added short-term brokered deposits to support liquidity during market volatility.
- Commercial and industrial loans grew 8.4% since year-end, including higher warehouse lending; single-family residential loans declined 5.2%. Office commercial real estate loans totaled $351.9 million, 4.9% of loans. Management reported weighted-average LTV and debt-service coverage of 53% and 1.6x for general office, and 55% and 2.3x for medical office.
- Q2 net charge-offs were $5.3 million, compared with net recoveries of $1.1 million in Q2 2022. Six-month net charge-offs were $9.2 million, versus net recoveries of $33.1 million in 2022, which included a $31.3 million recovery from settlement of a previously charged-off loan.
- Nonaccrual loans were 0.94% of total loans, versus 0.78% at year-end. The allowance for credit losses, including unfunded commitments, was $84.9 million, or 1.19% of loans, versus $91.3 million, or 1.28%. Allowance coverage of nonperforming loans declined to 126% from 165%.
- Available-for-sale securities had $54.1 million of unrealized losses; held-to-maturity securities had $61.4 million. Management attributed most declines to interest rates and market conditions, said it did not intend to sell loss-position securities, and considered it more likely than not they would not need to be sold before recovery. A $1.0 million credit-loss provision was recorded for three downgraded corporate debt securities.
Outlook, merger, and risks
The filing does not provide specific earnings or margin guidance. Management described economic and banking-industry uncertainty, inflation, continuing rate increases, competition for deposits, and possible deposit outflows as factors that may affect funding costs, loan demand, credit losses, securities values, liquidity, and profitability. Management said it considered the liquidity-enhancing actions taken during the first half prudent, despite their negative effect on Q2 and year-to-date profitability and margin.
On July 25, 2023, after quarter-end, Banc of California and PacWest Bancorp announced a proposed all-stock merger. PacWest shareholders would receive 0.6569 Banc of California shares per PacWest share. The transaction is conditioned on approvals and other closing requirements, including a substantially concurrent $400 million equity investment by Warburg Pincus and Centerbridge investors. The company also disclosed $3.5 billion of interest-rate swap options and a contingent forward sale agreement covering $1.8 billion of single-family residential loans in connection with the planned balance-sheet repositioning. Management expects the combined company to repay about $13 billion of wholesale borrowings and high-cost deposits using proceeds from asset sales. These are plans, not completed actions.
Merger risks include failure or delay in obtaining regulatory or shareholder approvals, failure to complete the equity investment or asset repositioning, potentially unfavorable sale prices, integration costs and disruption, employee or customer attrition, and a possible $39.5 million termination fee in certain circumstances. The filing also identifies interest-rate, liquidity, credit, deposit-concentration, securities-valuation, regulatory, litigation, and tax-attribute risks. Management said pending legal matters were not expected to have a material adverse effect; no material changes to previously reported risk factors were identified beyond merger-related risks.
Important facts for investors to verify
- Whether the PacWest merger and $400 million equity investment receive required approvals and close on the disclosed terms and timetable.
- Actual costs, asset-sale prices, capital effects, and funding changes from the merger-related balance-sheet repositioning and hedges.
- Deposit trends, including noninterest-bearing and brokered balances, deposit pricing, and liquidity available under stressed conditions.
- Subsequent credit performance, especially nonaccrual loans, C&I and SBA charge-offs, office real estate exposure, and allowance coverage.
- Whether rising funding costs continue to outpace asset-yield increases and further pressure net interest margin and earnings.
- Regulatory capital and securities losses, including the distinction between reported GAAP equity and management’s non-GAAP adjusted capital measures.