Banc of California, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The Company is a California-focused relationship business bank, operating 28 branches. Comparisons below are primarily with 2021.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets at year-end | $9.20 billion | $9.39 billion |
| Net interest income | $314.4 million | $253.8 million |
| Net interest margin | 3.59% | 3.26% |
| Net income | $120.9 million | $62.3 million |
| Net income available to common stockholders | $115.8 million | $50.6 million |
| Diluted EPS | $1.89 | $0.95 |
| Return on average assets | 1.29% | 0.75% |
| Operating cash flow | $136.1 million | $105.7 million |
Net interest income increased 23.9%, reflecting higher average earning assets and yields, partly offset by higher funding costs. Pre-tax, pre-provision income was $137.3 million versus $89.5 million; the Company’s non-GAAP adjusted figure was $149.9 million versus $103.1 million. The 2022 earnings comparison includes a $31.3 million pre-tax recovery from settlement of a loan charged off in 2019. The year also included a $7.7 million loss on securities sales. Noninterest income fell to $17.4 million from $19.4 million, while noninterest expense rose to $194.4 million from $183.7 million. The effective tax rate was 28.4%, up from 24.5%.
Year-end loans held for investment were $7.12 billion, down 1.9%; deposits were $7.12 billion, down $318.5 million. Cash and cash equivalents were $228.9 million. The allowance for credit losses was $91.3 million, or 1.28% of loans, compared with $98.2 million, or 1.35%, a year earlier. Nonperforming assets were $55.3 million, or 0.60% of assets, versus $52.6 million, or 0.56%.
Year-end FHLB advances were $727.3 million and long-term debt, net, was $274.9 million. The Company reported $2.66 billion of available secured and unsecured borrowing capacity. The Bank’s CET1, Tier 1 risk-based, total risk-based and leverage ratios were 14.94%, 14.94%, 16.02% and 12.25%, respectively; it was categorized as well-capitalized. Total stockholders’ equity was $959.6 million, down 9.9%; tangible common equity to tangible assets was 9.23% versus 9.36%.
Material changes and notable items
- Average deposits grew year over year, but year-end deposits declined. Noninterest-bearing deposits were 39.5% of year-end deposits (39% of average deposits for the year). Brokered deposits rose to $614.9 million from $10.0 million; uninsured deposits were $4.50 billion.
- Loan balances shifted: commercial real estate and multifamily loans together increased to $2.95 billion, or 41.5% of loans, from 36.8%. SFR mortgages rose to $1.92 billion, or 27.0% of loans, partly due to $814.3 million of purchases. C&I loans declined, substantially reflecting warehouse lending runoff.
- The Company acquired Deepstack, a payments technology business, on September 15, 2022 for $24.0 million in total consideration and recorded $18.2 million of goodwill. By January 2023, integration was complete and processing had begun for select small clients.
- The Company completed a $75 million common-stock repurchase, buying 4.21 million shares at a weighted-average $17.80, and redeemed all Series E preferred stock for $98.7 million. Book value per common share rose to $16.26 from $15.48; tangible common equity per share rose to $14.19 from $13.88.
- Available-for-sale securities fell to $868.3 million from $1.32 billion. The portfolio had $41.3 million of net unrealized losses at year-end; held-to-maturity securities had $66.2 million of unrealized losses. Management attributed declines primarily to interest rates and said it did not expect to need to sell securities before recovery. The Company transferred securities to held-to-maturity during 2022 to reduce equity sensitivity to rate changes.
- Cash flow from investing activities was $149.5 million and financing activities used $284.9 million; cash and cash equivalents increased $0.8 million for the year.
Outlook, risks and contingencies
Management provided no quantified earnings or balance-sheet guidance. It said it would continue to develop core commercial relationships, manage deposit costs, control expenses and focus on credit quality. The Company planned to scale Deepstack payment processing after the second quarter of 2023, subject to execution and business development.
Management cited inflation, higher interest rates, potential recession, competition for deposits and possible deposit outflows as key operating pressures. Credit risks include California real estate concentrations, adjustable-rate and interest-only residential loans, commercial real estate and multifamily exposure, and borrower cash-flow risk. Interest-rate sensitivity modeling indicated that an immediate +200 basis-point shock would increase next-12-month net interest income by 2.1%; a -200-basis-point shock would reduce it by 5.0%. The Company described its position as mildly asset-sensitive and cautioned that actual results may differ from model estimates.
Other risks include execution and integration of Deepstack, payment-processing fraud and chargebacks, cybersecurity and vendor dependence, regulatory and compliance requirements, and the transition from LIBOR. At year-end, 15.9% of loans and 40.7% of debt securities were LIBOR-indexed. Legal proceedings were described as arising in the ordinary course; management did not expect pending matters to be material based on available information. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management concluded disclosure controls and internal control over financial reporting were effective.
Subsequent events: In February 2023, the Board declared a quarterly common dividend of $0.10 per share and authorized a new share repurchase program of up to $35 million, expiring February 2024. The filing notes that near-term Bank dividends to the holding company require OCC approval.
Important facts for investors to verify
- How much of 2022 earnings growth is sustainable after excluding the $31.3 million loan recovery and considering the securities-sale loss?
- Can deposits stabilize or grow, and what are the cost, retention and concentration implications of higher brokered and uninsured deposits?
- How are credit quality, delinquencies, nonperforming loans and loss reserves developing across California real estate, SFR and commercial lending?
- What are the fair-value, liquidity and capital implications of securities losses, including the held-to-maturity portfolio, if interest rates or funding needs change?
- Is Deepstack scaling as planned, and what are its operating costs, revenues, payment-network compliance and chargeback exposure?
- What regulatory approvals or constraints could affect Bank dividends, the announced common dividend, or the new repurchase authorization?