Banc of California, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a California-focused bank holding company operating through Banc of California, N.A.; it reported 30 full-service branches, with 28 operating during the pandemic-related update.
Financial performance and condition
| Metric | Q2 2021 | Comparison |
|---|---|---|
| Net interest income | $59.8 million | Up $4.5 million from Q2 2020; up $1.9 million from Q1 2021 |
| Net interest margin | 3.27% | Up 18 basis points year over year and 8 basis points sequentially |
| Net income | $19.1 million | Compared with a net loss of $18.4 million in Q2 2020 and income of $14.4 million in Q1 2021 |
| Net income available to common stockholders | $17.3 million; diluted EPS $0.34 | Compared with a loss available to common stockholders of $21.9 million and diluted loss per share of $0.44 in Q2 2020 |
| Net interest income plus noninterest income | $64.0 million | Noninterest income was $4.2 million |
| Noninterest expense | $40.6 million | Down $32.2 million year over year, largely reflecting prior-year unusual charges |
| Credit-loss provision | $2.2 million reversal | Compared with a $11.8 million provision in Q2 2020 |
For the six months ended June 30, net interest income was $117.8 million, net income was $33.4 million, and net income available to common stockholders was $25.1 million, versus losses in the prior-year period. Six-month diluted EPS was $0.49 versus a loss of $0.63.
- Balance sheet: Total assets were $8.03 billion at June 30, up from $7.88 billion at December 31, 2020. Loans were $5.99 billion, up 1.5%; available-for-sale securities were $1.35 billion, up 9.9%.
- Deposits and liquidity: Deposits totaled $6.21 billion, up 2.0%. Noninterest-bearing deposits were $1.81 billion, or 29.1% of deposits, versus 25.6% at year-end. Cash and cash equivalents were $163.3 million. Management reported $753.7 million of available FHLB capacity, $269.5 million of Federal Reserve borrowing capacity, $210 million in unsecured federal funds lines, and $1.32 billion of unpledged available-for-sale securities.
- Cash flow: For the first six months, operating activities provided $64.1 million; investing activities used $206.2 million; financing activities provided $84.7 million. Cash and cash equivalents declined $57.5 million to $163.3 million.
- Debt and capital: At June 30, FHLB advances were $490.4 million, other borrowings were $125 million, and long-term debt was $256.6 million net of issuance costs. The company reported compliance with debt covenants. Company CET1 was 11.14%; the bank’s CET1 ratio was 16.09%.
- Credit quality: Nonperforming loans were $51.3 million, or 0.86% of total loans, versus $36.6 million at year-end. The allowance for credit losses was $79.7 million, or 1.33% of loans, and equaled 155% of nonperforming loans. Six-month net charge-offs were $1.3 million.
Material changes and notable items
- Compared with Q2 2020, net interest income improved as funding costs fell and average interest-earning assets increased, although asset yields also declined. Management attributed sequential margin improvement to lower funding costs and redeployment of excess liquidity.
- Q2 2020 expenses included a $26.8 million charge for terminating LAFC naming-rights agreements and a $2.5 million debt-extinguishment fee. These items make the year-over-year expense decline unusually large. Q2 2021 also included $0.7 million of merger-related costs.
- The company redeemed all outstanding Series D preferred stock in Q1 2021 for $93.3 million; the redemption reduced income available to common stockholders by $3.3 million. It also exercised all outstanding stock appreciation rights, issuing 305,772 common shares and recognizing a $2.1 million tax benefit.
- Management cited a $904.1 million Q2 loan-production total, including $847.0 million of fundings. Total loans grew modestly, while purchase activity and PPP forgiveness affected portfolio balances.
- Special-mention loans increased to $156.9 million from $75.4 million at year-end, and substandard loans increased to $99.8 million from $90.3 million. Nonperforming loans rose, including SFR loans and repurchased guaranteed SBA loans pending resolution.
Outlook, risks and contingencies
- Management said its loan pipeline was building and expected to support continued loan and earning-asset growth through 2021, assuming economic trends continued to improve. It gave no specific earnings or revenue guidance.
- The company expected the merger with Pacific Mercantile Bancorp, announced in March 2021, to close in Q3 2021 subject to regulatory approval and other conditions. The stated exchange ratio was 0.50 share of Banc of California common stock per eligible PMBC share.
- Management expected an effective tax rate of 25%–27% for the remaining quarters of 2021. It cautioned that actual results could differ due to COVID-19 and its variants, economic conditions, inflation, interest rates, real-estate values, borrower performance, deposit competition, regulatory actions, cybersecurity and other risks.
- The company described its interest-rate position as asset-sensitive. Its model estimated that an immediate +100 basis-point rate shock would increase next-12-month net interest income 1.8%, while a −100-basis-point shock would reduce it 2.5%; model outcomes are subject to assumptions and may differ from actual results.
- COVID-related deferrals and forbearances were $86.6 million at June 30, down from $108.7 million at March 31. Management noted uncertainty about the pandemic’s potential effects and continuing support for affected borrowers.
- A shareholder derivative action was subject to a proposed settlement involving governance changes, with no monetary component except a possible attorneys’ fee award; court approval and fee negotiations remained pending. The filing said other pending legal matters were not expected to be material. No material changes to the company’s previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the PMBC merger received approvals, closed on schedule, and delivered expected integration benefits and cost outcomes.
- Whether rising nonperforming loans, special-mention exposures, and repurchased SBA loans result in further charge-offs or higher credit-loss reserves.
- Whether loan growth, deposit mix, and low deposit costs persist as PPP balances are forgiven and market rates or competition change.
- How recurring profitability compares with results affected by credit-reserve reversals, alternative-energy investment valuation changes, prior-year one-time charges, and the preferred-stock redemption.
- Whether liquidity, capital ratios, and dividend capacity remain adequate; the filing states that near-term bank dividends to the holding company require OCC approval.