Banc of California, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Banc of California is a California-focused bank holding company operating through 29 full-service branches. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key financial results and position
| Metric | Q1 2021 | Comparison |
|---|---|---|
| Net interest income | $57.9 million | $51.9 million in Q1 2020; $61.6 million in Q4 2020 |
| Net interest margin | 3.19% | 2.97% in Q1 2020; 3.38% in Q4 2020 |
| Provision for credit losses | Reversal of $1.1 million | Provision of $15.8 million in Q1 2020; $1.0 million in Q4 2020 |
| Noninterest income | $4.4 million | $2.1 million in Q1 2020; $7.0 million in Q4 2020 |
| Noninterest expense | $46.7 million | $46.9 million in Q1 2020; $39.0 million in Q4 2020 |
| Net income (loss) | $14.4 million | $(6.6) million in Q1 2020; $21.7 million in Q4 2020 |
| Diluted earnings per common share | $0.15 | $(0.19) in Q1 2020; $0.35 in Q4 2020 |
| Operating cash flow | $23.9 million provided | $7.0 million provided in Q1 2020 |
| Cash and cash equivalents | $379.5 million | $220.8 million at Dec. 31, 2020 |
| Total assets / deposits | $7.93 billion / $6.14 billion | $7.88 billion / $6.09 billion at Dec. 31, 2020 |
| Loans, net of allowance | $5.69 billion | $5.82 billion at Dec. 31, 2020 |
| FHLB advances / long-term debt | $635.1 million / $256.4 million | $539.8 million / $256.3 million at Dec. 31, 2020 |
| Stockholders’ equity | $804.7 million | $897.2 million at Dec. 31, 2020 |
Material changes and management commentary
- Compared with Q1 2020, net interest income rose $6.1 million, supported by higher average earning assets and a 22-basis-point increase in net interest margin. Lower funding costs were a major factor; average total deposit cost fell to 0.28% from 1.11%.
- Compared with Q4 2020, net interest income declined $3.6 million and margin fell 19 basis points. Management cited lower prepayment fees, greater nonaccrual-interest reversals, lower PPP forgiveness-related fee income, and two fewer calendar days.
- The credit-loss reversal reflected more favorable economic forecasts and lower period-end loan balances. Total allowance for credit losses was $82.7 million, or 1.43% of loans; coverage of nonperforming loans declined to 148% from 230% at year-end.
- Loans declined 2.3% from year-end to $5.76 billion. C&I balances fell $210.0 million, partly offset by a $65.5 million increase in SBA loans, including PPP lending. Deposits increased $56.2 million; noninterest-bearing deposits were 27.7% of deposits at quarter-end.
- Nonperforming loans increased to $55.9 million from $36.6 million at year-end, primarily due to newly placed nonaccrual residential mortgage loans. The company reported $108.7 million of loans in deferment or forbearance, down 57% from year-end.
- Cash increased by $158.7 million during the quarter. Cash flows were $23.9 million from operations, $89.4 million from investing activities, and $45.4 million from financing activities.
Outlook, risks, contingencies, and unusual items
- Management said a steadily building loan pipeline was expected to support loan and earning-asset growth through 2021, assuming economic trends continued. It expected first-round PPP forgiveness to be substantially complete by year-end and anticipated that resulting liquidity could help reduce wholesale funding as it matures.
- In March 2021, the company agreed to acquire Pacific Mercantile Bancorp in a stock transaction at an exchange ratio of 0.50 Banc of California shares per eligible PMB share. Closing was expected in Q3 2021, subject to regulatory and shareholder approvals. Integration, approval, cost, and expected-benefit risks remain.
- The company redeemed all Series D preferred stock for $93.3 million. The $3.3 million excess over carrying value reduced income available to common shareholders. Q1 results also included a $2.1 million tax benefit from exercise of stock appreciation rights and $0.7 million of merger-related costs.
- A $3.6 million loss on alternative-energy partnership investments weighed on results. Management described these investments as primarily tax-benefit driven and noted that valuation depends on the hypothetical-liquidation-at-book-value method.
- Management identified COVID-19 recovery uncertainty, borrower credit quality, real-estate values, interest-rate and funding conditions, regulatory requirements, litigation, cybersecurity, and execution of strategic initiatives as risks. The company described its interest-rate profile as asset sensitive; modeled an immediate +200-basis-point shock as increasing next-12-month net interest income by 7.0%, and a -100-basis-point shock as decreasing it by 2.7%.
- Liquidity included $584.2 million of additional FHLB borrowing capacity, $384.9 million under the Federal Reserve BIC program, $175.0 million of unsecured federal funds lines, and $1.23 billion of unpledged available-for-sale securities. Management said liquidity was adequate, while noting pandemic-related uncertainty.
- A shareholder derivative action was under a proposed settlement framework announced after quarter-end. The contemplated settlement required governance changes, no monetary payment except possible attorneys’ fees, and court approval; fee negotiations were ongoing.
Important facts for investors to verify
- Whether the Pacific Mercantile acquisition received approvals, closed as expected, and delivered the anticipated benefits and integration results.
- Subsequent trends in nonperforming loans, residential mortgage delinquencies, forbearance balances, charge-offs, and allowance coverage, particularly as borrower relief programs expire.
- Whether margin and earnings stabilize after the Q1 decline versus Q4, including the effects of rates, deposit mix and costs, PPP fee recognition, and loan prepayments.
- How liquidity, wholesale borrowing, capital ratios, and dividend capacity change after the preferred-stock redemption and as deposits and PPP balances evolve. The company reported Q1 CET1 capital of 11.50% at the holding-company level and said near-term Bank dividends require OCC approval.
- The resolution and potential cost of the derivative litigation, and the performance and valuation sensitivity of alternative-energy partnership investments.
- Non-GAAP adjusted diluted EPS was $0.25 versus GAAP diluted EPS of $0.15; review the filing’s reconciliation and adjustment definitions when comparing results.