Banc of California, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. This is an annual report, not a standalone fourth-quarter filing. Banc of California is a California-based relationship-focused business bank operating 32 full-service branches in Southern California.
Financial performance and condition
| Metric | 2019 / year-end | 2018 / comparison |
|---|---|---|
| Total assets | $7.83 billion | $10.63 billion; down 26% |
| Total loans | $5.95 billion; net loans $5.89 billion | $7.70 billion; down 22.7% |
| Total deposits | $5.43 billion | $7.92 billion; down 31.4% |
| Net interest income | $248.2 million | $286.1 million; down 13.5% |
| Net interest margin | 2.89% | 2.95% |
| Provision for loan losses | $36.4 million | $30.2 million |
| Noninterest income | $12.1 million | $23.9 million; down 49.3% |
| Noninterest expense | $195.9 million | $232.8 million; down 15.8% |
| Net income from continuing operations | $23.8 million; diluted EPS $0.05 | $42.1 million; diluted EPS $0.38 |
| Net income available to common stockholders | $2.6 million | $22.9 million |
| Cash and cash equivalents | $373.5 million | $391.6 million |
| Borrowings | $1.37 billion, including $1.20 billion FHLB advances and $173.4 million net senior notes | $1.69 billion |
| Stockholders’ equity | $907.2 million; 11.59% of assets | $945.5 million; 8.89% of assets |
Cash flow from operating activities was $80.3 million, versus $123.0 million in 2018. Investing activities provided $2.80 billion, largely reflecting securities and loan sales and collections; financing activities used $2.89 billion, mainly due to deposit outflows, lower FHLB advances, preferred-stock repurchases, and dividends. The filing does not provide a clear standalone free-cash-flow measure.
Regulatory capital remained above well-capitalized thresholds: the Company’s CET1 and total risk-based capital ratios were 11.56% and 15.90%; the Bank’s were 16.39% and 17.46%. The allowance for loan losses was $57.6 million, or 0.97% of loans, and covered 132.97% of nonperforming loans.
Material changes and business developments
- The company continued its shift toward a relationship-focused commercial bank, reducing lower-margin and nonrelationship assets. It discontinued originating single-family residential mortgage loans during 2019 and exited third-party mortgage origination and brokered single-family lending.
- Loans declined primarily from approximately $1.13 billion of SFR and multifamily loan sales, including a $573.5 million Freddie Mac multifamily securitization, plus paydowns and payoffs. Securities available-for-sale fell 54.2% to $912.6 million following sales, calls, and repayments.
- Deposits fell as the Bank deliberately ran off higher-cost and more volatile funding. Brokered deposits declined from $1.71 billion (21.6% of deposits) to $10.0 million (0.2%). Core deposits also declined $791 million, despite growth in noninterest-bearing deposits and relationship channels.
- Net interest income was pressured by a smaller earning-asset base and higher funding costs. Interest expense rose to $142.9 million from $136.7 million, while net interest margin eased to 2.89%.
- Noninterest expense decreased, partly reflecting cost reductions and lower professional fees. Reported professional fees also benefited from $28.3 million of insurance recoveries related to litigation, indemnification, investigation, and legal expenses.
Outlook, risks, contingencies, and unusual items
- Credit and fraud: A $35.1 million C&I line-of-credit charge-off drove much of 2019’s $36.4 million provision; net charge-offs were $40.9 million. The Bank sued title companies seeking recovery, with no assurance of success. Nonperforming loans rose to $43.4 million from $21.6 million, and classified assets increased to $102.0 million from $84.5 million.
- CECL adoption: Effective January 1, 2020, the expected-credit-loss standard was expected to increase the allowance by approximately 5%–15% relative to the December 31, 2019 allowance. Management expected to use the regulatory three-year capital phase-in option.
- Litigation: A securities class-action settlement provides for insurers to pay $19.75 million, with no Company cash contribution expected. The court had preliminarily approved it; final approval was pending a March 16, 2020 hearing. Separate shareholder derivative litigation remained pending. The Company had accrued $20.2 million for various litigation matters, with an insurance receivable recorded for the class settlement.
- Multifamily securitization exposure: The Bank guaranteed credit losses up to 12% of the securitized pool, with maximum stated exposure of $68.8 million, supported by an FHLB letter of credit. A $4.4 million repurchase liability was recorded.
- Funding and dividends: Management reported adequate liquidity, including $1.02 billion of additional FHLB capacity, $16.7 million of Federal Reserve capacity, and $185.0 million of unsecured federal funds lines. However, the Bank’s dividend capacity to the holding company required OCC approval, and the holding company depends substantially on Bank dividends. The Board reduced the common dividend from $0.13 to $0.06 quarterly in 2019.
- Other notable items: A $9.0 million realized loss on swaps associated with the multifamily securitization was substantially offset by an $8.9 million gain on loan sales. Securities sales generated a $4.9 million net loss, and $731,000 of securities impairment was recorded. Management reported an asset-sensitive interest-rate position; modeled +200-basis-point shocks increased net interest income by 3.8%, while a −100-basis-point shock reduced it by 1.5%.
- Subsequent event: In February 2020, the Board declared a $0.06-per-share quarterly common dividend and authorized up to $45 million of common-stock repurchases. No specific earnings or revenue guidance is provided in the filing.
- Key broader risks include execution of the strategic transition and management changes, competition for core deposits, California real-estate and borrower credit exposure, interest-rate changes, CLO valuation and liquidity, cybersecurity and third-party providers, and regulatory requirements.
Most important facts for investors to verify
- Whether core relationship deposits stabilize or grow after the $2.49 billion total deposit decline and the sharp reduction in brokered funding.
- Credit performance after the fraud-related charge-off: C&I exposures, nonperforming loans, classified assets, recoveries, and the adequacy of the allowance.
- The actual January 2020 CECL allowance adjustment and resulting impact on retained earnings and regulatory capital.
- Final court approval and implementation of the insured securities-litigation settlement, plus the status and potential costs of derivative and other litigation.
- Whether loan sales, asset shrinkage, and reduced securities holdings support sustainable net interest income and margins without weakening liquidity or franchise growth.
- The Bank’s capacity to upstream dividends and the terms, funding, and execution of the announced share-repurchase authorization.