Banc of California, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Banc of California is a California-focused bank holding company with 32 full-service branches. Results include Pacific Mercantile Bancorp (PMB), acquired October 18, 2021, so comparisons with Q1 2021 are not fully like-for-like.
Key financial results and position
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Net interest income | $76.4 million | $57.9 million in Q1 2021; $73.0 million in Q4 2021 |
| Net interest margin | 3.51% | 3.19% in Q1 2021; 3.28% in Q4 2021 |
| Noninterest income / expense | $5.9 million / $46.6 million | Income was $4.4 million and expense $46.7 million in Q1 2021 |
| Net income | $48.5 million; $43.3 million available to common stockholders | $14.4 million / $7.8 million in Q1 2021; $5.8 million / $4.0 million in Q4 2021 |
| Diluted EPS | $0.69 | $0.15 in Q1 2021; $0.07 in Q4 2021 |
| Assets / stockholders’ equity | $9.58 billion / $979.0 million | Assets were $9.39 billion and equity $1.07 billion at December 31, 2021 |
| Loans / deposits | $7.45 billion / $7.48 billion | Loans rose 2.8% and deposits 0.5% from year-end 2021 |
| Cash and cash equivalents | $254.2 million | $228.1 million at December 31, 2021 |
| Borrowings / long-term debt | FHLB advances $556.4 million; other borrowings $190.0 million; long-term debt, net, $274.5 million | Other borrowings were $25.0 million at year-end 2021 |
| Regulatory capital | Company CET1 11.40%; Bank CET1 14.54% | Company CET1 was 11.31% at December 31, 2021 |
Net cash provided by operating activities was $5.3 million; investing activities used $155.0 million and financing activities provided $175.8 million. Cash increased $26.1 million during the quarter. The allowance for credit losses was $98.6 million, or 1.32% of loans, and equaled 181% of nonperforming loans. Nonperforming loans were $54.5 million, or 0.73% of loans.
Changes versus comparable periods
- Net interest income increased $18.5 million year over year, reflecting higher average loan balances, PMB-related growth, and lower funding costs. Average cost of total deposits was 0.08%, down from 0.28% a year earlier.
- Reported earnings were substantially affected by a $31.3 million pretax recovery from settlement of a loan charged off in 2019. The resulting credit-loss reversal drove much of the increase in net income; adjusted diluted EPS, a non-GAAP measure, was $0.75.
- Noninterest expense was nearly flat year over year. Lower legal and alternative-energy investment losses and completed merger activity were offset by higher salaries and other costs, including PMB-related expenses.
- Available-for-sale securities declined $416.9 million from year-end, mainly due to a $346.0 million transfer of longer-duration securities to held-to-maturity, market-value declines, payoffs, repayments and sales. AOCI moved from positive $7.7 million to negative $19.2 million, largely reflecting securities losses.
- Noninterest-bearing deposits were $2.96 billion, 39.6% of deposits, up from 37.5% at year-end 2021. Gross loans grew $200.1 million; commercial and industrial and single-family mortgage balances increased, while commercial real estate and SBA balances declined.
Outlook, risks and unusual items
- Management outlook: Management said the loan pipeline was building and expected to support loan and earning-asset growth through 2022, assuming improving economic trends continue. No specific earnings or revenue guidance was provided. Management expected the effective tax rate to remain similar to Q1’s 27.9%.
- Interest-rate exposure: Management described the balance sheet as asset-sensitive. Its model estimated that an immediate 100-basis-point increase would raise next-12-month net interest income 1.8%; a 200-basis-point increase would raise it 3.6%. These are modeled estimates, not guarantees; results depend on rate movements, deposit behavior, repricing and other assumptions.
- Credit and portfolio risks: The $31.3 million loan settlement recovery is unusual and not presented as recurring. Special-mention loans increased to $151.9 million. TDR balances rose to $29.9 million, primarily following modification of a nonperforming PMB-acquired loan. Warehouse lending was $1.57 billion, 56% of C&I loans. Management noted economic uncertainty, inflation, higher oil prices, supply-chain pressures and the Russia-Ukraine conflict as factors in credit-loss forecasts.
- Market and capital effects: Rising rates reduced securities fair values; management warned further AFS losses could reduce reported and tangible equity. The company transferred securities to held-to-maturity to limit future fair-value volatility, while acknowledging the transferred securities’ unrealized losses will be amortized into interest income over time.
- Liquidity and capital actions: The Bank reported unused secured borrowing capacity of $1.08 billion at the FHLB and $752.8 million through Federal Reserve facilities. It also had $210.0 million in unsecured federal funds lines and $441.0 million of AFX borrowing availability, which is variable and counterparty-dependent. The Bank’s near-term dividends to the holding company require OCC approval. The company redeemed all Series E preferred stock for $98.7 million and authorized up to $75 million of common-stock repurchases; it repurchased $4.3 million in Q1. After quarter-end, it repurchased a further $20.7 million through the filing’s subsequent-event period.
- Other matters: Management said pending legal matters were not expected to be material and reported no material change in risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported earnings and the credit-loss reversal is attributable to the one-time $31.3 million settlement recovery, and what underlying earnings imply without it.
- Whether loan growth, deposit mix and funding costs remain favorable as interest rates and customer deposit behavior change.
- Whether rising rates cause further securities losses or constrain capital, and how the AFS-to-HTM transfer affects future reported results and flexibility.
- Trends in criticized loans, nonperforming loans and TDRs, including the PMB-acquired credit exposure and the large warehouse-lending concentration.
- PMB integration progress, expense levels, and the sustainability of management’s conditional growth outlook.
- Liquidity and holding-company funding needs, including the availability and cost of wholesale borrowing and regulatory restrictions on Bank dividends and capital actions.