Banc of California, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company is a California-focused community bank operating 32 branches. Management says it is transitioning toward a relationship-focused commercial banking model, reducing reliance on high-cost deposits and lower-margin lending.
Key financial results
| Metric | Q2 2019 | Comparable period |
|---|---|---|
| Net interest income | $64.8 million | $73.0 million in Q2 2018; down 11.2% |
| Net interest margin | 2.86% | 2.81% in Q1 2019; 3.01% in Q2 2018 |
| Net income from continuing operations | $16.6 million | $13.9 million in Q2 2018 |
| Net income available to common stockholders | $11.9 million; diluted EPS $0.23 | $9.4 million; diluted EPS $0.18 in Q2 2018 |
| Net interest income after loan-loss provision | $66.8 million; $2.0 million provision reversal | $70.1 million; $2.7 million provision in Q2 2018 |
For the six months, net interest income was $132.6 million versus $144.2 million, while net income was $23.6 million versus $23.3 million. Common-stockholder earnings were $14.6 million, or $0.29 per diluted share, compared with $12.7 million, or $0.25, in the first half of 2018. Six-month results include materially different tax-credit and credit-loss effects between years.
Quarterly noninterest income was a loss of $2.3 million, principally reflecting a $9.6 million unrealized loss on swaps associated with the planned multifamily securitization. Management expected this to be primarily offset by a gain on the loans; the securitization was completed August 1, 2019. Noninterest expense was $43.6 million, including $6.2 million of legal, investigation, indemnification and litigation costs and $12.6 million of insurance recoveries. The recoveries helped reduce reported expense.
Financial position, liquidity and capital
- Total assets were $9.36 billion at June 30, down $1.27 billion from year-end 2018. Loans receivable were $6.72 billion, down $981 million; securities were $1.17 billion, down $825 million.
- Deposits fell $1.62 billion, or 20.5%, to $6.29 billion, primarily as the company reduced high-rate deposits, including $1.16 billion of brokered certificates of deposit. Cash and cash equivalents were $313.9 million.
- FHLB advances were $1.825 billion, up $305 million from year-end; long-term debt was $173.3 million, comprising $175 million par value of 5.25% senior notes due 2025. The company reported $942.6 million of additional FHLB borrowing capacity, $21 million of Federal Reserve capacity and $185 million of unsecured federal funds lines.
- Operating cash flow for the first half was $26.2 million versus $50.9 million in 2018. Investing activities provided $1.235 billion, while financing activities used $1.339 billion, including the net deposit outflow.
- Parent-company Common Equity Tier 1 ratio was 10.50%, up from 9.53% at year-end; the bank’s CET1 ratio was 15.73%. Management reported the bank was well capitalized.
- The quarterly common dividend was reduced from $0.13 to $0.06 per share in April. The OCC approved an $88.5 million bank dividend to the parent for Q3 to fund capital-stock repurchases and holding-company expenses; the filing says future bank dividends will require prior OCC approval after this dividend.
Material changes, outlook and risks
- The company continued to sell or reposition assets and deposits as part of its strategy. It transferred $573.9 million of multifamily loans to held-for-sale for a Freddie Mac securitization, also sold $178.2 million of multifamily loans and $131.5 million of single-family loans during Q2, and reduced its collateralized loan obligations portfolio.
- Credit indicators weakened in some areas: nonperforming assets rose 27.8% from year-end to $29.1 million; nonaccrual loans increased to $28.5 million; total past-due loans were $52.2 million. Loans rated special mention, substandard or doubtful increased $59.5 million, although the portfolio and pass-rated balances contracted. The allowance was $59.5 million, or 0.89% of loans, versus 0.81% at year-end.
- Management reported no formal earnings guidance in the provided filing text. Its stated priorities are lowering deposit costs, optimizing the balance sheet toward higher-margin products and managing expenses. Loan production was $599 million for Q2, including $186 million of commercial and industrial commitments.
- The company continued its exit from third-party mortgage origination and brokered single-family lending and cited CEO-transition-related restructuring costs. The filing identifies the SEC investigation and related litigation, credit and real-estate exposure, funding and interest-rate sensitivity, execution of the business transition, and expense control as significant risks. A securities class action was scheduled for trial in February 2020; three shareholder derivative actions were also pending. The company said it intended to contest the actions.
- CECL was scheduled to take effect for the company in 2020. Management could not reasonably estimate its impact and said the allowance could increase significantly under the lifetime expected-loss approach.
- The company commenced a tender offer on July 25 for Series D and E preferred depositary shares, up to $75 million in aggregate purchase price, with an expected closing by the end of August 2019. The filing also reports that the company completed the multifamily securitization on August 1.
- Management concluded disclosure controls were effective at June 30 and reported no material change in internal control over financial reporting during the quarter. The filing states risk factors were not materially changed from the 2018 Form 10-K.
Important facts for investors to verify
- Whether the securitization proceeds and loan-sale gain offset the $9.6 million swap loss as management anticipated, and the net impact on Q3 results.
- Whether deposit outflows stabilize as brokered funding is reduced, and the resulting effect on liquidity, funding costs and net interest margin.
- Credit migration, delinquencies, nonaccrual loans, charge-offs and allowance adequacy, including the growth in restructured and adversely rated loans.
- The amount and recurrence of legal and investigation costs and insurance recoveries, alongside the status and potential exposure of the SEC investigation and pending litigation.
- Execution and capital implications of the preferred-stock tender offer, the $88.5 million bank dividend and the reduced common dividend.
- CECL implementation progress and its eventual effect on reserves, earnings and regulatory capital.