Banc of California, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2022. Banc of California is a California-focused community bank with 31 full-service branches. Results include Pacific Mercantile Bancorp (PMB), acquired in October 2021, so comparisons with 2021 are affected by the acquisition.
Financial performance and position
- Q2 earnings: Net income was $26.7 million and diluted EPS was $0.43, compared with $19.1 million and $0.34 in Q2 2021 and $48.5 million and $0.69 in Q1 2022. Adjusted diluted EPS, a non-GAAP measure, was $0.45.
- Revenue and margin: Q2 net interest income was $78.3 million; noninterest income was $7.2 million; total revenue was $85.5 million. Net interest margin was 3.58%, up 7 basis points quarter over quarter and 31 basis points year over year. The efficiency ratio was 56.87%.
- Credit provision: Q2 had no provision or reversal for credit losses. Q1 included a $31.3 million pre-tax recovery of a loan charged off in 2019, driving a $31.5 million provision reversal and boosting Q1 earnings.
- Six-month results: Net income was $75.2 million, net interest income $154.7 million, and diluted EPS $1.13. The six-month comparison also reflects the $31.3 million loan recovery and the PMB acquisition.
- Cash flow: For the first half, operating cash flow was $75.1 million, investing cash flow was negative $134.9 million, and financing cash flow was $74.7 million. Cash and cash equivalents rose $14.9 million to $243.1 million.
- Balance sheet and liquidity: Total assets were $9.50 billion. Loans were $7.45 billion, up 2.8% from year-end 2021; deposits were $7.56 billion, up 1.6%. Noninterest-bearing deposits were 37.4% of deposits. The Bank reported unused secured borrowing capacity of $985.4 million at the FHLB and $789.0 million through Federal Reserve facilities, alongside $210 million of unused correspondent-bank lines.
- Debt and capital: FHLB advances were $511.7 million, other borrowings $98.0 million, and long-term debt, net, $274.6 million. The Bank’s CET1 ratio was 14.41%; the holding company’s was 11.29%. Total stockholders’ equity was $949.1 million, down from $1.07 billion at year-end, reflecting share repurchases, preferred stock redemption, and an AOCI decline.
Material changes and notable items
- Loan balances grew overall, with multifamily and single-family residential mortgages increasing; commercial and industrial, commercial real estate, and SBA balances declined. Warehouse lending within C&I fell to $1.16 billion from $1.60 billion at year-end.
- Nonperforming loans declined to $44.4 million, or 0.60% of loans, from $52.6 million, or 0.72%. The allowance for credit losses was $99.7 million, 1.34% of loans and 224% of nonperforming loans.
- Available-for-sale securities fell to $865.4 million from $1.32 billion at year-end. A $346.0 million amortized-cost portfolio transfer to held-to-maturity occurred in Q1. At June 30, held-to-maturity securities had a $43.6 million unrealized loss; available-for-sale securities had a $31.5 million net unrealized loss. Management attributed the declines principally to interest rates and market conditions, not credit deterioration, and said it did not intend or expect to be required to sell the securities before recovery.
- Common stockholders’ equity reflects a $41.8 million first-half after-tax other comprehensive loss, largely from securities valuation changes. The company repurchased $43.2 million of stock in the first half; $31.9 million remained under its $75 million authorization at June 30. Subsequent to quarter-end, it repurchased another $8.8 million through the period disclosed.
- The company redeemed all Series E preferred stock in Q1, paying $98.7 million and recording a $3.7 million charge affecting income available to common stockholders.
- Q2 noninterest expense was $48.6 million, up $8.8 million year over year, substantially reflecting PMB operations, higher staffing, professional fees, and alternative-energy investment losses.
Outlook, risks, and contingencies
- Management said the loan pipeline was building and expected to support continued loan and earning-asset growth through the year, assuming economic trends improved. It also expected some net interest margin expansion as short-term rates rose. These are expectations, not quantified formal earnings guidance.
- The Bank described its balance sheet as asset-sensitive. Its modeled +100-basis-point rate shock indicated a 1.0% increase in next-12-month net interest income; a -100-basis-point shock indicated a 6.8% decrease. Actual results may differ from modeled outcomes.
- Key risks include inflation, recession and market volatility; rising rates and deposit repricing; loan demand, real estate values and borrower credit quality; funding and deposit competition; regulatory restrictions; cybersecurity and third-party risks; litigation; and the continuing effects of COVID-19. The company reported no COVID-related payment deferrals or forbearances outstanding at June 30.
- The Bank’s near-term dividend payments to the holding company require OCC approval, according to the filing. The company also stated it was in compliance with its debt covenants. Management considered pending litigation liabilities, beyond amounts accrued and applicable insurance, unlikely to materially affect financial statements or operations.
- The company reported a $68.8 million maximum exposure related to a multifamily securitization guarantee, supported by a letter of credit, and $23.5 million maximum loss exposure on alternative-energy partnership investments. It also had substantial unfunded credit and investment commitments.
Important facts for investors to verify
- How much of future earnings reflects recurring banking operations versus the one-time $31.3 million loan recovery in Q1 and other non-GAAP adjustments.
- Whether deposit costs rise faster than loan and securities yields as rates change, and whether the modeled asset sensitivity translates into actual margin growth.
- Credit trends in C&I, multifamily, SBA, and non-traditional mortgage loans, including the increase in substandard loans and troubled debt restructurings.
- The effect of securities unrealized losses, further rate changes, and the AFS-to-HTM transfer on tangible equity and liquidity flexibility.
- Deposit mix and funding access, including brokered deposits, borrowings, and the holding company’s dependence on Bank dividends subject to regulatory approval.
- Progress and economics of the PMB integration, stock repurchases, and management’s growth outlook under less favorable economic conditions.