Banc of California, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with fiscal 2019. The company is a California-focused relationship business bank operating 29 branches across Southern California.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Interest and dividend income | $290.6 million | $391.1 million |
| Net interest income | $224.6 million | $248.2 million |
| Net interest margin | 3.13% | 2.89% |
| Provision for credit losses | $29.7 million | $35.8 million |
| Noninterest income | $18.5 million | $12.1 million |
| Noninterest expense | $199.0 million | $196.5 million |
| Net income | $12.6 million | $23.8 million |
| Net income (loss) available to common stockholders | $(1.1) million | $2.6 million |
| Diluted earnings (loss) per common share | $(0.02) | $0.05 |
| Operating cash flow | $74.9 million | $80.3 million |
- Net interest margin improved as funding costs fell faster than asset yields, although net interest income declined with lower average earning assets and rates.
- Total assets were $7.88 billion, up 0.6%; loans net of allowance were $5.82 billion, down 1.3%. Deposits rose 12.1% to $6.09 billion, including $1.56 billion of noninterest-bearing deposits (25.6% of deposits).
- Cash and cash equivalents were $220.8 million, down from $373.5 million. Available-for-sale securities totaled $1.23 billion. Management reported additional borrowing capacity of $821.7 million at FHLB, $422.4 million at the Federal Reserve, and $185.0 million in unsecured federal funds lines.
- FHLB advances were $539.8 million net of issuance costs. Long-term debt was $256.3 million net, comprising $175 million of 5.25% senior notes due 2025 and $85 million of 4.375% subordinated notes due 2030.
- Stockholders’ equity was $897.2 million; tangible common equity to tangible assets was 8.58%. Company regulatory capital ratios included 17.01% total risk-based capital and 11.19% CET1; the Bank’s ratios were 17.27% and 16.02%, respectively.
Material changes and unusual items
- Common-stockholder results declined to a loss despite positive net income, largely because preferred dividends exceeded net income attributable to the company’s common equity.
- The company recorded a $26.8 million pretax charge to terminate its LAFC stadium naming-rights arrangement. It estimated approximately $89.1 million of savings over the remaining term of the original agreement; no payment obligations continue after December 31, 2020.
- Loan portfolio mix shifted toward commercial and industrial lending and SBA lending, including $210 million of PPP loans. C&I loans increased $397 million; SFR and multifamily balances declined by $360.5 million and $204.7 million, respectively.
- CECL adoption increased the allowance by $6.4 million at January 1, 2020 and reduced retained earnings after tax by $4.5 million. Year-end allowance for credit losses was $84.2 million, or 1.43% of loans; nonperforming assets were $36.6 million versus $43.4 million in 2019.
- The company issued $85 million of subordinated notes and repurchased $12.0 million of common stock. It paid $11.8 million in common dividends and $13.9 million in preferred dividends during 2020.
Outlook, commentary, risks and contingencies
- No formal earnings or financial guidance is provided. Management’s stated priorities include attracting low-cost relationship deposits, emphasizing higher-margin lending while managing credit risk, and controlling expenses.
- Management described the COVID-19 outlook as uncertain, citing possible borrower stress, higher credit losses, liquidity and operational pressures, and interest-rate impacts. At year-end, $251.9 million of loans were reported in payment relief programs, subject to stated exclusions; additional deferment requests were being evaluated.
- The company resumed PPP originations on January 11, 2021 and expected forgiveness processing for first-round PPP loans to be substantially complete in the first half of 2021.
- Credit risks include California real-estate concentration, adjustable-rate and nontraditional SFR loans, commercial real estate exposure, and uncertainty in CECL forecasts. CLO holdings were $677.8 million, or 8.6% of assets; all were rated AAA or AA at year-end, but market value and liquidity remain risks.
- Other risks include deposit competition and funding concentration, interest-rate sensitivity, LIBOR transition, cybersecurity and third-party service disruption, and regulatory limits on dividends. The Bank required OCC approval for dividends to the holding company under applicable conditions.
- Pending matters include shareholder derivative litigation and the Bank’s lawsuit seeking recovery related to a prior alleged fraud loss. Management stated it intends to contest the derivative claims and pursue recovery, but outcomes are uncertain. The filing states pending legal matters were not expected to be material based on information then available.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. EY identified the allowance for credit losses, particularly management’s qualitative overlays, as a critical audit matter.
Important facts for investors to verify
- Whether loan performance, payment-relief expirations and economic conditions require further credit-loss provisions or changes to the allowance.
- Whether deposit growth is sustained through core client relationships and whether available liquidity and borrowing capacity remain accessible on acceptable terms.
- The earnings effect of lower interest rates, balance-sheet mix changes and the reported asset-sensitive interest-rate position.
- Realized savings from the LAFC termination compared with management’s estimate, and the continuing costs of operations.
- The status and potential financial effects of litigation, fraud-recovery efforts, loan repurchase exposure and regulatory dividend restrictions.
- The terms and transition plans for LIBOR-linked loans and securities, including the subordinated notes’ expected SOFR-based floating-rate period beginning in 2025.