Banc of California, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Banc of California is a California-focused community bank holding company operating 31 full-service branches in Southern California. Dollar amounts below are in U.S. dollars; financial-statement amounts are rounded to millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2020 / Sep. 30, 2020 | Comparison |
|---|---|---|
| Net income (loss) | $15.9 million; diluted EPS $0.24 | Q3 2019: net loss $14.1 million; diluted EPS $(0.45). Q2 2020: net loss $18.4 million. |
| Year-to-date net income (loss) | $(9.1) million; common-stockholder loss $(19.3) million; diluted EPS $(0.38) | First nine months 2019: net income $9.5 million; common-stockholder loss $(8.0) million; diluted EPS $(0.16). |
| Net interest income | Q3: $55.9 million; first nine months: $163.0 million | Q3 2019: $58.9 million; nine months 2019: $191.5 million. |
| Net interest margin | Q3: 3.09%; nine months: 3.05% | Q3 2019: 2.86%; nine months 2019: 2.84%. |
| Provision for credit losses | Q3: $1.1 million; first nine months: $28.7 million | Q3 2019: $38.6 million; nine months 2019: $38.8 million. |
| Total assets | $7.74 billion | $7.83 billion at Dec. 31, 2019. |
| Total loans / allowance | Loans: $5.68 billion; allowance for credit losses: $94.1 million, or 1.66% of loans (1.74% excluding PPP loans) | Loans: $5.95 billion and allowance: $61.7 million, or 1.04%, at Dec. 31, 2019. |
| Deposits | $6.03 billion; noninterest-bearing deposits were 24.1% of total | $5.43 billion at Dec. 31, 2019; noninterest-bearing deposits were 20.1%. |
| Borrowings | FHLB advances, net: $559.5 million; senior notes, net: $173.6 million | FHLB advances: $1.20 billion at Dec. 31, 2019. Senior notes mature in 2025. |
| Cash and cash equivalents | $292.5 million | $373.5 million at Dec. 31, 2019. |
| Regulatory capital | Company CET1 ratio: 11.59%; Bank CET1 ratio: 16.89% | Company CET1: 11.56%; Bank CET1: 16.39% at Dec. 31, 2019. |
For the first nine months, operating cash flow was $38.1 million, investing cash flow was $(49.0) million, and financing cash flow was $(70.1) million, resulting in an $81.0 million decrease in cash and cash equivalents.
Material changes and management commentary
- Q3 net interest income increased $0.5 million from Q2, as lower funding costs largely offset lower earning-asset yields; net interest margin remained 3.09%. Average deposit cost declined to 0.51%, and the period-end deposit cost was 0.39%.
- Year-to-date net interest income fell from 2019, primarily reflecting lower average earning assets after prior-year loan and securities sales and lower market rates. Lower funding costs and improved net interest margin partly offset these effects.
- Deposits increased $605.1 million from year-end, while net loans declined $273.9 million. SBA loans rose by $249.6 million, largely due to $255.8 million of PPP loans outstanding at quarter-end; single-family residential mortgage balances declined $356.3 million.
- Management said it is focused on growing relationship-based deposits, shifting toward relationship-focused community banking, managing credit risk and reducing expenses. The company had paused common-stock repurchases amid COVID-19 uncertainty.
- Q2 2020 included a $26.8 million one-time charge to terminate the LAFC stadium naming-rights arrangement. Management estimated approximately $89.1 million of aggregate pretax savings over the remaining 12.5 years of the original agreement. The agreement was scheduled to terminate by Dec. 31, 2020, with no continuing payment obligations thereafter, subject to specified exceptions.
- First-nine-month noninterest expense was $160.1 million, up $11.1 million from 2019, mainly because of the LAFC termination charge, a $2.5 million FHLB debt-extinguishment fee and higher professional fees. Q3 expense was $40.4 million, down 6.6% from Q3 2019.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said COVID-19’s economic effects, borrower performance and government support remained uncertain. Management’s estimated full-year 2020 effective tax rate was negative 10% to 15%, and it expected a Q4 effective tax rate of approximately 25%.
- COVID-19 borrower payment deferrals and forbearances declined to $282.5 million across 158 loans at September 30, from $604.2 million across 298 loans at June 30. Management said most remaining balances were on a second relief period; additional commercial deferrals may require credit enhancements.
- Nonperforming loans were $66.9 million, or 1.18% of loans, versus $43.4 million at year-end 2019. The allowance covered 141% of nonperforming loans. Management noted that three relationships represented 52% of nonperforming loans; one $16.1 million relationship was resolved after quarter-end at carrying value. A $9.1 million residential loan was subject to foreclosure proceedings; management expected resolution without loss, but that outcome was not assured.
- The allowance estimate depends on economic forecasts, model assumptions and management judgments. The company adopted CECL on Jan. 1, 2020, increasing the allowance by $6.4 million and reducing retained earnings after tax by $4.5 million at adoption.
- The securities portfolio included $685.9 million of collateralized loan obligations (CLOs), with $17.7 million of unrealized losses; management reported that all CLO holdings were rated AAA or AA and that it did not expect to sell securities in unrealized-loss positions before recovery. Credit-market and valuation risk remain relevant.
- Liquidity sources included $890 million of available FHLB capacity, $427.7 million of Federal Reserve borrowing capacity and $185 million of unsecured federal funds lines. Management considered liquidity adequate, while noting the pandemic could adversely affect liquidity and results. The Bank’s near-term dividend capacity was restricted and required OCC approval.
- On Oct. 30, 2020, after quarter-end, the company issued $85 million of 4.375% fixed-to-floating subordinated notes due 2030; the notes qualify as Tier II capital and are subordinated to senior debt.
- The company disclosed shareholder derivative litigation alleging breaches of fiduciary duty and related claims; it intended to contest the actions. It also reported a lawsuit seeking recovery related to a 2017 allegedly fraudulent loan. Management said pending legal matters were not likely to be material, but outcomes cannot be assured.
Most important facts for investors to verify
- Whether PPP forgiveness proceeds as expected and how loan demand, deposits and funding costs evolve.
- Whether the CECL allowance remains adequate as COVID-related relief ends and economic forecasts or borrower credit quality change.
- Developments in nonperforming loans, including outcomes for the large relationships and foreclosure matter identified by management.
- CLO credit performance, valuations and the effect of persistent unrealized losses or market volatility.
- Whether the projected LAFC cost savings are realized and whether any additional termination-related payments arise.
- Regulatory capital and holding-company dividend capacity, including the effect of the post-quarter subordinated-note issuance.