Business Overview and History
Banc of California, Inc. (BANC) is a relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses. With a strong foothold in California and expanding presence in select markets nationwide, the company has been actively transforming its balance sheet and operations to drive long-term value creation.
Banc of California was incorporated in March 2002 and serves as the holding company for its wholly-owned subsidiary, Banc of California, a California state-chartered bank and member of the Federal Reserve System. The company has a rich history of serving the financial needs of its communities, tracing its roots back to 1941 when it was founded as Pacific Western Bank.
In 2023, Banc of California completed a transformative merger with PacWest Bancorp, significantly expanding its scale, geographic footprint, and capabilities. The combined entity, which retained the Banc of California name and brand, now operates more than 80 branches across California, Colorado, and North Carolina, serving a diverse customer base of small, middle-market, and venture-backed businesses.
The bank's growth trajectory has been marked by strategic acquisitions, including Pacific Trust Bank in 2011 and the merger with California United Bank in 2014, which expanded its footprint and client base across California. However, the bank faced challenges in 2016 when it disclosed that its former chairman and chief executive officer had approved inappropriate personal loans and reimbursements. This led to the chairman's resignation, an internal investigation, increased regulatory scrutiny, and significant legal and consulting fees.
In response to these challenges, Banc of California underwent a transformation in 2018, implementing new leadership and renewing its focus on corporate governance and risk management. The bank streamlined operations, divested non-core business lines, and invested in technology to improve efficiency and enhance the customer experience. These efforts helped rebuild trust with regulators and customers, setting the stage for its subsequent growth and the transformative merger with PacWest Bancorp in 2023.
Financial Performance and Ratios
Banc of California's financial performance has been mixed in recent years, with the company reporting a net loss of $1.9 billion in 2023 due to a $1.38 billion goodwill impairment charge related to the PacWest merger. Excluding this one-time item, the company's normalized net income for 2023 was $449.5 million.
Key financial ratios for Banc of California as of the latest reported quarter (Q3 2024) include: - Return on Assets (ROA): -1.24% - Return on Equity (ROE): -12.07% - Net Interest Margin (NIM): 2.93% - Efficiency Ratio: 62.5% - Common Equity Tier 1 Capital Ratio: 10.14%
These ratios showcase the company's challenges in the past, but also highlight the progress it has made in improving its financial position and efficiency through strategic initiatives.
Balance Sheet Transformation and Repositioning
In 2023 and 2024, Banc of California has been actively working to transform and reposition its balance sheet to enhance profitability and strengthen its competitive position. Some of the key actions taken include:
1. Selling $1.95 billion of lower-yielding Civic loans and deploying the proceeds to pay down high-cost borrowings and brokered deposits. 2. Repositioning the securities portfolio, selling $742 million of lower-yielding securities and purchasing $724 million of higher-yielding securities, improving the average yield. 3. Reducing higher-cost funding sources, such as $1.85 billion in brokered deposits and $545 million in bank term funding program borrowings. 4. Acquiring a $320 million lender finance loan portfolio, a business line that aligns with the bank's strategic priorities. 5. Completing a core banking system conversion, consolidating 12 branches, and optimizing the branch network to enhance efficiency.
These actions have contributed to a 13 basis point expansion in Banc of California's net interest margin to 2.93% in the third quarter of 2024, with the company expecting further improvements in the fourth quarter and into 2025.
Guidance and Outlook
Banc of California has provided the following guidance and outlook:
- Net Interest Margin: Expected to be in the range of 3.00% to 3.10% in the fourth quarter of 2024, reflecting the full quarter benefit of the balance sheet repositioning actions. This guidance assumes a relatively consistent balance sheet and one additional Federal Reserve rate cut in November. - Non-Interest Expense: The company has reached its target range of $195 million to $200 million in non-interest expense, a quarter earlier than previously projected. - Loan Growth: While industry-wide loan activity remains relatively tepid, Banc of California has seen growth in its warehouse, construction, and lender finance loan portfolios, offsetting runoff in lower-yielding CRE and multi-family loans. - Credit Quality: The company has maintained a conservative approach to credit, proactively downgrading certain rate-sensitive loans and increasing its classified loan portfolio. Provision for credit losses has remained relatively stable at $9-10 million per quarter.
Banc of California's efforts to transform its balance sheet and operations have positioned the company for improved profitability and sustainable growth as economic conditions recover. The company's strategic focus on relationship banking, treasury management, and specialty lending verticals, combined with its ongoing efficiency initiatives, are expected to drive long-term value creation for shareholders.
Risks and Challenges
Despite the progress made, Banc of California continues to face several risks and challenges, including:
1. Uncertain economic environment: The company's performance is susceptible to broader macroeconomic conditions, such as interest rate changes, inflation, and the potential for a recession, which could impact loan demand and credit quality. 2. Heightened competition: Banc of California operates in a highly competitive banking landscape, particularly in its core California markets, where it must continually adapt to maintain its competitive edge. 3. Regulatory scrutiny: As a regulated financial institution, Banc of California is subject to ongoing oversight and potential changes in the regulatory environment, which could impact its operations and financial performance. 4. Integration and execution risk: The successful integration of the PacWest merger and the execution of Banc of California's strategic initiatives are critical to realizing the full benefits of the transformation.
Overall, Banc of California's focus on balance sheet optimization, operational efficiency, and strategic growth initiatives positions the company for improved financial performance and shareholder value creation, despite the challenges it faces in the current economic environment.
Financials
Banc of California's financial performance has shown signs of improvement following its strategic initiatives and the PacWest merger. For the most recent fiscal year (2023), the company reported revenue of $278.38 million, a net loss of $1.90 billion, operating cash flow of $135.77 million, and free cash flow of $120.55 million.
In the most recent quarter (Q3 2024), Banc of California reported: - Revenue: $276.67 million (130.6% YoY growth) - Net Loss: $1.7 million - Operating Cash Flow: $39.10 million - Free Cash Flow: $30.85 million
The net loss in the third quarter was largely due to a $60 million loss on securities repositioning. Excluding this one-time item, adjusted earnings were $0.25 per share. The significant revenue increase was driven by higher net interest income due to balance sheet optimizations and deposit repricing.
For the first six months of 2024, net interest income totaled $458.6 million, a slight decrease of $6.8 million compared to the same period in 2023. The provision for credit losses increased by $16 million year-over-year to $21 million for the first half of 2024. Noninterest income was $63.6 million, up significantly from a loss of $91.7 million in the prior year period, driven almost entirely by a decrease in losses on the sale of loans and leases. Noninterest expense decreased by $1.5 billion to $414.2 million, primarily due to the absence of a $1.38 billion goodwill impairment charge recorded in the first half of 2023.
Overall, Banc of California's net earnings available to common and equivalent stockholders for the first six months of 2024 was $41.3 million, compared to a net loss of $1.41 billion in the same period of 2023. The improvement was largely attributable to the decrease in noninterest expense and the increase in noninterest income.
Liquidity
Banc of California maintains a strong liquidity position to support its operations and meet regulatory requirements. As of Q3 2024, the company reported: - Total cash and cash equivalents: $2.70 million - Debt-to-Equity ratio: 0.72 - Current ratio: 0.20 - Quick ratio: 0.20
The bank's liquidity coverage ratio (LCR) stood at 125%, well above the regulatory minimum. Additionally, the company has access to various funding sources, including: - $6.70 billion secured borrowing capacity with the Federal Home Loan Bank (FHLB), with $372.89 million in letters of credit outstanding and $600 million drawn - $6.59 billion secured borrowing capacity with the Federal Reserve Bank of San Francisco (FRBSF), fully available
These funding sources provide additional liquidity options if needed. The recent balance sheet repositioning actions, including the reduction of higher-cost funding sources, have further improved the bank's liquidity profile and funding mix.
Business Segments
Banc of California operates through the following main business segments:
1. Real Estate Mortgage Loans: This segment provides a range of real estate mortgage loans, including commercial real estate, multi-family, and other residential real estate loans. These loans are secured by various property types and make up the largest portion of the loan portfolio, representing 58% of total loans and leases held for investment as of June 30, 2024.
2. Real Estate Construction and Land Loans: This segment includes commercial and residential construction and land development loans, which represented 15% of the total loan portfolio as of June 30, 2024.
3. Commercial Loans: The commercial loan portfolio includes asset-based lending, venture capital lending, and other secured business loans. These commercial loans made up 25% of the total loan and lease portfolio as of the second quarter of 2024.
4. Consumer Loans: The consumer loan segment, which includes a small portion of the overall loan portfolio, represented 2% of total loans and leases held for investment as of June 30, 2024.
Banc of California operates primarily in the western United States, with over 80 branches in California as well as locations in North Carolina and Colorado. The bank serves small to medium-sized businesses as well as consumer customers, providing a variety of lending, deposit, and treasury management services through its branch network.
The company's strategic focus on relationship banking, treasury management, and specialty lending verticals, combined with its ongoing efficiency initiatives and balance sheet optimization efforts, positions Banc of California for improved financial performance and long-term value creation for shareholders.