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Press Release

Banc of California Reports First Quarter 2020 Financial Results

Company Release - 4/29/2020 6:00 AM ET

SANTA ANA, Calif.--(BUSINESS WIRE)-- Banc of California, Inc. (NYSE: BANC) today reported net loss available to common stockholders for the first quarter of 2020 of $9.7 million, or diluted loss per common share of $0.19.

First quarter results included:

  • Common Equity Tier 1 capital at 11.57%
  • Noninterest-bearing deposit balances increased $167.6 million to 23% of total deposits, up from 20%
  • Total DDA balances increased $206.1 million to 51% of total deposits
  • End of period deposit costs dropped to 0.89%; average total deposit costs decreased 16 basis points to 1.11%
  • Allowance for credit losses increased to 1.45% of total loans, up from 1.04%
  • Day 2 CECL provision for credit losses of $15.8 million

Jared Wolff, President & CEO of Banc of California, commented, “Our first quarter results demonstrate our continued progress transforming Banc of California into a relationship focused business bank. Our work over the past 15 months to de-risk our balance sheet created significant excess capital to help absorb first quarter COVID-19 and CECL-related provisions while remaining very well-capitalized. As a result of our ongoing balance sheet transformation, we have also substantially increased our noninterest-bearing and low-cost deposits as a percent of total deposits. For 2020, while remaining vigilant about credit, we will continue to look to improve the deposit franchise, remix our loan portfolio towards relationship lending, and opportunistically deploy capital for the benefit of shareholders, building franchise value for the long term.”

Mr. Wolff continued, "During this time of uncertainty caused by the COVID-19 pandemic, we are focused on keeping our employees safe and healthy, so we can support our clients and our communities. We are actively assisting our clients who are experiencing disruption and hardship during these times. We are particularly proud of our colleagues who have been tireless in those efforts on the front lines and behind the scenes. At this time, we are demonstrating what true relationship banking is all about, solidifying relationships with existing clients and building new relationships as well."

Lynn Hopkins, Chief Financial Officer of Banc of California said, "We finished the first quarter in a strong financial position, with healthy capital levels, increased on-balance sheet liquidity, and continued growth in noninterest bearing and demand deposits. Net income was negatively impacted by a $15.8 million provision for credit losses under CECL and in response to the pandemic. Excluding the impact of the provision for credit losses and certain non-core expenses, pre-tax income was $10.6 million, and benefited from a $5 million reduction in core expenses that was set in motion before the crisis, and put us in a better position to operate with the lower revenues from the economic disruption and significant cuts in market interest rates. Our net interest margin held up relatively well at 2.97% against these rate cuts, as our dedicated and proactive deposit efforts lowered deposit costs another 16 basis points to an average of 1.11% for the first quarter, and ended the period with a spot rate of 89 basis points. This quarter marked the fifth consecutive quarter of growth in average noninterest-bearing deposits. While the economic outlook remains uncertain, our healthy reserves and strong capital position will serve the Company well with the potential challenges ahead, as we continue to focus on closely managing credit, actively improving the mix and cost of deposits, reducing expenses, and continuing to strengthen our balance sheet."

COVID-19 Operational Update

With the onset of the COVID-19 pandemic, we successfully implemented our business continuity plan to enable our team to work remotely while continuing to serve our clients with as little disruption as possible. Early in March, we took meaningful steps to transition our team members to a "work from home" environment and we have over 80% of our team working remotely. We continue to operate 25 of our 31 branches as we temporarily consolidated some overlapping areas to ensure an adequate balance between employee and client safety and business continuity to meet our clients' banking needs. For the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), we redeployed resources to this program in support of our clients and others seeking financial relief under the program. As of April 28, 2020, we estimate we helped our clients save over 8,500 jobs through pending applications or approvals for more than $270 million in PPP funds. We expect to earn fees of just under 3% on the total amount that ultimately funds. We are actively engaged with our borrowers who are seeking payment relief and waiving certain fees for impacted clients.

Adoption of the Current Expected Credit Loss (CECL) Model

On January 1, 2020, we adopted the new accounting standard, commonly known as CECL, which uses a current expected credit loss model for determining allowance for credit losses (ACL). Upon adoption, we recognized a Day 1 increase in the ACL of $6.4 million and a related after-tax decrease to retained earnings of $4.5 million. Our Day 1 ACL under the new CECL methodology totaled $68.1 million compared to $61.7 million under the incurred loss model at December 31, 2019, and represented 1.14% of total loans. We recorded a Day 2 provision for credit losses of $15.8 million which reflects the new CECL methodology using current economic forecasts and the estimated future impact of the COVID-19 pandemic on lifetime credit losses. At March 31, 2020, the ACL totaled $82.1 million resulting in an ACL to total loans coverage ratio of 1.45%, up from 1.04% at December 31, 2019. The ACL and provision for credit losses include amounts for unfunded commitments.

Income Statement Highlights

 

 

Three Months Ended

 

 

March 31,
2020

 

December 31,
2019

 

September 30,
2019

 

June 30,
2019

 

March 31,
2019

 

 

($ in thousands)

Total interest and dividend income

$

74,714

 

$

83,702

 

$

92,657

 

$

104,040

 

$

110,712

Total interest expense

22,853

 

27,042

 

33,742

 

39,260

 

42,904

Net interest income

51,861

 

56,660

 

58,915

 

64,780

 

67,808

Total noninterest income (loss)

2,061

 

4,930

 

3,181

 

(2,290

)

6,295

Total revenue

53,922

 

61,590

 

62,096

 

62,490

 

74,103

Total noninterest expense

46,919

 

47,483

 

43,240

 

43,500

 

62,249

Pre-tax / pre-provision income

7,003

 

14,107

 

18,856

 

18,990

 

11,854

Provision for (reversal of) credit losses

15,761

 

(2,976

)

38,607

 

(1,900

)

2,098

Income tax (benefit) expense

(2,165

)

2,811

 

(5,619

)

4,308

 

2,719

Net (loss) income

$

(6,593

)

$

14,272

 

$

(14,132

)

$

16,582

 

$

7,037

 

 

 

 

 

 

Net (loss) income available to common stockholders(1)

$

(9,694

)

$

10,415

 

$

(22,722

)

$

11,909

 

$

2,527

(1)

Balance represents the net (loss) income available to common stockholders after subtracting preferred stock dividends, income allocated to participating securities, participating securities dividends and impact of preferred stock redemption from net (loss) income. Refer to the Statement of Operations for additional detail on these amounts.

Net interest income

Net interest income decreased $4.8 million to $51.9 million for the first quarter due to the combination of lower average interest-earning assets and a lower net interest margin. Average interest-earning assets declined from the prior quarter by $354.7 million to $7.03 billion, including a $440.4 million reduction in average loans to $5.78 billion, and our net interest margin declined 7 basis points to 2.97%.

The lower net interest margin was due to a 23 basis point decline in the average yield on interest-earning assets to 4.27%, partially offset by a 14 basis point decline on the average cost of interest bearing liabilities to 1.71%. The decline in the earning asset yield was due mostly to lower yields on most interest-earning asset classes due to originating new business and repricing variable rate loans and investments in the lower interest rate environment given the cuts in the federal funds target rates during the current and prior quarters. On a linked-quarter basis, our average yield on loans declined 15 basis points to 4.56% and our average yield on securities decreased 42 basis points. The average yield for variable rate collateralized loan obligations (CLOs) was 3.60% for the first quarter compared to 3.81% for the fourth quarter as this investment class reprices quarterly.

The 14 basis point decline in the average cost of interest-bearing liabilities to 1.71% for the first quarter from 1.85% for the fourth quarter, was driven by the lower average cost of interest-bearing deposits and higher average noninterest-bearing deposits. The average cost of interest-bearing deposits declined 16 basis points to 1.41% from the prior quarter. Additionally, average noninterest-bearing deposits increased by $25.2 million, or 2.3%, and represented 21.4% of total average deposits in the first quarter. Our total cost of deposits decreased 16 basis points to 1.11% for the first quarter. The decrease in our funding cost is due to a lower reliance on high cost transaction accounts and wholesale funds as we have managed down the balance sheet and continue to execute on our strategy to focus on relationship clients.

Provision for credit losses

We recognized a provision for credit losses of $15.8 million under the CECL model compared to a recovery of credit losses of $3.0 million in the prior quarter under the incurred loss model. Our provision for credit losses includes $1.1 million related to unfunded commitments. The higher provision for credit losses was driven by using the new CECL model, the estimated future impact of the health crisis on our loans, and net charge-offs, partially offset by lower period end loan balances of $284.4 million. For the first quarter, approximately $19 million of the provision for credit losses was attributed to the change in the economic forecast.

Noninterest income

Noninterest income decreased $2.9 million, or 58%, to $2.1 million for the first quarter from the prior quarter. The decrease was primarily due to the impact of lower market interest rates on certain assets subject to fair value accounting including a $1.6 million decrease in the fair value of loans held for sale, a $333 thousand decrease in the fair value of customer-related loan swaps, and a $166 thousand decrease in the value of servicing assets due mostly to the impact of prepayment assumptions. In addition, the prior quarter included a $650 thousand insurance recovery; there was no similar insurance recovery in the current quarter. These decreases were offset in part by lower net losses on sales of loans of $860 thousand.

Noninterest expense

Noninterest expense decreased $564 thousand to $46.9 million for the first quarter compared to the prior quarter. Noninterest expense decreased due to: (1) lower salaries and benefits expense of $600 thousand primarily related to lower headcount and loan production-based incentives, (2) lower regulatory assessments of $1.4 million related to changes in the size of our asset base and an FDIC assessment credit, and (3) lower restructuring expense of $1.6 million as the prior quarter included certain severance costs compared to none in the current quarter. These decreases were offset in part by higher professional fees of $3.4 million as a result of the timing of certain legal costs and recoveries compared to the prior quarter, and a $866 thousand increase in loss on investments in alternative energy partnerships. The change in professional fees attributed to the timing difference of certain indemnified legal costs and recoveries was $1.7 million. When such indemnified legal costs and recoveries are excluded, professional fees would have decreased $1.9 million from the prior quarter and totaled $4.3 million for the first quarter. Other includes an $850 thousand charge to settle a legacy lending claim from an acquired bank; there was no similar item in the prior quarter. Total operating costs, defined as noninterest expense adjusted for certain non-core items (refer to section Non-GAAP Measures), decreased $5.0 million to $43.3 million for the first quarter compared to the prior quarter.

Income taxes

Income tax benefit totaled $2.2 million for the first quarter resulting in an effective tax rate of 24.7%. This compares to a $2.8 million expense for the fourth quarter and an effective tax benefit rate of 16.5%. The estimated effective tax rate for 2020 is approximately 25%.

Balance Sheet

At March 31, 2020, total assets were $7.66 billion, which represented a linked quarter decrease of $165.8 million, consistent with our strategic shift towards reducing non-core assets and focus on relationship lending. The following table shows selected balance sheet line items as of the dates indicated.

 

As of and for the Three Months Ended

 

Amount Change

 

March 31,
2020

 

December 31,
2019

 

September 30,
2019

 

June 30,
2019

 

March 31,
2019

 

Q1-20 vs. Q4-19

 

Q1-20 vs. Q1-19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

Total assets

$

7,662,607

 

 

$

7,828,410

 

 

$

8,625,337

 

 

$

9,359,931

 

 

$

9,886,525

 

 

$

(165,803

)

 

$

(2,223,918

)

Securities available-for-sale

$

969,427

 

 

$

912,580

 

 

$

775,662

 

 

$

1,167,687

 

 

$

1,471,303

 

 

$

56,847

 

 

$

(501,876

)

Loans held-for-investment

$

5,667,464

 

 

$

5,951,885

 

 

$

6,383,259

 

 

$

6,719,570

 

 

$

7,557,200

 

 

$

(284,421

)

 

$

(1,889,736

)

Loans held-for-sale

$

20,234

 

 

$

22,642

 

 

$

23,936

 

 

$

597,720

 

 

$

25,191

 

 

$

(2,408

)

 

$

(4,957

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

$

2,828,470

 

 

$

2,622,398

 

 

$

2,602,011

 

 

$

2,510,233

 

 

$

2,690,738

 

 

$

206,072

 

 

$

137,732

 

Other core deposits

2,515,703

 

 

2,794,769

 

 

3,074,936

 

 

3,301,080

 

 

3,575,140

 

 

(279,066

)

 

(1,059,437

)

Brokered deposits

218,665

 

 

10,000

 

 

93,111

 

 

480,977

 

 

1,459,054

 

 

208,665

 

 

(1,240,389

)

Total Deposits

$

5,562,838

 

 

$

5,427,167

 

 

$

5,770,058

 

 

$

6,292,290

 

 

$

7,724,932

 

 

$

135,671

 

 

$

(2,162,094

)

As percentage of total deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

50.85

%

 

48.32

%

 

45.10

%

 

39.89

%

 

34.83

%

 

2.53

%

 

16.02

%

Other core deposits

45.22

%

 

51.50

%

 

53.29

%

 

52.46

%

 

46.28

%

 

(6.28

)%

 

(1.06

)%

Brokered deposits

3.93

%

 

0.18

%

 

1.61

%

 

7.64

%

 

18.89

%

 

3.75

%

 

(14.96

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loan yield

4.56

%

 

4.71

%

 

4.75

%

 

4.80

%

 

4.76

%

 

(0.15

)%

 

(0.20

)%

Average cost of interest-bearing deposits

1.41

%

 

1.57

%

 

1.78

%

 

1.89

%

 

1.92

%

 

(0.16

)%

 

(0.51

)%

Average cost of deposits

1.11

%

 

1.27

%

 

1.48

%

 

1.62

%

 

1.67

%

 

(0.16

)%

 

(0.56

)%

Investments

Securities available-for-sale increased $56.8 million to $969.4 million at March 31, 2020, primarily due to purchases of $147.4 million of corporate debt and government agency securities, offset by net CLO maturities of $30.0 million and a higher net unrealized loss of $59.9 million due to changes in market prices and expectations attributed mainly to the estimated impact of the COVID-19 pandemic. The CLOs are AA and AAA rated and the carrying value includes an unrealized net loss of $80.0 million. As of March 31, 2020, our securities portfolio included $623.6 million of CLOs, $243.4 million of agency securities, $54.4 million of municipal securities, and $47.9 million of corporate debt securities.

Loans

The following table sets forth the composition, by loan category, of our loan portfolio as of the dates indicated:

 

March 31,
2020

 

December 31,
2019

 

September 30,
2019

 

June 30,
2019

 

March 31,
2019

 

($ in thousands)

Composition of held-for-investment loans

 

 

 

 

 

 

 

 

 

Commercial real estate

$

810,024

 

 

$

818,817

 

 

$

891,029

 

 

$

856,497

 

 

$

865,521

 

Multifamily

1,466,083

 

 

1,494,528

 

 

1,563,757

 

 

1,598,978

 

 

2,332,527

 

Construction

227,947

 

 

231,350

 

 

228,561

 

 

209,029

 

 

211,549

 

Commercial and industrial

1,578,223

 

 

1,691,270

 

 

1,789,478

 

 

1,951,707

 

 

1,907,102

 

SBA

70,583

 

 

70,981

 

 

75,359

 

 

80,929

 

 

74,998

 

Total commercial loans

4,152,860

 

 

4,306,946

 

 

4,548,184

 

 

4,697,140

 

 

5,391,697

 

Single-family residential mortgage

1,467,375

 

 

1,590,774

 

 

1,775,953

 

 

1,961,065

 

 

2,102,694

 

Other consumer

47,229

 

 

54,165

 

 

59,122

 

 

61,365

 

 

62,809

 

Total consumer loans

1,514,604

 

 

1,644,939

 

 

1,835,075

 

 

2,022,430

 

 

2,165,503

 

Total gross loans

$

5,667,464

 

 

$

5,951,885

 

 

$

6,383,259

 

 

$

6,719,570

 

 

$

7,557,200

 

Composition percentage of held-for-investment loans

 

 

 

 

 

 

 

 

 

Commercial real estate

14.3

%

 

13.8

%

 

14.0

%

 

12.7

%

 

11.5

%

Multifamily

25.9

%

 

25.1

%

 

24.5

%

 

23.8

%

 

30.9

%

Construction

4.0

%

 

3.9

%

 

3.6

%

 

3.1

%

 

2.8

%

Commercial and industrial

27.9

%

 

28.4

%

 

28.0

%

 

29.1

%

 

25.2

%

SBA

1.2

%

 

1.2

%

 

1.2

%

 

1.2

%

 

1.0

%

Total commercial loans

73.3

%

 

72.4

%

 

71.3

%

 

69.9

%

 

71.4

%

Single-family residential mortgage

25.9

%

 

26.7

%

 

27.8

%

 

29.2

%

 

27.8

%

Other consumer

0.8

%

 

0.9

%

 

0.9

%

 

0.9

%

 

0.8

%

Total consumer loans

26.7

%

 

27.6

%

 

28.7

%

 

30.1

%

 

28.6

%

Total gross loans

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

Held-for-investment loans decreased $284.4 million to $5.67 billion from the prior quarter, due mostly to lower single-family residential mortgage loans of $123.4 million, lower commercial and industrial (C&I) loans of $113.0 million, and lower multifamily loans of $28.4 million. The decline in single-family residential is attributed to accelerated payoffs as the loans refinance away in the lower rate environment and proceeds are invested in other core business loans. The decline in C&I loans is primarily in response to strategically reducing certain credit facilities in response to the changed economic landscape and corresponding lower outstanding balances. The impact of the COVID-19 pandemic tempered loan production for the last part of the quarter and we did not experience any significant increase in credit line usage.

We continue to remix our real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and commercial real estate loans. We are no longer originating single-family residential mortgage loans. Single-family residential mortgage and multifamily loans comprise 51.8% of the total held-for-investment loan portfolio as compared to 58.7% one year ago. Commercial real estate loans comprised 14.3% of the loan portfolio and commercial and industrial loans constituted 27.9%. Currently, loans secured by residential real estate (single-family, multifamily, single-family construction, and credit facilities) represent approximately 83% of our total loans outstanding.

The C&I portfolio has limited exposure to certain business sectors undergoing severe stress, as demonstrated by the following (as a percentage of total outstanding C&I loan balances):

 

March 31, 2020

 

Amount

 

% of Portfolio

C&I Portfolio by Industry

($ in thousands)

Real estate and rental and leasing