Banc of California, Inc. (NYSE: BANC) today reported net income of $17.9 million, or $0.31 per diluted common share, for the second quarter of 2023. This compares to net income of $20.3 million, or $0.34 per diluted common share for the first quarter of 2023. On an adjusted basis, net income was $18.4 million for the quarter, or $0.32 per diluted common share.(1) This compares to adjusted net income of $21.7 million, or $0.37 per diluted common share, for the first quarter of 2023.(1)
Second quarter highlights:
- Interest income growth, up $9.2 million or 9% from the prior quarter due to higher interest rates and changes in the portfolio as new originations have higher yields than payoffs. Overall, net interest income was down $3.4 million or 5% from the prior quarter due to higher funding costs, changes in the balance sheet mix and the impact of the strategy to hold extra liquidity, which resulted in higher short-term borrowings from the FHLB and FRB.
- Stable overall deposits, down approximately 1% on average and period-end balances, with the period-end noninterest-bearing percentage stable at approximately 36% quarter over quarter.
- Noninterest-bearing deposit growth from new clients, which contributed inflows of $74.8 million in the quarter, consistent with the prior quarter’s growth and up 13% over the same period last year.
- Loan growth, up $101.8 million or 1% from the prior quarter and 6% annualized, highlighted by core commercial and industrial growth of $64 million or 6% and increased warehouse utilization.
- Lower noninterest expenses, which declined $2.1 million or 4% from the prior quarter due primarily to lower losses in alternative energy partnerships and compensation expenses.
- High liquidity levels, with immediately available on-balance sheet liquidity and unused borrowing capacity of $3.9 billion. Available liquidity was 2.2 times the level of uninsured and uncollateralized deposits, which was consistent with the prior quarter.
- Low unrealized losses, with AFS unrealized losses of $54.1 million on securities of $922.1 million, representing 4.3% of CET1 capital. Total AFS and HTM unrealized losses of $115.5 million on total securities of $1.25 billion represented 9.1% of CET1 capital.
- Strong capital ratios(2) well above the regulatory thresholds for "well capitalized" banks, including an estimated 14.26% Total risk-based capital ratio, 11.88% Tier 1 capital ratio, 11.88% CET1 capital ratio and 9.54% Tier 1 leverage ratio.
- Other performance highlights as follows:
- Book value per share of $16.67, up from $16.33
- Tangible common equity per share of $14.56, up from $14.26(1)
- Repurchased $16.0 million of common stock during the quarter and $21.1 million during the six months ended June 30, 2023
Jared Wolff, Chairman, President & CEO of Banc of California, commented, "We are very excited to announce our merger with PacWest Bancorp. This is a reflection of the strength of the franchise we have built and our continued ability to create value for our stockholders. Our second quarter results reflect strong performance in several areas. Notwithstanding an uncertain economic landscape, our team did an exceptional job to bring in nearly $75 million of noninterest-bearing deposits from new relationships, maintaining ending and average noninterest-bearing deposits at 36%, in line with noninterest-bearing deposits at the end of first quarter. Loan growth came in above expectation in core C&I, and expenses remain well-controlled. Our margin reflected excess cash balances held for a good part of the quarter, but our June margin of 3.24% is more representative of where we expect to see our margin in the quarter ahead. Due to our solid financial performance and prudent balance sheet management, we increased our tangible common equity ratio to more than 9%, grew our tangible book value per share by 2.1% and repurchased $16.0 million of our common stock at well below tangible book value per share.”
Mr. Wolff continued, “We expect to see earnings growth ahead. As noted, we exited the second quarter with a 13 basis points higher net interest margin in the month of June than our margin for the entire second quarter. We continue to experience positive trends in noninterest-bearing deposit inflows, and higher end-of-period loan balances than average balances for the quarter. Over the longer term, we believe we are in an excellent position to capitalize on the dramatic change we have seen in the competitive environment in California over the past two years in which many banks have either completely exited or significantly pulled back from the markets in which we operate. The proposed merger with PacWest will only accelerate the exceptional opportunity for us to continue adding new clients and banking talent that we believe will increase our market share, increase our scale and level of efficiencies, generate profitable growth, and further enhance the value of our franchise.”
(1) | Non-GAAP measures; refer to section 'Non-GAAP Measures' | |
(2) | Capital ratios are preliminary. |
Income Statement Highlights
Three Months Ended | Six Months Ended | |||||||||||||||||||||
June 30,
| March 31,
| December 31,
| September 30,
| June 30,
| June 30,
| June 30,
| ||||||||||||||||
($ in thousands) | ||||||||||||||||||||||
Total interest and dividend income | $ | 116,151 | $ | 106,919 | $ | 104,112 | $ | 95,973 | $ | 88,418 | $ | 223,070 | $ | 172,687 | ||||||||
Total interest expense | 46,519 | 33,866 | 23,895 | 16,565 | 10,119 | 80,385 | 17,947 | |||||||||||||||
Net interest income | 69,632 | 73,053 | 80,217 | 79,408 | 78,299 | 142,685 | 154,740 | |||||||||||||||
Net (loss) gain on sale of securities available for sale | — | — | (7,708 | ) | — | — | — | 16 | ||||||||||||||
Other noninterest income | 6,024 | 7,859 | 6,281 | 5,681 | 7,186 | 13,883 | 13,080 | |||||||||||||||
Total noninterest income | 6,024 | 7,859 | (1,427 | ) | 5,681 | 7,186 | 13,883 | 13,096 | ||||||||||||||
Total revenue | 75,656 | 80,912 | 78,790 | 85,089 | 85,485 | 156,568 | 167,836 | |||||||||||||||
Total noninterest expense | 49,132 | 51,239 | 48,203 | 50,962 | 48,612 | 100,371 | 95,208 | |||||||||||||||
Pre-tax / pre-provision income(1) | 26,524 | 29,673 | 30,587 | 34,127 | 36,873 | 56,197 | 72,628 | |||||||||||||||
Provision for (reversal of) credit losses | 1,900 | 2,000 | — | — | — | 3,900 | (31,542 | ) | ||||||||||||||
Income tax expense | 6,745 | 7,395 | 9,068 | 9,931 | 10,161 | 14,140 | 28,946 | |||||||||||||||
Net income | $ | 17,879 | $ | 20,278 | $ | 21,519 | $ | 24,196 | $ | 26,712 | $ | 38,157 | $ | 75,224 | ||||||||
Net income available to common stockholders(2) | $ | 17,879 | $ | 20,278 | $ | 21,519 | $ | 24,196 | $ | 26,712 | $ | 38,157 | $ | 70,057 | ||||||||
(1) | Non-GAAP Measure; refer to section 'Non-GAAP Measures' | |
(2) | Balance represents the net income available to common stockholders after subtracting preferred stock dividends and the impact of preferred stock redemption from net income. Refer to the Statements of Operations for additional detail on these amounts. |
Net interest income
Q2-2023 vs Q1-2023
Net interest income decreased $3.4 million, or 4.7%, to $69.6 million for the second quarter primarily due to the impact of the higher market interest rates, changes in the balance sheet mix, and the cost of excess short-term borrowings from the FHLB and FRB related to maintaining higher levels of liquidity during the first two months of the quarter, which was partially offset by higher average balances and yields on interest-earning assets.
The net interest margin decreased 30 basis points to 3.11% for the second quarter as the average cost of funds increased 52 basis points while the average interest-earning assets yield increased 21 basis points.
The yield on average interest-earning assets increased to 5.20% for the second quarter from 4.99% in the first quarter mainly due to higher yields on loans, securities and other interest-earning assets. The overall loan yield increased 21 basis points to 5.28% during the second quarter as a result of the impact of higher market interest rates and changes in portfolio mix from originations and payoffs. The yield on securities increased 17 basis points to 4.83% due mostly to rate resets in the CLO portfolio.
The average cost of funds increased 52 basis points to 2.20% for the second quarter from 1.68% in the first quarter, driven by higher market interest rates and changes in the balance sheet mix. The cost of average interest-bearing liabilities increased 61 basis points to 3.08% for the second quarter from 2.47% in the first quarter. This increase was due partially to the cost of excess short-term borrowings from the FHLB and FRB related to maintaining excess liquidity at the end of the first quarter and into the second quarter due to the operating environment. Average noninterest-bearing deposits were $192.3 million lower and average total deposits were $61.3 million lower for the second quarter.
YTD 2023 vs YTD 2022
Net interest income decreased $12.1 million, or 7.8%, to $142.7 million for the six months ended June 30, 2023 due primarily to higher funding costs from higher market interest rates, changes in the balance sheet mix and the conservative strategy to hold extra liquidity at the end of the first quarter and into the second quarter due to the operating environment.
The net interest margin decreased 29 basis points to 3.26% as the average cost of funds increased 151 basis points while the average interest-earning assets yield increased 114 basis points between periods.
The yield on average interest-earning assets increased 114 basis points to 5.10% for the six months ended June 30, 2023, from 3.96% for the same period in 2022 due mostly to higher market interest rates and changes in the mix of interest-earning assets. The yield on average loans increased 86 basis points to 5.17% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The yield on average investment securities increased 227 basis points for the same period. Average loans represented 80% of average earnings assets for the six months ended June 30, 2023 compared to 83% for the six months ended June 30, 2022. Average loans decreased by $238.1 million due mostly to lower average warehouse balances, partially offset by organic loan growth in other loan categories.
The average cost of funds increased 151 basis points to 1.95% for the six months ended June 30, 2023 from 0.44% for the six months ended June 30, 2022 due mostly to higher market interest rates and changes in the balance sheet mix. The average cost of total deposits increased 132 basis points to 1.44% for the six months ended June 30, 2023 compared to the same period in 2022. The cost of average interest-bearing liabilities increased 213 basis points to 2.79% for the six months ended June 30, 2023 compared to 0.66% for the same period in 2022 and included a 209 basis point increase in the cost of average interest-bearing deposits to 2.29%. The increase in the cost of these funding sources was mainly due to the impact of higher market interest rates as the average effective Federal Funds rate increased 430 basis points to 4.75% for the six months ended June 30, 2023 from 0.45% in the same period in 2022. Average noninterest-bearing deposits decreased $279.0 million for the six months ended June 30, 2023 compared to the same period in 2022 and average total deposits decreased $593.0 million. Average noninterest-bearing deposits represented 37% of total average deposits for the six months ended June 30, 2023 compared to 38% for the same period in 2022.
Provision for credit losses
Q2-2023 vs Q1-2023
The provision for credit losses was $1.9 million for the second quarter and included a $1.7 million provision for loan losses and a $1.0 million provision for credit loss for securities available-for-sale, partially offset by an $800 thousand reversal of the provision for credit losses related to lower unfunded commitments. There was a $2.0 million provision for credit losses for the first quarter of 2023. The provision for credit losses in the second quarter was mainly due to net charge-offs and an increase in specific reserves, partially offset by the change in portfolio mix and lower unfunded commitments.
YTD 2023 vs YTD 2022
During the six months ended June 30, 2023, the provision for credit losses was $3.9 million, and included a $4.2 million provision for loan losses and a $1.0 million provision for credit loss for securities available-for-sale, partially offset by a $1.3 million reversal of the provision for credit losses related to lower unfunded commitments. The provision for credit losses was a reversal of $31.5 million during the six months ended June 30, 2022, and included a $31.3 million recovery from the settlement of a loan previously charged-off in 2019.
Noninterest income
Q2-2023 vs Q1-2023
Noninterest income decreased $1.8 million to $6.0 million for the second quarter mainly due to the timing of revenue received from equity investments of $1.2 million and the prior quarter included $1.1 million in recoveries of certain charged-off loans acquired in a business combination.
YTD 2023 vs YTD 2022
Noninterest income for the six months ended June 30, 2023 increased $0.8 million to $13.9 million compared to the same period in 2022. The increase was mainly due to higher loan servicing income from higher purchased mortgage servicing asset balances, lower valuation losses on loan held for sale, and higher rental income due to an increase in subleased facilities, partially offset by lower customer services fees.
Noninterest expense
Q2-2023 vs Q1-2023
Noninterest expense decreased $2.1 million to $49.1 million for the second quarter compared to the first quarter. The decrease was due primarily to (i) lower net losses in alternative energy partnership investments of $1.7 million, (ii) lower salaries and employee benefits of $1.4 million as the first quarter included $1.0 million of severance costs and higher payroll taxes, (iii) the reversal of a provision for loan repurchases of $797 thousand, partially offset by (iv) higher marketing, recruiting and other expense of $1.2 million and (v) higher software and technology expense of $305 thousand as we continue to invest in our technology infrastructure.
Adjusted noninterest expense, which represents total operating costs(1), decreased $825 thousand to $48.4 million for the second quarter compared to $49.2 million for the prior quarter. This decrease was due to lower salaries and benefits of $1.4 million, the reversal of a provision for loan repurchases of $797 thousand and lower professional fees of $443 thousand, partially offset by higher marketing, recruiting and other expense of $1.2 million and software and technology expense of $305 thousand.
YTD 2023 vs YTD 2022
Noninterest expense for the six months ended June 30, 2023 increased $5.2 million to $100.4 million compared to the same period in 2022. The increase was due to higher (i) software and technology expense of $1.4 million related to investments in our technology infrastructure, (ii) professional fees of $1.2 million, including a $783 thousand increase in indemnified legal fees (net of insurance recoveries), (iii) marketing, recruiting and other expenses of $1.0 million, (iv) regulatory assessments of $707 thousand as the FDIC increased assessment rates in 2023 and (v) salaries and employee benefits of $687 thousand due mostly to the aforementioned severance costs.
Income taxes
Q2-2023 vs Q1-2023
Income tax expense totaled $6.7 million for the second quarter resulting in an effective tax rate of 27.4% compared to $7.4 million for the first quarter and an effective tax rate of 26.7%. The effective tax rate for the full year 2023 is estimated to be 27% to 28%.
YTD 2023 vs YTD 2022
Income tax expense totaled $14.1 million for the six months ended June 30, 2023, representing an effective tax rate of 27.0%, compared to $28.9 million and an effective tax rate of 27.8% for the six months ended June 30, 2022.
(1) | Non-GAAP measures; refer to section 'Non-GAAP Measures' |
Balance Sheet
At June 30, 2023, total assets were $9.37 billion, which represented a linked-quarter decrease of $668.6 million. The following table shows selected balance sheet line items as of the dates indicated:
Amount Change | ||||||||||||||||||||||
June 30,
| March 31,
| December 31,
| September 30,
| June 30,
| Q2-23 vs.
| Q2-23 vs.
| ||||||||||||||||
($ in thousands) | ||||||||||||||||||||||
Cash and cash equivalents | $ | 283,729 | $ | 1,010,951 | $ | 228,896 | $ | 256,058 | $ | 243,064 | $ | (727,222 | ) | $ | 40,665 | |||||||
Securities held-to-maturity | $ | 328,405 | $ | 328,520 | $ | 328,641 | $ | 328,757 | $ | 329,272 | $ | (115 | ) | $ | (867 | ) | ||||||
Securities available-for-sale | $ | 922,091 | $ | 958,427 | $ | 868,297 | $ | 847,565 | $ | 865,435 | $ | (36,336 | ) | $ | 56,656 | |||||||
Loans held-for-investment | $ | 7,156,206 | $ | 7,054,380 | $ | 7,115,038 | $ | 7,289,320 | $ | 7,451,264 | $ | 101,826 | $ | (295,058 | ) | |||||||
Total assets | $ | 9,370,265 | $ | 10,038,901 | $ | 9,197,016 | $ | 9,368,578 | $ | 9,502,113 | $ | (668,636 | ) | $ | (131,848 | ) | ||||||
Noninterest-bearing deposits | $ | 2,446,693 | $ | 2,506,616 | $ | 2,809,328 | $ | 2,943,585 | $ | 2,826,599 | $ | (59,923 | ) | $ | (379,906 | ) | ||||||
