Banc of California, Inc. (NYSE: BANC) (“Banc of California”) today reported net income of $42.6 million, or $0.74 per diluted common share, for the third quarter of 2023. This compares to net income of $17.9 million, or $0.31 per diluted common share for the second quarter of 2023. On an adjusted basis, net income was $17.1 million for the quarter, or $0.30 per diluted common share.(1) This compares to adjusted net income of $18.4 million, or $0.32 per diluted common share, for the second quarter of 2023.(1) The third quarter of 2023 included a $46.2 million pre-tax mark-to-market gain on derivative instruments used to hedge the interest rate risk associated with various assets on the Company’s balance sheet, in anticipation of the anticipated sale of such assets in connection with the proposed merger with PacWest Bancorp (“PacWest”). The gain was partly offset by $9.3 million of other transaction costs.
Third quarter highlights:
- Net income of $42.6 million, or $0.74 per diluted common share, up 138% from the prior quarter as the bank strategically positioned the balance sheet ahead of the merger, which included a $46.2 million gain from derivative instruments, partly offset by $9.3 million of transaction costs.
- Stable overall deposit mix, with the period-end noninterest-bearing deposit percentage consistent with the prior quarter at 36% of total deposits.
- Addition of new clients with noninterest-bearing deposits, which contributed inflows of $52.2 million in the quarter and $201.5 million year-to-date.
- Net interest margin improvement of 8 basis points from 3.11% to 3.19% in comparison to the prior quarter, as the increase in the yield on loans and securities exceeded the increase in the cost of funds.
- Disciplined noninterest expense management, with total noninterest expense of $56.2 million reflecting an increase of $7.0 million over the prior quarter. Excluding the impact of $9.3 million of merger-related expenses, adjusted noninterest expense(1) decreased $2.2 million to $46.2 million for the third quarter.
- High liquidity levels, with immediately available on-balance sheet liquidity and unused borrowing capacity of $3.67 billion. Available liquidity was 2.1 times the level of uninsured and uncollateralized deposits, which was consistent with the prior quarter.
- Strong capital ratios(2) well above the regulatory thresholds for "well capitalized" banks, including an estimated 14.48% Total risk-based capital ratio, 12.19% Tier 1 capital ratio, 12.19% CET1 capital ratio and 10.15% Tier 1 leverage ratio.
- Low unrealized losses relative to capital, with AFS unrealized pre-tax losses of $51.9 million on securities of $915.1 million, representing 3.9% of CET1 capital. Total AFS and HTM unrealized pre-tax losses of $129.9 million on total securities of $1.24 billion represented 9.8% of CET1 capital.
- Continued growth in book value and tangible book value, with book value per share of $17.44, up from $16.67, and tangible book value per share of $15.34, up from $14.56.(1)
(1) | Non-GAAP measures; refer to section 'Non-GAAP Measures' | |
(2) | Capital ratios are preliminary. |
Jared Wolff, Chairman, President & CEO of Banc of California, commented, "Our third quarter results reflect the impact of our strategic approach to positioning our balance sheet ahead of our merger with PacWest, continuing to bring new relationships to the bank, limiting reliance on high cost deposits, effectively hedging interest rate risk on our balance sheet, and accelerating the resolution of certain acquired credits. Due in large part to this strategic approach, we generated net income of $42.6 million during the quarter, which resulted in increases in all of our capital ratios, a 4.6% increase in our book value per share and a 5.4% increase in our tangible book value per share. We also continue to be active in our new business development efforts with $201.5 million in noninterest-bearing deposits added from new commercial relationships year-to-date.”
Mr. Wolff continued, “As announced last week, we are very pleased to have received regulatory approval for the merger. We expect to close the merger on or about November 30, 2023. We remain focused on our overall strategy for the combined company which includes a strong, liquid balance sheet with strong credit, ample reserves and capital, and growth centered around relationship banking and high quality commercial clients. Our two organizations have made significant progress on our integration planning that will enable our combined institution post-closing to immediately focus on the strategic market opportunities presented by our merger, generate long-term profitable growth, and further enhance the value of our franchise.”
Proposed Merger with PacWest
On July 25, 2023, we announced the signing of a definitive agreement with PacWest pursuant to which the companies will combine in an all-stock merger transaction. Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, PacWest will merge into Banc of California, and Banc of California, N.A. will merge into Pacific Western Bank (together, the “Merger”). The combined holding company and bank will operate under the Banc of California name and brand following closing of the Merger. Under the terms of the merger agreement, PacWest stockholders will receive 0.6569 of a share of Banc of California common stock for each share of PacWest common stock. On October 19, 2023, we announced that the Board of Governors of the Federal Reserve System granted its approval of the Merger. In addition, on October 5, 2023, the California Department of Financial Protection and Innovation granted its approval of the merger of Banc of California, N.A. and Pacific Western Bank. No further regulatory approvals are required to complete the proposed transaction. Banc of California and PacWest will each hold a special meeting of its respective stockholders in connection with the Merger on November 22, 2023. The consummation of the proposed transaction is expected to close on or about November 30, 2023, subject to the satisfaction of the remaining closing conditions set forth in the merger agreement, including receipt of the requisite stockholder approvals, and the concurrent closing of a $400 million equity capital raise.
We are monitoring the economic environment and its impact on the projected combined company’s opening day and post-restructuring balance sheets and the combined company’s projected performance in future periods as compared to the estimates and projections set forth in the Investor Presentation dated July 25, 2023 (the “Investor Presentation”).
After considering developments occurring subsequent to the issuance of the Investor Presentation, including the volatility and changes in the interest rate environment, the relative performance of the two companies, the potential impacts on the opening day and post-restructuring balance sheets, and refinements to many of the assumptions and estimates used in the creation of projections included in the Investor Presentation, we are not aware of any material changes to the projected 2024 EPS range or CET1 regulatory capital levels for the combined company as stated in the Investor Presentation.
The recent volatility and resulting increase in longer term (7 and 10-year) interest rates decreased the current valuation of PacWest’s portfolio of available-for-sale securities which, with the corresponding increase in unrealized losses included in accumulated other comprehensive income (AOCI), reduced PacWest’s tangible book value. If these conditions persist through the closing date of the merger, there would be a corresponding decrease in the opening day tangible book value of the combined company as compared to the projections included in the Investor Presentation. In addition, PacWest’s third quarter 2023 net income was lower than forecasted in the estimates set forth in the Investor Presentation, which could also negatively impact the opening day tangible book value of the combined company. The noninterest-bearing deposit percentage at PacWest has decreased from the projections used in the Investor Presentation, which could impact the percentage of noninterest-bearing deposits forecasted in the opening day and the post-restructuring balance sheets.
The economic environment remains dynamic with heightened levels of volatility in interest rates, market levels and potentially other economic impacts. Accordingly, we will continue to monitor the effects of these and other potential impacts on the financial projections and estimates included in the Investor Presentation.
Income Statement Highlights
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30,
| June 30,
| March 31,
| December 31,
| September 30,
| September 30,
| September 30,
| |||||||||||||||||
($ in thousands) | |||||||||||||||||||||||
Total interest and dividend income | $ | 116,222 | $ | 116,151 | $ | 106,919 | $ | 104,112 | $ | 95,973 | $ | 339,292 | $ | 268,660 | |||||||||
Total interest expense | 47,004 | 46,519 | 33,866 | 23,895 | 16,565 | 127,389 | 34,512 | ||||||||||||||||
Net interest income | 69,218 | 69,632 | 73,053 | 80,217 | 79,408 | 211,903 | 234,148 | ||||||||||||||||
Net (loss) gain on sale of securities available for sale | — | — | — | (7,708 | ) | — | — | 16 | |||||||||||||||
Change in fair value of derivative instruments(1) | 46,186 | 10 | (24 | ) | (8 | ) | 39 | 46,172 | 224 | ||||||||||||||
Other noninterest income | 4,592 | 6,014 | 7,883 | 6,289 | 5,642 | 18,489 | 18,537 | ||||||||||||||||
Total noninterest income | 50,778 | 6,024 | 7,859 | (1,427 | ) | 5,681 | 64,661 | 18,777 | |||||||||||||||
Total revenue | 119,996 | 75,656 | 80,912 | 78,790 | 85,089 | 276,564 | 252,925 | ||||||||||||||||
Acquisition, integration and transaction costs | 9,329 | — | — | — | 2,080 | 9,329 | 2,080 | ||||||||||||||||
Other noninterest expense | 46,835 | 49,132 | 51,239 | 48,203 | 48,882 | 147,206 | 144,090 | ||||||||||||||||
Total noninterest expense | 56,164 | 49,132 | 51,239 | 48,203 | 50,962 | 156,535 | 146,170 | ||||||||||||||||
Pre-tax / pre-provision income(2) | 63,832 | 26,524 | 29,673 | 30,587 | 34,127 | 120,029 | 106,755 | ||||||||||||||||
Provision for (reversal of) credit losses | 5,000 | 1,900 | 2,000 | — | — | 8,900 | (31,542 | ) | |||||||||||||||
Income tax expense | 16,258 | 6,745 | 7,395 | 9,068 | 9,931 | 30,398 | 38,877 | ||||||||||||||||
Net income | $ | 42,574 | $ | 17,879 | $ | 20,278 | $ | 21,519 | $ | 24,196 | $ | 80,731 | $ | 99,420 | |||||||||
Net income available to common stockholders(3) | $ | 42,574 | $ | 17,879 | $ | 20,278 | $ | 21,519 | $ | 24,196 | $ | 80,731 | $ | 94,253 | |||||||||
(1) | For the three and nine months ended September 30, 2023, balance includes a $46.2 million pre-tax mark-to-market gain on derivative instruments, including interest rate swaptions and a contingent forward sale agreement on the single family residential (SFR) loan portfolio executed concurrently with the announcement of the proposed merger with PacWest | |
(2) | Non-GAAP Measure; refer to section 'Non-GAAP Measures' | |
(3) | For the nine months ended September 30, 2022, 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
Q3-2023 vs Q2-2023
Net interest income decreased $0.4 million, or 0.6%, to $69.2 million for the third quarter primarily due to lower average interest-earning assets partially offset by net interest margin expansion.
Average interest-earning assets of $8.61 billion decreased $360.4 million from the prior quarter as the Company used cash to pay down FHLB borrowings and other liabilities reducing the excess liquidity that was carried in the prior quarter. The net interest margin increased 8 basis points to 3.19% for the third quarter as average interest-earning assets yield increased 16 basis points while the average cost of funds increased 9 basis points.
The yield on average interest-earning assets increased 16 basis points to 5.36% for the third quarter from 5.20% in the second quarter mainly due to higher yields on loans, securities and other interest-earning assets. The yield on average loans increased 10 basis points to 5.38% during the third quarter as a result of higher market interest rates and changes in portfolio mix from originations and payoffs. The yield on average investment securities increased 34 basis points to 5.17% due mainly to rate resets in the collateralized loan obligations (CLO) portfolio.
The average cost of funds increased 9 basis points to 2.29% for the third quarter from 2.20% in the second quarter due mainly to higher market interest rates and changes in the balance sheet mix. The average cost of total deposits increased 19 basis points to 1.86% for the third quarter compared to 1.67% in the second quarter. The average cost of interest-bearing liabilities increased 13 basis points to 3.21% for the third quarter from 3.08% in the second quarter. Average noninterest-bearing deposits decreased $80.5 million for the third quarter compared to the second quarter and average total deposits decreased $83.2 million.
YTD 2023 vs YTD 2022
Net interest income decreased $22.2 million, or 9.5%, to $211.9 million for the nine months ended September 30, 2023 from the same period in 2022 due primarily to higher funding costs from higher market interest rates, changes in the balance sheet mix, and the enhanced liquidity management strategies in the first half of 2023 due to the operating environment.
The net interest margin decreased 32 basis points to 3.24% as the average cost of funds increased 150 basis points while the average interest-earning assets yield increased 110 basis points.
The yield on average interest-earning assets increased 110 basis points to 5.18% for the nine months ended September 30, 2023 from 4.08% for the same period in 2022 due mainly to higher market interest rates and changes in the mix of interest-earning assets. The yield on average loans increased 86 basis points to 5.24% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The yield on average investment securities increased 211 basis points to 4.89% for the same period. Average loans represented 80% of average earnings assets for the nine months ended September 30, 2023 compared to 83% for the nine months ended September 30, 2022. Average loans decreased by $248.1 million due mainly to lower average warehouse balances, partially offset by organic loan growth in other loan categories.
The average cost of funds increased 150 basis points to 2.06% for the nine months ended September 30, 2023 from 0.56% for the nine months ended September 30, 2022 due mainly to higher market interest rates and changes in the balance sheet mix. The average cost of total deposits increased 134 basis points to 1.58% for the nine months ended September 30, 2023 compared to the same period in 2022. The average cost of interest-bearing liabilities increased 209 basis points to 2.93% for the nine months ended September 30, 2023 compared to 0.84% for the same period in 2022 driven primarily by a 210 basis point increase in the cost of average interest-bearing deposits to 2.49% from 0.39% for the same period in 2022. 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 389 basis points to 4.92% for the nine months ended September 30, 2023 from 1.03% in the same period in 2022. Average noninterest-bearing deposits decreased $356.8 million for the nine months ended September 30, 2023 compared to the same period in 2022 and average total deposits decreased $670.7 million. Average noninterest-bearing deposits represented 36% of total average deposits for the nine months ended September 30, 2023 compared to 38% for the same period in 2022.
Provision for credit losses
Q3-2023 vs Q2-2023
The provision for credit losses was $5.0 million for the third quarter and related entirely to the provision for loan losses which was driven primarily by net charge-offs of legacy loans from the acquisition of Pacific Mercantile Bank. 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 $0.8 million reversal of the provision for credit losses related to lower unfunded commitments.
YTD 2023 vs YTD 2022
During the nine months ended September 30, 2023, the provision for credit losses was $8.9 million and included a $9.2 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 nine months ended September 30, 2022, and included a $31.3 million recovery from the settlement of a loan previously charged-off in 2019.
Noninterest income
Q3-2023 vs Q2-2023
Noninterest income increased $44.8 million to $50.8 million for the third quarter primarily due to a $46.2 million mark-to-market gain recognized on derivative instruments, partially offset by a $1.7 million decrease in income from equity investments. Concurrently with the announcement of the proposed merger with PacWest, we entered into an aggregate of $3.1 billion in interest rate swaptions and a contingent forward sale agreement on the SFR loan portfolio of $1.8 billion to hedge the interest rate risk component of the change in fair value of our balance sheet in anticipation of the application of purchase accounting upon the closing of the proposed merger transaction with PacWest. These derivatives were marked to market at the end of the period and reflected an increase in value from the changes in market interest rates.
YTD 2023 vs YTD 2022
Noninterest income for the nine months ended September 30, 2023 increased $45.9 million to $64.7 million compared to the same period in 2022 mainly due to the $46.2 million market-to-market gain recognized on derivative instruments, higher loan servicing income from higher purchased mortgage servicing asset balances and higher rental income due to an increase in subleased facilities, partially offset by lower customer service fees.
Noninterest expense
Q3-2023 vs Q2-2023
Noninterest expense increased $7.0 million to $56.2 million for the third quarter compared to the second quarter. The increase was due mainly to acquisition, integration and transaction costs of $9.3 million incurred related to our proposed merger with PacWest, partially offset by lower salaries and employee benefits of $2.5 million.
Adjusted noninterest expense(1), which represents total operating costs, decreased $2.2 million to $46.2 million for the third quarter compared to $48.4 million for the second quarter mainly due to lower salaries and employee benefits of $2.5 million. Adjusted noninterest expense for the third quarter excludes acquisition, integration and transaction costs of $9.3 million incurred for the proposed merger with PacWest.
YTD 2023 vs YTD 2022
Noninterest expense for the nine months ended September 30, 2023 increased $10.4 million to $156.5 million compared to the same period in 2022. The increase was mainly due to higher (i) acquisition, integration and transaction costs of $7.2 million, (ii) software and technology expense of $1.6 million related to investments in technology infrastructure, (iii) regulatory assessments of $1.2 million as the FDIC increased assessment rates in 2023, (iv) marketing and other expenses of $1.0 million, and (v) professional fees of $0.9 million, including a $0.4 million increase in indemnified legal fees (net of insurance recoveries), partially offset by lower salaries and employee benefits of $1.5 million. Acquisition, integration and transactions costs related to the proposed merger with PacWest were $9.3 million for the nine months ended September 30, 2023, compared to $2.1 million related to the acquisition of Deepstack for the nine months ended September 30, 2022.
Adjusted noninterest expense(1) for the nine months ended September 30, 2023 increased $2.9 million to $143.9 million compared to the same period in 2022. The increase was mainly due to higher (i) software and technology expense of $1.6 million related to investments in technology infrastructure, (ii) regulatory assessments of $1.2 million as the FDIC increased assessment rates in 2023, (iii) marketing and other expenses of $1.0 million, and (iv) professional fees of $0.5 million, partially offset by lower salaries and employee benefits of $1.5 million. Adjusted noninterest expense excludes acquisition, integration and transactions costs, indemnified legal fees and loss in alternative energy partnership investments in both periods.
(1) | Non-GAAP measures; refer to section 'Non-GAAP Measures' |
Income taxes
Q3-2023 vs Q2-2023
Income tax expense totaled $16.3 million for the third quarter resulting in an effective tax rate of 27.6% compared to $6.7 million for the second quarter and an effective tax rate of 27.4%. 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 $30.4 million for the nine months ended September 30, 2023, representing an effective tax rate of 27.4%, compared to $38.9 million and an effective tax rate of 28.1% for the nine months ended September 30, 2022.
Balance Sheet
At September 30, 2023, total assets were $9.25 billion, which represented a decrease of $123.2 million from the prior quarter. The following table shows selected balance sheet line items as of the dates indicated:
Amount Change | ||||||||||||||||||||||
September 30,
| June 30,
| March 31,
| December 31,
| September 30,
| Q3-23 vs. Q2-23 | Q3-23 vs. Q3-22 | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||||
Cash and cash equivalents | $ | 310,985 | $ | 283,729 | $ | 1,010,951 | $ | 228,896 | $ | 256,058 | $ | |||||||||||
