10-Q: Banc of California Reports Third Quarter 2024 Results, Impacted by Loan Sale and Strategic Repositioning

Banc of California's third quarter results reflect a net loss due to a strategic securities sale, offset partially by improved net interest income and reduced operating expenses.

Summary

• Banc of California reported a net loss of $1.2 million for the third quarter of 2024, or a loss of $0.01 per diluted share.
• This compares to net earnings of $20.4 million, or $0.12 per diluted share, in the second quarter of 2024.
• The decrease in net earnings was primarily due to a $59.9 million loss on the sale of securities, offset partially by a $2.7 million increase in net interest income and a $7.4 million decrease in noninterest expense.
• The company sold $741.8 million of securities with a weighted average yield of 2.94% resulting in a pre-tax loss of $60 million and purchased $724 million of similar quality securities with a weighted average yield of 5.65%.
• The company also paid off $1.85 billion of brokered deposits with an average cost of 5.35% and the remaining $545 million in Bank Term Funding Program balance with a rate of 5.40%.
• The company replaced a portion of these higher-cost fundings with the addition of a $500 million long-term FHLB advance with a rate of 3.18%.
• For the nine months ended September 30, 2024, the company reported net earnings of $40.1 million, or $0.24 per diluted share, compared to a net loss of $1.4 billion, or a loss of $18.61 per diluted share, for the same period in 2023.
• The increase in net earnings for the nine months ended September 30, 2024 was due mainly to lower noninterest expense of $1.5 billion, higher noninterest income of $96.0 million and higher net interest income of $94.7 million, offset partially by higher provision for credit losses of $25.0 million and higher income tax expense of $163.7 million.

Sentiment

Score: 5

Explanation: The document presents mixed results, with a net loss in the quarter due to a strategic securities sale, but also shows positive trends in net interest income and expense management. The company is taking steps to improve its balance sheet and liquidity, but faces ongoing challenges in the current economic environment.

Positives

• Net interest income increased by $2.7 million in the third quarter of 2024 compared to the second quarter of 2024.
• Noninterest expense decreased by $7.4 million in the third quarter of 2024 compared to the second quarter of 2024.
• The company's net interest margin increased by 13 basis points in the third quarter of 2024 compared to the second quarter of 2024.
• The company's total cost of funds decreased by 13 basis points in the third quarter of 2024 compared to the second quarter of 2024.
• The company's primary liquidity was $4.7 billion at September 30, 2024.
• The company's secondary liquidity was $11.7 billion at September 30, 2024.

Negatives

• The company reported a net loss of $1.2 million for the third quarter of 2024.
• The company recorded a $59.9 million loss on the sale of securities in the third quarter of 2024.
• Total assets decreased by $5.1 billion since year-end.
• Total deposits decreased by $3.6 billion since year-end.
• Total borrowings decreased by $1.3 billion since year-end.

Risks

• The company's results are subject to changes in general economic conditions, interest rates, and credit risks.
• The company's results are subject to fluctuations in the demand for loans and real estate values.
• The company's results are subject to the quality and composition of its securities portfolio.
• The company's results are subject to the ability to develop and maintain a strong core deposit base.
• The company's results are subject to the costs and effects of litigation.
• The company's results are subject to risks related to acquisitions, including disruption to current plans and operations.
• The company's results are subject to the results of examinations by regulatory authorities.
• The company's results are subject to legislative or regulatory changes.
• The company's results are subject to the risk that its enterprise risk management framework may not be effective.
• The company's results are subject to errors in estimates of fair values of certain assets and liabilities.
• The company's results are subject to failures or security breaches with respect to its computer systems.
• The company's results are subject to the effects of climate change, severe weather events, natural disasters, pandemics, and other external events.
• The company's results are subject to the impact of bank failures or other adverse developments at other banks.
• The company's results are subject to the possibility that its recorded goodwill could become impaired.
• The company's results are subject to the risk that it may incur significant losses on future asset sales.

Future Outlook

The company expects to continue to focus on growing customer deposits, managing its loan portfolio, and controlling operating expenses. The company also expects to continue to evaluate strategic opportunities to enhance its scale and presence in California and augment and diversify its sources of revenue.

Management Comments

• Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded loan commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date.
• Management believes that the information available on the Merger Date provided a reasonable basis for estimating fair value, additional information obtained during the measurement period resulted in changes in the second and third quarters of 2024 and further additional information that may be obtained during the remaining measurement period may result in additional changes to the estimated fair value amounts.

Industry Context

The results reflect the ongoing challenges in the banking industry, including interest rate volatility, credit quality concerns, and the need to manage liquidity effectively. The company's strategic repositioning and focus on core banking activities are consistent with industry trends.

Comparison to Industry Standards

• The company's capital ratios are above the minimum regulatory requirements and are comparable to other regional banks.
• The company's net interest margin of 2.93% is within the range of other regional banks, but is subject to fluctuations based on interest rate changes and balance sheet mix.
• The company's nonperforming assets to loans and leases held for investment and foreclosed assets, net of 0.75% is within the range of other regional banks, but is subject to fluctuations based on credit quality and economic conditions.
• The company's allowance for credit losses to nonaccrual loans and leases held for investment of 167.5% is within the range of other regional banks, but is subject to fluctuations based on credit quality and economic conditions.

Related Party Transactions

• The company has a services agreement with IntraFi Network LLC, where affiliates of funds managed by Warburg Pincus LLC hold a material investment interest and a board member is also a member of the board of directors of IntraFi.

Stakeholder Impact

• Shareholders may be concerned about the net loss in the third quarter of 2024, but may be encouraged by the company's strategic repositioning and improved net interest margin.
• Customers may benefit from the company's focus on core banking activities and improved liquidity.
• Employees may be affected by the company's ongoing efforts to manage costs and improve efficiency.
• Creditors may be reassured by the company's strong capital ratios and liquidity position.

Next Steps

• The company will continue to focus on growing customer deposits.
• The company will continue to manage its loan portfolio.
• The company will continue to control operating expenses.
• The company will continue to evaluate strategic opportunities to enhance its scale and presence in California and augment and diversify its sources of revenue.

Key Dates

Keywords

Banc of California, financial results, net interest income, net interest margin, loans, deposits, securities, capital, liquidity, credit quality, operating expenses, interest rates, asset sales, merger, Civic loans