- Key insight: Banc of California restructured its balance sheet during the second quarter, leading to a net loss that appeared to surprise investors.
- What's at stake: The restructuring will ultimately position the bank for higher recurring earnings and improved capital generation, CEO Jared Wolff said.
- Forward look: The bank expects to complete the sale of select commercial estate loans during the third quarter.
Banc of California surprised investors Wednesday by reporting a second-quarter loss stemming from a balance-sheet restructure that's intended to deliver higher recurring earnings.
During the quarter, the Los Angeles-based bank sold $2.3 billion of lower-yielding securities and redeployed more than half of that into higher-yielding, shorter-duration ones, it disclosed in a press release. It also initiated the sale of $827 million of certain commercial real estate loans and multifamily construction loans, in part to reduce exposures and enhance capital efficiency, and it retired $385 million of subordinated debt prior to a higher contractual interest-rate reset.
The result was a net loss of $251.3 million, or $1.61 per share, for the period ending June 30. That was significantly worse than the 40 cents-per-share gain predicted by analysts, according to S&P Capital IQ.
Banc of California CEO Jared Wolff framed the balance sheet restructure and resulting net loss as a necessary step to achieve future growth. In a call with analysts, Wolff said the benefits of the actions taken will "become increasingly visible" in the form of stronger recurring net interest income, a higher margin and faster organic capital generation.
"We have clear financial targets, strong franchise momentum and the flexibility to allocate capital toward the businesses and relationships where we see the best risk-adjusted returns," Wolff said on the call. "That is the work ahead, and our team is focused on delivering on it."
Investors seemed wary. The bank's stock price was down by more than 11% Wednesday afternoon.
Banc of California is the third-largest bank headquartered in California, with $35 billion of assets as of June 30. It was substantially smaller, at just under $10 billion of assets, when it agreed to
Banc of California's takeover of the embattled PacWest was backed by private investors, and it involved a substantial balance-sheet repositioning.
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As Banc of California
Among the actions that Banc of California took during the second quarter, the largest was the securities positioning. The bank said it deployed $1.7 billion of the $2.3 billion of lower-yielding securities into higher-yielding ones with shorter durations, and plans to invest the remaining proceeds in the third quarter. The action resulted in a $256.7 million pre-tax loss on securities, it said.
"At a time when many banks are managing margin pressure, this strategic repositioning puts us in a favorable position with early benefits to net interest margin already visible," Wolff said on the call. He predicted that the bank's net interest margin will rise to 3.30% after the securities sale and the full reinvestment of the proceeds, and then "expand further in the second half of the year."
During the second quarter, Banc of California's net interest margin was 3.13%.
Meanwhile, the sale of select commercial real estate loans and multifamily construction loans followed a competitive loan-sale process that drew multiple bids, Wolff told analysts. The bank has entered into purchase-and-sale agreements and expects those sales to be finalized by the end of the third quarter.
The loans fall into two buckets, according to Wolff. About $300 million were construction loans to a single borrower "that were personally guaranteed but showing signs of weakness," he said. The remaining loans were still performing, but carrying lower interest rates, Wolff said.
The bank plans to use the sale proceeds to fund market-rate loans, Wolff said.
During the second quarter, the bank's net interest income totaled $250.5 million, up 4.3% year over year. Fee income was a loss of $234.1 million, driven by the losses on the securities sale and the loan sales. Expenses were $189.9 million, up 2% from the year-ago period as a result of higher Federal Deposit Insurance Corp. assessment costs related to the balance-sheet tweaks.
Gary Tenner, an analyst at D.A. Davidson, asked on the call if Banc of California executives could give investors some assurance that the bank is finished with selling loans. Wolff said that PacWest had been "very comfortable having large relationships," while Banc of California has "tried to reduce concentrations."
"I don't ever want to take off the table that I wouldn't sell loans in the future if I thought it was the right thing for shareholders in any given quarter," he said. "But I think to your question about … what we can identify today, do we think we've gotten through the things we need to get through, I think the answer is yes."
