Banc of California(US:BANC)2023-02-26 16:00markdown Part I [Business](index=7&type=section&id=Item%201.%20Business) Banc of California, Inc. is the holding company for Banc of California, N.A., a relationship-focused business bank serving California since 1941, providing loan and deposit products through 28 branches, with strategic acquisitions of Pacific Mercantile Bancorp and Deepstack Technologies, and is extensively regulated by the FRB and OCC - The company operates as a relationship-focused business bank in California, serving clients through **28 full-service branches** from San Diego to Santa Barbara[13](index=13&type=chunk) - The company's strategy is to be the premier business bank in California by delivering customized solutions and superior service, including investing in technology to improve client experience and operational efficiency[14](index=14&type=chunk) - Completed the acquisition of Deepstack Technologies on September 15, 2022, a software-led payments platform, to offer full-stack payment processing solutions to its clients[15](index=15&type=chunk)[36](index=36&type=chunk) Loan Portfolio Composition (December 31, 2022) | Loan Category | Amount (Billions) | Percentage of Total Assets | | :--- | :--- | :--- | | Total Loans Held-for-Investment | $7.12 | 77.4% | Deposit Market Share (June 30, 2022) | County | Market Share | | :--- | :--- | | Orange County | 2.17% | | Los Angeles County | 0.51% | | Santa Barbara County | 0.28% | | San Diego County | 0.19% | - The company and its bank subsidiary are extensively regulated by federal agencies, including the Federal Reserve Board (FRB) for the holding company and the Office of the Comptroller of the Currency (OCC) for the bank[47](index=47&type=chunk) [Risk Factors](index=20&type=section&id=Item%201A.%20Risk%20Factors) The company faces a wide range of risks that could adversely affect its business and financial results, categorized into operational, interest rate, credit, funding, liquidity, legal, compliance, market, and external event risks - Operational risks include challenges with new business lines like payment processing, cybersecurity threats, reliance on third-party vendors, and potential difficulties in integrating acquisitions such as Deepstack[72](index=72&type=chunk)[80](index=80&type=chunk)[85](index=85&type=chunk) - Credit and interest rate risks are significant, stemming from potential loan losses exceeding allowances, deterioration in economic conditions, declining property values, and the transition away from LIBOR[73](index=73&type=chunk)[101](index=101&type=chunk)[121](index=121&type=chunk) - Funding and liquidity risks involve the ability to maintain a stable, low-cost core deposit base and access to additional capital, with the holding company's dividend payments dependent on its bank subsidiary's regulatory-restricted dividends[76](index=76&type=chunk)[122](index=122&type=chunk)[124](index=124&type=chunk) - The company operates in a highly regulated environment, facing legal and compliance risks from potential changes in laws, fair lending regulations, and anti-money laundering requirements[77](index=77&type=chunk)[129](index=129&type=chunk)[132](index=132&type=chunk) - External risks include the potential negative impact of climate change, severe weather events, economic downturns concentrated in its California market, and intense competition from other financial institutions[78](index=78&type=chunk)[135](index=135&type=chunk)[137](index=137&type=chunk) [Unresolved Staff Comments](index=36&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[145](index=145&type=chunk) [Properties](index=36&type=section&id=Item%202.%20Properties) As of December 31, 2022, the company operates from 34 offices, which include its main executive offices in Santa Ana, California, and 28 branch offices across Los Angeles, Orange, San Diego, and Santa Barbara counties - The company conducts its operations from **34 offices**, including **28 branch offices** in Southern California[145](index=145&type=chunk) [Legal Proceedings](index=36&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal actions arising in the normal course of business, with management believing any resulting liability would not materially adversely affect its financial statements or operations - The company is party to various legal actions in the normal course of business, but management does not expect them to have a material adverse effect on its financial condition[146](index=146&type=chunk) [Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[146](index=146&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=37&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Banc of California's common stock trades on the NYSE under the symbol BANC, and in 2022, the company redeemed all outstanding Series E Preferred Stock, paid **$14.5 million** in common stock dividends, and completed a **$75 million** stock repurchase program - The company's voting common stock is listed on the New York Stock Exchange under the symbol BANC[148](index=148&type=chunk) - In 2022, all outstanding Series E Preferred Stock and its corresponding depositary shares were redeemed[148](index=148&type=chunk) - The holding company paid **$14.5 million** in dividends to common stockholders in 2022, while the Bank paid dividends of **$126.0 million** to the holding company during the same period[149](index=149&type=chunk) - A stock repurchase program of up to **$75 million** was announced on March 15, 2022, and was completed by December 31, 2022, with the company repurchasing **4,212,882 shares** at a weighted average price of **$17.80 per share**[152](index=152&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=40&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2022, Banc of California's net income available to common stockholders significantly increased to **$115.8 million** from **$50.6 million** in 2021, driven by a **23.9%** rise in net interest income and a **$31.5 million** reversal of credit losses, which included a **$31.3 million** recovery on a previously charged-off loan, while total assets decreased slightly to **$9.20 billion** - Management identifies the allowance for credit losses (ACL), business combinations, valuation of acquired loans, goodwill, and deferred income taxes as its most critical accounting estimates, requiring complex and subjective judgments[158](index=158&type=chunk) Financial Highlights for 2022 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Diluted EPS | $1.89 | $0.95 | | Adjusted Diluted EPS | $2.10 | $1.15 | | Net Interest Margin | 3.59% | 3.26% | | Return on Average Assets (ROAA) | 1.29% | 0.75% | | Book Value per Share | $16.26 | $15.48 | | Tangible Common Equity per Share | $14.19 | $13.88 | - Net interest income increased by **$60.6 million** (**23.9%**) to **$314.4 million** in 2022, driven by higher average balances and yields on interest-earning assets, which outpaced the rise in funding costs[196](index=196&type=chunk) - The company recorded a reversal of provision for credit losses of **$31.5 million** in 2022, compared to a provision of **$6.9 million** in 2021, primarily due to a **$31.3 million** recovery from the settlement of a loan previously charged-off in 2019[203](index=203&type=chunk) - Total loans decreased by **1.9%** to **$7.12 billion** at year-end 2022, mainly due to a **$1.00 billion** reduction in warehouse lending balances, partially offset by **$814.3 million** in SFR loan purchases and organic growth in other commercial loan categories[224](index=224&type=chunk) - Total deposits decreased by **$318.5 million** to **$7.12 billion**, with a shift in composition from savings and money market accounts to higher-cost certificates of deposit, while noninterest-bearing deposits remained stable and constituted **39.5%** of total deposits[268](index=268&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=75&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's most significant market risk is interest rate risk, managed by its Asset/Liability Committees (ALCOs), using simulation models to measure the potential impact of interest rate changes on Net Interest Income (NII) and Economic Value of Equity (EVE), with the balance sheet mildly "asset sensitive" as of December 31, 2022 - The company's primary market risk is interest rate risk, which is the risk associated with changes in interest rates and the ability to adapt to these changes[295](index=295&type=chunk) - As of December 31, 2022, the company's interest rate risk profile reflects a mildly "asset sensitive" position, meaning an increase in short-term interest rates is expected to slightly expand net interest margin[297](index=297&type=chunk) Interest Rate Sensitivity Analysis (as of December 31, 2022) | Change in Interest Rates (bps) | Change in Economic Value of Equity (%) | Change in Net Interest Income (%) | | :--- | :--- | :--- | | +200 | (0.1)% | +2.1% | | +100 | +0.2% | +1.1% | | -100 | (1.6)% | (2.0)% | | -200 | (4.6)% | (5.0)% | [Financial Statements and Supplementary Data](index=78&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the consolidated financial statements of Banc of California, Inc. for the fiscal year ended December 31, 2022, audited by Ernst & Young LLP, including the Consolidated Statements of Financial Condition, Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows, along with detailed notes - The financial statements were audited by Ernst & Young LLP, which issued an unqualified opinion, stating the financials are presented fairly in all material respects in conformity with U.S. GAAP[308](index=308&type=chunk) - A critical audit matter identified was the Allowance for Loan Losses (ALL), due to the high degree of subjectivity and judgment involved in determining the probabilities assigned to forecast scenarios used to estimate future credit losses[312](index=312&type=chunk)[314](index=314&type=chunk) [Consolidated Statements of Financial Condition](index=81&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) The consolidated balance sheet shows a slight decrease in total assets from **$9.39 billion** in 2021 to **$9.20 billion** in 2022, driven by a decrease in securities available-for-sale and a modest decline in net loans receivable, while total stockholders' equity declined from **$1.07 billion** to **$959.6 million** Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $9,197,016 | $9,393,743 | | Loans Receivable, Net | $7,029,078 | $7,158,896 | | Total Deposits | $7,120,921 | $7,439,435 | | Total Liabilities | $8,237,398 | $8,328,453 | | Total Stockholders' Equity | $959,618 | $1,065,290 | [Consolidated Statements of Operations](index=82&type=section&id=Consolidated%20Statements%20of%20Operations) The company's net income nearly doubled to **$120.9 million** in 2022 from **$62.3 million** in 2021, primarily driven by a significant increase in net interest income to **$314.4 million** and a reversal of provision for credit losses of **$31.5 million**, resulting in diluted earnings per share rising to **$1.89** from **$0.95** Consolidated Income Statement Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income | $314,365 | $253,778 | $224,594 | | (Reversal of) Provision for Credit Losses | $(31,542) | $6,854 | $29,719 | | Noninterest Income | $17,350 | $19,376 | $18,870 | | Noninterest Expense | $194,373 | $183,678 | $199,385 | | Net Income | $120,939 | $62,346 | $12,574 | | Diluted EPS | $1.89 | $0.95 | $(0.02) | [Notes to Consolidated Financial Statements](index=89&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures supporting the consolidated financial statements, covering significant accounting policies, acquisitions, loan portfolio composition, credit quality, deposit and borrowing structures, stockholders' equity changes, and regulatory capital adequacy - **Note 2 (Business Combinations):** Details the acquisition of Deepstack for **$24.0 million** in 2022, resulting in **$18.2 million** of goodwill, and the 2021 acquisition of Pacific Mercantile Bancorp for **$225.4 million**, resulting in **$59.0 million** of goodwill[350](index=350&type=chunk)[353](index=353&type=chunk)[355](index=355&type=chunk) - **Note 5 (Loans and ACL):** Total loans decreased to **$7.12 billion** in 2022 from **$7.25 billion** in 2021, with a significant reduction in warehouse lending, while non-traditional mortgage (NTM) loans, primarily interest-only, increased to **$862.3 million** (**12.1% of total loans**)[393](index=393&type=chunk)[439](index=439&type=chunk) - **Note 18 (Stockholders' Equity):** In Q1 2022, the company redeemed all outstanding Series E Preferred Stock for **$98.7 million**, and completed a **$75 million** common stock repurchase program, buying back **4.2 million shares**[521](index=521&type=chunk)[522](index=522&type=chunk) Regulatory Capital Ratios (as of Dec 31, 2022) | Ratio | Banc of California, Inc. | Banc of California, NA | Well-Capitalized Requirement (Bank) | | :--- | :--- | :--- | :--- | | Total risk-based capital | 14.21% | 16.02% | 10.00% | | Tier 1 risk-based capital | 11.80% | 14.94% | 8.00% | | Common equity tier 1 | 11.80% | 14.94% | 6.50% | | Tier 1 leverage | 9.70% | 12.25% | 5.00% | [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=148&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None reported[566](index=566&type=chunk) [Controls and Procedures](index=148&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2022, with the independent auditor also issuing an unqualified opinion on the effectiveness of internal control over financial reporting - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[567](index=567&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, an assessment concurred with by Ernst & Young LLP[568](index=568&type=chunk)[571](index=571&type=chunk) - There were no changes in internal control over financial reporting during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, internal controls[569](index=569&type=chunk) [Other Information](index=150&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[575](index=575&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=151&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information required for this item, including details on directors, executive officers, the audit committee, and the code of ethics, is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement[577](index=577&type=chunk) [Executive Compensation](index=151&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information regarding executive compensation is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement[578](index=578&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=151&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership by certain beneficial owners and management, as well as details on equity compensation plans, is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information regarding security ownership is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement[579](index=579&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 14,904 | $13.05 | 2,131,185 | | Not approved by security holders | — | — | — | [Certain Relationships and Related Transactions, and Director Independence](index=152&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information regarding related transactions and director independence is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement[582](index=582&type=chunk) [Principal Accountant Fees and Services](index=152&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information regarding principal accountant fees and services is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement[583](index=583&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=153&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including corporate governance documents, material contracts, and required certifications - This item provides a comprehensive list of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications[585](index=585&type=chunk)[586](index=586&type=chunk) [Form 10-K Summary](index=154&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no information for this item - None[592](index=592&type=chunk)