Banc of California Repositions Balance Sheet as Margin Narrows
Net interest margin compressed 11 basis points to 3.13% as funding costs rose.
Banc of California (BANC), the California-focused commercial bank, reported an 11-basis-point sequential decline in net interest margin to 3.13%, reversing the prior quarter’s expansion. Net interest income slipped $1.1 million to $250.5 million as higher interest expense outweighed growth in interest income, though NII remained 4.3% above the year-earlier period. Average deposit costs rose 2 basis points to 1.80%, while lower earning-asset yields and short-term funding also weighed on the margin.
Loan activity accelerated despite that pressure. Average loans increased 2.3% QoQ, more than twice the first quarter’s gain, as annualized growth rose to 9%. Production and disbursements reached $2.8 billion, up from $2.1 billion, while the weighted-average production yield declined to 6.39%.
The portfolio shifted further toward commercial lending as the bank prepared to sell selected real-estate credits. Held-for-investment loans fell to $24.2 billion after Banc of California transferred $827.0 million of commercial-real-estate and multifamily-construction loans to held for sale. Real estate declined to 61% of the HFI portfolio from 63% in the prior quarter, while commercial loans increased to 38% from 36%.
Deposit growth accelerated, but the mix became more expensive. Average deposits rose $299.1 million QoQ and period-end deposits increased 2.9% to $28.1 billion. Average noninterest-bearing balances declined $24.4 million, reducing their share of deposits by 40 basis points to 28.5%, while total funding costs increased 4 basis points to 2.14%.
The balance-sheet repositioning reduced capital ratios during the quarter. Estimated CET1 fell 93 basis points to 9.25%, and the Tier 1 ratio declined 87 basis points to 11.67%. Management expects CET1 to recover to roughly 9.45% to 9.50% when the loan sale closes and reach 9.50% to 9.60% by the end of the third quarter.
Credit costs reflected the planned loan exit. Provision for credit losses rose to $161.8 million from $9.8 million, driven chiefly by $161.6 million of charge-offs tied to the held-for-sale transfer. Classified and special-mention loan ratios improved by 99 and 154 basis points, respectively, while the nonperforming-loan ratio increased 9 basis points to 0.84%. Total delinquencies fell to 0.72% of HFI loans from 1.39%, though nonperforming loans increased $18.0 million to $203.7 million.
The repositioning also produced a $234.1 million noninterest-income loss, principally from a $256.7 million securities loss and a $12.5 million valuation loss on held-for-sale loans. Noninterest expense increased $8.5 million to $189.9 million as insurance, assessment, and software-obsolescence costs offset lower compensation expense.
Management expects net interest margin to rise to approximately 3.30% following the loan sale. The outlook also incorporates a securities repositioning that reinvested $1.7 billion at a 4.87% yield, a 276-basis-point pickup from the securities sold, positioning the bank for higher asset yields after absorbing the transaction’s immediate earnings and capital costs.