Banc of California spent the second quarter doing something most $35-billion-asset banks spend a decade deferring: it paid for its own reorganization in cash, on the income statement, in a single reporting period. Net loss available to common stockholders was $251.3 million, or $(1.61) per diluted share, against $62.0 million and $0.39 in the first quarter. Two of the three drivers were management decisions, not market events - a $256.7 million pre-tax loss on a $2.3 billion securities repositioning and a $161.8 million provision that absorbed the mark-down on $827 million of commercial real estate and multi-family construction loans the company is selling this quarter - and the third was a $385 million subordinated-debt redemption the company chose to execute before an interest-rate reset. Strip those three actions out and the operating quarter was unremarkable in the right direction: net interest income held at $250.5 million, average loans grew $556 million, deposits grew $799 million, and book value per share at $18.38 reflected the actions rather than any underlying erosion.
The transaction is the report. $2.3 billion of low-yielding held-to-maturity securities - averaging 2.1% - were sold at a pre-tax loss of $256.7 million and partly redeployed at 4.87%, a 276-basis-point pickup on the redeployed balances. $827 million of multi-family and CRE loans were transferred to held-for-sale and have already been sold under purchase-and-sale agreements signed in July, removing a credit exposure the bank had carried in the worst segment of the worst vintage of the rate cycle. The $385 million of subordinated debt came off the books ahead of a step-up to a higher contractual rate. Three actions, one quarter, one charge.
The market has decided this is the right trade - the stock closed the prior session at $15.79 and the reference price is $19.74, a 25% move on a quarter that lost $1.61 a share, with the average analyst target at $22.27. The market is pricing the actions for the run-rate, not the report. The risk is that the market is wrong: the repositioning only works if the redeployed securities earn 4.87% in a portfolio the bank just took a $256.7 million loss on, if the loan sale closes at the agreed marks, and if the loss of NII from the disposed loans is offset by margin expansion on what remains. The next two reports answer that question.