Bank of California (BANC) Q1 2023: Non-Interest Deposit Base Holds at 36% Amid $1B Liquidity Ramp
Bank of California navigated Q1’s regional bank turmoil by boosting balance sheet liquidity to $1B and preserving a 36% non-interest-bearing deposit base, signaling franchise resilience despite sector-wide outflows. Management’s conservative posture—prioritizing risk management, capital strength, and relationship-driven deposit growth—positions BANC to capitalize on industry dislocation, even as margin and loan growth face cyclical pressure. With a stable credit profile and strategic cost discipline, the bank is focused on long-term franchise value over near-term earnings volatility.
Summary
- Deposit Stickiness Surfaces as Core Advantage: Relationship-driven business deposits held steady, reinforcing franchise value despite sector volatility.
- Liquidity Buffer Prioritized Over Near-Term Profit: Excess cash and borrowings raised to 2.2x uninsured deposits, sacrificing margin for safety.
- Strategic Patience on Loan Growth and Capital Deployment: Management signals a wait-and-see approach to lending and share repurchases, favoring flexibility and risk discipline.
Business Overview
Bank of California (BANC) is a California-focused commercial bank serving small and medium-sized businesses with a relationship-driven model. The bank generates revenue from net interest income on loans (commercial, real estate, multifamily, and specialty verticals), treasury management, and payment processing services. Its business is anchored in core deposit relationships, with non-interest-bearing deposits representing a key franchise pillar. BANC’s major segments include commercial lending, real estate lending, and a growing payments platform, supported by a conservative risk and capital management framework.
Performance Analysis
BANC’s Q1 results reflect a deliberate shift toward liquidity and capital preservation, as management responded to industry turmoil by boosting cash balances to $1B—quadruple the historical average. This move, funded via overnight borrowings and short-term brokered deposits, increased the cost of funds and compressed net interest margin by 28 basis points. Despite these headwinds, the bank’s average non-interest-bearing deposit base remained robust at 36%, with only a modest 2% core deposit outflow for the quarter—a notable achievement amid widespread sector deposit flight.
Loan demand stayed muted, with total loans down $61M due to runoff and selective pruning of legacy credits lacking deposit relationships. New loan production focused on targeted verticals (bridge real estate, healthcare, media, education), but management maintained strict risk-adjusted return thresholds, signaling willingness to shrink the loan book if opportunities do not align with franchise strategy. Asset quality remained strong, with a 20% decline in delinquent loans and classified assets, and minimal exposure to general office CRE—a sector under scrutiny across the industry.
- Liquidity Ramp Drives Margin Compression: Excess cash and borrowings increased interest expense, trading near-term profitability for stability.
- Deposit Mix Stability Outperforms Peers: Non-interest-bearing deposits held at 36%, a key differentiator versus regional bank peers facing more severe outflows.
- Expense Discipline and Capital Returns: FTEs reduced by 3%, dividend hiked 67%, and opportunistic share repurchases executed below tangible book value.
Non-interest income rebounded from prior quarter losses, while credit costs remained manageable and reserves robust relative to portfolio risk. Overall, BANC’s performance underscores a cautious, franchise-protective stance rather than a growth-at-any-cost strategy.
Executive Commentary
"We have significant available excess liquidity, with our cash and available borrowing capacity representing approximately 2.2 times our level of uninsured and uncollateralized deposits... While these actions had an impact on our profitability in the first quarter, we believed it was prudent from a risk management perspective."
Jared Wolf, President & CEO
"Our net interest margin decreased 28 basis points from the prior quarter to 3.41%... partly attributable to overnight borrowings and short-term broker deposits we brought on during March to temporarily increase our liquidity."
Ray Rendoni, Interim CFO
Strategic Positioning
1. Relationship Banking Defends Deposit Base
BANC’s focus on “sticky” business operating accounts and sophisticated treasury management solutions underpins its ability to retain and grow non-interest-bearing deposits, even as rate competition intensifies. The bank’s client-centric approach, targeting businesses with complex needs, acts as a buffer against retail-driven rate sensitivity and deposit churn.
2. Liquidity and Capital as Strategic Shields
Management’s aggressive liquidity build—boosting cash and borrowing capacity to cover more than double uninsured deposits—signals a preference for fortress balance sheet positioning over maximizing spread income in the near term. With high capital ratios and low unrealized losses, BANC retains flexibility for both organic and inorganic growth as market opportunities arise.
3. Selective Lending and Portfolio Optimization
Loan growth is intentionally muted, with management pruning legacy credits that lack deposit relationships and prioritizing risk-adjusted returns over volume. The bank is willing to let loans run off and redeploy into short-term securities yielding near 6% if lending opportunities do not meet franchise criteria, demonstrating discipline over market share chasing.
4. Payments Platform and Fee Income Expansion
The upcoming payments processing business, set to onboard clients in H2 2023, is positioned as a future growth vector, enhancing the value proposition for business clients and diversifying revenue streams beyond traditional lending.
5. Opportunistic Capital Deployment
BANC increased its dividend and executed share buybacks below tangible book value, but remains selective and conservative, preserving dry powder for attractive opportunities in a consolidating regional banking landscape.
Key Considerations
This quarter’s results reflect a management team prioritizing risk control and franchise value over short-term earnings, with multiple levers in play to navigate uncertainty and capitalize on market dislocation.
Key Considerations:
- Deposit Franchise as Scarcity Value: The stability and growth potential of non-interest-bearing deposits position BANC as a relative winner amid sector turmoil.
- Margin Headwinds from Liquidity Actions: Elevated liquidity and higher cost funding will continue to pressure NIM until sector confidence stabilizes.
- Loan Production Remains Cautious: Management’s willingness to shrink the loan book if risk-adjusted returns are inadequate underscores discipline.
- Payments Launch as Medium-Term Catalyst: The planned rollout of the payments platform in H2 2023 could drive incremental fee income and deepen client relationships.
- Capital Flexibility for M&A or Shareholder Returns: Strong capital ratios and low securities losses enable optionality for acquisitions or continued buybacks if valuation remains depressed.
Risks
BANC faces ongoing margin compression risk as elevated liquidity and competitive deposit pricing persist, with management guiding to potential further NIM declines in Q2. Loan demand remains soft, and further deposit outflows or a renewed banking crisis could strain funding costs. While CRE office exposure is low, broader commercial real estate volatility remains an industry risk. The bank’s conservative stance may limit near-term earnings upside if sector conditions normalize faster than expected.
Forward Outlook
For Q2 2023, Bank of California management guided to:
- Operating expenses in the $49M to $50M range, reflecting cost discipline and targeted reinvestment.
- Potential further NIM compression of 10 to 20 basis points, depending on deposit mix and loan growth.
For full-year 2023, management maintained a cautious outlook:
- Low single-digit loan growth, contingent on risk-adjusted returns and deposit-linked opportunities.
Leadership emphasized that capital and liquidity levels will remain elevated until sector stability returns, with opportunistic share repurchases and dividend increases as capital flexibility allows.
- Payments business on track for H2 client onboarding.
- Deposit growth pipeline remains strong, with non-interest-bearing balances expected to be stable or grow.
Takeaways
Bank of California’s Q1 playbook reflected franchise defense and strategic patience, prioritizing relationship deposit stability, liquidity, and capital strength over near-term spread income.
- Deposit Franchise Outperforms: Relationship-driven deposit base held firm at 36%, providing a competitive edge as peers saw sharper outflows.
- Risk Management Trumps Growth: Management’s willingness to shrink the loan book and build liquidity, even at the expense of margin, signals discipline and long-term focus.
- Payments Platform and M&A Optionality: The upcoming payments launch and strong capital position provide levers for future growth, while sector consolidation could create inorganic opportunities.
Conclusion
Bank of California’s Q1 2023 results highlight a franchise that is weathering sector dislocation by leveraging its relationship deposit base, conservative liquidity, and capital management. While near-term margin and loan growth are pressured, the bank’s strategic patience and operational discipline position it to emerge stronger as industry volatility subsides.
Industry Read-Through
BANC’s stable deposit base and liquidity-first posture offer a blueprint for regional banks navigating post-crisis uncertainty, underscoring the premium on relationship-driven funding and capital flexibility in a market still digesting the failures of high-profile peers. The bank’s willingness to trade near-term profitability for franchise stability may become a sector norm, while the focus on payments and fee-based services reflects a broader industry pivot to diversify away from pure spread income. CRE exposure, especially office, remains a key area of scrutiny across the sector, with BANC’s low exposure providing a relative advantage. Investors should watch for further consolidation and the emergence of “scarcity value” franchises as competitive dynamics reset.