Bank of California (BANC) Q3 2023: $200M New Deposits Offset Outflows as PacWest Merger Nears
Bank of California’s quarter was strategically defined by disciplined balance sheet actions and visible merger integration momentum, with regulatory approvals secured for the PacWest deal and capital ratios rising. Deposit gathering from new commercial relationships countered sector contraction, while leadership reaffirmed 2024 earnings targets amid a cautious lending environment. Execution on cost saves, asset sales, and risk management sets the stage for a transformative close in November, positioning the combined franchise for scalable growth and improved profitability in a consolidating market.
Summary
- Merger Integration Advances: Regulatory approvals and integration planning keep the PacWest deal on track for November close.
- Deposit Engine Resilience: New commercial deposit relationships offset industry-wide outflows, supporting funding stability.
- Cost and Asset Actions Drive Upside: Disciplined expense control and asset repositioning underpin 2024 earnings visibility.
Business Overview
Bank of California is a regional commercial bank focused on serving businesses and individuals across California. The bank generates revenue primarily through net interest income, which is the spread between interest earned on loans and paid on deposits, as well as non-interest income from services and fee businesses. Its major segments include commercial lending, treasury management, and a developing payments processing platform. The pending PacWest merger will expand scale, diversify funding, and create the third-largest bank headquartered in California.
Performance Analysis
Q3 results reflected deliberate pre-merger positioning, with net income supported by higher net interest margin and proactive credit risk management. Net interest margin expanded by eight basis points to 3.19 percent, as loan yield increases outpaced deposit cost growth, aided by variable rate loan repricing and higher rates on new loan production. Commercial relationship-driven deposit growth of over $200 million year-to-date offset broader industry contraction, demonstrating franchise resilience.
Loan originations remained muted, reflecting a cautious approach amid economic uncertainty and a focus on balance sheet strength ahead of the merger. Asset quality metrics improved, with problem loan categories declining outside the single-family residential (SFR) portfolio, which is slated for sale at closing. The $5 million provision for credit losses, mainly tied to acquired loans, was absorbed without missing consensus earnings, underscoring disciplined risk management.
- Margin Expansion Outpaces Funding Costs: Net interest margin gains were driven by asset yield increases and prudent deposit pricing strategy.
- Deposit Franchise Flexes Amid Industry Contraction: New core deposit relationships offset outflows, maintaining funding stability without resorting to expensive deposits.
- Asset Dispositions and Hedging Mitigate Rate Risk: Proactive hedging and planned asset sales insulate capital from rate volatility and facilitate post-merger repositioning.
Capital ratios improved, tangible book value per share rose five percent, and expense discipline was maintained despite $9.3 million in merger-related costs. The combination of these factors positions the bank favorably for the transformative PacWest integration.
Executive Commentary
"Expansion of our margin, increase in loan yields, outpacing increasing cost of funds, improvement in core credit metrics, strong buildup in tangible value per share, and continued growth in new relationships to the bank."
Jared Wolf, Chairman, President, and CEO
"We forecast that even with the sale we can hit our targeted, our projected regulatory capital levels."
Joe Cowder, Chief Financial Officer
Strategic Positioning
1. PacWest Merger Execution and Integration
Regulatory approvals were secured for both the merger and Federal Reserve membership, clearing key hurdles and enabling a late November close. Integration planning is well underway, with leadership emphasizing a smooth transition and a May 2024 system conversion to maximize risk management and operational continuity.
2. Balance Sheet Optimization and Risk Discipline
Balance sheet actions focused on liquidity, capital, and asset quality, including limiting new fixed-rate deposits, accelerating resolution of acquired credit issues, and hedging interest rate exposures tied to assets earmarked for sale. The loan-to-deposit ratio is expected to be in the low 80s post-close, supporting conservative funding and lending practices.
3. Deposit Franchise and Core Relationship Growth
Deposit gathering from new commercial relationships—over $200 million year-to-date—offset sector-wide contraction, with a focus on treasury management solutions for property management and commercial clients. The strategy emphasizes stable, operating deposits over high-cost, transient funding, reducing concentration risk and supporting long-term growth.
4. Payments Processing and Fee Income Diversification
The new payments processing business launched in Q3, with leadership projecting meaningful fee income contributions in 2024, especially as the PacWest client base is onboarded. This initiative aims to diversify revenue beyond traditional spread income and leverage the combined bank’s expanded client base.
5. Cost Synergy and Capital Management
Cost saves of $130 million are on track, with potential upside, as merger-related FDIC expense normalization and operational efficiencies are realized. Asset sales and deleveraging will further lower funding costs and support regulatory capital targets, providing a platform for scalable post-merger profitability.
Key Considerations
The quarter’s results were shaped by visible progress on merger execution, disciplined risk and expense management, and a clear focus on long-term franchise value. Investors should weigh the following:
Key Considerations:
- Merger Synergy Realization: Timely execution of cost saves, asset sales, and system integration will determine the pace of margin and earnings accretion post-close.
- Deposit Franchise Durability: The ability to sustain core deposit growth amid sector contraction remains a critical competitive advantage and risk mitigant.
- Credit and Asset Quality Vigilance: Accelerated resolution of acquired credits and robust provisioning support transparency, but ongoing monitoring is needed as economic conditions evolve.
- Payments Business Scale Potential: The ramp-up of the payments platform could diversify fee income and enhance cross-sell opportunities, particularly with PacWest’s venture and HOA clients.
Risks
Integration risk is elevated due to the scale and pace of the PacWest merger, with system conversion and cost saves dependent on effective execution. Asset sales are subject to market and rate volatility, which could impact capital outcomes if conditions shift. Deposit outflows and credit normalization remain sector-wide risks, particularly if economic activity slows or rate pressures reaccelerate. Management’s transparency and hedging actions mitigate some downside, but the transition period will be closely watched.
Forward Outlook
For Q4 2023, Bank of California expects:
- Merger closing with PacWest around November 30, with immediate asset sales and funding optimization actions.
- Initial net interest margin decline post-close, followed by improvement as high-cost funding is reduced and cost saves are realized.
For full-year 2024, management reaffirmed guidance:
- EPS range of $1.65 to $1.80, reflecting pro forma earnings power and synergy realization.
Management highlighted several factors that will shape results:
- Execution of cost saves and asset disposition plans to drive earnings accretion.
- Payments business ramp and deposit franchise expansion to support fee and spread income growth.
Takeaways
Bank of California’s disciplined execution ahead of the PacWest merger, combined with visible cost and capital actions, positions the combined bank as a consolidator with scale and funding stability in a contracting market.
- Balance Sheet Resilience: Margin expansion, conservative funding, and asset quality improvements support a strong foundation for integration.
- Strategic Growth Levers: New deposit relationships, payments business ramp, and cost synergy realization offer multiple paths to earnings growth.
- Investor Focus for 2024: Watch for system conversion execution, asset sale outcomes, and deposit franchise trends as leading indicators of post-merger profitability and risk profile.
Conclusion
Bank of California enters its merger close with PacWest from a position of operational strength, capital discipline, and visible integration progress. Execution on cost, asset, and funding levers will be decisive for delivering on 2024 earnings targets and establishing the combined franchise as a regional leader.
Industry Read-Through
This quarter underscores the premium on deposit franchise stability and cost discipline in regional banking, as sector-wide deposit contraction and funding cost pressures persist. The BANC-PacWest merger signals ongoing consolidation among mid-size banks, with scale, diversified fee income, and robust capital management emerging as key differentiators. Regional peers should note the importance of proactive asset sales, hedging, and transparency in navigating rate and credit risk volatility, while payments platform investments highlight the growing need for non-spread revenue streams in a structurally higher-rate environment.