KBRA Affirms Ratings for Banc of California, Inc. and Upgrades Preferred Stock Rating

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Banc of California, Inc. (NYSE: BANC) ("the company"). KBRA also upgrades the preferred stock rating to BB+ from BB for BANC. Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Banc of California. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the well-executed, post-merger strategy that has better positioned the institution on a go-forward basis, including a commitment to rebuilding capital, as reflected by the 32 bp increase in the company’s CET1 ratio through 9M24 (BANC reported a CET1 ratio of 10.5% for 3Q24, with the upward trend expected to continue into 2025). Since the completion of the company's transformative merger with PacWest Bancorp that occurred in 4Q23, BANC has optimized the balance sheet through various asset sales, totaling approximately $8 billion. The most recent asset sale of its $2.0 billion CIVIC loan portfolio in 3Q24 enabled the company to further paydown wholesale funding as well as reposition roughly $0.7 billion of its securities portfolio (BANC reported a loss on sale of securities totaling approximately $60 million related to this repositioning in 3Q24). Altogether, BANC has paid down approximately $12 billion in wholesale funding since the close of the merger, leading to the company’s recent trend in decreasing funding costs, which was down 16 bps over the last two quarters to 2.78% in 3Q24. Overall, the change within the balance sheet has driven the recent NIM expansion, which is expected to track closer to rated peers, with the company projecting a NIM between 3.00% - 3.10% in 4Q24. Moreover, with the bulk of its repositioning efforts behind them, earnings should trend higher, with the improved results likely to be more sustainable long-term.

KBRA had previously taken into consideration the elevated debt level within the company’s capital stack, including $499 million in preferred stock, $456 million in subordinated notes and $558 million in trust preferred (TruPS), resulting in the two-notch difference between BANC's preferred stock and subordinated debt. However, due to the meaningfully improved liquidity of the company as well as increased capital levels and the potential for the paydown of some of the company’s debt over the medium term, KBRA upgrades the preferred stock rating to BB+ from BB, to better align with our typical notching for preferred stock.

Rating Sensitivities

The Stable Outlook is reflective of KBRA's view that a rating change is unlikely over the medium term. However, the continued execution of its post-merger strategy, to include further improvements to its funding profile as well as the continued rebuild of capital with its CET1 ratio more closely aligned with higher rated peers, along with stabilized asset quality and earnings, could result in positive rating momentum over time. Conversely, meaningful deterioration in asset quality with credit losses impacting the profitability of the company or a change in capital management towards a more aggressive posture could negatively impact ratings.

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Methodologies