Banc of California is playing a game of financial chess, and a seemingly insignificant, "discontinued" loan portfolio may be their most potent piece. While analysts focus on headline metrics like net interest margin and deposit growth, a closer look at the transcript of Banc of California's Q1 2024 earnings call reveals a hidden opportunity within the remnants of the legacy PacWest acquisition: the Civic loan portfolio.

This isn't just about shedding dead weight. CEO Jared Wolff and CFO Joe Kauder repeatedly hint at the potential for selling parts, or even the entirety, of this $2.3 billion portfolio. They've already started, quietly moving some Civic loans held-for-sale off the balance sheet, selling them at carry value. But this could be the tip of the iceberg.

What makes Civic so intriguing? It's a combination of factors. First, the portfolio, primarily composed of single-family rental and bridge loans, is performing well, albeit with slightly elevated delinquency levels stemming from legacy borrower behavior that Banc of California is actively rectifying. Second, there's strong inbound interest from potential buyers, indicating a potentially lucrative market for these assets.

Here's where things get really interesting. Wolff and Kauder emphasize profitability as their primary focus, even hinting at shrinking the balance sheet further if it drives ROA higher. The Civic portfolio, with its lower average yield of around 3.5%, offers a unique opportunity to turbocharge this strategy.

Let's hypothesize. Assume Banc of California sells half of the Civic portfolio, approximately $1.15 billion, for a modest premium to carry value. This influx of capital could be strategically deployed to repay the remaining $1.5 billion BTFP balance and further reduce high-cost deposits, two moves that directly impact their interest expense and bolster their margin.

The impact on profitability could be substantial. Even without factoring in the premium from the sale, eliminating the drag from Civic's lower yield and the associated higher-cost funding could boost ROA by as much as 10 basis points, accelerating their progress towards the 1.1% target.

But the implications go beyond pure numbers. Shedding Civic allows Banc of California to further sharpen its focus on relationship banking in its core California market. It's a strategic realignment, echoing the bank's impressive track record of growing non-interest bearing deposits through high-touch service, a strategy that stands in stark contrast to the industry's current struggles.

There's an element of poetic justice here. PacWest, plagued by the very concentration risk that Banc of California is now diligently managing, acquired Civic in 2020. Now, this same portfolio, dismissed as "discontinued", holds the key to unlocking Banc of California's full potential. It's a masterstroke that, if executed effectively, could leave analysts wondering how they missed the signal amidst the noise.

Projected Net Interest Margin Growth

Based on statements made during the Q1 2024 earnings call, Banc of California expects continued improvement in their net interest margin throughout the year. The following chart illustrates the projected growth trajectory, starting with the March 2024 average margin of 2.82%.

"Fun Fact: Did you know that Banc of California was founded in 1941 as a single branch in Los Angeles? It's come a long way, now boasting over 90 branches and a reputation for innovative banking solutions. The bank has also been a long-time supporter of California's vibrant arts and culture scene, sponsoring events and organizations across the state."