Banc of California (BANC)

Regional bank Banc of California (NYSE:BANC) announced better-than-expected revenue in Q4 CY2025, with sales up 10.7% year on year to $292.9 million. Its non-GAAP profit of $0.42 per share was 13.7% above analysts’ consensus estimates.

Company Overview

Originally established in 1941 and now operating with a tech-forward approach that includes its SmartStreet platform for homeowner associations, Banc of California (NYSE:BANC) is a California-based bank holding company that provides banking services to small and middle-market businesses, entrepreneurs, and individuals.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

Banc of California competes with other regional banks operating in California and the western United States, including Pacific Premier Bancorp (NASDAQ:PPBI), East West Bancorp (NASDAQ:EWBC), and First Republic Bank, as well as larger national institutions like Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC).

Net interest income and and fee-based revenue are the two pillars supporting bank earnings. The former captures profit from the gap between lending rates and deposit costs, while the latter encompasses charges for banking services, credit products, wealth management, and trading activities. Unfortunately, Banc of California struggled to consistently increase demand as its $1.12 billion of revenue for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. Banc of California’s annualized revenue growth of 7.5% over the last two years is above its five-year trend, but we were still disappointed by the results. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Banc of California reported year-on-year revenue growth of 10.7%, and its $292.9 million of revenue exceeded Wall Street’s estimates by 1.3%.

Net interest income made up 88.3% of the company’s total revenue during the last five years, meaning Banc of California barely relies on non-interest income to drive its overall growth.

Markets consistently prioritize net interest income growth over fee-based revenue, recognizing its superior quality and recurring nature compared to the more unpredictable non-interest income streams.

The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.

Investors focus on efficiency ratio changes rather than absolute levels, understanding that expense structures vary by revenue mix. Counterintuitively, lower efficiency ratios indicate better performance since they represent lower costs relative to revenue.

Over the last five years, Banc of California’s efficiency ratio has increased by 20.4 percentage points, going from 47.2% to 63.3%. Said differently, the company’s expenses have increased at a faster rate than revenue, which usually raises questions unless the company is in high-growth mode and reinvesting its profits into attractive ventures.

Banc of California’s efficiency ratio came in at 59.4% this quarter, beating analysts’ expectations by 505.5 basis points (100 basis points = 1 percentage point).

For the next 12 months, Wall Street expects Banc of California to rein in some of its expenses as it anticipates an efficiency ratio of 61.7%.

The balance sheet drives banking profitability since earnings flow from the spread between borrowing and lending rates. As such, valuations for these companies concentrate on capital strength and sustainable equity accumulation potential.

This explains why tangible book value per share (TBVPS) stands as the premier banking metric. TBVPS strips away questionable intangible assets, revealing concrete per-share net worth that investors can trust. EPS can become murky due to acquisition impacts or accounting flexibility around loan provisions, and TBVPS resists financial engineering manipulation.

Banc of California’s TBVPS declined at a 3.9% annual clip over the last five years. However, TBVPS growth has accelerated recently, growing by 7.9% annually over the last two years from $15.04 to $17.51 per share.

Over the next 12 months, Consensus estimates call for Banc of California’s TBVPS to grow by 7.7% to $18.86, paltry growth rate.

Leverage is core to a financial firm’s business model (loans funded by deposits). To ensure economic stability and avoid a repeat of the 2008 GFC, regulators require certain levels of capital and liquidity, focusing on the Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a firm holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all firms must maintain a Tier 1 capital ratio greater than 4.5%. On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, firms generally must maintain a 7-10% ratio at minimum.

Over the last two years, Banc of California has averaged a Tier 1 capital ratio of 10.2%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.

Over the last five years, Banc of California has averaged an ROE of negative 4.7%, a bad result not only in absolute terms but also relative to the majority of banks putting up 15%+. It also shows that Banc of California has little to no competitive moat.

We were impressed by how significantly Banc of California blew past analysts’ net interest income expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. Investors were likely hoping for more, and shares traded down 5% to $20.04 immediately after reporting.

Updated: January 21, 2026 at 11:43 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Banc of California falls short of our quality standards. To begin with, its revenue growth was weak over the last five years. And while its astounding EPS growth over the last one years shows its profits are trickling down to shareholders, the downside is its relatively low ROE suggests management has struggled to find compelling investment opportunities. On top of that, its TBVPS has declined over the last five years.

Banc of California’s P/B ratio based on the next 12 months is 1x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $22.32 on the company (compared to the current share price of $20.35).