Los Angeles-based Banc of California absorbed its first quarterly loss in more than two years and moved to shed $827 million of commercial real estate and construction loans, a decisive retreat from the property exposures that have weighed on regional banks since interest rates climbed.
The lender reported a second-quarter net loss of $251.3 million, or $1.61 per diluted share, its first quarterly loss since the fourth quarter of 2023, according to a statement released July 29. The results triggered the sharpest single-day slide in the company’s shares in more than a year. Chief Executive Officer Jared Wolff framed the red ink as the price of a deliberate overhaul, telling investors the moves would build a more efficient balance sheet even as they generated significant one-time charges.
At the center of the repositioning is a $827 million pool of commercial real estate and multifamily construction loans the bank has put up for sale, a portfolio it is jettisoning to reduce concentration risk and, in the company’s words, lower the potential for future credit-related earnings volatility. The composition tells the story of where the pressure sits. Roughly $300 million consists of construction loans tied to a single borrower relationship that management acknowledged was showing signs of weakness, while the remaining $525 million is performing commercial real estate debt carrying below-market rates. The blended yield on the package runs near 4.6 percent, according to details management disclosed on the company’s earnings call, well under what the bank can earn redeploying the capital into new loans.
The loan sale lands as commercial real estate remains the fault line for lenders with heavy property concentrations. Construction and multifamily credit, in particular, has drawn intense scrutiny from investors and regulators wary of refinancing risk in a higher-for-longer rate environment. By marketing the loans now rather than holding them to maturity, Banc of California is choosing to crystallize the cost of an underwater portfolio in exchange for cleaner forward earnings.
The bank did not disclose a geographic breakdown of the loans slated for sale. Its lending franchise, however, is concentrated in California, and its commercial real estate and multifamily books are weighted toward the state’s major metropolitan markets, particularly Southern California and the greater Los Angeles area, where the company is headquartered. That footprint puts the repositioning squarely in the region’s office, apartment and construction lending markets, which have contended with elevated vacancy, softer valuations and constrained transaction volume over the past two years.
The credit cleanup extends beyond the sale. Management reported broad improvement in problem-loan metrics during the quarter, with special mention loans down 56 percent, classified loans down 31 percent and delinquent loans down 50 percent, according to the company’s disclosures. One loan tied to the sale process closed after quarter-end, an event management said would improve third-quarter nonperforming assets by $34 million. Wolff signaled that longer-duration exposures remain on the books, pointing to roughly $6 billion in multifamily loans priced near 4 percent that carry a predictable runoff, or burn rate, as they reprice over time.
The property-loan sale was one leg of a wider balance-sheet reset. The bank sold and reclassified $2.3 billion of lower-yielding held-to-maturity securities, booking a pre-tax loss of $256.7 million, and redeployed roughly $1.7 billion into shorter-duration, higher-yielding instruments. The swap lifted the reinvested yield to 4.87 percent from 2.11 percent, a 276-basis-point pickup, according to the company. Separately, Banc of California retired $385 million of subordinated debt ahead of an anticipated step-up in its interest rate, removing a costlier funding layer before it could reset higher.
Taken together, the actions are engineered to widen the bank’s margin and reset its earnings power. Net interest margin registered 3.13 percent in the second quarter, and management guided to more than 3.30 percent in the third quarter and a range of 3.30 percent to 3.40 percent by year-end. The company set fourth-quarter pre-tax, pre-provision income guidance at $125 million to $130 million, a figure Wolff characterized as conservative.
The wager is straightforward. By selling low-rate property loans, offloading underwater bonds and retiring expensive debt in a single quarter, Banc of California is trading a large upfront loss for a leaner, higher-yielding balance sheet heading into 2027. Whether the market rewards the reset will hinge on execution: the loan sales must close on the terms management has outlined, and the commercial real estate markets underpinning the retained portfolio must hold. For a lender that spent the past two years digesting its merger with PacWest and rebuilding its footing, the second quarter marks a bet that taking the pain now clears the path to steadier earnings ahead.
