Finvest
BANC Banks · Regional bank · California · Commercial lending · Thesis updated July 2, 2026

Credit risk is back in control

01 Running thesis

Credit now drives the story

Banc of California has a simple bull case. The bank has moved past much of the PacWest merger cleanup, kept a 63% real estate and 36% commercial loan mix, expanded net interest margin by 4 basis points to 3.24%, and grew book value per share. If the latest credit flare-up fades without large losses, the bank can still earn its way through the problem.

The bear case is stronger right now. Special mention loans, which are loans showing early warning signs, rose by $230.0 million to $688.7 million in Q1 2026. That reverses the prior quarter's improvement. Classified loans, which are more serious problem loans, also rose by $42.5 million to $842.8 million, or 3.40% of total loans.

The key issue is not only that bad loans are growing. The pipeline is filling again. The most important items to watch are the $352.4 million jump in special mention residential construction and land loans, the $73.4 million increase in classified multi-family loans, and whether net charge-offs stay near the recent 0.23% run rate.

May 2026▼Q1 2026 weakened the thesis. Special mention loans rose by $230.0 million, and classified loans increased by $42.5 million to $842.8 million.
Feb 2026→The 2025 10-K gave a mixed signal. Classified loans rose by $236.8 million to $800.3 million, but special mention loans fell by $638.6 million.
Nov 2025▼Q3 2025 strengthened the bear case. Classified loans rose to $763.6 million, even as net interest margin improved to 3.22%.
Aug 2025→The bank began a strategic loan sale covering about $506.7 million of loans with negative credit traits. The move helped headline credit metrics, but classified loans still rose versus year-end 2024.
May 2025▼Q1 2025 showed a sharp credit decline. Classified loans rose by $201.2 million to $764.7 million, led by multi-family and commercial real estate construction.
Mar 2025▼The 2024 10-K showed the merger balance sheet cleanup was largely complete, but credit quality worsened. Nonperforming, classified, and special mention loans all increased sharply year over year.
Nov 2024→The initial thesis balanced better funding and capital after the PacWest merger against rising credit stress. The central question became whether balance sheet repositioning could offset loan losses.
02 Business model

A spread lender with branch deposits

BANC is a relationship-based community bank. It takes deposits, lends that money out, and earns the difference between what borrowers pay and what depositors and lenders receive. That difference is called net interest income.

The bank also sells business banking and treasury management services. Those fees help, but lending quality matters most. If borrowers fall behind, the bank must set aside money for losses, and that can eat into earnings fast.

Its customer base includes small businesses, middle-market companies, and venture-backed businesses. The bank serves them through 80 full-service branches, mainly in California, plus branches in North Carolina and Colorado and loan production offices around the country.

03 Product portfolio

Loans are the core product

Cash cow

Real estate mortgage loans

This is the largest lending pool and includes commercial, multi-family, and residential mortgages. It supplies a large share of earning assets, but it also carries the current credit debate.

Steady

Real estate construction and land loans

These loans fund building projects and land activity. The $352.4 million rise in special mention residential construction and land loans makes this one of the most important books to watch.

Growth engine

Commercial loans and leases

This includes asset-based lending, equipment finance, premium finance, lender finance, and other secured business loans. Commercial loans were 36% of total loans at year-end 2025, up from 28% a year earlier.

Option

Venture capital lending

BANC lends to venture-backed companies and equity funds. This can deepen relationships, but venture capital loans also added $39.0 million to special mention loans in Q1 2026.

Cash cow

Deposits and treasury management

Deposits are the raw material for the lending business. Treasury management services also tie business customers more closely to the bank and create fee income.

Steady

Consumer lending

Consumer lending is small compared with the business and real estate books. It was about 1% of total loans at year-end 2025.

04 Business segments

Loan mix still leans real estate

Total real estate loans63%declining
Total commercial loans36%growing fast
Consumer loans1%declining

The structured mix uses the December 31, 2025 loan portfolio disclosure. BANC also reported that total real estate loans were still 63% of loans at March 31, 2026, and California was 71% of the real estate loan portfolio at year-end 2025.

05 Risk factors

What could break the thesis

Special mention loans keep rising

High impact · High odds

Special mention loans are loans with early warning signs. They rose by $230.0 million to $688.7 million in Q1 2026, mainly from residential construction and venture capital loans. If these loans worsen, they can move into classified status and raise future loss costs.

We watchQuarterly special mention loans, especially residential construction and land loans.

Classified loans turn into losses

High impact · High odds

Classified loans are more serious problem loans. They rose to $842.8 million at March 31, 2026, equal to 3.40% of total loans. Multi-family loans drove much of the latest increase, with $73.4 million newly classified in the quarter.

We watchClassified loans as a percent of total loans and the resolution plan for multi-family credits.

Charge-offs return as a steady headwind

High impact · Medium odds

Net charge-offs are loans the bank gives up on collecting, after recoveries. They were $13.8 million in Q1 2026, near the $14.1 million level from Q1 2025 and well above the unusually low $2.7 million in Q4 2025. If charge-offs stay high, earnings can lag even if net interest margin improves.

We watchNet charge-off rate and provision expense each quarter.

Commercial real estate stress spreads

Medium impact · Medium odds

BANC still has a real estate-heavy loan book. At year-end 2025, real estate loans were 63% of total loans, and California was 71% of the real estate loan portfolio. Office property exposure is also a disclosed concern because remote and hybrid work can reduce demand for office space.

We watchCRE criticized loans, office reserve commentary, and California real estate trends.

Funding costs pressure the spread

Medium impact · Medium odds

The bank earns money from the spread between loan income and deposit costs. Net interest margin expanded to 3.24% in Q1 2026, but that can reverse if deposits get more expensive or loan yields fall. A smaller spread would weaken the main earnings engine while credit costs are already a concern.

We watchNet interest margin, deposit costs, and noninterest-bearing deposit trends.
06 Quick answers

In one breath

What does Banc of California do?

Banc of California is a regional bank focused on business banking, deposits, treasury management, and lending. It serves small, middle-market, and venture-backed businesses, with branches mainly in California.

Why is BANC credit quality a concern?

Problem-loan indicators worsened in Q1 2026. Special mention loans rose by $230.0 million, and classified loans rose to $842.8 million, or 3.40% of total loans.

What would improve the BANC thesis?

The clearest improvement would be a decline in both special mention and classified loans. Investors should also watch whether the new residential construction issues are resolved without large charge-offs.