Banc of California, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Banc of California is a California-focused bank holding company with banking, mortgage banking, and financial advisory and asset management businesses. Comparisons are with the corresponding 2014 periods unless otherwise noted.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $54.1m | $35.6m | $106.1m | $70.8m |
| Noninterest income | $66.7m | $35.4m | $112.7m | $60.7m |
| Noninterest expense | $87.9m | $60.3m | $163.8m | $117.9m |
| Net income | $15.9m | $8.1m | $28.5m | $8.8m |
| Net income available to common shareholders | $13.1m | $7.2m | $24.7m | $7.0m |
| Diluted EPS | $0.32 | $0.27 | $0.62 | $0.30 |
| Net interest margin | 3.64% | 3.70% | 3.66% | 3.84% |
- Q2 pre-tax income was $27.4m versus $8.5m; six-month pre-tax income was $49.5m versus $9.5m. Effective tax rates rose to 41.9% and 42.4%, respectively, from 5.1% and 6.6% in 2014.
- Mortgage banking activity generated $39.4m of Q2 net revenue and $77.3m for the first half, versus $26.1m and $43.5m. Q2 conforming mortgage originations were $1.27bn and sales were $1.22bn; reported gain margin was 2.75%.
- Q2 return on average assets was 1.02% and return on average equity was 10.13%; the efficiency ratio was 72.78%, compared with 85.00% a year earlier. Management’s non-GAAP return on average tangible common equity was 14.52%.
- At June 30, assets were $6.44bn, up 7.8% from year-end 2014. Net loans and leases were $4.44bn, up 13.2%; deposits were $5.11bn, up 9.3%.
- Cash and cash equivalents were $459.0m. Six-month cash flows were negative $65.2m from operations and negative $126.6m from investing, offset by $419.5m provided by financing; ending cash increased $227.8m.
- FHLB advances were $350.0m and long-term debt was $264.1m, totaling $614.1m, down from $726.6m at December 31, 2014. The company issued $175m of 5.25% senior notes due 2025; the Bank also issued $111.4m gross of Series D preferred stock.
- Bank regulatory capital ratios were 14.86% total risk-based, 14.04% Tier 1 and common equity Tier 1, and 10.26% Tier 1 leverage. The Bank exceeded applicable “well-capitalized” thresholds.
Material changes and operating drivers
- Year-over-year growth reflects the November 2014 acquisition of 20 Banco Popular branches, which added approximately $1.07bn of loans and $1.08bn of deposits, as well as expansion in mortgage banking and other businesses.
- Net interest income increased, but net interest margin narrowed. Loan growth drove higher interest income, while lower yields on originated loans and reduced accretion on purchased-loan discounts weighed on yields. Lower deposit costs partly offset higher funding costs.
- Noninterest expense rose 45.8% in Q2 and 38.9% for the first half, driven mainly by staffing, commissions, facilities, and processing costs associated with acquisition and business growth.
- Q2 noninterest income included a $9.9m gain on sale of an office property. The sale generated $52.3m proceeds; $2.3m of related selling costs were recorded in expenses. Mortgage banking revenue also includes material servicing-rights valuation and capitalization effects.
- Net loans transferred from held for sale to the held-for-investment portfolio increased, including $476.9m of transfers in the first half. Non-traditional mortgages rose to $720.3m, or 16.1% of gross loans, from $350.6m, or 8.9%, at year-end.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key risks include credit deterioration, real estate and economic conditions, interest-rate and funding changes, mortgage origination and servicing exposures, regulatory requirements, and execution of acquisitions and integration. Management identifies interest-rate risk as the company’s most significant market risk. Its model estimated that an immediate 100-basis-point rate increase would reduce economic value of equity by 7.4% and net interest income by 2.0%; a 100-basis-point decrease was estimated to increase economic value of equity 3.9% but reduce net interest income 1.3%.
- Nonaccrual loans and leases were $42.7m, up from $38.4m at year-end; no loans were 90 days past due and still accruing. The allowance for loan and lease losses was $34.8m, or 0.78% of gross loans, and covered 81.45% of nonperforming loans. Management cited a $4.5m initial reserve provision for loans transferred from held for sale.
- Mortgage repurchase obligations remain a contingent exposure: the reserve was $9.4m, up from $8.3m at year-end. Management noted that representations and warranties may require loan repurchases or loss reimbursements.
- The Bank had $459.0m cash, potential additional FHLB borrowing capacity of $1.02bn, a $111.8m Federal Reserve line, $85.0m of unsecured federal funds lines, and up to $403.9m of repurchase-agreement capacity. Within 12 months, $772.9m of certificates of deposit and $350.0m of FHLB advances were scheduled to mature.
- After quarter-end, the Bank agreed to sell two branches and related assets and deposits to Americas United Bank; June 30 balances included $43.7m of loans and $52.8m of deposits. Closing was expected in Q3 2015, subject to approvals and other conditions. The Bank also made a $50m BOLI investment in July, which would increase BOLI holdings to $69.2m.
- A patent appeal involving the discontinued Green Account product was scheduled for oral argument in September 2015; the company said it did not expect a material impact, while noting no assurance. The filing reports no material changes to previously disclosed risk factors and says disclosure controls were effective.
- The filing discloses related-party dealings, including advisory and investment relationships involving company insiders’ affiliates and Oaktree-related entities, and a BOLI vendor relationship connected to a Patriot principal’s family. Review the stated approvals, terms, and exposures.
Important facts for investors to verify
- How much of earnings growth is sustainable core banking and mortgage activity versus the $9.9m property gain, servicing-rights estimates, performance fees, and other nonrecurring or valuation-sensitive items.
- Whether the higher non-traditional mortgage balance, rising nonaccruals, transferred loans, and allowance coverage signal changing credit risk; monitor delinquencies, charge-offs, and reserve adequacy.
- Mortgage banking profitability and repurchase-reserve adequacy, including the effect of origination volumes, gain margins, hedging, and California housing exposure.
- Deposit retention and funding costs around scheduled maturities, branch-sale completion, and the company’s debt and preferred-stock costs.
- Post-quarter branch-sale and BOLI transactions, related-party arrangements, and the outcome of the patent appeal.