Banc of California, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unless otherwise noted, financial amounts are in U.S. dollars. The company is a California-focused banking and financial holding company; its businesses include banking, mortgage banking, and financial advisory and asset management. Results include the effects of the 2014 Banco Popular branch acquisition.
Financial results and position
| Metric | Q1 2015 / March 31, 2015 | Comparable / prior period |
|---|---|---|
| Total assets | $6.10 billion | $5.97 billion at Dec. 31, 2014; $4.03 billion at Mar. 31, 2014 |
| Net interest income | $52.0 million | $35.2 million in Q1 2014 |
| Net interest margin | 3.69% | 4.00% in Q1 2014 |
| Noninterest income | $46.0 million | $25.3 million in Q1 2014 |
| Noninterest expense | $75.9 million | $57.6 million in Q1 2014 |
| Net income | $12.6 million; $0.29 diluted EPS | $0.7 million; common stockholders had a $0.01 per-share loss in Q1 2014 |
| Cash and cash equivalents | $265.4 million | $231.2 million at Dec. 31, 2014 |
| Deposits | $4.86 billion | $4.67 billion at Dec. 31, 2014 |
| Loans and leases, net | $3.90 billion | $3.92 billion at Dec. 31, 2014 |
| Borrowings | $652.7 million: $545.0 million FHLB advances, $15.0 million other borrowings, and $92.7 million notes payable | $726.6 million at Dec. 31, 2014 |
| Operating cash flow | $(70.0) million | $(267.9) million in Q1 2014 |
Net income available to common stockholders was $11.7 million, after $0.9 million of preferred dividends. Return on average assets was 0.86%, return on average equity 9.86%, and the efficiency ratio 77.45% (95.25% in Q1 2014). The company recorded no loan-loss provision in Q1 2015, compared with $1.9 million in Q1 2014.
Q1 operating cash use principally reflects the cash-flow profile of mortgage banking, including substantial loan originations and sales. Financing activities provided $111.0 million, primarily from deposit growth; cash increased by $34.2 million during the quarter.
Material changes and drivers
- Net interest income rose 47.8% year over year, mainly from growth in average earning assets, including loans acquired in the Banco Popular branch transaction. Lower loan yields and reduced accretion on purchased-loan discounts contributed to the decline in net interest margin.
- Mortgage banking revenue increased to $37.9 million from $17.3 million. The bank originated $1.01 billion and sold $927.7 million of conforming residential mortgages; the reported gain margin was 3.41%, versus 2.96% a year earlier.
- Expenses increased 31.7% year over year. Management attributed much of the increase to higher staffing, commissions, occupancy and data-processing costs associated with business growth, acquisitions and mortgage banking expansion.
- Assets, deposits and equity expanded substantially versus Q1 2014, reflecting growth and acquisitions. During Q1, total assets rose 2.1% and deposits 4.1% from year-end 2014; net loans and leases declined 0.4% from year-end.
- Nonperforming loans were $42.8 million, up 11.4% from year-end; nonperforming assets were $43.3 million. The allowance was $29.3 million, or 0.75% of gross loans; coverage of nonperforming loans was 68.64%, down from 76.81% at year-end.
Liquidity, capital, debt and outlook
Management reported $265.4 million of cash and cash equivalents and $393.6 million of available-for-sale securities. Additional stated borrowing capacity included $943.0 million from the FHLB, $111.1 million at the Federal Reserve Discount Window, $85.0 million of unsecured federal funds lines and up to $319.6 million under repurchase agreements. These facilities are subject to availability and applicable terms. Certificates of deposit totaling $804.3 million and FHLB advances of $545.0 million mature within 12 months.
At March 31, the bank’s regulatory capital ratios were 13.58% total risk-based, 12.86% Tier 1 and common equity Tier 1, and 9.49% leverage; each exceeded the filing’s stated “well-capitalized” thresholds. The company’s corresponding ratios were 11.55%, 10.83%, 9.01% and 7.99%. Basel III requirements had taken effect, with certain provisions and the capital conservation buffer phasing in through 2019.
After quarter-end, the company issued $175.0 million of 5.25% senior notes due 2025, receiving approximately $172.8 million net proceeds, and issued Series D preferred depositary shares for $111.4 million gross proceeds. The filing gives no specific earnings or operating guidance. Management cautions that results are subject to economic, interest-rate, credit, integration and market risks and that quarterly results are not necessarily indicative of full-year performance.
Risks, contingencies and unusual items
- Mortgage banking activity and servicing-right valuations are sensitive to interest rates, prepayments and housing conditions. At quarter-end, $78.8% of properties securing loans held for sale were in California. Mortgage servicing rights were valued using significant unobservable assumptions; a $0.5 million fair-value decrease was recorded in Q1.
- The mortgage business had $8.4 million reserved for repurchase and reimbursement losses. Q1 provisions were $1.3 million, up from $0.6 million a year earlier; claims may differ from estimates.
- Credit risks include purchased credit-impaired loans, nontraditional mortgage products and real-estate concentration. Nontraditional mortgages totaled $353.8 million, including interest-only and loans with potential negative amortization.
- The company reported $5.7 million of unrecognized tax benefits and stated that up to $5.3 million could decrease within 12 months, subject to anticipated tax-accounting changes. The effective tax rate was 43.1%, including effects related to a tax examination settlement and prior-year valuation-allowance release.
- A patent appeal involving the discontinued Green Account product remained pending; management believed it lacked merit and did not expect a material impact, while noting no assurance. The filing reported no other pending litigation expected to result in material liability.
- Management identified acquisition integration, retention, cost and synergy risks, as well as credit losses, interest-rate exposure, liquidity, regulatory, technology, litigation and third-party risks. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether mortgage origination volumes, gain margins and servicing-right valuations remain sustainable, and how sensitive earnings are to rates and prepayments.
- Credit trends behind the increase in nonperforming loans, the absence of a Q1 loan-loss provision, and the adequacy of allowance coverage and acquired-loan discounts.
- Deposit retention and funding costs, upcoming certificate and FHLB maturities, and the availability and terms of reported borrowing capacity.
- The impact of the post-quarter senior-note and preferred-stock offerings on interest expense, capital, dilution and preferred dividends.
- Progress integrating acquired operations and controlling costs, plus developments in tax matters, mortgage repurchase claims and the patent appeal.