Banc of California, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company is a California-focused financial holding company; its bank had 35 California branches. Results are presented as continuing operations unless identified as consolidated, which includes discontinued mortgage-banking operations. Amounts below are rounded to millions.
Business context and reporting period
The company completed the sale of its Banc Home Loans division on March 30, 2017, largely exiting mortgage banking and focusing on commercial banking. The division’s results and related assets and liabilities are classified as discontinued operations. The company now reports one segment, Commercial Banking.
Financial performance and condition
| Metric | Q2 2017 | Comparable period / change |
|---|---|---|
| Continuing-operations net income | $15.1 million | Down 23.4% from $19.8 million in Q2 2016 |
| Consolidated net income | $12.3 million; $7.1 million available to common shareholders | Down 53.8% from $26.5 million; discontinued operations posted a $2.9 million loss |
| Diluted EPS | $0.14 consolidated | $0.43 in Q2 2016 |
| Net interest income | $78.3 million consolidated | Down 3.4% from $81.0 million |
| Net interest margin | 3.09% | 3.39% in Q2 2016 |
| Noninterest income | $19.8 million consolidated | Down from $65.6 million; continuing-operations income was $5.7 million |
| Noninterest expense | $98.2 million consolidated | Continuing-operations expense was $76.3 million, up 17.3% year over year |
For the first six months, continuing-operations net income was $24.5 million and consolidated net income was $29.5 million, compared with $37.1 million and $46.2 million, respectively, in the first half of 2016. Consolidated net interest income rose 7.0% to $162.0 million, but margin declined to 3.14% from 3.39%. The reported efficiency ratio was 100.10% for Q2 and 92.25% for the half year; adjusted for the alternative-energy partnership effects, it was 80.51% and 79.51%, respectively.
- Balance sheet at June 30: Assets were $10.37 billion, down 6.0% from year-end 2016. Net loans and leases were $5.91 billion, down 1.3%; deposits were $8.04 billion, down 12.0%; and stockholders’ equity was $1.01 billion.
- Liquidity and funding: Cash and cash equivalents were $511 million. FHLB advances were $870 million and repurchase-agreement borrowings were $53 million; long-term debt was $173 million. Management reported $1.36 billion of additional FHLB borrowing capacity, $187 million available at the Federal Reserve Discount Window, and $210 million in unsecured federal-funds lines. Deposit reduction reflected planned brokered-deposit runoff and outflows in several business units.
- Cash flow, first half: Operating activities provided $383 million, investing activities provided $452 million, and financing activities used $763 million. Cash increased $72 million to $511 million. Financing cash use principally reflected a $1.10 billion net decline in deposits.
- Credit quality: Nonperforming loans and leases were $9.1 million, down from $14.9 million at year-end; nonperforming assets were $12.3 million. The allowance for loan and lease losses was $42.4 million, or 0.71% of loans, versus $40.4 million and 0.67% at year-end. First-half provision rose to $5.1 million from $2.1 million; net charge-offs also increased.
- Capital: The company’s total risk-based capital ratio was 14.39%, common equity tier 1 was 9.83%, and leverage ratio was 8.93%. The bank’s corresponding ratios were 16.13%, 15.45%, and 10.05%; it exceeded the stated “well-capitalized” thresholds.
Material changes, outlook, and risks
- Mortgage-business sale: The sale generated a $13.5 million net disposal gain in the first half. Mortgage-banking revenue and activity were substantially lower than the prior year, and the company said the division’s exit could affect future revenue and profitability.
- Portfolio repositioning: The company transferred all $740.9 million of held-to-maturity securities to available-for-sale, citing liquidity and duration objectives. This produced a $22.0 million pretax increase in accumulated other comprehensive income and limits its ability to classify securities as held-to-maturity for the foreseeable future.
- Tax and investment items: Alternative-energy partnerships generated $15.7 million of Q2 tax credits, but the company recorded a $9.8 million Q2 investment loss and an $18.4 million first-half loss. The resulting tax benefit materially affected reported earnings and effective tax rates; the company disclosed a 570.3% Q2 effective tax rate on consolidated operations.
- Costs and restructuring: Higher professional fees included costs tied to the special committee and pending SEC investigation. The company recorded $5.4 million of continuing-operations restructuring expense in the first half and expected approximately $10 million of total 2017 restructuring expense.
- Leadership, controls, and litigation: Former CEO Steven Sugarman resigned in January; Douglas Bowers became CEO in May. The company disclosed a pending SEC investigation and securities class-action lawsuits, which it intends to contest. It also reported that disclosure controls were ineffective at June 30 because a previously identified material weakness in the control environment remained under remediation. Management said the financial statements fairly presented the periods shown.
- Other commitments: The company committed $100 million over 15 years for LAFC stadium naming and sponsorship rights, with $10 million paid by June 30. It also reported $1.39 billion of credit commitments and unused lines, and material unfunded investment commitments, including $111.7 million for alternative-energy partnerships.
- Guidance: The filing provides no specific earnings or revenue guidance. Management said available liquidity was adequate for day-to-day needs and identified no known event or commitment reasonably likely to materially affect liquidity, while cautioning that actual results may differ because of economic, credit, interest-rate, regulatory, litigation, and execution risks.
Important facts for investors to verify
- Whether deposit outflows and the planned reduction in brokered deposits stabilize, and what funding costs do to net interest margin.
- Whether ongoing control remediation addresses the disclosed material weakness, and the potential financial or reputational effects of the SEC investigation and shareholder litigation.
- Whether the bank can replace revenue lost with the mortgage-banking exit while achieving the expected restructuring savings.
- The performance and risk exposure of alternative-energy investments, including remaining funding commitments and the sustainability of associated tax benefits.
- Whether credit-loss provisions and charge-offs remain adequate as the portfolio shifts, including the loans transferred to held-for-sale and nontraditional mortgage exposures.
- The impact of the securities reclassification and large securities holdings on liquidity, interest-rate sensitivity, and future reported earnings.