Banc of California, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Banc of California is a California-focused financial holding company operating a commercial bank, mortgage banking business and, during the quarter, The Palisades Group, an investment adviser.
Financial performance
| Metric | Q1 2016 | Comparable period / change |
|---|---|---|
| Net interest income | $70.4 million | $52.0 million; up 35.4% |
| Net interest margin | 3.39% | 3.69% |
| Noninterest income | $52.0 million | $46.0 million; up 13.0% |
| Noninterest expense | $89.1 million | $75.9 million; up 17.4% |
| Net income | $19.7 million | $12.6 million; up 56.6% |
| Net income available to common stockholders | $15.1 million | $11.7 million |
| Diluted earnings per common share | $0.36 | $0.29 |
| Return on average assets | 0.90% | 0.86% |
| Efficiency ratio | 72.81% | 77.45% |
Net interest income rose with growth in average earning assets, while higher funding costs and a slightly lower average loan yield partly offset that benefit. Noninterest income included a $16.8 million gain on available-for-sale securities; mortgage servicing losses were $5.3 million, and mortgage banking revenue declined to $33.7 million from $37.9 million. Expenses increased with business expansion, staffing and facilities; professional fees also rose, partly due to a legal settlement, for which the amount is not specified in the filing text.
Financial position, liquidity and capital
- Total assets were $9.62 billion at quarter-end, up 16.8% from December 31, 2015. Net loans and leases were $5.43 billion, up 5.4%; loans held for sale were $863.9 million, up 29.2%.
- Deposits reached $6.84 billion, up 8.5% from year-end. Borrowings totaled $1.71 billion, comprising $1.195 billion in Federal Home Loan Bank advances, $257.1 million in repurchase agreements and $260.9 million in long-term debt, net.
- Cash and cash equivalents were $215.0 million. Management reported $1.79 billion of total available borrowing capacity, including secured and unsecured sources, and stated liquidity was adequate for day-to-day needs.
- Stockholders’ equity was $867.5 million. The company’s total risk-based capital ratio was 13.59% and its common equity tier 1 ratio was 8.14%; the Bank’s corresponding ratios were 14.03% and 13.42%. The Bank exceeded the stated well-capitalized thresholds.
- Operating cash flow was negative $195.5 million and investing cash flow was negative $989.1 million; financing provided $1.243 billion. Cash increased by $58.9 million to $215.0 million. The filing attributes the funding activity in part to securities purchases and loan growth, alongside deposit and equity issuance proceeds.
Changes, credit quality and business segments
- Q1 offerings raised approximately $77.0 million gross from common stock and $121.1 million gross from Series E preferred stock. Preferred dividends rose to $4.6 million from $0.9 million a year earlier.
- Available-for-sale securities nearly doubled from year-end to $1.66 billion. The company sold $2.23 billion of securities during the quarter, recognizing the $16.8 million net gain, and said it repositioned the portfolio to manage rate volatility and earnings variability.
- Nonperforming loans were $44.2 million, down 2.0% from year-end; nonperforming assets were $44.5 million, or 0.46% of assets. The allowance for loan and lease losses was $35.8 million, equal to 0.66% of gross loans, versus 0.69% at year-end. The quarter’s provision was $321,000.
- Non-traditional mortgages totaled $799.8 million, or 14.6% of gross loans. The filing identifies their interest-only and potential negative-amortization features as credit risks; $17.2 million of the first-lien NTM portfolio had loan-to-value ratios above 100%.
- Commercial Banking generated $43.8 million of pretax income, compared with $18.5 million a year earlier. Mortgage Banking reported a $6.0 million pretax loss versus $5.3 million of income, reflecting lower mortgage-related noninterest income and higher costs. Financial Advisory reported a $563,000 pretax loss.
Outlook, risks and subsequent events
The filing provides no specific earnings or financial guidance. Management cited interest-rate, credit, funding, securities valuation, mortgage servicing, loan repurchase, litigation, regulatory and execution risks. Mortgage loan repurchase demands could be material; the company reported a $9.8 million reserve and said known or probable estimable demands were adequately reserved at March 31.
The company and Bank each had assets close to $10 billion at quarter-end. Management warned that crossing applicable $10 billion thresholds could bring additional regulatory oversight and compliance costs, potentially higher deposit insurance assessments, and lower debit-card interchange income. The filing says some requirements apply after specified consecutive quarters above the threshold.
After quarter-end, the company redeemed Series A and B preferred stock on April 1, agreed on April 4 to sell The Palisades Group, and redeemed $84.8 million of Senior Notes I on April 15. The company also increased its unsecured credit line to $75 million on April 20. Management stated pending litigation was not expected to result in material liability; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the $16.8 million securities gain and other valuation-sensitive items are representative of recurring earnings.
- How mortgage servicing values, prepayment assumptions and mortgage banking margins evolve, and the financial impact of the Palisades Group sale.
- Loan credit trends, including NTM delinquencies, criticized assets, PCI loan cash-flow estimates and adequacy of loss reserves.
- Funding costs, reliance on FHLB advances and short-term repurchase agreements, and liquidity after the subsequent debt and preferred-stock redemptions.
- Progress toward the $10 billion asset threshold and any resulting regulatory, deposit-insurance or revenue effects.