Banc of California, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013 unless stated otherwise. The company is a California-focused bank holding company with retail banking, commercial and real-estate lending, mortgage banking, and financial advisory operations. At quarter-end it operated 16 banking offices and 53 mortgage loan production offices. Recent acquisitions and bank consolidation materially expanded the business, so reported year-over-year comparisons are not fully like-for-like.
Financial results and position
| Metric | Q1 2014 | Comparable / prior value |
|---|---|---|
| Interest and dividend income | $42.8 million | $19.2 million in Q1 2013 |
| Net interest income | $35.2 million | $15.4 million in Q1 2013 |
| Net interest margin | 4.00% | 3.70% in Q1 2013 |
| Noninterest income | $25.3 million | $17.9 million in Q1 2013 |
| Noninterest expense | $57.8 million | $29.6 million in Q1 2013 |
| Net income | $0.8 million | $0.9 million in Q1 2013 |
| Net income (loss) available to common shareholders | $(0.2) million; $(0.01) per share | $0.6 million; $0.05 per share in Q1 2013 |
| Total assets | $4.03 billion | $3.63 billion at Dec. 31, 2013 |
| Deposits | $3.11 billion | $2.92 billion at Dec. 31, 2013 |
| Net loans and leases held for investment | $2.38 billion | $2.43 billion at Dec. 31, 2013 |
| Loans held for sale | $1.00 billion | $716.7 million at Dec. 31, 2013 |
| Cash and cash equivalents | $333.6 million | $110.1 million at Dec. 31, 2013 |
| Total borrowings | $547.4 million | $332.3 million at Dec. 31, 2013 |
| Shareholders’ equity | $325.3 million | $324.9 million at Dec. 31, 2013 |
- Pre-provision net interest income rose substantially with growth in average earning assets, including acquired loans; higher deposit interest expense partly offset the increase. Noninterest income included $17.3 million in mortgage banking gains and $2.6 million in gains on loan sales.
- Expense growth reflected acquisitions and mortgage business expansion: salaries and benefits rose 81.8% year over year, occupancy and equipment expense rose 167.4%, and total noninterest expense rose 95.4%. The efficiency ratio was 95.54%, compared with 88.80% in Q1 2013.
- Net income fell 18.5% year over year; higher preferred dividends ($0.9 million versus $0.3 million) turned positive net income into a loss attributable to common shareholders. The reported effective tax rate was 1.1%; a $17.0 million valuation allowance left deferred tax assets at zero.
- Net cash used in operating activities was $267.9 million, compared with $3.5 million used in Q1 2013, largely reflecting mortgage and other loan originations held for sale. Investing activities provided $88.5 million; financing activities provided $403.0 million. Cash increased $223.5 million during the quarter.
- At March 31, the Bank’s regulatory capital ratios were 14.54% total risk-based, 13.47% Tier 1 risk-based, and 9.41% Tier 1 leverage. The company’s corresponding ratios were 11.93%, 10.86%, and 7.59%. The Bank exceeded the stated “well-capitalized” thresholds.
- Liquidity included $333.6 million cash and cash equivalents, with additional borrowing capacity of $509.0 million from the FHLB and $89.3 million from the Federal Reserve. $335.0 million of certificates of deposit were due within 12 months; $395.0 million of FHLB advances and $70.0 million of federal funds purchased also had maturities under one year.
Material changes and credit indicators
- Assets increased 11.1% from year-end, primarily from higher loans held for sale and cash. Loans held for sale rose 39.6%; net loans and leases held for investment declined 2.1%, including a $59.1 million transfer to held-for-sale.
- Deposits grew 6.5%, with management attributing growth to core-deposit initiatives. Borrowings increased mainly through $145 million of additional FHLB advances and $70 million of federal funds purchased.
- Gross loans were $2.40 billion, down 2.0% from year-end. Nonperforming loans were $32.4 million and nonperforming assets $32.6 million; nonperforming assets were 0.81% of total assets. The allowance for loan and lease losses was $20.0 million, or 0.83% of gross loans, versus $18.8 million, or 0.77%, at year-end.
- Residential real estate exposure is material: single-family residential mortgage loans and Green loans represented approximately 42.4% and 6.0% of the loan and lease portfolio, respectively, with significant Southern California concentration. Nontraditional mortgage loans totaled $269.4 million, 11.2% of gross loans, down from $309.6 million at year-end; 12.4% of the disclosed nontraditional first-lien portfolio had current LTV above 100%.
- The securities portfolio declined to $107.5 million from $170.0 million, largely due to sales and principal repayments. Unrealized losses were $1.0 million; the company reported no other-than-temporary impairment and said it did not intend, and was not likely required, to sell the securities before recovery.
Outlook, transactions, and risks
- The filing provides no quantified earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year results. It identifies integration, expense control, credit quality, real estate conditions, interest rates, deposit competition, liquidity, and regulatory changes as significant risks.
- After quarter-end, the Bank agreed to acquire 20 Banco Popular North America California branches. Based on March 31 balances, the transaction would add approximately $1.1 billion of loans and $1.1 billion of deposits; the stated payment is approximately $5.4 million, an effective deposit premium of 0.5%. Closing depends on regulatory approvals, other conditions, and financing. The Bank could owe a $2 million termination fee in specified circumstances. BPNA agreed to indemnify up to 1.5% of credit losses on acquired loans for two years.
- Also on April 22, the company signed securities purchase agreements with Oaktree and Patriot for common-stock investments at $11.50 per share, subject to adjustment under specified circumstances. These transactions were pending as of the filing; the filing does not state a completed closing.
- A sale of mortgage servicing rights on loans with $941.1 million unpaid principal balance for $10.1 million closed April 1, 2014. The company was to remain interim servicer until later in Q2.
- The company expects to become subject to Basel III capital rules beginning January 1, 2015; management was evaluating the impact. The filing also describes unrecognized tax benefits of $2.6 million and ongoing IRS examinations for 2010–2011.
- A patent case involving the company’s Green Loan products was stayed pending a Supreme Court decision. Management said it did not expect a material impact, while noting no assurance could be given. The filing also discloses related-party arrangements, including a five-year Palisades consulting agreement with the CEO’s brother, with minimum payments exceeding $600,000, and related-party interests in the CS Financial acquisition.
Important facts for investors to verify
- Whether the BPNA branch acquisition and Oaktree/Patriot investments received approvals, financing, and closed on the anticipated terms; track integration costs, deposit runoff, and acquired-loan performance.
- Whether operating expenses can be controlled as acquisitions and mortgage operations scale, and whether mortgage gains and margins remain sustainable.
- Credit trends in residential, commercial real-estate, purchased credit-impaired, and nontraditional mortgage portfolios; assess nonperforming loans, collateral values, and allowance adequacy.
- Near-term funding needs, deposit retention and pricing, borrowing maturities, and capital ratios as growth continues and Basel III rules take effect.
- Final accounting valuations for recent acquisitions, mortgage servicing rights, and the deferred-tax valuation allowance, along with outcomes of tax examinations and material legal matters.