Banc of California, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; filed November 7, 2014. Unaudited consolidated results. Banc of California is a California-focused bank holding company with mortgage-banking and advisory activities.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $38.2 million | $26.9 million | $108.9 million | $63.9 million |
| Net interest margin | 3.58% | 3.25% | 3.75% | 3.56% |
| Noninterest income | $44.1 million | $18.2 million | $104.7 million | $62.2 million |
| Noninterest expense | $67.6 million | $52.3 million | $185.8 million | $121.5 million |
| Net income (loss) | $11.2 million | $(8.5) million | $20.1 million | $(3.2) million |
| Diluted EPS | $0.30 | $(0.53) | $0.63 | $(0.32) |
Mortgage banking drove a substantial share of noninterest income: mortgage banking revenue was $26.9 million in Q3 and $70.4 million year to date. Q3 also included $10.3 million of loan-sale gains, including a gain on seasoned residential mortgage pools. The efficiency ratio improved to 82.10% from 115.80% in Q3 2013, but remained high. Return on average assets was 1.01% for Q3 and 0.66% year to date.
Balance sheet, liquidity and capital
- Total assets were $4.54 billion at September 30, up 25.1% from year-end 2013. Net loans and leases were $2.69 billion; loans held for sale were $1.13 billion.
- Deposits totaled $3.63 billion, up 24.4% from year-end. Cash and cash equivalents were $185.0 million; available-for-sale securities were $310.4 million.
- Total borrowings were $400.5 million, including $305.0 million of Federal Home Loan Bank advances and $95.5 million of notes payable. The company reported $790.5 million of additional FHLB borrowing capacity and $98.4 million of Federal Reserve Bank lines.
- Shareholders’ equity was $446.9 million. Bank regulatory capital ratios were 15.75% total risk-based, 14.80% Tier 1 risk-based and 9.80% Tier 1 leverage; each exceeded the stated “well-capitalized” minimums.
- Operating cash flow was negative $541.0 million for the first nine months, primarily reflecting mortgage-loan originations and timing of sales. Investing cash flow was negative $259.8 million; financing cash flow was positive $875.7 million, including deposit growth and equity-linked issuance. Cash increased $74.9 million to $185.0 million.
Credit quality and changes versus prior periods
- Nonperforming loans increased to $38.3 million from $31.6 million at December 31, 2013; nonperforming assets were $38.9 million, or 0.86% of assets. No loans were 90 days past due and still accruing.
- The allowance for loan and lease losses rose to $25.3 million, or 0.93% of gross loans, from $18.8 million, or 0.77%, at year-end. Management enhanced its reserve methodology during Q3, estimating the changes added $591,000 to the allowance versus the prior methodology.
- Growth reflected lending and acquisitions: net loans increased 10.7% from year-end, while total assets, deposits and equity also expanded. Results are not directly comparable with 2013 because of acquisitions, including Private Bank of California, CS Financial and Palisades, and the consolidation of subsidiary banks.
- Noninterest expense increased 29.2% in Q3 and 53.0% year to date, principally due to higher staffing, mortgage-banking activity, facilities and acquisition-related growth. The year-to-date comparison also reflects differing acquisition periods.
- Mortgage repurchase reserve was $7.0 million, up from $5.4 million at year-end; the company recorded $3.1 million in repurchase provisions year to date.
Outlook, transactions and risks
- No quantified earnings or margin guidance is provided. Management described plans to grow and diversify lending and deposits and anticipated closing the acquisition of 20 Banco Popular North America California branches on or about November 7, 2014. The transaction was subject to customary conditions and financing, and was expected to involve approximately $1.1 billion of loans and $1.1 billion of deposits, based on September 30 balances.
- The company expected approximately $50 million of gross proceeds from concurrent share issuances to Oaktree and Patriot investors to help fund the branch acquisition. It had issued $69 million of tangible equity units in May; net proceeds were $65.0 million. The TEUs carry an 8.00% distribution and include an amortizing debt component bearing 7.50% interest.
- Material risk factors include successful branch integration and customer retention, acquisition financing and costs, loan quality, real-estate and California market exposure, interest-rate sensitivity, mortgage repurchase claims, and the ability to deploy growth-related capital efficiently. The company noted that actual acquisition costs, deposit or loan runoff and synergies could differ from expectations.
- Internal controls: Management concluded disclosure controls were ineffective at September 30 because of a material weakness in internal control over financial reporting. Prior-period errors were identified but were not considered material and no restatement was reported. Remediation steps were underway; management said the weakness would not be considered fully remediated until new controls had operated for a sufficient period.
- The effective tax rate was unusually low (6.0% in Q3; 4.7% year to date), partly due to release of part of the deferred-tax valuation allowance. The company reported an $8.7 million net deferred tax asset, net of an $8.3 million valuation allowance.
- A court ruled a patent asserted against the Bank invalid and entered judgment for the Bank; the plaintiff appealed. The company did not expect a material impact, while noting no assurance. The filing also discloses related-party arrangements, including payments under a consulting agreement with the CEO’s brother and acquisition-related interests involving company executives and their affiliates.
- Interest-rate sensitivity analysis projected that an immediate +100 basis-point change would reduce modeled economic value of equity by 4.1% and net interest income by 0.8%; results depend on assumptions about repricing and prepayments.
Important facts for investors to verify
- Whether the Banco Popular branch acquisition closed as planned, how it was financed, and subsequent deposit and loan retention and integration costs.
- Whether the material weakness was fully remediated and whether later filings identify additional control deficiencies or adjustments.
- Trends in nonperforming loans, reserve adequacy, charge-offs and mortgage repurchase claims as the portfolio grows.
- The sustainability of mortgage-banking and loan-sale gains, and the effect of higher operating expenses on efficiency and recurring profitability.
- Capital and dilution effects of the TEUs and planned investor share issuances, alongside liquidity needs and funding costs.
- For context, the filing reports both $10.3 million of Q3 net gain on loan sales and a $7.7 million gain on seasoned SFR pool sales; investors should review the detailed statements and notes for classification and reconciliation.