Banc of California, Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Banc of California is a California-focused financial holding company operating through its bank, mortgage banking business and Palisades Group financial advisory business. The company reported $8.24 billion in assets and operated 35 bank branches at year-end. Its growth strategy combines lending and deposit expansion with acquisitions.
Financial performance and position
| Metric | FY 2015 / year-end | FY 2014 / year-end |
|---|---|---|
| Total assets | $8.24 billion | $5.97 billion |
| Total revenue proxy: net interest income plus noninterest income | $443.9 million | $300.9 million |
| Net interest income | $223.7 million | $155.3 million |
| Net interest margin | 3.52% | 3.72% |
| Net income | $62.1 million | $30.2 million |
| Net income available to common stockholders | $52.2 million; diluted EPS $1.34 | $26.6 million; diluted EPS $0.90 |
| Noninterest income / expense | $220.2 million / $332.2 million | $145.6 million / $263.5 million |
| Efficiency ratio | 74.83% | 87.56% |
| Loans and leases held for investment, net | $5.15 billion | $3.92 billion |
| Total deposits | $6.30 billion | $4.67 billion |
| Total stockholders’ equity | $652.4 million | $503.3 million |
- Growth and earnings drivers: Assets rose 37.9%, loans held for investment grew 31.4%, and deposits grew 34.9%. Higher net interest income reflected a larger earning-asset base, partly offset by lower loan yields and a lower margin. Noninterest income growth was led by mortgage banking revenue and loan-sale gains.
- Profitability and unusual items: Pretax income was $104.3 million, up from $26.5 million. FY 2015 included a $9.9 million gain on sale of an office property, $3.3 million in securities-sale gains and $37.2 million in loan-sale gains. The effective tax rate was 40.5%, compared with a tax benefit in 2014, when the company released a valuation allowance.
- Cash flow: Operating cash flow was negative $45.2 million; investing cash flow was negative $2.26 billion; financing cash flow was positive $2.23 billion. Cash and cash equivalents declined $75.1 million to $156.1 million. Mortgage-loan originations and securities/loan purchases were major investing and operating cash uses; deposits and capital/debt issuance funded growth.
- Credit quality: The allowance for loan and lease losses was $35.5 million, or 0.69% of loans and leases, versus $29.5 million, or 0.75%, a year earlier. Nonperforming loans and leases increased to $45.1 million from $38.4 million, while their share of total loans declined to 0.87% from 0.97%. Nonperforming assets were $46.2 million, or 0.56% of assets, compared with $38.8 million, or 0.65%.
- Capital, debt and liquidity: Total borrowings were $1.19 billion, including $930 million in FHLB advances; total liabilities were $7.58 billion. The bank reported a 12.79% common equity Tier 1 ratio and 9.64% leverage ratio, and was categorized as well-capitalized. The holding company’s CET1 ratio was 7.36%. Year-end liquidity included $156.1 million cash, $102.6 million in unpledged government mortgage-backed securities cited as highly liquid, and borrowing capacity of $1.29 billion from the FHLB and $89.7 million from the Federal Reserve.
- Funding mix: Core deposits were $5.02 billion, or 79.6% of deposits; brokered deposits were $992.9 million, or 15.8% of deposits. Certificates of deposit totaling $1.05 billion matured within 12 months.
Material changes versus 2014
- Net income more than doubled; pretax income increased 294%. Net interest income rose 44.1%, while the net interest margin fell 20 basis points.
- Mortgage banking revenue increased to $144.7 million from $95.4 million. Conforming residential mortgage originations rose to $4.39 billion from $2.82 billion; mortgage loans sold rose to $4.30 billion from $2.75 billion.
- Noninterest expense increased 26.1%, principally reflecting business expansion, higher staffing and mortgage commissions. The efficiency ratio nevertheless improved.
- Nontraditional mortgage loans increased to $785.9 million, or 15.2% of loans, from $350.6 million, or 8.9%. Interest-only loans rose to $664.5 million from $209.3 million.
- The investment portfolio expanded and changed composition: year-end securities included $833.6 million available-for-sale and $962.2 million held-to-maturity; no held-to-maturity securities were reported at year-end 2014.
Outlook, risks and other notable items
- The filing provides no specific earnings, revenue or margin guidance. Management cited projected future taxable income as support for realizing its $11.3 million net deferred tax asset; this is an estimate, not a formal operating forecast.
- Key stated risks include California real-estate and borrower credit exposure, interest-rate and net-interest-margin sensitivity, deposit competition and reliance on brokered funding, mortgage-market and servicing-right valuation volatility, and loan repurchase or indemnification claims. The company identified growth execution, acquisitions, regulatory change, cybersecurity, third-party providers and liquidity as additional risks.
- Residential concentration merits attention: single-family residential mortgages and HELOCs represented 45.2% of held-for-investment loans. Management also flagged interest-only and other nontraditional products; these may have payment increases or balloon features. The filing notes that many nonconforming loans may not meet the CFPB qualified-mortgage definition.
- Mortgage servicing rights rose to $49.9 million from $19.1 million; changes in fair value reduced earnings by $8.8 million in 2015. The year-end reserve for mortgage loan repurchases was $9.7 million.
- Held-to-maturity securities had $30.2 million in gross unrealized losses at year-end. Management reported no other-than-temporary impairment and said it did not intend, and did not expect to be required, to sell the securities before recovery.
- The company issued $175 million of 5.25% senior notes and $111 million of Series D preferred stock in 2015. After year-end, it issued Series E preferred stock for $121.1 million gross proceeds; the underwriters also received an option for additional shares.
- KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The filing says pending litigation was not expected to have a material effect; a patent case was resolved in the company’s favor.
Important facts for investors to verify
- Whether deposit growth remains durable and the company can reduce or maintain its reliance on brokered deposits as funding needs and maturities evolve.
- Credit performance of the rapidly expanded residential and nontraditional mortgage portfolios, including interest-only payment resets, delinquency trends and acquired re-performing loans.
- Whether the allowance remains adequate as loans grow, and whether nonperforming balances or charge-offs increase.
- How sustainable mortgage banking gains and margins are, including the effect of interest rates on originations, MSR valuations and loan-sale demand.
- Debt service, capital ratios and liquidity after the 2015 funding transactions and subsequent Series E preferred issuance; also verify dividend capacity and the bank’s ability to upstream dividends.
- The contribution of one-time gains and accounting estimates to reported earnings, especially the property-sale gain, MSR fair value, loan repurchase reserve and deferred tax asset assumptions.