Banc of California, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. The company is a California-focused financial holding company operating banking, mortgage banking, financial advisory and asset management businesses.
Business context and major developments
- On November 8, 2014, the Bank acquired 20 Southern California branches from Banco Popular North America, adding approximately $1.07 billion of loans and $1.08 billion of deposits. The net purchase price was $24.0 million; $4.3 million of integration costs were expensed in 2014, and some purchase valuations remained preliminary.
- The company also acquired RenovationReady in January 2014 and completed common-stock and tangible-equity-unit offerings and a private placement during the year.
- The Bank operated 37 branches and 67 loan production offices at year-end. Strategy emphasizes California banking growth, commercial and multifamily lending, mortgage banking, and complementary financial services.
Financial performance and position
| Metric | FY 2014 / Dec. 31, 2014 | Comparable period |
|---|---|---|
| Total interest income | $188.1 million | $120.5 million in 2013 |
| Net interest income | $155.3 million; net interest margin 3.72% | $97.2 million; margin 3.67% in 2013 |
| Noninterest income | $145.6 million | $96.7 million in 2013 |
| Noninterest expense | $264.2 million | $178.7 million in 2013 |
| Provision for loan and lease losses | $11.0 million | $8.0 million in 2013 |
| Income before taxes | $25.8 million | $7.3 million in 2013 |
| Net income | $30.3 million; common EPS $0.91 | $79,000; common loss per share $0.14 in 2013 |
| Efficiency ratio | 87.79% | 92.11% in 2013 |
| Assets / loans and leases, net | $5.97 billion / $3.92 billion | $3.63 billion / $2.43 billion in 2013 |
| Deposits / borrowings | $4.67 billion / $726.6 million | $2.92 billion / $332.3 million in 2013 |
| Cash and cash equivalents | $231.2 million | $110.1 million in 2013 |
| Stockholders’ equity | $503.6 million; 8.43% of assets | $324.9 million; 8.95% of assets in 2013 |
Net income included a $4.5 million income-tax benefit, chiefly reflecting release of the prior-year deferred-tax-asset valuation allowance. The company reported a $16.4 million net deferred tax asset at year-end, with no valuation allowance.
Cash flow: Operating cash flow was negative $627.5 million, investing cash flow negative $463.2 million, and financing cash flow positive $1.21 billion; cash increased $121.1 million. Operating outflow primarily reflected mortgage and other loan originations held for sale, so it should be considered alongside the mortgage banking business and related sales.
Material changes versus 2013
- Total assets grew 64.6%, loans and leases receivable net grew 61.5%, and deposits grew 60.1%, driven substantially by the BPNA acquisition, business growth, and increased mortgage loans held for sale.
- Net interest income increased 59.7%; higher average earning-asset balances drove growth, partly offset by lower loan yields. Net interest margin rose modestly.
- Noninterest income rose 50.5%, including mortgage banking revenue of $95.4 million, gains on loan sales of $19.8 million, advisory fees of $12.9 million and brokerage income of $8.7 million. Noninterest expense increased 47.8%, primarily from staffing, mortgage commissions, occupancy, acquisition and growth costs.
- The loan mix shifted toward commercial real estate and multifamily lending. Single-family residential loans held for investment fell to 29.7% of total loans and leases from 52.6% in 2013, while commercial real estate and multifamily loans together reached 49.5%.
- Nonperforming loans and leases rose to $38.4 million from $31.6 million, but declined to 0.97% of total loans and leases from 1.29%. The allowance was $29.5 million, or 0.75% of loans and leases and 76.81% of nonperforming loans.
Liquidity, debt and capital
- Year-end deposits were $4.67 billion, including $763.0 million of brokered deposits (16.3% of deposits; 12.8% of assets). Core deposits, as defined by the company, totaled $3.48 billion, or 74.4% of deposits.
- FHLB advances were $633.0 million, all contractually maturing in 2015. The Bank reported capacity for an additional $501.3 million of FHLB borrowing and $102.3 million from the Federal Reserve. Cash and available-for-sale securities totaled approximately $576.9 million.
- Holding-company debt included $84.8 million of 7.50% senior notes due 2020 and $12.5 million of junior subordinated amortizing notes; notes payable were $93.6 million net on the balance sheet. The TEU offering also carries a stock-settlement component that may dilute common shareholders.
- The Bank exceeded year-end 2014 “well-capitalized” thresholds: total risk-based capital 12.04%, Tier 1 risk-based capital 11.29%, and Tier 1 leverage 9.17%. New capital rules took effect January 1, 2015; management expected the company and Bank to remain well-capitalized and meet the phased-in conservation buffer.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s strategy is to continue organic and acquisition-led growth and diversify lending; results depend on realizing BPNA integration benefits, retaining acquired customers and controlling expenses.
- Principal risks include credit and collateral deterioration, Southern California real-estate concentration, interest-rate and funding sensitivity, mortgage origination and secondary-market volatility, loan-sale repurchase claims, and execution/integration risks. Commercial and multifamily real estate loans were 49.5% of loans and leases; 80.4% of commercial real estate loans and 93.4% of originated residential loans were secured in Southern California.
- Nontraditional mortgages totaled $350.6 million. Green Loans were $128.2 million, including $12.5 million nonperforming; total nonperforming nontraditional mortgage loans rose to $14.6 million from $7.7 million. These products include interest-only, revolving or balloon-payment features.
- The company identified a material weakness in 2013 related to financial-reporting controls and immaterial prior-period errors. Management said remediation was effective and the weakness was remediated as of December 31, 2014; management and KPMG both concluded internal control was effective at year-end. Prior-period corrections increased loan-repurchase and loan-loss provisions and other expense, but were judged immaterial.
- The $8.3 million reserve for mortgage-loan repurchases and indemnifications increased from $5.4 million. BPNA acquisition valuations were preliminary. The company recorded no securities OTTI despite unrealized losses of $618,000 and reported no material expected liability from pending litigation; an appeal remained pending in the Green Account patent case, which management considered without merit.
- Related-party items warrant review: The Palisades Group recorded $1.24 million of 2014 compensation under a consulting agreement with the CEO’s brother; the Bank paid $5.3 million in 2014 management fees to Oaktree-affiliated funds, which also became a significant shareholder. The CS Financial acquisition also involved the Bank’s lending executive and entities related to the CEO; the filing describes independent-board review and approvals.
Important facts for investors to verify
- BPNA branch integration, acquired-loan performance, deposit retention, and final purchase-accounting valuations and integration costs.
- Underlying earnings excluding the deferred-tax valuation-allowance release, mortgage-sale gains and other transaction-related or variable items.
- Credit trends by loan type, particularly commercial/multifamily real estate, acquired loans, nontraditional mortgages, and Southern California collateral; adequacy of the allowance and repurchase reserve.
- Liquidity and refinancing exposure from $633.0 million of FHLB advances due in 2015, brokered deposits, and mortgage loans held for sale.
- Common-share dilution from TEU settlement, equity awards, and other potential issuances; capital ratios under the new regulatory rules.
- Continuing effectiveness of remediated financial controls, deferred-tax-asset realizability, and the terms and governance of related-party arrangements.