BANC OF CALIFORNIA, INC. annual report, FY2013

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Banc of California, Inc. — 2013 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2013; quarterly figures below include the fourth quarter. Banc of California is a financial holding company whose principal business is community and mortgage banking in California. In 2013, it combined its bank subsidiaries into one national bank and acquired The Private Bank of California, The Palisades Group and CS Financial.

Financial performance and condition

  • Revenue and earnings: Full-year interest and dividend income was $120.5 million and noninterest income was $96.7 million. Net income was $79,000, versus $6.0 million in 2012; after $2.2 million of preferred dividends, the loss available to common shareholders was $2.1 million, or $0.14 per share, compared with income of $4.6 million, or $0.40 per share, in 2012.
  • Fourth quarter: Net interest income was $33.3 million, noninterest income $34.5 million, provision for loan losses $1.8 million and noninterest expense $57.2 million. Net income was $3.3 million, following a third-quarter net loss of $8.5 million.
  • Margins and costs: Net interest margin was 3.67%, slightly below 3.69% in 2012. The efficiency ratio increased to 92.11% from 86.04%. Noninterest expense rose 149.7% to $178.7 million, primarily reflecting acquisitions and mortgage-banking expansion.
  • Balance sheet: Total assets more than doubled to $3.63 billion. Net loans and leases were $2.43 billion, loans held for sale were $716.7 million, deposits were $2.92 billion, and shareholders’ equity was $324.9 million.
  • Funding and debt: Core deposits grew to $2.48 billion, or 84.9% of deposits; brokered deposits were $350 million. FHLB advances totaled $250 million, including $235 million maturing in January 2014. Senior notes were $82.3 million at 7.50%, due April 2020. Total borrowings were $332.3 million.
  • Liquidity and cash flow: Cash and cash equivalents were $110.1 million. The Bank also reported capacity to borrow an additional $322.9 million from the FHLB and $80.8 million from the Federal Reserve. Operating cash flow was negative $435.5 million, investing cash flow negative $1.30 billion, and financing cash flow positive $1.74 billion; mortgage-loan originations and purchases were significant cash uses.
  • Credit and capital: Nonperforming loans were $31.6 million, up from $23.0 million, while nonperforming assets fell to 0.87% of assets from 1.64%. The allowance for loan and lease losses was $18.8 million, or 0.77% of gross loans, versus $14.4 million, or 1.16%, in 2012. The Bank reported well-capitalized ratios: 14.65% total risk-based, 13.60% Tier 1 risk-based and 9.58% Tier 1 leverage.

Material changes versus 2012

  • Assets, loans and deposits expanded substantially, driven by acquisitions, originations and purchases of seasoned residential mortgage loan pools. Five such pools were acquired in 2013 for $849.9 million against $1.02 billion of unpaid principal balance at acquisition.
  • Net interest income rose 108.9% to $97.2 million, mainly due to higher average earning-asset balances. Noninterest income rose to $96.7 million, including $67.9 million of mortgage-banking gains and a $12.1 million branch-sale gain.
  • Higher operating costs and a $7.3 million tax expense substantially offset revenue growth. The Company recorded a full $17.3 million valuation allowance against net deferred tax assets; the 2012 allowance was $8.4 million.
  • The Bank sold eight branches and transferred $464.3 million in deposits to AmericanWest Bank for a 2.3% deposit premium. It recorded a $12.1 million gain and said the sale reshaped its network toward business and high-net-worth customers.
  • Core deposits increased, while time deposits declined. The FHLB balance rose from $75 million to $250 million, and the allowance-to-gross-loans ratio declined as the portfolio grew.

Outlook, risks and unusual items

The filing provides no quantified earnings or revenue guidance. Management’s stated strategy is to grow a California-focused full-service bank, expand commercial and mortgage lending, build core deposits and develop complementary financial-services businesses. Management anticipated remaining well-capitalized under new capital rules taking effect from 2015, with phase-in through 2019.

  • Key risks include acquisition integration and retention, rapid growth and expense control, credit deterioration, Southern California real-estate concentration, adjustable-rate and nontraditional mortgages, re-performing purchased loans, interest-rate sensitivity, deposit and wholesale-funding access, and dependence on mortgage-sale markets.
  • Mortgage repurchase and indemnification exposure is material: the year-end reserve was $5.4 million, including exposure related to previously sold loans. The Company recorded $2.4 million of repurchase provision in 2013.
  • Mortgage activity generated large gains, but the result depends on origination volumes, secondary-market conditions, servicing-right valuations and hedging. The Company originated $1.94 billion and sold $1.86 billion of conforming residential loans in 2013.
  • Seasoned residential-loan pool delinquencies increased during the year; management attributed part of the rise to servicing transfers and reported that certain conventional-loan delinquencies were brought current in January 2014. Purchased credit-impaired loans remain subject to revised cash-flow estimates and possible future impairment.
  • The Company reported no other-than-temporary impairment on securities despite $1.9 million of unrealized losses at year-end. It also reported no OREO at year-end. These assessments depend on valuation assumptions and market conditions.
  • Related-party matters include CS Financial’s acquisition from a business controlled by an executive, with some consideration allocated to the CEO’s relatives, and a Palisades consulting agreement with the CEO’s brother. The filing describes independent committee review and approvals.
  • Subsequent events included becoming a financial holding company, acquiring RenovationReady assets, and the announced resignation of the Chief Accounting Officer effective March 18, 2014. The filing reports an unqualified audit opinion and effective internal control over financial reporting.

Important facts for investors to verify

  1. Whether 2013’s near break-even net income and loss attributable to common shareholders improve as acquisition and mortgage-platform costs are absorbed.
  2. Whether mortgage-banking gains, loan-sale volumes and servicing-right valuations are sustainable, and how much earnings depend on these activities.
  3. Performance, delinquency and loss experience of the purchased seasoned residential loan pools and acquired credit-impaired loans.
  4. Whether the $18.8 million allowance and $5.4 million mortgage repurchase reserve adequately reflect portfolio and representation-and-warranty risks.
  5. How the Bank refinanced or repaid the $235 million of FHLB advances due in January 2014, and how deposit mix and liquidity evolved after year-end.
  6. The effect of acquisition integration, related-party arrangements, tax-asset valuation allowances and new regulatory capital rules on future results and capital.