Banc of California, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.” The company was formerly First PacTrust Bancorp and changed its name effective July 16, 2013.
Business context
The company is a California-focused bank holding company whose revenue comes mainly from community banking and residential mortgage origination and sales. At quarter-end, its banks operated 19 branches and 42 loan production offices. Results compared with 2012 are substantially affected by the Beach and Gateway acquisitions, growth in mortgage banking, and purchases and sales of seasoned residential loan pools.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $21.6m | $8.4m | $37.0m | $17.3m |
| Noninterest income | $26.1m | $0.6m | $44.0m | $1.1m |
| Provision for loan and lease losses | $1.9m | $0.3m | $4.1m | $1.0m |
| Noninterest expense | $39.6m | $9.9m | $69.2m | $18.2m |
| Net income (loss) | $4.4m | $(0.7)m | $5.3m | $(0.4)m |
| EPS | $0.36 | $(0.09) | $0.41 | $(0.09) |
| Net interest margin | 3.93% | 3.26% | 3.84% | 3.44% |
| Efficiency ratio | 83.01% | 109.63% | 85.39% | 98.44% |
Q2 mortgage banking gains were $20.3m; six-month gains were $36.6m. Six-month mortgage operations originated $867.6m and sold $729.0m of loans. Six-month net gain on loan sales was $4.0m, including a $3.4m gain on a seasoned-loan pool sale. Mortgage-related gains and related production costs were material contributors to reported results.
| Balance sheet / liquidity | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $2.535bn | $1.683bn |
| Loans and leases receivable, net | $1.597bn | $1.234bn |
| Loans held for sale | $257.9m | $113.2m |
| Total deposits, including $457.0m held for sale | $2.110bn | $1.306bn |
| Cash and cash equivalents | $462.3m | $108.6m |
| FHLB advances | $45.0m | $75.0m |
| Notes payable, net | $82.1m | $81.9m |
| Shareholders’ equity | $268.5m | $188.8m |
Cash flow: For the first half of 2013, operating cash flow was $(143.2)m, investing cash flow $(350.8)m, and financing cash flow $847.7m. Cash increased $353.7m to $462.3m, with financing supported by deposit growth and common and preferred stock offerings. The negative operating cash flow reflects, in part, mortgage-loan originations and sales activity.
Credit and capital: The allowance for loan and lease losses was $17.0m, versus $14.4m at year-end; six-month net charge-offs were $1.6m. Nonaccrual loans declined to $9.2m from $23.0m. The company reported a 1.49% allowance-to-originated-loans ratio under its stated exclusions. At June 30, PacTrust Bank’s total risk-based capital ratio was 19.78% and its Tier 1 leverage ratio was 10.03%; Beach’s were 16.79% and 11.94%, respectively. Company-wide ratios were 19.34% total risk-based capital and 11.16% Tier 1 leverage.
Material changes and transactions
- Total assets rose 50.7% from year-end, while net loans and leases increased $363.3m and cash increased $353.7m. Deposits increased $803.5m, or 61.5%, reflecting acquisitions and the core-deposit campaign.
- Net interest margin improved, with management attributing the increase partly to higher-yielding acquired loans and seasoned residential loan purchases. Loan interest income also included substantial purchase-discount accretion.
- Noninterest income and expense both rose sharply. Mortgage banking gains drove much of the income increase; acquisitions, mortgage commissions, staffing and expansion contributed to higher expense.
- During the first half, the company issued common stock for approximately $43.5m net and Series C preferred stock for approximately $33.7m net. The preferred stock carries an 8% non-cumulative dividend.
- After quarter-end, the company completed the Private Bank of California acquisition on July 1, issuing cash and 2,083,333 common shares; it also completed common and preferred offering over-allotments. The company changed its name to Banc of California effective July 16.
- PacTrust agreed to sell eight branches and approximately $457.0m of deposits to AmericanWest Bank at a 2.3% premium on eligible deposits; management expected closing by October 2013. The deposits were classified as held for sale at quarter-end.
Outlook, commentary and risks
- Management described plans to expand commercial and private banking, mortgage production and SBA lending, and to consider additional acquisitions and seasoned residential loan purchases. It did not provide numerical earnings guidance.
- Management projected taxable income for full-year 2013 and noted that the company emerged from a three-year cumulative loss position in Q2. It said that, if profitability evidence is sustained, a substantial release of the $8.0m deferred-tax-asset valuation allowance could occur in the second half and materially benefit earnings and other comprehensive income. No release was assured.
- Liquidity included $462.3m cash, stated additional borrowing capacity of $425.5m at the FHLB and $119.1m at the Federal Reserve, and $348.0m of certificates of deposit maturing within 12 months. Management expected to fund the branch sale, maturities and planned $40.0m office purchase through excess cash, loan and securities sales, and additional borrowing as needed.
- Key risks include credit deterioration and real-estate concentration; performance and valuation of acquired and purchased credit-impaired loans; interest-rate and mortgage-market volatility; mortgage repurchase and representation-and-warranty claims; execution and integration of acquisitions; and retention of deposits. About 51.1% of the loan and lease portfolio consisted of single-family residential loans and 10.9% of Green loans, with significant Southern California concentration.
- Seasoned-loan pool delinquencies increased during the period; management attributed some increase to additional acquisitions and a servicing transfer, which it said could temporarily interrupt customer contact. The allowance and expected cash flows on purchased credit-impaired loans remain judgment-sensitive.
- The company reported an ongoing patent lawsuit involving Green Account products, but stated it did not expect a material impact; no assurance was given. Management was evaluating Basel III capital rules scheduled to apply beginning in 2015.
- Subsequent events also included a July exercise of a call option to acquire CS Financial for $10m, subject to definitive documentation and conditions; management expected a fourth-quarter 2013 closing. A $40m office property purchase was expected to close in September.
Most important facts for investors to verify
- How much of earnings depends on mortgage banking gains, loan-sale gains and purchase-discount accretion, and whether those sources persist.
- Whether the branch sale closes on expected terms and how the transfer of $457.0m in deposits affects funding costs, liquidity and earnings.
- Credit performance of acquired and seasoned loan pools, including delinquencies, updated expected cash flows, charge-offs and adequacy of the allowance.
- Whether reported taxable profitability continues and whether any deferred tax valuation allowance is released.
- Integration and financial effects of the PBOC acquisition, the proposed CS Financial acquisition, and the planned $40.0m property purchase.
- Deposit retention and refinancing needs, including near-term certificate maturities, and sensitivity to interest-rate changes.