Banc of California, Inc. — Q1 2017 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2017. Banc of California is a California-focused commercial bank with 37 banking offices. It completed the sale of its Banc Home Loans division on March 30, 2017, classified the mortgage banking business as discontinued operations, and identified Commercial Banking as its sole reportable segment. Figures below are in U.S. dollars; “continuing operations” excludes the sold business.
Financial performance and condition
| Metric | Q1 2017 | Comparable period / reference |
|---|---|---|
| Net interest income, continuing operations | $80.5 million | $67.2 million in Q1 2016 |
| Net interest income, consolidated operations | $83.7 million | $70.4 million in Q1 2016 |
| Net interest margin, consolidated | 3.19% | 3.39% in Q1 2016 |
| Continuing income before tax | $2.9 million | $29.0 million in Q1 2016 |
| Income from continuing operations | $9.4 million | $17.3 million in Q1 2016 |
| Income from discontinued operations | $7.8 million | $2.4 million in Q1 2016; includes a $13.3 million disposal gain before tax |
| Net income / diluted EPS | $17.2 million / $0.23 | $19.7 million / $0.36 in Q1 2016 |
| Cash flows, consolidated | Operating: $(16.0) million; investing: $(71.1) million; financing: $56.9 million | Net cash decreased $30.2 million; ending cash was $409.3 million |
- Revenue and expenses: Continuing noninterest income was $14.9 million, down 29.7%, mainly reflecting smaller gains on securities sales. Continuing noninterest expense rose 52.0% to $89.9 million. Major items included $15.1 million in professional fees, an $8.7 million alternative-energy partnership loss, and $5.3 million in restructuring expense. A $7.8 million reversal of a prior incentive-compensation accrual reduced salary expense.
- Assets and lending: Total assets were $11.05 billion at March 31, 2017, versus $9.62 billion a year earlier. Net loans and leases were $6.06 billion, up 1.1% from year-end 2016 and above $5.43 billion a year earlier. Loan growth included commercial and multifamily lending; single-family residential mortgage balances declined. The allowance for loan and lease losses was $42.7 million, or 0.70% of loans, versus $35.8 million and 0.66% a year earlier.
- Credit quality: Nonperforming loans and leases were $16.2 million, and nonperforming assets were $19.6 million, or 0.18% of assets. There were no loans 90 days past due and still accruing. Provision expense rose to $2.6 million from $0.3 million in Q1 2016.
- Deposits, liquidity and debt: Deposits were $8.60 billion, down 6.0% from December 31, 2016; management cited planned brokered-deposit reductions and outflows in private and commercial banking. Cash and cash equivalents totaled $409.3 million. FHLB advances rose to $1.08 billion from $490.0 million at year-end; repurchase borrowings were $26.3 million. The company also had $68.0 million outstanding on a holding-company credit line, whose maturity was extended to July 17, 2017. Long-term debt, net, was $174.1 million.
- Capital: The Bank reported total risk-based capital of 15.11%, common equity Tier 1 capital of 14.48%, and Tier 1 leverage of 9.43%; each exceeded the stated well-capitalized thresholds. The holding company’s corresponding ratios were 13.72%, 9.37%, and 8.51%.
Material changes and outlook
- The Banc Home Loans sale produced $55.6 million of net cash proceeds and a $13.3 million pretax gain. Caliber may pay up to a further $5 million based on loan-officer retention; an additional performance-based earn-out is possible. Sale-related restructuring and transition costs are expected to continue; management estimated approximately $10 million of total restructuring expense during 2017.
- Management attributed higher net interest income to growth in average earning assets, partly offset by a lower average loan yield and increased deposit costs. It reported no specific earnings or revenue guidance in the supplied filing text. Management said the sale supports a refocus on core commercial banking, while warning that mortgage-banking revenue may not be replaced and anticipated savings may not be achieved.
- Alternative-energy partnerships generated $8.8 million of tax credits, but also an $8.7 million pretax investment loss and $1.5 million of deferred tax expense. These credits contributed to a consolidated effective tax benefit rate of 5.8% for the quarter. The company had funded $88.3 million of a $200 million commitment; maximum loss exposure, including unfunded commitments, was $159.4 million.
- The company disclosed a pending SEC investigation and securities class actions alleging misleading statements concerning a purported relationship with an individual who pleaded guilty to securities fraud in unrelated matters. The company said the cases were at an early stage and intended to defend them. Management time, reputational effects, legal costs, and possible sanctions are identified risks.
- Disclosure controls were judged ineffective at March 31, 2017 because of an unresolved material weakness in the control environment and “tone at the top.” Remediation and governance changes were underway but had not operated long enough for management to conclude the weakness was remediated. The former CEO resigned in January; Douglas H. Bowers became CEO effective May 8, 2017.
- Other identified risks include deposit retention, interest-rate and margin exposure, credit losses, regulatory requirements associated with growth above $10 billion in assets, loan-repurchase demands, and execution of the mortgage-business transition. The filing also describes a $100 million, 15-year LAFC stadium naming-rights and sponsorship commitment, with $10 million paid by March 31, 2017.
Most important facts for investors to verify
- Whether recurring earnings and operating efficiency improve after the mortgage-banking disposal, restructuring, and unusually high investigation-related fees.
- How much of quarterly earnings depended on the disposal gain, incentive-accrual reversal, and alternative-energy tax benefits, and the timing and value of any Caliber earn-out.
- Whether deposit outflows continue, how funding costs evolve, and how increased FHLB borrowing affects liquidity and margins.
- Whether loan growth—especially in commercial, construction, and multifamily portfolios—causes further provisions or deterioration in credit quality.
- Progress in remediating the material weakness, developments in the SEC investigation and shareholder litigation, and any resulting costs or findings.
- The remaining commitments and future cash obligations, including alternative-energy funding, the LAFC agreement, debt maturities, and the holding-company credit line maturity.