Banc of California, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a California-focused bank holding company with commercial banking, mortgage banking, and financial advisory businesses. Year-over-year comparisons are affected by the November 2014 acquisition of Banco Popular’s California branches and subsequent business growth.
Financial results and condition
- Q3 earnings: Net income was $14.5 million, up 29.2% from $11.2 million a year earlier. Net income available to common stockholders was $11.5 million; diluted EPS was $0.29 versus $0.31.
- Nine-month earnings: Net income was $43.0 million, up 114.2% from $20.1 million. Common-stockholder income was $36.2 million; diluted EPS was $0.93 versus $0.63.
- Revenue and margins: Q3 net interest income rose 45.5% to $55.6 million, while noninterest income increased 15.0% to $50.7 million. Net interest margin declined to 3.42% from 3.58%. For nine months, net interest income rose 48.4% to $161.7 million and noninterest income rose 56.0% to $163.4 million; margin declined to 3.57% from 3.75%.
- Expenses and credit provision: Q3 noninterest expense increased 21.4% to $81.7 million, primarily reflecting higher staffing and business expansion. The Q3 loan-loss provision fell to $0.7 million from $2.8 million; the nine-month provision was $6.2 million versus $6.8 million.
- Balance sheet at September 30: Assets were $7.26 billion, up 21.5% from year-end 2014; net loans and leases were $4.70 billion, up 19.8%; deposits were $5.42 billion, up 16.1%. Cash and cash equivalents totaled $379.0 million. Securities totaled $1.22 billion, including $693.2 million available for sale and $529.5 million held to maturity.
- Debt and capital: Total borrowings were $1.09 billion, including $830.0 million of FHLB advances and $262.8 million of long-term debt. The company issued $175 million of 5.25% senior notes due 2025 and $110.9 million of Series D preferred stock during the period. Bank regulatory ratios were 14.93% total risk-based capital, 14.19% Tier 1 and common equity Tier 1, and 10.53% Tier 1 leverage.
- Cash flow: Nine-month operating cash flow was positive $40.4 million versus negative $541.0 million in 2014; investing cash outflow was $1.15 billion and financing cash inflow was $1.25 billion. Cash increased by $147.8 million from year-end.
- Asset quality: Nonperforming loans were $45.2 million, or 0.96% of gross loans; the allowance was $34.8 million, or 0.74% of gross loans. Nonperforming assets were 0.62% of total assets. The non-traditional mortgage portfolio expanded to $759.3 million, or 16.1% of gross loans, from $350.6 million at year-end.
Changes, outlook, and notable items
- Growth in net interest income and mortgage-banking revenue was driven substantially by higher average balances, acquired deposits and loans, and increased mortgage originations. Mortgage banking activity generated $114.4 million of net revenue for the first nine months, compared with $70.4 million.
- Management cited lower loan yields and lower net interest margins, while deposit costs declined. Expense growth, particularly salaries and benefits, reflected acquisitions, organic growth, and expanded mortgage operations.
- Notable items included a $9.9 million gain on an office-building sale, $1.75 million of Q3 securities-sale gains, and losses on mortgage servicing rights from fair-value changes. The Q3 servicing-rights fair-value loss was $5.5 million; management attributed the decline to generally lower interest rates.
- The effective tax rate was 38.9% for Q3 and 41.3% for the first nine months, compared with 7.4% and 7.1% in 2014. Management attributed the year-over-year difference primarily to a valuation-allowance release in 2014.
- Management provided no specific earnings or financial guidance. It highlighted risks including acquisition integration, credit quality, interest-rate and funding conditions, mortgage-market exposure, and regulatory requirements as the company grows.
- Liquidity included $379.0 million cash and stated additional borrowing capacity of $554.0 million from the FHLB, $98.4 million at the Federal Reserve Discount Window, $85.0 million in federal-funds lines, and up to $361.4 million through repurchase agreements. Management expected a significant portion of maturing deposits to remain, but gave no assurance.
- Potentially material exposures include mortgage-loan repurchase representations and warranties; the reserve was $9.1 million, and the filing notes future demands could be material. The company reported no material change in its previously disclosed risk factors. A patent judgment favoring the Bank was affirmed on appeal, with a possible further appeal noted.
- After quarter-end, the Bank agreed to purchase Santa Ana office property for approximately $77 million, with a contemplated November 2015 closing. The filing also reports that James J. McKinney was promoted to CFO effective November 15, 2015.
Key investor verification points
- Assess the growth and credit performance of the rapidly expanded non-traditional and interest-only mortgage portfolios, including delinquency trends, collateral values, and allowance adequacy.
- Review mortgage-banking earnings sustainability, servicing-rights valuation assumptions, and exposure to repurchase claims and California housing-market conditions.
- Track margin pressure, funding costs, deposit retention and maturities, borrowing levels, and liquidity after the planned property purchase.
- Separate recurring earnings from the building and securities-sale gains, and account for the unusually low 2014 comparison-period tax rate.
- Evaluate acquisition integration, expense growth, regulatory-capital buffers, and the terms and governance of disclosed related-party arrangements.