Banc of California, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless noted otherwise, amounts below are in millions of dollars. Comparisons are with Q3/nine months 2012 or December 31, 2012, as applicable.
Business context and material developments
The company is a California-focused bank holding company with community banking and residential mortgage origination and sales businesses. The quarter’s results and balance-sheet growth were materially affected by acquisitions, mortgage lending expansion, and purchases of seasoned residential loan pools. PBOC was acquired on July 1, 2013; the company acquired Palisades on September 10. The company changed its name from First PacTrust Bancorp to Banc of California in July.
- During the nine months, the company acquired five seasoned single-family residential loan pools with aggregate unpaid principal of $1.02 billion and acquisition-date fair value of $846.6 million.
- On October 4, eight branches and related deposits were sold to AmericanWest Bank for a deposit premium of about $10.7 million; transferred deposits were about $464.3 million. The two banking subsidiaries merged on October 11 to form Banc of California, National Association. These were subsequent to quarter-end.
- The company acquired CS Financial on October 31 for $10 million, also subsequent to quarter-end.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $26.9 | $14.4 | $63.9 | $31.7 |
| Noninterest income | $18.2 | $19.5 | $62.2 | $20.7 |
| Net interest income plus noninterest income | $45.2 | $33.9 | $126.2 | $52.4 |
| Provision for loan and lease losses | $2.1 | $1.0 | $6.2 | $2.0 |
| Noninterest expense | $52.3 | $24.5 | $121.5 | $42.6 |
| Net income (loss) | $(8.5) | $9.5 | $(3.2) | $9.2 |
| Net income (loss) available to common shareholders | $(9.5) | $9.2 | $(4.5) | $8.1 |
| Diluted EPS | $(0.53) | $0.79 | $(0.32) | $0.70 |
- Margins and efficiency: Net interest margin was 3.25% in Q3, down from 3.97%; for the nine months it was 3.56%, versus 3.66%. Q3 efficiency ratio was 115.80%, versus 72.10%; nine-month ratio was 96.28%, versus 81.38%.
- Drivers: Higher loan balances, acquisitions, seasoned-loan purchases, and mortgage banking boosted interest income and noninterest income. However, higher funding costs compressed Q3 margin, and significant growth in salaries, commissions, occupancy, professional fees, and other expenses contributed to the quarterly loss. Mortgage banking gains were $16.2 million in Q3 and $52.9 million year-to-date.
- Balance sheet at September 30: Total assets were $3.72 billion, up 121% from year-end 2012; gross loans and leases were $2.59 billion, up 108%; net loans were $2.58 billion. Total deposits were $3.26 billion, up 149%, including $462.8 million classified as held for sale. Cash and cash equivalents were $416.0 million, versus $108.6 million at year-end.
- Debt and funding: FHLB advances were $25.0 million, down from $75.0 million. Notes payable, net, were $82.2 million; the senior notes bear 7.50% interest and mature in 2020. The filing reports $527.4 million of additional FHLB borrowing capacity and $156.9 million of available Federal Reserve lines.
- Cash flow: Nine-month operating cash flow was $(148.4) million and investing cash flow was $(922.4) million, primarily reflecting loan origination and purchase activity. Financing cash flow was $1.38 billion, principally from deposit growth, and cash increased by $307.4 million.
- Credit quality: The allowance for loan and lease losses was $19.1 million, versus $14.4 million at year-end. Nonaccrual loans were $15.4 million, excluding purchased credit-impaired loans; loans over 90 days past due still on accrual were zero. Other real estate owned was $1.4 million, down from $4.5 million.
- Capital: Company total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 12.64%, 11.58%, and 7.82%, respectively. The Bank’s corresponding ratios were 15.39%, 14.14%, and 8.11%. Management was evaluating Basel III rules, which were scheduled to apply beginning January 1, 2015.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or financial guidance is provided. Management describes plans to grow commercial and private banking, mortgage and SBA lending, and the western-region franchise, while improving efficiency and integrating acquired businesses. It also intends to continue evaluating seasoned residential loan pool purchases for risk-adjusted returns.
- Management says results are not necessarily indicative of full-year performance. Comparability is limited by acquisitions, loan-pool purchases and sales, and the prior-year $12.1 million Gateway bargain purchase gain.
- Mortgage banking is exposed to interest rates, secondary-market pricing, pipeline hedging, and loan repurchase or indemnification claims. The repurchase-loss reserve was $4.3 million; nine-month provision for loan repurchases was $1.4 million.
- Credit risks include geographic concentration in Southern California real estate and nontraditional mortgage products. The company reported $374.3 million of nontraditional mortgages; management notes their interest-only, balloon-payment, or potential negative-amortization features can increase risk. Purchased credit-impaired loans and pool performance may require further impairment or provisions.
- Net deferred tax assets were $5.5 million after a $12.3 million valuation allowance. Management stated it could not yet conclude that all deferred tax assets would be realized. A Gateway pre-acquisition federal tax return was under IRS examination for 2008 and 2009.
- The company is defending a patent lawsuit concerning products with characteristics similar to Green Accounts. Management does not expect a material impact, but gives no assurance. The filing reports no material change to previously disclosed risk factors.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point increase would reduce economic value of equity by 5.75% but increase modeled net interest income by 4.43%; a 100-basis-point decrease would increase economic value of equity by 5.01% and reduce modeled net interest income by 5.00%. The filing cautions that the model has limitations.
Most important facts for investors to verify
- Whether mortgage banking gains, loan production, and margins can be sustained, and how much earnings depend on fair-value marks and hedging results.
- Whether elevated expense levels and integration costs moderate after the PBOC acquisition, bank merger, branch sale, and CS Financial acquisition.
- Performance, delinquencies, collateral values, and expected cash flows for the large seasoned-loan purchases and acquired credit-impaired portfolios; adequacy of the allowance.
- Deposit retention and funding costs following the branch sale, including the maturities of certificates of deposit and the company’s reliance on wholesale funding capacity.
- Future deferred-tax-asset valuation allowances, mortgage repurchase claims, and the outcome of the patent litigation.
- Post-quarter effects of the branch transaction, bank merger, and CS Financial acquisition on assets, deposits, capital, expenses, and reported results.