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BANC > SEC Filings for BANC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for BANC OF CALIFORNIA, INC.


12-Nov-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion compares the consolidated financial condition of Banc of California, Inc. (the Company or we, us and our), at September 30, 2013, to its financial condition at December 31, 2012, and the results of operations for the three and nine months ended September 30, 2013 and 2012. This discussion should be read in conjunction with the unaudited interim consolidated financial statements and footnotes included herein.

The Company is the bank holding company of Banc of California, National Association (the Bank). The Company derives substantially all of its revenues from the retail, commercial, and mortgage banking services provided by the Bank.

The Company's assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company also generates non-interest income by providing fee based banking services and by the origination and sale of conventional conforming and FHA/VA residential mortgage loans to the secondary market. The Company's basic strategy is to maintain and grow net interest income and non-interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and plans to expand its banking offices further into Southern California and its loan production offices throughout the western United States. The Company's primary market risk exposure is interest rate risk and credit risk.

CRITICAL ACCOUNTING POLICIES

Our financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the Consolidated Statements of Financial Condition dates and our results of operations for the reporting period. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, we have established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. Our critical accounting policies are described in "Notes to Consolidated Financial Statements" in our Annual Report on Form 10-K in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the Consolidated Financial Statements, "Significant Accounting Policies."


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SELECTED FINANCIAL DATA

The following tables set forth certain selected financial data for the periods
indicated:



                                              As of and for the                    As of and for the
                                             Three Months Ended                    Nine Months Ended
                                                September 30,                        September 30,
                                           2013               2012              2013              2012
                                                     ($ in thousands, except per share data)
AVERAGE BALANCES:
Average gross loans and leases (1)     $  2,530,856       $  1,197,737       $ 1,934,555       $   954,167
Average investment securities               221,245            123,022           147,459           111,495
Average interest-earning assets           3,286,840          1,444,985         2,397,486         1,158,604
Average total assets                      3,439,433          1,520,310         2,509,750         1,227,060
Average total depostis                    2,948,644          1,207,801         2,103,721           962,015
Average borrowings                          124,419             99,257           131,513            65,534
Average interest-bearing
liabilities                               2,659,186          1,096,561         1,995,855           912,796
Average stockholders' equity                336,963            191,958           244,778           187,431
PER SHARE DATA:
Basic earnings (loss) per common
share                                  $      (0.53 )     $       0.79       $     (0.32 )     $      0.70
Diluted earnings (loss) per common
share                                  $      (0.53 )     $       0.79       $     (0.32 )     $      0.70
Basic earnings (loss) per class B
common share                           $      (0.53 )     $       0.79       $     (0.32 )     $      0.70
Diluted earnings (loss) per class B
common share                           $      (0.53 )     $       0.79       $     (0.32 )     $      0.70
Common shares outstanding                17,439,562         10,683,327
Class B non-voting non-convertible
common stock outstanding                    579,490          1,090,061
PERFORMANCE RATIOS:
Return on average assets (2) (3)              -0.98 %             2.50 %           -0.17 %            1.00 %
Return on average stockholders'
equity (2) (4)                               -10.05 %            19.78 %           -1.77 %            6.54 %
Efficiency ratio (5)                         115.80 %            72.10 %           96.28 %           81.38 %
Net interest spread (6)                        3.06 %             3.76 %            3.39 %            3.47 %
Net interest margin (7)                        3.25 %             3.97 %            3.56 %            3.66 %
Average stockholders' equity to
average total assets                           9.80 %            12.63 %            9.75 %           15.27 %
SELECTED CAPITAL RATIOS:
Banc of California, Inc.
Total risk-based capital ratio                12.64 %            11.47 %
Tier 1 risk-based capital ratio               11.58 %            14.36 %
Tier 1 leverage ratio                          7.82 %            15.61 %
PacTrust Bank
Total risk-based capital ratio:               15.39 %            17.41 %
Tier 1 risk-based capital ratio:              14.14 %            16.15 %
Tier 1 leverage ratio:                         8.11 %            11.22 %
The Private Bank of California
Total risk-based capital ratio:               11.55 %            14.36 %
Tier 1 risk-based capital ratio:              11.06 %            14.15 %
Tier 1 leverage ratio:                         8.34 %            10.76 %
ASSET QUALITY:
Nonaccrual Loans, excluding PCI
loans                                  $     15,408       $     16,181
90+ delinquent loans, excluding PCI
loans                                        14,100              1,479
Other real estate owned, net                  1,383              8,704
Net loan charge-offs                            (42 )              100       $     1,513       $     2,402
Allowance for loan losses:
Originated loans                       $     17,416       $     11,663
Purchased/acquired loans:
Non-credit impaired                           1,402                716
Credit impaired                                 312                 -

Total purchased/acquired loans                1,714                716

Total ALLL                             $     19,130       $     12,379

Loans:
Originated loans                       $  1,252,673       $    810,010
Purchased/acquired loans:
Non-credit impaired (8)                     994,387            300,836
Credit impaired (9)                         349,128            104,528

Total purchased/acquired loans            1,343,515            405,364

Total loans                            $  2,596,188       $  1,215,374

ALLL to originated loans                       1.39 %             1.44 %

(1) Gross loans are net of deferred fees and related direct cost, but excluding the allowance for loan and lease losses

(2) Calculated based on annualized net income

(3) Net income divided by average total assets

(4) Net income divided by average stockholders' equity

(5) Total non-interest expense divided by the sum of net interest income before provision for loan and lease losses and total non-interest income

(6) Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities


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(7) Annualized net interest income before provision for loan and lease losses divided by average interest-earning assets

(8) Includes $47.0 million and $3.3 million discounts at September 30, 2013 and 2012, respectively

(9) Includes $110.1 million and $54.5 million discounts at September 30, 2013 and 2012, respectively


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EXECUTIVE OVERVIEW

This overview of management's discussion and analysis highlights selected information in the financial results of the Company and may not contain all of the information that is important to you. For a more complete understanding of trends, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Company's consolidated financial condition and results of operations.

The Company announced July 16, 2013 that its corporate name was changed from First PacTrust Bancorp, Inc. to Banc of California, Inc. The new name is intended to reflect the Company's goal to be the leading community banking organization serving businesses and families in California.

On July 1, 2013, the Company completed its previously announced acquisition of The Private Bank of California (PBOC). The acquisition was accomplished by merging PBOC into Beach Business Bank (Beach), a wholly owned subsidiary of the Company. Upon completion of the transaction, Beach was renamed "The Private Bank of California." On October 11, 2013, the Company merged PBOC, a California-chartered bank, with the Company's other banking subsidiary, Pacific Trust Bank, a federal savings bank, to form the Bank, which has a national bank charter issued by the Office of the Comptroller of the Currency. Unless the context indicates otherwise, references to the "Bank" prior to October 11, 2013 mean Pacific Trust Bank and PBOC (Beach prior to July 1, 2013), collectively, and references to the "Bank" on or after October 11, 2013 refer to Banc of California, National Association.

In connection with the rebranding and renaming of the Company and the Bank, the Bank's residential lending divisions Mission Hills Mortgage Bankers and PacTrust Home Mortgage were consolidated and rebranded under a single national brand, Banc Home Loans. As a division of Banc of California, Banc Home Loans will be positioned to leverage all of the products and resources of the Bank as Banc Home Loans seeks to establish a national presence as a leading provider and innovator in the residential lending business.

As a bank holding company, the Company generally is prohibited from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by regulation or order of the Federal Reserve Board, have been identified as activities closely related to the business of banking or managing or controlling banks.

The Bank is a community-oriented financial institution offering a variety of financial services to meet the banking and financial needs of the communities the Bank serves. The Bank is headquartered in Orange County, California. As of September 30, 2013, the Bank operated twenty-three banking offices in San Diego, Riverside, Orange, and Los Angeles Counties in California and 50 producing loan production offices in California, Arizona, Oregon, Washington and Montana. On October 4, 2013, eight of the Bank's banking offices were sold to AmericanWest Bank. The sale of these banking offices is a key part of the Bank's ongoing effort to improve its overall efficiency and profitability and to reshape the Bank's retail branch network to focus on servicing small - to mid - sized businesses and high net worth families throughout Los Angeles, Orange and San Diego Counties.

The principal business of the Bank consists of attracting deposits from the general public and investing these funds primarily in loans secured by first mortgages on owner-occupied, one-to-four SFR residences, a variety of consumer loans, multi-family and commercial real estate and commercial business loans. The Bank offers a variety of deposit accounts for both individuals and businesses with varying rates and terms, which generally include savings accounts, money market deposits, certificate accounts and checking accounts. The Bank solicits deposits in its market area and, to a lesser extent, from institutional depositors nationwide, and in the past has accepted brokered deposits. Banc Home Loans, the Bank's residential lending division, operates 50 producing loan production offices and focuses on originating and selling mortgage loans. The Bank also provides SBA loans, as member of the SBA's Preferred Lender Program. In addition, the acquisition of PBOC gave the Company the ability to offer specialized private banking services to high net worth individuals, family owned businesses, entrepreneurs, law firms, the entertainment business and others who require a very high level of personalized banking services and customized solutions.

During the three months ended September 30, 2013, the Company purchased a certain improved real property office complex located at 1588 South Coast Drive, Costa Mesa, California (the Property) at a purchase price of approximately $40.0 million. The Property is under construction for improvement and will be used for the Company's main office in the future.

Growth Strategies

Expand our franchise through acquisitions or the establishment of de novo branches or banks in markets that offer regional continuity, such as the greater Southern California market and other western markets. The plan is to develop a scalable and


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meaningful platform for retail bank relationships, residential lending infrastructure and commercial banking development, to which the Company added 8 new producing loan production offices during the three months ended September 30, 2013. In addition, the Company closed the PBOC transaction on July 1, 2013.

Continue as a public company with a common stock that is quoted and traded on a national stock market. In addition to providing access to growth capital, we believe a "public currency" provides flexibility in structuring acquisitions and will allow us to attract and retain qualified management through equity-based compensation.

Expand our commercial business loan portfolio to diversify both our customer base and maturities of the loan portfolio and to benefit from the low cost deposits associated with individual accounts and the professional, general business, private banking and service industries that are common commercial borrowers. The Company successfully completed two acquisitions in 2012 and one acquisition in 2013 that includes a team of local commercial lending officers which has given us a greater network and far greater capacity to attract commercial and private banking relationships. The Company will seek to continue to develop its commercial lending loans through strategic "lift outs" of lending teams in various geographic markets that have particular business "niches" and "specialty".

Diversify the residential lending platform through additional lending channels such as correspondent lending, warehouse lending and wholesale lending, which will result in expanding production sources and broadening our own product mix and geographic concentration. As a result of our 2012 Gateway acquisition, the Bank acquired a well-established mortgage banking platform (Mission Hills Mortgage Banking or MHMB). The platform provided us with 22 loan production offices in California, Arizona, Oregon and Washington. The Company has opened 28 additional loan production offices subsequent to the acquisition as of September 30, 2013 for a total of 50 producing loan production offices.

Enhance the residential lending product mix and loan sale alternatives with Ginnie Mae approval to originate qualified loans that are subsequently sold as mortgage backed securities with a full government credit guaranty. The Bank originated and sold $97.3 million to Ginnie Mae during the third quarter of 2013.

Increase our SBA production. SBA loans provide us an option to portfolio or to sell the guaranteed portion of loans in the secondary market. The 2012 acquisitions of Beach and Gateway provided us with a well-established SBA platform from which to grow. With centralized underwriting in Southern California and strong marketing personnel, we anticipate both interest income and non-interest income from SBA production will continue to increase in the near term and become a stable source of recurring income.

Purchases of seasoned SFR mortgage loan pools. The Company completed three acquisitions of seasoned SFR mortgage loan pools during 2012 and acquired five pools during the nine months ended September 30, 2013 at a discount to both the current property value of the collateral and the note balance. As of September 30, 2013, the total unpaid principal balance and carrying values of these eight pools was $927.9 million and $789.5 million, respectively. The Company intends to continue the purchase and strategic sale of such loans where management believes it can obtain an attractive risk adjusted return as part of our portfolio diversification strategy.

Continue to grow our commercial real estate lending by leveraging the backgrounds and contacts of our experienced lending officers to expand market share.

Develop an expertise and core competency in the integration of the Company's community bank acquisition strategy to maximize utilization of banking expertise obtained in acquisitions from personnel. The Company also is investing in its infrastructure to have the ability to scale efficiently and effectively in line with our long-term goal of creating a complete community banking franchise.

The comparability of the Company's operating results for the three and nine months ended September 30, 2013 and 2012 is significantly impacted by the Company's acquisitions of PBOC during the third quarter of 2013 and Beach and Gateway during the third quarter of 2012, as well as the seasoned SFR mortgage loan pool purchases and sales in 2012 and 2013.


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RESULTS OF OPERATIONS



                                                Three Months Ended
                                                  September 30,                 Increase (Decrease)
                                               2013           2012           Amount          Percentage
                                                                  ($ in thousands)
Net interest income                          $  26,943      $  14,408      $    12,535              87.0 %
Provision for loan and leases losses            (2,109 )       (1,031 )         (1,078 )           104.6 %
Noninterest income                              18,226         19,512           (1,286 )            -6.6 %
Noninterest expense                            (52,304 )      (24,456 )        (27,848 )           113.9 %
Income tax (expense) benefit                       710          1,110             (400 )           -36.0 %

Net income (loss)                               (8,534 )        9,543          (18,077 )           189.4 %
Preferred stock dividends                         (946 )         (328 )           (618 )           188.4 %

Net income (loss) available to common
shareholders                                 $  (9,480 )    $   9,215      $   (18,695 )           202.9 %

For the three months ended September 30, 2013, the Company recorded a net loss of $8.5 million, a decrease of $18.1 million from a net income of $9.5 million for the three months ended September 30, 2012. Preferred stock dividends were $946 thousand and $328 thousand for the three months ended September 30, 2013 and 2012, respectively, and net (loss) income available to common shareholders was $(9.5) million and $9.2 million for the three months ended September 30, 2013 and 2012, respectively.

                                                Nine Months Ended
                                                  September 30,                Increase (Decrease)
                                               2013           2012           Amount         Percentage
                                                                 ($ in thousands)
Net interest income                         $   63,927      $  31,715      $   32,212             101.6 %
Provision for loan and leases losses            (6,195 )       (2,001 )        (4,194 )           209.6 %
Noninterest income                              62,226         20,654          41,572             201.3 %
Noninterest expense                           (121,456 )      (42,617 )       (78,839 )           185.0 %
Income tax (expense) benefit                    (1,744 )        1,430          (3,174 )          -222.0 %

Net income (loss)                               (3,242 )        9,181         (12,423 )           135.3 %
Preferred stock dividends                       (1,234 )       (1,042 )          (192 )            18.4 %

Net income (loss) available to common
shareholders                                $   (4,476 )    $   8,139      $  (12,615 )           155.0 %

For the nine months ended September 30, 2013, the Company recorded a net loss of $3.2 million, a decrease of $12.4 million from a net income of $9.2 million for the nine months ended September 30, 2012. Preferred stock dividends were $1.2 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively, and net (loss) income available to common shareholders was $(4.5) million and $8.1 million for the three months ended September 30, 2013 and 2012, respectively.

Net Interest Income

For the three months ended September 30, 2013, net interest income increased by $12.5 million, or 87.0 percent, to $26.9 million, compared to $14.4 million for the three months ended September 30, 2012. The increase in net interest income from 2012 to 2013 was primarily attributable to the increase in loan interest income from the loan growth, loans acquired in connection with the PBOC acquisition and purchases of seasoned SFR mortgage loan pools, partially offset by the increase in interest expense from a larger balance sheet, a full quarter of interest expense associated with the long term debt issued in December 2012, and the mix and higher pricing of deposits. Net interest margin decreased by 0.72 basis points to 3.25 percent for the three months ended September 30, 2013 from 3.97 percent for the three months ended September 30, 2012 as a result of decreasing yields on loans and earning assets, higher pricing of deposits with a larger balance average balance and a high cost on the long term debt. In an effort to increase core deposits, the Bank introduced a premier deposit program that has more aggressive pricing and slightly above market rates during the fourth quarter of 2012.

For the nine months ended September 30, 2013, net interest income increased by $32.2 million, or 101.6 percent, to $63.9 million, compared to $31.7 million for the nine months ended September 30, 2012. The increase in net interest income from 2012 to 2013 was primarily attributable to the increase in loan interest income from the loan growth, loans acquired in connection with the PBOC acquisition and purchases of seasoned SFR mortgage loan pools, partially offset by the increase in interest expense from a larger balance sheet, a full nine month-period of interest expense associated with the long term debt issued in April and December 2012, and the mix and higher pricing of deposits. Net interest margin decreased by 10 basis points to 3.56 percent for the nine months ended September 30, 2013 from 3.66 percent for the nine months ended September 30, 2012 as a result of higher pricing of deposits with a larger balance average balance and a high cost on the long term debt.


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The following table shows the average balances of assets, liabilities and shareholders' equity the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the three months ended September 30, 2013 and 2012:

                                                                   Three months ended September 30,
                                                          2013                                          2012
                                                                        Average                                       Average
                                          Average                        Rate/          Average                        Rate/
                                          Balance        Interest        Yield          Balance        Interest        Yield
                                                                           ($ in thousands)
INTEREST EARNING ASSETS
Gross loans (1)                         $ 2,530,856      $  32,061          5.03 %    $ 1,197,737      $  15,928          5.29 %
Securities                                  221,245          1,292          2.32 %        123,022            708          2.29 %
Other interest-earning assets (2)           534,739            493          0.37 %        124,226             86          0.28 %

Total interest-earning assets             3,286,840         33,846          4.09 %      1,444,985         16,722          4.60 %

Allowance for loan and lease losses         (17,524 )                                     (11,542 )
BOLI and non-interest earning assets
(3)                                         170,117                                        86,867

Total assets                            $ 3,439,433                                   $ 1,520,310

INTEREST-BEARING LIABILITIES
Savings                                 $   907,413      $   2,471          1.08 %    $   165,968      $     211          0.51 %
NOW                                         447,961            995          0.88 %         43,028             24          0.22 %
Money market                                599,971            556          0.37 %        216,753            244          0.45 %
Certificates of deposit                     579,422          1,062          0.73 %        571,555          1,099          0.76 %
FHLB advances                                40,183             56          0.55 %         64,978             74          0.45 %
Capital lease obligation                      1,334             27          8.03 %            255              2          3.12 %
Long-term debt                               82,902          1,736          8.31 %         34,024            660          7.72 %

Total interest-bearing liabilities        2,659,186          6,903          1.03 %      1,096,561          2,314          0.84 %

. . .
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