Banc of California, Inc. (BANC) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] I’ll now like to turn the call over to Mr. Richard Herrin, Executive Vice President, Chief Administrative Officer and Corporate Secretary for First PacTrust Bancorp, Inc. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today for our First Quarter 2013 Earnings Conference Call. With me on the call today is First PacTrust Bancorp’s Chief Executive Officer, Steven Sugarman; our Chief Financial Officer, Ronald Nicolas, Jr.; our President, Robert Franko; and Chief Accounting Officer, Lonny Robinson. Today’s conference call is being recorded and a copy of the recording will be available later on the company’s Investor Relations website. Before I turn it over to Steven, I want to remind everyone that, as always, elements of this presentation are forward-looking and based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. The forward-looking statement in today’s 8-K filing also applies to our comments today. That document is available on our firstpactrustbancorp.com investor relations website, as our other 8-K filings regarding investor presentation material and other matters. We will have time for a Q&A at the end of this presentation. And now I would like to turn it over to our CEO, Mr. Steven Sugarman.

Thanks, Richard. Good morning, everyone. The first quarter was very important for First PacTrust. We made significant progress in executing against our business plan. I’m proud to report that we finished the quarter just above $2 billion in assets. And pro forma for the closing of the acquisition of The Private Bank of California, our total assets will exceed $2.7 billion. Prior to discussing, our detailed operating results let me first provide an update relating to First PacTrust's progress on several key initiatives. First, the acquisition of Private Bank of California. First PacTrust has received approvals from the FDIC and DFI to complete its acquisition of The Private Bank of California. Additionally, our S-4 proxy statement for the acquisition is now effective, and we understand that The Private Bank of California has scheduled its shareholder vote for June 20. Upon confirmation of a successful vote for the acquisition by the shareholders of The Private Bank of California, First PacTrust plans to close the acquisition, and this is expected to occur on or before July 5, 2013. Importantly, The Private Bank of California continues to perform well. During the first quarter, The Private Bank generated approximately $450,000 of net income and grew its total assets and total loans to $674 million and $369 million respectively. We continue to be thankful to all the professionals at The Private Bank for their corporation and support in planning for the integration. Secondly, our application to become a financial holding company. On May 7, First PacTrust submitted an application notifying the Federal Reserve Board of its desire to become a financial holding company. We expect to have a response to this notice within 30 days of the submission. Third, the acquisition of the Palisades Group. First PacTrust has notified the Palisades Group of its intent to acquire the Palisades Group, subject to regulatory approval. The Palisades Group will become a subsidy of First PacTrust upon the closing of the transaction. Now let me turn things over to Ron Nicolas to provide an update as to the first quarter 2013 financial results. Ron?

Thanks, Steve, and good morning. I will be directing my comments to the financial statements included with the release, focusing primarily on the comparison to the fourth quarter starting with the income statement. During the first quarter of 2013, the company reported net income of $929 million or $0.05 per share compared to a loss of $3.2 million or $0.30 per share for the fourth quarter and net income of $377,000 and $0 per share for the first quarter of 2012, as highlighted in our release. Revenue came in strong, with net interest income of $15.4 million and noninterest income of just under $18 million. Our consolidated net interest margin for the quarter was 3.7% compared to 3.72% for the fourth quarter of 2012. And today, it exceeds 4% on a run rate basis. The NIM in our banks increased approximately 16 basis points during the first quarter and remained above 4%. While the consolidated NIM was lower due to the interest owed on our senior debt at our holding company. Interest income was $19.2 million for the quarter compared to $17.6 million for the fourth quarter. Loan growth and expanding asset yields contributed to the $1.6 million linked quarter increase. Interest expense increased $1 million from the prior quarter to $3.8 million, in part to fund the incremental asset growth, as the average assets were up $77 million over prior quarter. Also, importantly, the company realized a full quarter of interest expense related to the additional $52 million of long-term debt issued in December, a $700,000 increase. Lastly is our deposit strategy took hold, reducing CD deposits in favor of transactional accounts. This also resulted in a slight increase in our core deposit funding costs. Bob Franko will speak more about the deposit growth in a couple of minutes.…

Thanks, Ron. Importantly during the first quarter, our asset quality also improved with nonaccrual loans following over 25%, from approximately $23 million to approximately $16.5 million at the end of the first quarter. Importantly, on last quarter’s conference call, we discussed 2 nonaccrual loans representing approximately $7 million that we had entered into an agreement to sell at book value. The $2 million loan was sold during the first quarter, while the $5 million loan remained on nonaccrual status as of the end of the first quarter and is still included in the $16.5 million nonaccrual number. That said, the $5 million loan has cured during the second quarter and is now on accrual status. We still expect to sell this loan pursuant to the previously disclosed arrangement. The improvements in our credit metrics are testament to the hard work and focus of Bob Franko, Ray Vadalma and our entire credit services team. Now for a brief update about our progress executing against our various banking initiatives, I’ll turn it over to Bob.

Thanks, Steve. During the first quarter, many of our initiatives have started to take hold and produce results. Our deposit growth and deposit mix are particularly important right now. Thanks to Gaylin Anderson and his team of branch professionals, the increase in core deposits is providing the liquidity we need to be able to fund the growth in our earning assets. Even more impressive, we are originating core deposits in those markets where we already had new branches. So our marginal cost to acquire, book and service these new deposits is quite affordable. At the same time, those new branches are now rapidly approaching the critical mass necessary to justify their cost. Almost as important, people who represent the new relationships we are building carry high deposit balances but they also own and purchase homes that need mortgage financing. So our new clients have been a good source of incremental asset generation. Many of them also own businesses and professional practices, so that we’ve been able to acquire new commercial relationships as well. On the commercial front, commercial real estate loan production has been solid. But I’m sure no surprise to any listener, CRE pricing is still very competitive. We are often fortunate to pick-up some additional yield over our competitors based on the quality of our service model. Our commercial team tries to differentiate themselves by being responsive and timely in underwriting and funding loans. Our commercial and industrial, C&I, and private banking business will soon be under the leadership of Nick Zappia and Richard Smith, respectively, following The Private Bank acquisition. We are looking forward to bringing all of that together in a way that we can scale The Private Bank business model. In the second half of the year, we had 2 conversions planned with Fiserv. The first conversion will bring Beach and Private bank onto the same platform. Then later in the year, we will be bringing PacTrust Bank under Fiserv premier operating system. As we do that, combined with the number of new technology initiatives, we expect to see significant operating efficiencies fall into place towards the end of the year. We are particularly pleased with our workforce. They’ve been challenged this year with a lot of change and they have made this company a much stronger organization. We’re only as good as the people who work for us, and we truly have some of the finest bankers in the country. And with that, I’d like to turn it back over to Steve.

Thanks, Bob. Overall, we are very pleased with the company’s projects year-to-date given the loan and deposit growth during the first quarter, it is important to evaluate the state of our core commercial banking franchise. As of the -- as of quarter end, our banking subsidiaries saw increases in their net interest margin of approximately 16 basis points. As Ron mentioned, our consolidated net interest margin has increased to above 4% on a run rate basis as of March 31. Management believes that this wider net interest margin are continued and even increased in April. Meanwhile the consolidated efficiency ratio of our banking subsidiaries fell back below 90% during the first quarter. While we still have a long way to go before the number's respectable, management has the plan that will enable it to reduce the efficiency ratio for our commercial bank as of yearend 2013 to run rate of no more than 65%. Importantly, our deposit gathering saw dramatic strength during the first quarter. Our retail deposits grew by 28% during what has continued -- and has continued to grow throughout April with another 11% growth on top of that. This was in large part due to our new one account program that we launched to target high net worth depositors. These accounts are singular interest paying checking or savings account that is designed to replace the need for multiple bank accounts, including checking, saving and overdraft account, which involve multiple statements, wires or cash transfers to rebalance, overdraft protection and the need to manage the CD portfolio to maximize returns. This account simplifies the banking experience and is well suited to high net worth depositors, including those with business managers and accountants managing their affairs. We believe that the success of this program is primarily driven by the…

[Operator Instructions] Your first question comes from the line of Brett Rabatin from Sterne Agee.

It’s Brett from Sterne Agee. Steve, maybe you can just start with talking about some capital. And then kind of pro forma, The Private Bank deal looks to me like your TCE will be a little under 6%. Any thoughts on common equity and your thoughts on capital ratios kind of post the transaction?

Sure. Thanks for the question, Brett. I’m not sure that management agrees with the calculations as you laid out. However, we can tell you that we received the regulatory approvals to move forward with The Private Bank transaction without a need for additional capital. That being said as we continue to grow our First PacTrust's operating franchise towards our stated goal over the next several years of reaching $5 billion of total assets, our current capital base would not be sufficient unless earnings generation ramped up considerably from here.

Okay. What are you assuming your pro forma TCE ratio is going to be post the deal? And then make sure I understand correctly, you’re saying you won’t add any additional capital with this transaction, but you would with any additional ones after that?

Actually, with regard to our capital, we’re comfortable with the current capital position with the announced initiatives we have. The TCE pro forma for the closing of our Private Bank California will be impacted materially from a couple of factors, not the least to which is earnings over the second, third quarter of the year. And so we’re not in a position today to provide you guidance as to where that TCE will fall, but I’d direct you to our S-4 statement and filings, which provide kind of a consolidated look at the pro forma entity.

Okay, fair enough. And then I wanted to ask about -- if you gave it, I missed it, but just the amount of loans you purchased in the quarter. Any detail on those would be great.

Sure. Our commercial bank's driven by our ability to gather high-quality core deposits. We had significant success tracking deposits in the first quarter and that enabled us to also grow our earning assets to better provide scale to our business and to increase the profitabilities offered to new deposits that we’ve gathered. Generally speaking, with the early strong capabilities we have within single family, we acquired seasoned single-family loans. These loans generally had -- we generally paid a price which was at a significant discount to current fair market values such that the bank had protection against the collateral and loans that had attractive pay histories. This was a way to help the bank reach scale in some of its key businesses, but also support deposit growth you’re seeing coming in. I believe that when we filed the 10-Q. You'll be able to see the portion of loans that we brought on to our balance sheet in pools. And I don’t have that at my finger tips right now the exact number, but the 10-Q will lay that out pretty clearly.

Your next question comes from the line of Andrew Liesch from Sanders (sic) [Sandler] O’Neill & Partners.

Can you talk a little bit about the commercial loan growth? It look like -- I'm just trying to back of the envelope back out what the purchase loans. But it look like the commercial balances were up as well and it sounded like, based on Bob's comments, that CRE is obviously pretty difficult, but we’re in challenging to go right now. But can you discuss like what portfolios rose in the quarter?

Sure, Ron, do you want to take that or Bob?

Yes, I’ll take that. This is Bob. We had CRE portfolios rose in a somewhat meaningful fashion. We were able to originate. As I mentioned, rates are still pretty challenging, and we don’t go out and chase rates down. But we were able to attract some pretty -- to close some deals that were some of which had carried over from the end of the year, some of which were originated in the first quarter. And we still -- currently, we’re seeing more demand right now. We’re still seeing the ability to capture some of the pricing that we want. So we think that’s likely to continue. Our C&I portfolio, we’ve seen some increase in demand on revolvers. So some of the commitments we'll be had have started to be drawn now. We’re seeing more of that. We’re seeing some more in terms of equipment financing and other C&I lending. So overall, I’d say we’re definitely seeing a pick-up in demand in the commercial areas. We’re seeing a chance to continue to be competitive on pricing. And we think that towards the middle of the year, particularly with The Private Bank and the C&I group from The Private Bank and the private banking opportunity coming over with Richard Smith's group, it's meaningful increase in that area. So it’s not -- I would say at this point, it's a good trend and we're very satisfied with where we are. I don’t want to tell you that this is the beginning of a huge upside to that market. But we’re going to try and make that as meaningful as we can. The fact is still in that business, every one of those loans is originated, underwritten and put on one loan at a time. So it's a -- that’s a ground game, but so far it's seems going through some loan, we're satisfied completely with it.

Right. And then...

Let me just add to what Bob said. With the closing of The Private Bank of California, our loan mix will also change and we believe improve with a material uptick in commercial lending.

For sure. I guess switching back to capital question. With these deposits coming on as fast as they are and it sounds like it’s continued into April, is there a ratio at the holding company level that you guys are more concerned with? Because I think that TCE ratio might be pressured as well, especially with the deposit growth. But is there a holding company ratio that you guys target?

Yes, and it’s a good question. And I’d caution drawing straight-line extrapolations indefinitely into the future. As you know, from last quarter’s call and even within this quarter, while we continue to grow, we also continue to monetize some of the assets on our portfolio, such as some of the portfolio sales in the single-family business that we’ve also conducted, which demonstrated the ability to exit some of our originations at a profit. So the fact that our balance sheet -- the loans that we have on our balance sheet have active second markets around them, particularly in the single-family space, we’re able to manage around some of these ratios as appropriate. That being said, within our banking subsidiaries, that the number we follow most closely, although all of the ratios are important, is our total leverage ratio within the banks. Within the holding company, we conduct robust stress testing to ensure that the banks have the capital they needed to support their businesses, plus the holding company can support the operating cost that it has and provide an extra level of capital at the holding company for stress events or future growth. So the #1 role of the holding company is to support these banks and within the banks, the ratio that we focus on most closely is our total leverage ratio.

[Operator Instructions] Your next question comes from the line Don Worthington from Raymond James.

Were there any merger costs in the expenses during the quarter related to Private Bank?

No, Don, there -- this is Ron. There weren't any cost of any significance. Obviously, we’ve already initiated the integration plans and project teams, but that’s more of a normal course of business and cost. So there were no extraordinary items of any significance during the quarter.

Yes. What I’d add to that Don is, as we talked about the cost savings that we’ll realize as we bring the banks and the platforms together, during the first quarter, we continued to have to support a lot of the activities relating to the merger, both in terms of the merger preparations but also with all the financial reporting and filings around the S-4 and otherwise and also legal work relating to our application and other kind of legal and regulatory items. So while the direct cost, so that we can pinpoint relating specifically The Private Bank of California were low. There’s been a lot of effort in -- through our things that have stood in the way of quicker efficiency realizations.

Okay. And then on the SBLF, it looks like the rate in the quarter was in the 3% range. When would you expect that to get down to the 1%?

Yes, we continue to seek to originate additional SBLF qualifying lending products. We’re around halfway to the level necessary to get at 1%. But we haven’t seen the demand or the ability to make those loans at the pace that we were hoping for. And so I can’t tell you exactly when we’ll get there, but we continue to have a focus and we continue to look out for those loans with high-quality credits.

Your next question comes from the line of Jacque Chimera from KBW.

I just want to make sure that I heard you correctly. The 65% efficiency target that you said you were aiming for, that was year-end 2013?

Yes. Back to last year at our Investor Day, we set forth a goal on a run rate basis that our banking -- commercial banking subsidiaries will be operating at a 65% efficiency ratio. And that continues to be the same objective that we have today.

Does that incorporate -- I know that you have some cost saves that are coming with you do the conversions and everything. Does it also include revenue productions as well?

Yes.

You got there. Okay. And then, I noticed that average loans weren't up as significant as end of period loans. Was the purchase a quarter-end event?

A material amount of the new assets came in the second half of March. And that’s part of the explanation for the additional color Ron provided about expanding net interest margins in April.

And that 4% would be combined company rate?

Yes.

Okay. Just want to make sure I had that written down correctly. So is that something you would look to do in the future then, to the extent that deposit growth outpaces the loan growth with the new product? Do you supplement some of that with purchases?

Yes. So for instance, this is not a new business. In 2012, we acquired close to $70 million of seasoned single-family loans. And so this is a continuation of that part of our strategy, and it’s been a nice way to supplement our deposit efforts without taking on operational stress unnecessarily or reaching offer with respect to credit.

Do you have any legacy accounts from the former business model maybe still in CDs that you would look to run off as this growth continues?

Well, as we mentioned, we have reduced CDs by considerable amount in the first quarter. We’d look to continue to do so. We have north of $400 million of CDs maturing over the course of the fiscal year 2013. And our goal is to continue to shift the mix of our deposits from CD funding to transactional account funding.

Your next question comes from the line of Tony Stern from Boston Provident.

So do you mind breaking out some of the expenses you'll be stripping from your cost structure going forward to get to the 65% efficiency target in the commercial bank?

I think if you refer back to the investor presentation from last -- fourth quarter of last year at our Investor Day, we provided some guidance with respect to that. And I just suggest that when you look at the commercial bank, there is the top of the ratio and the bottom. So as I think Jacque pointed out, part of that revenue projection, part of it are cost saving projection. But we provided some guidance and at this point, I think we’re going to kind of stick with the guidance provided.

Okay. And your tax rate going forward, once you get the DTA valuation allowance reversed, if you get that reversed, what would be your effective tax rate?

Ron?

Sure, Tony. So I think as I indicated with my earlier comments, the potential reversal of our valuation allowance related to the DTA will be related to the progress, the continued growth, profitability of the company. As that materializes to the extent that that materializes, what’s going to happen is that, that valuation $8.1 million would be reversed out from the balance sheet, but effectively, it will be realized through the income statement through a lower effective tax rate. And I can’t tell you exactly what that effective tax rate will be at this point in time, but that’s essentially how it’s going to happen.

What will your GAAP tax rate be?

While our statutory rate today is 42%. And obviously if we were to reverse out that $8.1 million and then bleed that back in through the effective rate, depending upon obviously the level of earnings, the rate is going to be down fairly significantly from there.

Got you. And do you mind just speaking to your pipeline in mortgage banking and what you’re seeing out there?

Sure. In within -- we expect to file the 10-Q this week. And within that document, you'll also see statistics on mortgage banking, such as the rate locks as of the end of the quarter and things of that nature, which will give you a pretty good indication. But the mortgage banking business is executing very well for us. We continue to see volumes ramp up kind of consistent with expectations of volumes coming on line within that 30 to -- I'm sorry, the 60 to 90-day period following the hiring of a new production group. Given the amount of hiring during the first quarter, a significant part of additional production will be a second quarter and third quarter event. That being said, our margins during the quarter improved, given some of the benefits from scale and additional efficiency that we’ve introduced into the business. Additionally and importantly, we are expecting to receive our licensing within Ginnie Mae in the near future, which should also enhance our margins in the single-family residential business, as production that’s eligible for sale through that channel are represents a meaningful amount of our volumes. So absent macro conditions or significant changes in the operating environment as it reflects mortgage banking business, the metrics that we track the closest are probably our daily lock rates. And as I mentioned in the comments before, our daily locks are tracking a little bit north of 100%, higher than they were at the end of last year.

[Operator Instructions] Your next question comes from the line of Brett Villaume from FIG Partners.

Steve, the -- did you say you still need regulatory approval on Palisades Group acquisition? And also, I wanted to know could there be some expenses associated with closing out?

I think -- and you’re little fuzzy, but I think the question was about the Palisades Group acquisition. And the process for closing the Palisades Group acquisition's a more limited process than, for instance, The Private Bank of California transaction. So depending on the response we receive on our financial holding company application, the Palisades Group notification could be an expedited event. With regard to costs, the cost for that acquisition are -- were previously disclosed in an 8-K, but it’s $100,000, $200,000 range. So it’s not a material cost item.

Okay. And then you also mentioned the opening [indiscernible]. What about on the branches plan? Could you mention anything going on with your full-service branches that you’re anticipating?

Sure. Given the success of the deposit gathering initiative during the first part of this year, we’ve focused on bringing the de novo branches that we had launched over the last couple of years up to critical mass and getting their operating efficiencies more in line with long-term numbers we’d expect. So we haven’t been focused on rapid de novo branch expansion. But the one exception is that we are opening a branch in Pasadena, which is another kind of target market of ours. Going forward I would not expect significant branch expansion in the next couple of quarters. However, as part of our business plan, we do seek to have branch locations in some additional markets in Southern California that we believe are some of the more attractive markets that we don’t exist -- don’t currently have branches. And that might include some areas kind of on the west side of Los Angeles and some areas in San Diego and potentially in Orange County.

[Operator Instructions] There are no further questions at this time.

Well thanks, everyone, for taking the time to dial in. Again, we were pleased with some of the progress in the first quarter, look forward to joining you again after the second quarter to update you on the status of these initiatives. So thank you.

This does conclude today’s conference call. You may now disconnect.