Irvine-based Banc of California’s plans to shed its main residential mortgage line, cut its headcount almost in half and concentrate on commercial banking is winning fans on Wall Street.
Shares climbed 5.7% on March 1 after the bank announced the sale of its home loan division to Caliber Home Loans Inc.
The transaction unloads a relatively low-margin business that’s prone to volatility, according to D.A. Davidson analyst Gary Tenner.
“We expect the greater focus on and earnings visibility of the core commercial banking business will result in an enhanced earnings multiple over time, reducing the relative discount to peer institutions,” Tenner wrote in a note to investors last week.
The move signals a dramatic shift for Banc of California, whose assets more than quadrupled to $11 billion in the past five years under the leadership of Chairman and Chief Executive Steven Sugarman before he stepped down amid controversy this year.
Expectations
The bank ranked third on last year’s Business Journal list of the fastest-growing public companies in Orange County, with a two-year revenue growth rate of 116%.
It seems bound to take a break from that pace this year, while the sale of the residential mortgage business also is likely to lower its ranking among OC-based banks in terms of assets.
Banc of California executives nonetheless expect higher profits.
“As we look forward to 2017 and beyond, our commercial banking business should continue to gain significant traction and deliver an increasing proportion of high quality earnings for the bank,” interim President and Chief Financial Officer J. Francisco Turner said in an emailed statement.
The number of workers will fall to less than 950 from more than 1,800; many of the employees should be retained by Caliber Home Loans, bank spokesperson Joe Hixson said.
The reduction in employees will cut the bank’s annual run-rate, noninterest expenses by more than $150 million, Banc of California said. The bank reported noninterest expense of $442.7 million last year, up 33% over 2015.
The commercial banking unit provided the majority of the bank’s income before taxes last year, with a total of $141.1 million compared with $17.2 million in the mortgage banking unit.
The bank is selling assets related to residential mortgage loans; it expects to continue to originate portfolio jumbo residential mortgage loans.
It will receive a $25 million cash premium payment and the net book value of certain assets for $2.7 million upon closing, which is expected on March 30.
The bank also is selling to Irving, Texas-based Caliber the mortgage servicing rights on approximately $3.8 billion in unpaid balances of conventional agency mortgages, the filing said. Caliber is paying $36 million for the MSRs, which will result in a net loss for the bank of $3.5 million.
“The sale of the mortgage business will align Banc of California’s business profile with that of a more traditional spread-based lender by significantly reducing the bank’s reliance on mortgage banking gains on sale revenue, lowering the risk of MSR valuation changes impacting earnings,” interim Chief Executive Hugh Boyle said in the emailed statement.
The conventional agency mortgages are related to Freddie Mac and Fannie Mae, Tenner said. He expects the company to consider options regarding a potential disposition of its remaining $3.8 billion of Ginnie Mae servicing assets. Tenner, who boosted the bank’s target price from $22 to $26 a share, said the bank will likely remain at a discount to its peers over the intermediate term.
Turmoil
The sale closely follows a period of turmoil that started about six months prior to Sugarman’s departure.
The Securities and Exchange Commission is investigating whether the bank misled investors about an investigation into allegations made last October by an anonymous blogger. The board commissioned an independent report that last month exonerated the bank of the blogger’s allegations.
Sugarman resigned in January, followed by Vice Chairman Chad Brownstein last month.
The bank issued an annual report last week that cited material weaknesses and criticized the previous management.
“An inadequate tone at the top regarding the importance of internal control over financial reporting gave rise to the material weakness,” the annual report said. The bank didn’t make a material restatement.
The board appointed two new directors and may face a proxy battle at the annual meeting for two more seats, which are being sought by activist fund Legion Partners Asset Management LLC. The bank is also searching for a new chief financial officer to replace James McKinney, who resigned in September.
The shares have climbed 39% since Sugarman’s resignation was announced on Jan. 23.
