Matthew Lindenbaum's Basswood Capital has increased the size of its position in Banc of California (BANC), which was formerly known as First PacTrust Bancorp, to a total of 1.1 million shares, according to a 13G filed with the Securities and Exchange Commission. This is an increase from the roughly 340,000 shares that Basswood had owned at the end of March, according to the fund's 13F filing for the first quarter of 2013, and the increase gives Lindenbaum and his team ownership of 7.4% of the total shares outstanding.
Banc of California engages in retail banking and business and mortgage loans and has 19 branch locations in the Los Angeles-Orange-Riverside-San Diego area. Its market capitalization is only about $180 million, but on average just over 100,000 shares are traded per day, so at the current stock price of more than $15, there is over $1 million in daily dollar volume.
A look at Basswood's most recent 13F shows that the fund is overweight the financial sector, and while many of its largest positions by market value are megabanks such as Wells Fargo (WFC) and U.S. Bancorp (USB), the fund has many smaller positions in regional banks similar to Banc of California.
Currently there are thousands of smaller regional banks in the U.S., and analysts have suggested for some time that a degree of industry consolidation may make sense. Banc of California itself has been fairly acquisitive lately as it seeks to strengthen its position in Southern California, and it might be expected to continue doing so unless it is acquired itself by a regional bank that's looking to expand into the area.
In part because of its acquisitions, Banc of California's net interest income grew considerably in the first quarter of 2013 from a year earlier. Costs have also been higher, and so the bank earned only $0.05 cents per share for the quarter. Earnings per share are expected to be much better for the rest of 2013, and as a result analysts are expecting Banc of California to earn a total of $0.99 cents for the year, making for a current-year P/E multiple of 15.
Given where other banks, including larger banks, are currently trading, that would seem to represent a small valuation premium. Perhaps investors expect the consolidation of the company's recent acquisitions to create synergies, or perhaps markets are pricing in a small chance of a takeover. Wall Street analysts are optimistic on Banc of California's future earnings, and so the current price is only 11x consensus estimates for 2014.
Banc of California currently makes quarterly dividend payments of $0.12 per share, for an annual yield of 3.2% at current prices. This is likely not high enough to excite an income investor on its own, but it's a factor that should be worth considering. The mortgage and financial crisis had a larger impact on Southern California than it did in most of the rest of the U.S., and it forced the company to slash its dividend significantly; Banc of California's dividend is still below its mid-2008 levels.
Investors should therefore be aware that the stock is highly exposed to economic conditions, including the mortgage market, in one particular part of the country. This makes it more risky, though it also may be a desirable factor if analysts believe that Southern California and its real estate market will be strong in the future.
It's possible that Basswood believes that recent and future acquisitions will benefit Banc of California and put it on track for the earnings forecast that analysts are expecting, although we would note that the fund is invested in a number of regional banks, and so the investment team may be drawing a wide net and hoping that many of its picks are acquired as the industry consolidates (or will be boosted by the strength of these banks' mortgage-related businesses).
As such, we find the fund's large stake in the company worth noting, but we would hesitate to take this as a particularly strong recommendation compared with the bank's peers or with larger retail and commercial banks.