Banc of California Reports Fourth Quarter 2021 Financial Results

Banc of California, Inc. (NYSE: BANC) today reported net income of $5.8 million and net income available to common stockholders for the fourth quarter of 2021 of $4.0 million, or $0.07 per diluted common share. This compares to net income of $23.2 million and net income available to common stockholders of $21.4 million, or $0.42 per diluted common share, for the third quarter. The fourth quarter of 2021 included $13.5 million of pre-tax merger costs and $11.3 million of provision for credit losses for the loans acquired in the Pacific Mercantile Bancorp acquisition. For the year ended December 31, 2021, net income totaled $62.3 million and net income available to common stockholders totaled $50.6 million, or $0.95 per diluted common share. The year-to-date results for 2021 included $27.1 million of pre-tax merger costs and provision for credit losses related to the acquisition of Pacific Mercantile Bancorp.

Fourth quarter summary:

• Completed the acquisition of Pacific Mercantile Bancorp (the "PMB Acquisition") on October 18, 2021, for total purchase consideration of $225.4 million, adding $1.54 billion in total assets, $962.9 million in loans and $1.28 billion in deposits at acquisition date
• Completed the system conversion for the PMB Acquisition in November 2021
• Return on average assets of 0.24%
• Adjusted pre-tax pre-provision return on average assets of 1.39%, up from 1.34% in the prior quarter
• Net interest margin of 3.28%, flat with the prior quarter
• Average cost of total deposits of 0.11%, a 4 basis point decrease from the previous quarter
• Noninterest-bearing deposit balances represented 37% of total deposits at December 31, 2021, up from 26% a year earlier
• Allowance for credit losses at 1.35% of total loans and 187% of non-performing loans
• Non-performing loans increased 15.2% to $52.6 million as a result of loans acquired in the PMB Acquisition
• Common Equity Tier 1 capital at 11.38%

Jared Wolff, President & CEO of Banc of California, commented, “Our continued organic growth and initial benefits of the Pacific Mercantile Bancorp acquisition combined to produce a significant improvement in our core earnings power during the fourth quarter, with our adjusted pre-tax pre-provision income increasing 18% from the prior quarter and our adjusted pre-tax pre-provision return on average assets increasing 5 basis points to 1.39%. We finished the year with one of our largest quarters of loan fundings, with well balanced production across markets, asset classes and industries, while our deposit mix continued to improve with noninterest-bearing deposits increasing to 37% of total deposits at the end of 2021 and our spot rate cost of deposits declining to 0.07%.”

Mr. Wolff continued, “We continue to see good loan demand and high quality lending opportunities, and the deposit gathering engine we have built enables us to fund these loans with low-cost core deposits. With the combination of our continued momentum in business development, the positive impact of the Pacific Mercantile acquisition, and our increasing level of asset sensitivity, we believe we are very well positioned to deliver continued growth in revenue, earnings per share and franchise value.”

Lynn Hopkins, Chief Financial Officer of Banc of California, said, “Excluding the loans added from the Pacific Mercantile acquisition, we saw continued improvement in our asset quality with non-performing loans declining 32% from the end of the prior quarter, while criticized and classified loans declined 23%. Given the strength of our balance sheet and capital ratios, we remain in good position to redeem our Series E Preferred Stock during the first half of 2022, subject to regulatory approval, which will provide another catalyst for earnings growth going forward.”

Pacific Mercantile Bancorp Acquisition

On October 18, 2021, we acquired Pacific Mercantile Bancorp pursuant to an Agreement and Plan of Merger dated as of March 22, 2021. As a result of the PMB Acquisition, we issued approximately 11.9 million shares and $3.2 million in cash for total consideration of $225.4 million. We acquired $1.54 billion in total assets, including $962.9 million in loans, $1.3 billion in deposits, $17.5 million in trust preferred securities, and $57.2 million of goodwill. The PMB Acquisition reduced our tangible book value per share by approximately $0.10. The system conversion was completed in November 2021.

Income Statement Highlights

Net interest income

Q4-2021 vs Q3-2021

Net interest income increased $10.1 million to $73.0 million for the fourth quarter due to higher average interest-earning assets and a lower cost of interest-bearing liabilities, offset by a lower yield on interest-earning assets and higher average interest-bearing liabilities.

The net interest margin remained steady at 3.28% for the fourth quarter as the average earning-assets yield decreased 7 basis points and the average cost of total funding decreased 8 basis points. The yield on average interest-earning assets decreased to 3.66% for the fourth quarter from 3.73% for the third quarter due primarily to the impact of cash balances added in the PMB Acquisition that was subsequently deployed later in the fourth quarter. Average loans increased by $888.0 million and average securities and other interest-earning assets increased $314.8 million due mostly to the PMB Acquisition. The average yield on loans increased 2 basis points to 4.20% during the fourth quarter as a result of the portfolio mix and an increase in prepayment penalties, offset by a decrease in total PPP income. The loan yield includes the impact of prepayment penalty fees, the net reversal or recapture of nonaccrual loan interest, accelerated discount accretion on the early payoff of purchased loans, and accelerated fees from PPP loan forgiveness; these items increased the loan yield by 12 basis points in the fourth quarter and 11 basis points in the third quarter.

The average cost of funds decreased 8 basis points to 0.41% for the fourth quarter from 0.49% for the third quarter. This decrease was driven by the lower average cost of interest-bearing liabilities due to an improved funding mix, including higher average noninterest-bearing deposits as a result of the PMB Acquisition. Average noninterest-bearing deposits represented 35% of total average deposits for the fourth quarter compared to 30% of total average deposits for the third quarter. Average noninterest-bearing deposits were $674.8 million higher in the fourth quarter compared to the third quarter while average deposits were $1.09 billion higher for the linked quarters due mostly to the PMB Acquisition. Average Federal Home Loan Bank (FHLB) advances and other borrowings decreased $127.9 million, offset by the impact of $17.5 million of trust preferred securities added in the PMB Acquisition. The average cost of interest-bearing liabilities decreased 6 basis points to 0.61% for the fourth quarter from 0.67% for the third quarter due to our continuing efforts to actively manage down the cost of interest-bearing deposits. The average cost of interest-bearing deposits declined 5 basis points to 0.17% for the fourth quarter from 0.22% for the third quarter. The average cost of total deposits decreased 4 basis points to 0.11% for the fourth quarter. The spot rate of total deposits was 0.07% at the end of the fourth quarter.

YTD 2021 vs YTD 2020

Net interest income for the year ended December 31, 2021 increased $29.2 million to $253.8 million from $224.6 million for 2020. Net interest income was positively impacted by higher average interest-earning assets, lower average interest-bearing liabilities and improved funding costs, offset by lower yields on average interest-earning assets. For the year ended December 31, 2021, average interest-earning assets increased $628.3 million to $7.79 billion, and the net interest margin increased 13 basis points to 3.26% compared to 3.13% for 2020.

The net interest margin expanded due to a 47 basis point decrease in the average cost of funds outpacing a 32 basis point decline in the average interest-earning assets yield. The average yield on interest-earning assets decreased to 3.74% for the year ended December 31, 2021, from 4.06% for 2020 due mostly to the impact of lower average market interest rates on loan and securities yields over these same timeframes. The average fed funds rate for the year ended December 31, 2021 was 0.08% compared to 0.38% for 2020. The average yield on loans was 4.24% for the year ended December 31, 2021, compared to 4.52% for 2020 and the average yield on securities decreased 48 basis points to 2.13% due mostly to CLOs repricing into the lower rate environment.

The average cost of funds decreased to 0.52% for the year ended December 31, 2021, from 0.99% for 2020. This decrease was driven by the lower average cost of interest-bearing liabilities and the overall improved funding mix, including higher average noninterest-bearing deposits. The average cost of interest-bearing liabilities decreased 51 basis points to 0.72% for the year ended December 31, 2021 from 1.23% for 2020 due to the combination of actively managing deposit pricing down into the lower interest rate environment and the overall reduced usage of FHLB advances to fund loan growth. Compared to 2020, the average cost of interest-bearing deposits declined 58 basis points to 0.27% and the average cost of total deposits decreased 47 basis points to 0.19%. Additionally, average noninterest-bearing deposits increased by $673.8 million or 50.9% for the year ended December 31, 2021 when compared to 2020.

Provision for credit losses

Q4-2021 vs Q3-2021

The provision for credit losses was $11.3 million for the fourth quarter, compared to a reversal of $1.1 million for the third quarter. The fourth quarter provision for credit losses of $11.3 million related to the initial charge for the expected lifetime losses related to loans acquired in the PMB Acquisition which are not credit impaired, referred to as "non-PCD loans", as well as the impact of net organic loan growth, specific reserves, improved economic forecasts and lower unfunded commitments at December 31, 2021.

YTD 2021 vs YTD 2020

During the year ended December 31, 2021, the provision for credit losses was $6.9 million, compared to $29.7 million during 2020. The lower provision for credit losses was due primarily to improvements in key macro-economic forecast variables, such as unemployment and gross domestic product, lower specific reserves and consideration of credit quality metrics, offset partially by higher period end loan balances of $1.35 billion, which included the $11.3 million charge related to the initial allowance for credit losses established for non-PCD loans acquired in the PMB Acquisition.

Noninterest income

Q4-2021 vs Q3-2021

Noninterest income decreased $659 thousand to $4.9 million for the fourth quarter due mostly to a decrease in all other income offset by increases in customer service fees and net gains on the sale of loans. The $1.0 million decrease in all other income was due mostly to the third quarter including an $841 thousand gain related to a sale-leaseback transaction. The $137 thousand increase in customer service fees was due mostly to the increase in customer activity as a result of the PMB Acquisition. Net gain on sale of loans totaled $275 thousand during the fourth quarter and related to the sale of $11.2 million in underperforming loans.

YTD 2021 vs YTD 2020

Noninterest income for the year ended December 31, 2021 increased $412 thousand to $18.9 million compared to 2020. The increase in noninterest income was mainly due to higher customer service fees, income from bank-owned life insurance, and fair value gain for loans held for sale, offset by lower net gain on sale of securities and all other income. The $1.9 million increase in customer services fees was due mostly to higher deposit activity fees of $2.1 million. The increase in deposit activity fees is attributed to higher average deposit balances and our initiative to bring our service fee schedules more in line with market. Fair value adjustment for loans held for sale improved $1.7 million as 2020 included valuation losses on loans held for sale due to the impact of the decreases in market interest rates. There were no gains from sale of securities for the year ended December 31, 2021, compared to $2.0 million in net gains in 2020 from the sale of $20.7 million in securities, primarily consisting of corporate securities. The $1.7 million decrease in all other income is due mostly to 2020 including legal settlement income of $3.2 million and earnout income of $1.6 million which ended in 2020, offset by the increases from the aforementioned $841 thousand gain related to the sale-leaseback transaction, higher loan processing fees of $1.1 million and higher interest rate swap income of $502 thousand.

Noninterest expense

Q4-2021 vs Q3-2021

Noninterest expense increased $20.3 million to $58.1 million for the fourth quarter compared to the prior quarter. The increase was due mostly to higher merger-related costs of $12.5 million, salaries and employee benefits of $3.0 million, occupancy and equipment of $731 thousand, professional fees of $3.0 million, all other expense of $410 thousand and lower net gain in alternative energy partnership investments of $565 thousand. Total merger-related costs increased $12.5 million to $13.5 million for the fourth quarter compared to the prior quarter as the result of severance, system conversion, facilities-related and other transaction costs. The increase in salaries and employee benefits and occupancy and equipment is due mostly to the increase in employees and facilities as a result of the PMB Acquisition. Professional fees included net indemnified legal expenses of $642 thousand in the fourth quarter compared to net recoveries of $2.2 million during the third quarter.

Total operating costs, defined as noninterest expense adjusted for certain expense items (refer to section Non-GAAP Measures), increased $4.5 million to $45.2 million for the fourth quarter compared to $40.7 million for the prior quarter primarily due to the higher salaries and benefits of $3.0 million, higher occupancy and equipment of $731 thousand, and higher all other expense of $410 thousand.

YTD 2021 vs YTD 2020

Noninterest expense for the year ended December 31, 2021 decreased $15.8 million to $183.2 million compared to the prior year. The decrease was primarily due to: (i) 2020 including a $26.8 million one-time charge related to the termination of our LAFC naming rights agreements, (ii) lower professional fees of $5.2 million, due mostly to a $3.0 million decrease in legal fees, net of insurance recoveries and a $1.9 million decrease in other professional fees, (iii) lower advertising fees of $2.8 million due to the termination of the LAFC agreements in May 2020, and (iv) lower all other expense of $4.2 million resulting from the previous year including a $2.5 million debt extinguishment fee for the early repayment of certain FHLB term advances and a $1.2 million charge for two legacy legal settlements combined with overall expense reduction efforts. These decreases were partially offset by: (i) higher salaries and employee benefits of $6.5 million due to the increase in personnel from the PMB Acquisition and higher commissions and incentive-based compensation due to higher production and financial performance levels, (ii) merger-related costs of $15.9 million, and (iii) higher operating costs in most other categories due to the impact of the PMB Acquisition.

Income taxes

Q4-2021 vs Q3-2021

Income tax expense totaled $2.8 million for the fourth quarter resulting in an effective tax rate of 32.4% compared to $8.7 million for the third quarter and an effective tax rate of 27.2%. The increase in effective tax rate during the fourth quarter was due mostly to the impact the PMB Acquisition had on our annual effective tax rate and other permanent items.

YTD 2021 vs YTD 2020

Income tax expense totaled $20.3 million for the year ended December 31, 2021, representing an effective tax rate of 24.5%, compared to $1.8 million and an effective tax rate of 12.4% for 2020. The effective tax rate for the year ended December 31, 2021 differs from the 29.5% combined federal and state statutory rate due primarily to the net tax benefit of $2.5 million resulting from the exercise of all previously issued outstanding stock appreciation rights in the first quarter of 2021, the impact the PMB Acquisition, and other discrete tax items that impact our effective tax rate.

Balance Sheet

At December 31, 2021, total assets were $9.39 billion, which represented a linked-quarter increase of $1.12 billion. The following table shows selected balance sheet line items as of the dates indicated:

Investments

Securities available-for-sale increased $12.3 million during the fourth quarter to $1.32 billion at December 31, 2021 primarily due to purchases of $60.9 million, offset by payoffs of $30.5 million from CLO calls, principal payments of $13.1 million, and lower unrealized net gains of $4.5 million. The decrease in unrealized net gains was due mostly to decreases in the value of mortgage-backed securities, corporate debt securities and municipal securities as a result of increases in longer term interest rates during the fourth quarter, offset by improved pricing of CLOs. As of December 31, 2021, the securities portfolio included $519.0 million of CLOs, $433.5 million of agency securities, $119.0 million of municipal securities, $173.6 million of corporate debt securities, $56.0 million of residential collateralized mortgage obligations, and $14.6 million of SBA securities. The CLO portfolio, which is comprised only of AA and AAA rated securities, represented 39% of the total securities portfolio and the carrying value included an unrealized net loss of $2.3 million at December 31, 2021 compared to 42% of the total securities portfolio and an unrealized net loss of $2.5 million at September 30, 2021.

Loans

The following table sets forth the composition, by loan category, of our loan portfolio as of the dates indicated:

Held-for-investment loans increased $1.02 billion during the fourth quarter of 2021 to $7.25 billion due in part to $905.3 million in loans added in the PMB Acquisition and outstanding at the end of the year. The increase in the fourth quarter included higher commercial real estate loans of $403.9 million, multifamily loans of $65.4 million, construction loans of $51.3 million, commercial and industrial (C&I) loans related to warehouse credit facilities of $79.5 million, other C&I loans of $292.8 million, and SBA loans of $24.0 million. The PMB Acquisition added $76.3 million in SBA PPP loans and $63.4 million in PPP loans were forgiven during the fourth quarter. At December 31, 2021, SBA loans included $123.1 million of PPP loans, net of fees.

The single-family residential mortgage loans increased by $26.3 million as a result of $210.2 million in purchases offset by repayment activity and other consumer loans increased by $79.6 million due mostly to auto loans from the PMB Acquisition.

The C&I industry concentrations in dollars and as a percentage of total outstanding C&I loan balances are summarized in the following table:

Deposits

The following table sets forth the composition of our deposits at the dates indicated:

Total deposits increased $896.2 million during the fourth quarter of 2021 to $7.44 billion at December 31, 2021 due mostly to $1.13 billion in deposits that were added in the PMB Acquisition and outstanding at the end of the year. The increase in the fourth quarter included higher noninterest-bearing checking balances of $680.5 million, interest-bearing checking of $178.7 million, and savings and money market balances of $90.1 million, offset by lower non-brokered certificates of deposit of $53.1 million. Noninterest-bearing deposits totaled $2.79 billion and represented 37% of total deposits at December 31, 2021 compared to $2.11 billion, or 32% of total deposits, at September 30, 2021.

Debt

Advances from the FHLB increased $70.3 million during the fourth quarter to $476.1 million at December 31, 2021, due to higher overnight advances. At December 31, 2021, FHLB advances included $70.0 million of overnight borrowings and $411.0 million in term advances with a weighted average life of 4.0 years and weighted average interest rate of 2.53%. Other borrowings totaled $25.0 million at December 31, 2021 and related to unsecured overnight borrowings from various financial institutions through the American Financial Exchange platform. Long-term debt increased $17.7 million during the fourth quarter primarily from trust preferred securities acquired from PMB.

Equity

At December 31, 2021, total stockholders’ equity increased by $220.5 million to $1.07 billion and tangible common equity increased by $158.7 million to $869.6 million on a linked-quarter basis. The increase in total stockholders’ equity for the fourth quarter included the value of the shares issued in the PMB Acquisition of $222.2 million, net income of $5.8 million and share-based award compensation of $1.3 million, offset by lower net accumulated other comprehensive income of $3.2 million, and dividends to common and preferred stockholders of $5.5 million. Book value per share increased to $15.48 as of December 31, 2021 from $14.76 at September 30, 2021. Tangible book value per share decreased to $13.88 as of December 31, 2021 from $13.99 at September 30, 2021.

Capital ratios remain strong with total risk-based capital at 15.07% and a tier 1 leverage ratio of 10.42% at December 31, 2021. The interim capital relief related to the adoption of the current expected credit losses (CECL) accounting standard increased the Bank's leverage ratio by approximately 11 basis points at December 31, 2021. The following table sets forth our regulatory capital ratios as of the dates indicated:

Credit Quality

Total delinquent loans increased $27.6 million in the fourth quarter to $72.8 million at December 31, 2021, due mostly to additions of $45.8 million, offset by $5.8 million returning to current status and $12.5 million in other reductions including paydowns. The additions included (i) $19.1 million in loans acquired in the PMB Acquisition consisting mostly of $10.1 million in commercial & industrial loans and $8.5 million in SBA PPP and (ii) $25.8 million in single-family residential mortgage loans. At December 31, 2021, delinquent loans included SFR loans of $31.9 million, SBA PPP loans of $8.5 million and other SBA loans of $10.8 million of which $17.2 million is guaranteed, and other loans of $21.5 million.

Non-performing loans increased $6.9 million to $52.6 million as of December 31, 2021, of which $19.8 million, or 38%, relates to loans in a current payment status. The fourth quarter increase was due mostly to the addition of $35.5 million in non-performing loans, including $21.6 million from the PMB Acquisition, offset by $3.7 million in loans returning to accrual status and $24.9 million in payoffs, paydowns, charge-offs and sales. At December 31, 2021, non-performing loans included (i) a $12.8 million commercial & industrial relationship acquired from PMB, (ii) SBA PPP loans of $5.5 million and other SBA loans totaling $11.1 million, of which $14.3 million is guaranteed, (iii) SFR loans totaling $7.1 million, and (iv) other commercial loans of $15.8 million.

In light of the pandemic, we provided support to clients by granting loan deferments or forbearances. The loans on deferment or forbearance status as of the dates indicated are shown below:

Allowance for Credit Losses

The allowance for expected credit losses (ACL), which includes the reserve for unfunded loan commitments, totaled $98.2 million, or 1.35% of total loans, at December 31, 2021, compared to $78.8 million, or 1.26% of total loans, at September 30, 2021. The $19.4 million increase in the ACL was due to: (i) a $13.7 million initial allowance for credit losses established for purchased credit-deteriorated ("PCD") loans from the PMB Acquisition, (ii) an $11.3 million initial charge for all other loans acquired from PMB, partially offset by (iii) net charge-offs of $5.5 million, including $2.3 million of net charge-offs related to loans acquired in the PMB Acquisition. The ACL coverage of non-performing loans was 187% at December 31, 2021 compared to 173% at September 30, 2021.

At the date of acquisition, a reserve is established for PCD loans using our current expected credit losses methodology with a corresponding adjustment to the acquired loan balance. Similarly, a reserve is also established for loans not considered PCD loans, however, this reserve is established through a charge to the provision for credit losses.

Our ACL methodology uses a nationally recognized, third-party model that includes many assumptions based on historical and peer loss data, current loan portfolio risk profile including risk ratings, and economic forecasts including macroeconomic variables (MEVs) released by our model provider during December 2021. The December 2021 forecasts reflect a consistent view of the economy as compared to the September 2021 forecasts. While the current forecasts generally reflect an improving economy with the availability of the vaccine and other factors, there continues to be uncertainty regarding the impact of inflation (lasting or transitory), COVID-19 variants, further government stimulus, supply chain issues, and the ultimate pace of economic recovery. Accordingly, the economic assumptions used in the model and the resulting ACL level and provision consider both the positive assumptions and potential uncertainties.

Conference Call

The Company will host a conference call to discuss its fourth quarter 2021 financial results at 10:00 a.m. Pacific Time (PT) on Tuesday, January 25, 2022. Interested parties are welcome to attend the conference call by dialing (888) 317-6003, and referencing event code 7050527. A live audio webcast will also be available and the webcast link will be posted on the Company’s Investor Relations website at www.bancofcal.com/investor. The slide presentation for the call will also be available on the Company's Investor Relations website prior to the call. A replay of the call will be made available approximately one hour after the call has ended on the Company’s Investor Relations website at www.bancofcal.com/investor or by dialing (877) 344-7529 and referencing event code 7843092.

About Banc of California, Inc.

Banc of California, Inc. (NYSE: BANC) is a bank holding company with $9.4 billion in assets at December 31, 2021 and one wholly-owned banking subsidiary, Banc of California, N.A. (the Bank). The Bank has 38 offices including 32 full-service branches located throughout Southern California. Through our dedicated professionals, we provide customized and innovative banking and lending solutions to businesses, entrepreneurs and individuals throughout California. We help to improve the communities where we live and work, by supporting organizations that provide financial literacy and job training, small business support and affordable housing. With a commitment to service and to building enduring relationships, we provide a higher standard of banking. We look forward to helping you achieve your goals. For more information, please visit us at www.bancofcal.com.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of the “Safe-Harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are necessarily subject to risk and uncertainty and actual results could differ materially from those anticipated due to various factors, including those set forth from time to time in the documents filed or furnished by Banc of California, Inc. with the Securities and Exchange Commission (SEC). In addition to those, statements about the potential effects of the COVID-19 pandemic on the business, financial results and condition of Banc of California, Inc. and its subsidiaries may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the control of Banc of California, Inc., including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on Banc of California, Inc. and its subsidiaries, their customers and third parties. Further, statements about the potential effects of the Pacific Mercantile Bancorp acquisition on the business, financial results and condition of Banc of California, Inc. and its subsidiaries may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the control of Banc of California, Inc., including (i) the risk that the benefits from the transaction may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which Banc of California Inc. operates; (ii) the ability to promptly and effectively integrate the businesses of Banc of California, Inc. and Pacific Mercantile Bancorp; (iii) diversion of management time on integration-related issues; (iv) lower than expected revenues, credit quality deterioration or a reduction in real estate values or a reduction in net earnings; and (v) other risks that are described in Banc of California, Inc.’s public filings with the SEC. You should not place undue reliance on forward-looking statements and Banc of California, Inc. undertakes no obligation to update any such statements to reflect circumstances or events that occur after the date on which the forward-looking statement is made.