Banc of California Reports First Quarter 2021 Financial Results

Banc of California, Inc. (NYSE: BANC) today reported net income of $14.4 million and net income available to common stockholders for the first quarter of 2021 of $7.8 million, or diluted earnings per common share of $0.15.

Highlights for the first quarter included:

• Return on average assets of 0.74%
• Average cost of total deposits of 0.28%, an 8 basis point decrease from the prior quarter, and period-end total cost of deposits of 0.24%
• Noninterest-bearing deposit balances represented 28% of total deposits at March 31, 2021, up from 23% a year earlier
• Allowance for credit losses at 1.43% of total loans and 148% of non-performing loans
• Total deferrals/forbearances declined to $108.7 million at March 31, 2021 from $251.9 million at December 31, 2020
• Common Equity Tier 1 capital at 11.50%
• Entered into an agreement and plan of merger with Pacific Mercantile Bancorp, a commercial bank headquartered in Costa Mesa, California with total assets of $1.6 billion at December 31, 2020
• Redemption of all Series D Preferred Stock for total consideration of $93.3 million

Jared Wolff, President & CEO of Banc of California, commented, “Our first quarter results reflected solid core operating performance and execution on the strategies that are enhancing the value of our franchise. We continued to grow average loans and earning assets, improve our deposit mix, reduce our cost of deposits, and maintain disciplined expense control. Certain non-core items in the quarter masked some of these results but, adjusted for these items, our quarterly results were very good.”

Mr. Wolff continued, “Strong loan production helped to offset runoff in certain legacy areas of our portfolio. Our loan pipeline is steadily building which should support continued loan and earning asset growth through the year, assuming economic trends continue. During the first quarter, we also announced that we entered into a definitive agreement to acquire Pacific Mercantile Bancorp. The transaction is currently on track to close during the third quarter of 2021 and both organizations are excited about the opportunities to leverage the collective strengths of the combined company, and to realize the earnings accretion and other benefits that will further accelerate profitability.”

Lynn Hopkins, Chief Financial Officer of Banc of California, said, “Given the high level of reserves we built during 2020 and improving economic forecasts, we had a small reserve release in the first quarter, and our allowance for credit losses to total loans ratio was unchanged from the prior quarter. We continued to see a significant decline in loan deferrals during the first quarter, although non-performing loans increased due to the downgrade of well-secured single family residential loans. We are pleased we were able to redeem our Series D Preferred Stock during the first quarter, which we expect to be accretive to our earnings per share going forward. With the improvement we are seeing in our financial performance and strong capital ratios, we remain well positioned to redeem our Series E Preferred Stock late in 2021 or in early 2022, which we expect will provide additional earnings accretion.”

Ms. Hopkins continued, “Our net income available to common stockholders and earnings per share in the first quarter included $3.6 million in pre-tax losses on alternative energy investment partnership investments, $1.4 million in pre-tax merger-related and indemnified professional fees, $3.4 million in Series D preferred stock redemption expense, and $2.1 million in tax benefits related to the exercise of all previously issued outstanding stock appreciation rights. Excluding these items, net of a more normalized effective tax rate of 25%, our adjusted net income available to common stockholders for the quarter would have been $12.9 million or $0.25 per diluted share.”

Income Statement Highlights

Net interest income

Q1-2021 vs Q4-2020

Net interest income decreased $3.6 million to $57.9 million for the first quarter due to lower prepayment fees, higher net nonaccrual interest reversal, lower amortized fee income from PPP loan forgiveness, and 2 less days in the current quarter, offset by higher average interest-earning assets and lower interest expense. Compared to the prior quarter, average interest-earning assets increased by $110.0 million to $7.36 billion, including higher average loans of $39.1 million and higher other interest-earning assets of $74.1 million.

The net interest margin decreased 19 basis points to 3.19% for the first quarter of 2021 from 3.38% for the fourth quarter of 2020 as the average earning-assets yield decreased 26 basis points and the average cost of total funding decreased 7 basis points. The yield on average interest-earning assets decreased to 3.78% for the first quarter from 4.04% for the fourth quarter due mostly to lower loan yields. The average yield on loans decreased 28 basis points to 4.30% during the first quarter due to impact of lower prepayment penalty fees, higher net reversal of nonaccrual loan interest, and lower amortized fees from PPP loan forgiveness; these items increased the first quarter loan yield by 13 basis points and the fourth quarter loan yield by 34 basis points. The average yield on securities remained flat at 2.13% between quarters. The average yield on our collateralized loan obligations (CLOs) decreased 3 basis points to 1.91% for the first quarter from 1.94% for the fourth quarter as these securities reprice quarterly.

The average cost of total funding decreased 7 basis points to 0.63% for the first quarter from 0.70% for the fourth quarter. This decrease was driven by the lower average cost of interest-bearing liabilities and improved funding mix, including higher average noninterest-bearing deposits during the first quarter. During the first quarter, average deposits increased $164.2 million, consisting of higher average noninterest-bearing deposits of $205.1 million and lower average interest-bearing deposits of $40.9 million. Average Federal Home Loan Bank (FHLB) advances decreased $87.7 million primarily due to maturities of $105.0 million in advances during the prior quarter. The average cost of interest-bearing liabilities decreased 6 basis points to 0.83% for the first quarter of 2021 from 0.89% for the fourth quarter of 2020 due to actively managing down the cost of interest-bearing deposits into the current rate environment. The average cost of interest-bearing deposits declined 9 basis points to 0.38% for the first quarter from 0.47% for the prior quarter. Additionally, average noninterest-bearing deposits represented 27% of total average deposits for the first quarter compared to 24% of total average deposits for the fourth quarter. The average cost of total deposits decreased 8 basis points to 0.28% for the first quarter. The spot rate of total deposits at the end of the first quarter of 2021 was 0.24%.

Provision for credit losses

Q1-2021 vs Q4-2020

The provision for credit losses was a reversal of $1.1 million for the first quarter, compared to a provision for credit losses of $1.0 million for the fourth quarter. The first quarter reversal of credit losses was due primarily to improvements in key macro-economic forecast variables, such as unemployment and gross domestic product, consideration of credit quality metrics, and lower period end loan balances of $134.0 million.

Noninterest income

Q1-2021 vs Q4-2020

Noninterest income decreased $2.6 million, to $4.4 million for the first quarter due mostly to lower other income from legacy legal settlements for the benefit of the Company which totaled $2.8 million during the fourth quarter of 2020. Customer service fees decreased by $195 thousand due to lower loan fees of $367 thousand, offset by higher deposit activity fees of $172 thousand. The increase in deposit activity fees is attributed to higher balances and our initiative to bring our service fee schedules more in line with market.

Noninterest expense

Q1-2021 vs Q4-2020

Noninterest expense increased $7.8 million to $46.7 million for the first quarter compared to the prior quarter. The increase was primarily due to higher professional fees of $4.0 million, higher merger-related costs of $700 thousand, and higher net losses in alternative energy partnership investments of $4.3 million. Professional fees included indemnified legal expenses, net of recoveries, of $721 thousand in the first quarter compared to net recoveries of $4.2 million during the fourth quarter. These increases were offset by lower occupancy and equipment of $364 thousand due mostly to lower rent and other facility-related expenses and a $566 thousand decrease in all other expense. The fourth quarter all other expenses included the write-off of capitalized software costs of $336 thousand; there were no similar charges in the first quarter. Total operating costs, defined as noninterest expense adjusted for certain non-core items (refer to section Non-GAAP Measures), decreased $2.3 million to $41.7 million for the first quarter compared to $44.0 million for the prior quarter primarily due to lower professional fees, occupancy and equipment, and other expenses.

Income taxes

Q1-2021 vs Q4-2020

Income tax expense totaled $2.3 million for the first quarter resulting in an effective tax rate of 13.8% compared to $6.9 million for the fourth quarter and an effective tax rate of 24.1%. The lower effective tax rate between quarters was due to a tax benefit resulting from the exercise of all previously issued outstanding stock appreciation rights, including a net benefit of $2.1 million in the first quarter. The effective tax rate is expected to be in the 25% to 27% range for the remaining quarters in 2021.

Balance Sheet

At March 31, 2021, total assets were $7.93 billion, which represented a linked-quarter increase of $56.1 million. The following table shows selected balance sheet line items as of the dates indicated.

Investments

Securities available-for-sale increased $39.4 million during the first quarter to $1.27 billion at March 31, 2021 primarily due to purchases of $52.8 million, offset by principal payments of $9.4 million and lower unrealized net gains of $3.6 million. The decrease in the unrealized net gains was due mostly to decreases in the value of mortgage-backed securities as a result of increases in longer term interest rates, offset by improved pricing of CLOs and corporate debt securities due to lower credit spreads. There were no sales of securities during the first quarter. As of March 31, 2021, our securities portfolio included $683.9 million of CLOs, $334.3 million of agency securities, $85.5 million of municipal securities, $150.3 million of corporate debt securities, and $16.7 million of SBA pool securities. The CLO portfolio, which is comprised only of AA and AAA rated securities, represented 53.8% of the total securities portfolio and the carrying value included an unrealized net loss of $3.6 million at March 31, 2021 compared to an unrealized net loss of $9.7 million at December 31, 2020.

Loans

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

Held-for-investment loans decreased $134.0 million to $5.76 billion from the prior quarter, resulting from lower commercial and industrial (C&I) loans of $210.0 million due, in part, to decreased utilization of credit facilities and decreases in multifamily loans of $31.5 million, and construction loans of $6.9 million due to prepayment activity. The decreases were partially offset by increases in commercial real estate loans of $32.8 million and SBA loans of $65.5 million due mostly to $131.9 million in new PPP loans originated, offset by the SBA processing forgiveness requests of $62.5 million during the quarter. At March 31, 2021, SBA loans included $276.0 million of PPP loans, net of fees.

We continue to focus the real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and commercial real estate loans. Currently, loans secured by residential real estate (single-family, multifamily, single-family construction, and credit facilities) represent approximately 66% of our total loans outstanding.

The C&I portfolio has limited exposure to certain business sectors undergoing severe stress. The C&I industry concentrations in dollars and as a percentage of total outstanding C&I loan balances are summarized below:

Deposits

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

Total deposits increased $56.2 million during the first quarter of 2021 to $6.14 billion due to higher noninterest-bearing checking balances of $141.1 million and money market balances of $60.8 million, offset by lower interest-bearing checking of $19.4 million, savings balances of $22.7 million, and non-brokered certificates of deposit of $87.3 million. We continue to focus on growing relationship-based deposits, strategically augmented by wholesale funding, as we actively managed down deposit costs in response to the current interest rate environment. Noninterest-bearing deposits totaled $1.70 billion and represented 27.7% of total deposits at March 31, 2021 compared to $1.56 billion, or 25.6% of total deposits, at December 31, 2020.

Debt

Advances from the FHLB increased $95.3 million, or 18%, to $635.1 million, as of March 31, 2021, due to higher overnight advances, offset by maturities of $45.0 million in term advances. At the end of the first quarter, FHLB advances included $225.0 million in overnight borrowings, $5.0 million in term advances maturing within three months, and $411.0 million maturing beyond three months with a weighted average life of 4.7 years and weighted average interest rate of 2.53%.

Equity

At March 31, 2021, total stockholders’ equity decreased by $92.5 million to $804.7 million and tangible common equity decreased by $2.3 million to $670.2 million on a linked-quarter basis. The decrease in total stockholders’ equity for the first quarter, was a result of the redemption of all remaining Series D Preferred Stock for $93.3 million, lower net accumulated other comprehensive income of $2.6 million, dividends to common and preferred stockholders of $6.2 million and the impact of vested and exercised share-based awards of $6.4 million, offset by net income of $14.4 million and share-based award compensation of $1.5 million. Tangible book value per share decreased to $13.24 as of March 31, 2021 from $13.39 at December 31, 2020.

Capital ratios remain strong with total risk-based capital at 15.87% and a tier 1 leverage ratio of 9.62%. The following table sets forth our regulatory capital ratios at March 31, 2021 and the previous four quarters. 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 10 basis points at March 31, 2021.

Credit Quality

Total delinquent loans increased $29.7 million in the first quarter to $61.3 million at March 31, 2021, due to $39.0 million of additions, offset by $9.2 million returning to current status and $0.2 million of principal payments or payoffs. Delinquent loans included single-family residential (SFR) loans of $47.8 million, or 78% of the total delinquent balance at quarter end, and represented $24.9 million of the quarter over quarter increase. Excluding delinquent SFR loans, the remaining delinquent loans totaled $13.5 million, or 0.30% of total loans at March 31, 2021.

Non-performing loans increased $19.3 million to $55.9 million as of March 31, 2021, of which $18.1 million, or 32%, relates to loans in a current payment status. The first quarter increase was due to $22.5 million of loans placed on non-accrual status, offset by $3.2 million in cured loans and payoffs. Of the $22.5 million of loans placed on non-accrual status, $20.0 million, or 88.7%, of such loans, related to SFR loans.

At March 31, 2021, non-performing loans included (i) a legacy relationship totaling $7.3 million, or 13% of total non-performing loans, that is well-secured by a combination of commercial real estate and SFR properties with an average loan-to-value ratio of 51%, (ii) SFR loans totaling $32.4 million, or 58% of total non-performing loans, and (iii) other commercial loans of $16.1 million, or 29% of total non-performing loans.

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:

Loans on deferment or forbearance status decreased $143.2 million, or 57%, during the first quarter of 2021. Of the balances as of March 31, 2021, all other loans include 8 commercial loans totaling $34.0 million under review and pending approval for deferral, of which 3 loans totaling $17.3 million were initial deferral requests. We continue to actively monitor and manage all lending relationships in a manner that supports our clients and protects the Bank.

Allowance for Credit Losses

The allowance for expected credit losses (ACL), which includes the reserve for unfunded loan commitments, totaled $82.7 million, or 1.43% of total loans, at March 31, 2021, compared to $84.2 million, or 1.43% of total loans, at December 31, 2020. The $1.5 million decrease in the ACL was due to: (i) lower general reserves of $1.0 million from portfolio mix, (ii) net charge-offs of $393 thousand, and (iii) lower specific reserves of $58 thousand. The ACL coverage of non-performing loans was 148% at March 31, 2021 compared to 230% at December 31, 2020.

Our ACL methodology and resulting provision continues to be impacted by the current economic uncertainty and volatility caused by the COVID-19 pandemic. The 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 March 2021. In contrast to the December 2020 forecasts, the March forecasts reflect a more favorable view of the economy (i.e. higher GDP growth rates and lower unemployment rates). While the forecasts are improving and the economy is showing signs of recovery with the rollout of the vaccine and additional government stimulus, there remains uncertainty regarding the ultimate impact of the pandemic and the pace of the recovery. Accordingly, our economic assumptions and the resulting ACL level and provision reflect these uncertainties. The ACL also incorporated qualitative factors to account for certain loan portfolio characteristics that are not taken into consideration by the third-party model including underlying strengths and weaknesses in the loan portfolio. As is the case with all estimates, the ACL is expected to be impacted in future periods by economic volatility, changing economic forecasts, underlying model assumptions, and asset quality metrics, all of which may be better than or worse than current estimates.

The Company will host a conference call to discuss its first quarter 2021 financial results at 10:00 a.m. Pacific Time (PT) on Thursday, April 22, 2021. Interested parties are welcome to attend the conference call by dialing (888) 317-6003, and referencing event code 3056351. 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 10145608.

About Banc of California, Inc.

Banc of California, Inc. (NYSE: BANC) is a bank holding company with approximately $7.9 billion in assets and one wholly-owned banking subsidiary, Banc of California, N.A. (the Bank). The Bank has 36 offices including 29 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 proposed acquisition of Pacific Mercantile Bancorp 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 possibility that the merger does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; (ii) changes in Banc of California Inc.’s or Pacific Mercantile Bancorp’s stock price before closing, including as a result of its financial performance prior to closing, or more generally due to broader stock market movements, and the performance of financial companies and peer group companies; (iii) 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. and Pacific Mercantile Bancorp operate; (iv) the ability to promptly and effectively integrate the businesses of Banc of California Inc. and Pacific Mercantile Bancorp; (v) the reaction to the transaction of the companies’ customers, employees and counterparties; (vi) diversion of management time on merger-related issues; (vii) lower than expected revenues, credit quality deterioration or a reduction in real estate values or a reduction in net earnings; and (viii) other risks that are described in Banc of California Inc.’s and Pacific Mercantile Bancorp’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.

Additional Information About the Merger and Where to Find It

Investors and security holders are urged to carefully review and consider each of Banc of California Inc.’s and Pacific Mercantile Bancorp’s public filings with the SEC, including but not limited to their Annual Reports on Form 10-K, their proxy statements, their Current Reports on Form 8-K and their Quarterly Reports on Form 10-Q. The documents filed by Banc of California Inc. with the SEC may be obtained free of charge at Banc of California Inc.’s website at www.bancofcal.com or at the SEC’s website at www.sec.gov. These documents may also be obtained free of charge from Banc of California Inc. by requesting them in writing to Banc of California, Inc., 3 MacArthur Place, Santa Ana, CA 92707; Attention: Investor Relations, by submitting an email request to ir@bancofcal.com or by telephone at (855) 361-2262.

The documents filed by Pacific Mercantile Bancorp with the SEC may be obtained free of charge at Pacific Mercantile Bancorp’s website at www.pmbank.com or at the SEC’s website at www.sec.gov. These documents may also be obtained free of charge from Pacific Mercantile Bancorp by requesting them in writing to Pacific Mercantile Bancorp, 949 South Coast Drive, Suite 300, Costa Mesa, CA 92626; Attention: Investor Relations, or by telephone at 714-438-2500.

Banc of California Inc. intends to file a registration statement with the SEC, which will include a joint proxy statement of Banc of California Inc. and Pacific Mercantile Bancorp and a prospectus of Banc of California Inc., and each party will file other documents regarding the proposed transaction with the SEC. Before making any voting or investment decision, investors and security holders of Banc of California Inc. and Pacific Mercantile Bancorp are urged to carefully read the entire registration statement and joint proxy statement/prospectus, when they become available, as well as any amendments or supplements to these documents, because they will contain important information about the proposed transaction. A definitive joint proxy statement/prospectus will be sent to the shareholders of Banc of California Inc. and Pacific Mercantile Bancorp seeking any required shareholder approvals. Investors and security holders will be able to obtain the registration statement and the joint proxy statement/prospectus free of charge from the SEC’s website or from Banc of California Inc. or Pacific Mercantile Bancorp by writing to the addresses provided for each company set forth in the paragraphs above.

Banc of California Inc., Pacific Mercantile Bancorp, their directors, executive officers and certain other persons may be deemed to be participants in the solicitation of proxies from Banc of California Inc. and Pacific Mercantile Bancorp shareholders in favor of the approval of the transaction. Information about the directors and executive officers of Banc of California Inc. and their ownership of Banc of California Inc. common stock is set forth in the proxy statement for Banc of California Inc.’s 2021 annual meeting of stockholders, as previously filed with the SEC. Information about the directors and executive officers of Pacific Mercantile Bancorp and their ownership of Pacific Mercantile Bancorp common stock is set forth in the proxy statement for PMB’s 2020 annual meeting of shareholders, as previously filed with the SEC. Shareholders may obtain additional information regarding the interests of such participants by reading the registration statement and the joint proxy statement/prospectus when they become available.