BANC - Banc of California Reports Strong Profitability $1.2 Billion in Loan Fundings and Net Interest Margin Expansion for Second Quarter 2022

Banc of California, Inc. (NYSE: BANC) today reported net income and net income available to common stockholders of $26.7 million, or $0.43 per diluted common share, for the second quarter of 2022. This compares to net income of $48.5 million and net income available to common stockholders of $43.3 million, or $0.69 per diluted common share, for the first quarter of 2022. The first quarter of 2022 net income available to common stockholders included a $31.3 million pre-tax recovery from the settlement of a previously charged-off loan and a $3.7 million after-tax charge related to the redemption of Series E Preferred Stock.

Second quarter highlights:

• Adjusted EPS of $0.45
• Pre-tax pre-provision return on average assets of 1.58%, up from 1.54% in the prior quarter
• Net interest margin of 3.58%, an increase of 7 basis points from the prior quarter
• Average noninterest-bearing deposits of 38%, flat with the prior quarter
• Tangible book value per share of $14.05, flat with the prior quarter
• Average cost of total deposits of 0.17%, an increase of 9 basis points from the prior quarter
• Allowance for credit losses at 1.34% of total loans and 224% of non-performing loans, up from 1.32% and 181% in the prior quarter
• Repurchased $38.9 million of common stock during the quarter and $51.9 million cumulatively through July 20

Jared Wolff, President & CEO of Banc of California, commented, “We delivered another quarter of solid operating performance which is a good representation of our strong commercial banking franchise: well diversified, robust loan production funded with a low-cost deposit base; disciplined expense control; and solid asset quality in our conservatively underwritten, well secured loan portfolio. We capitalized on the resilient economic conditions and loan demand we are experiencing in California to generate $1.2 billion in loan fundings during the second quarter, which was the highest level of fundings in over 3 years.”

Mr. Wolff continued, “Although interest rates have increased, our loan pipeline remains strong, which should result in continued loan growth in the second half of the year, as well as further expansion of our operating leverage. We believe that our asset sensitive balance sheet will benefit from the rising rate environment and position us to continue delivering strong financial results for the benefit of shareholders.”

Lynn Hopkins, Chief Financial Officer of Banc of California, said, “During the second quarter, our net interest margin increased seven basis points. We believe our current loan pipeline reflects the higher interest rate environment, which should lead to additional expansion in our net interest margin going forward, providing us with another catalyst for driving further increases in earnings per share and our level of returns.”

Income Statement Highlights

Net interest income

Q2-2022 vs Q1 - 2022

Net interest income increased $1.9 million to $78.3 million for the second quarter due to higher yield on interest-earning assets, offset by lower average interest-earning assets and higher average interest-bearing liabilities balances and costs.

The net interest margin increased 7 basis points to 3.58% for the second quarter as the average interest-earning assets yield increased 17 basis points and the cost of average total funding increased 10 basis points. The yield on average interest-earning assets increased to 4.04% for the second quarter from 3.87% for the first quarter due to the mix of interest-earning assets and higher yields on loan and securities. The average yield on loans increased 9 basis points to 4.35% during the second quarter as a result of the portfolio mix and the impact of higher market interest rates. 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 10 basis points in both the second quarter and prior quarter.

The average cost of funds increased 10 basis points to 0.49% for the second quarter from 0.39% for the first quarter. This increase was driven by the higher average cost of interest-bearing deposits. Average noninterest-bearing deposits represented 38% of total average deposits for both the second quarter and the first quarter. Average noninterest-bearing deposits were $9.2 million higher in the second quarter compared to the first quarter while average deposits were $11.8 million higher for the linked quarters. Average Federal Home Loan Bank (FHLB) advances and other borrowings increased $27.1 million. The average cost of interest-bearing liabilities increased 16 basis points to 0.74% for the second quarter from 0.58% for the first quarter due to higher cost of interest-bearing deposits. The average cost of interest-bearing deposits increased 16 basis points to 0.28% for the second quarter from 0.12% for the first quarter. The average cost of total deposits increased 9 basis points to 0.17% for the second quarter due mostly to higher market interest rates. The spot rate of total deposits was 0.21% at the end of the second quarter.

YTD 2022 vs YTD 2021

Net interest income increased $37.0 million to $154.7 million for the six months ended June 30, 2022 due to higher average balances and yield on interest-earning assets, higher average balances and lower costs of interest-bearing liabilities.

The net interest margin increased 32 basis points to 3.55% as the average earning-assets yield increased 16 basis points and the average cost of total funding decreased 16 basis points. The yield on average interest-earning assets increased to 3.96% for the six months ended June 30, 2022, from 3.80% for 2021 due mostly to the mix of interest-earning assets and higher market interest rates. Average loans represented 82.6% of average earnings assets in 2022 compared to 78.6% for the same period in 2021 Average loans increased by $1.49 billion from ongoing loan growth, including the acquisition of Pacific Mercantile Bancorp (PMB) in the fourth quarter of 2021. The yield on average loans for the six months ended June 30, 2022 was 4.31% compared to 4.30% for the same period in 2021. The yield on average investment securities and other interest-earning assets increased 34 basis points and 47 basis points, respectively, for the six months ended June 30, 2022, compared to the same period in 2021.

The average cost of funds decreased 16 basis points to 0.44% for the six months ended June 30, 2022 from 0.60% for 2021. 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 as a result of growth from business development efforts and the acquisition of PMB. Average noninterest-bearing deposits represented 38% of total average deposits for the six months ended June 30, 2022 compared to 28% for the same period in 2021. Average noninterest-bearing deposits were $1.09 billion higher during the six months ended June 30, 2022 compared to the same period in 2021 while average total deposits were $1.20 billion higher. Average FHLB advances and other borrowings increased $146.5 million due mostly to higher overnight borrowings offset by lower term advances. The average cost of interest-bearing liabilities decreased 14 basis points to 0.66% for the six months ended June 30, 2022 compared to the same period in 2021. This included a 15 basis points decline in the average cost of interest-bearing deposits to 0.20% for the six months ended June 30, 2022 compared to 0.35% for the same period in 2021. The average cost of total deposits decreased 13 basis points to 0.12% for the six months ended June 30, 2022.

Provision for credit losses

Q2-2022 vs Q1 - 2022

There was no provision for credit losses for the second quarter, compared to a reversal of $31.5 million for the first quarter. The first quarter reversal of credit losses included $31.3 million related to a recovery from the settlement of a loan previously charged-off in 2019.

YTD 2022 vs YTD 2021

During the six months ended June 30, 2022, the provision for credit losses was a reversal of $31.5 million, compared to a reversal of $3.3 million during 2021. The higher reversal of credit losses for the six months ended June 30, 2022 was due to recovery from the settlement of a loan previously charged-off in 2019.

Noninterest income

Q2-2022 vs Q1 - 2022

Noninterest income increased $1.3 million to $7.2 million for the second quarter compared to the prior quarter due mostly to higher other income. All other income increased $1.2 million due to higher income from equity investments of $2.1 million, partially offset by a fair value write-down of $455 thousand recorded on loans held for sale and the first quarter including a $771 thousand gain related to a sale-leaseback transaction; there were no sale-leaseback transactions in the second quarter. Gains or losses from equity investments are recorded based on the most recent information available from the investee and fluctuates based on their underlying performance.

YTD 2022 vs YTD 2021

Noninterest income for the six months ended June 30, 2022 increased $4.8 million to $13.1 million compared to 2021. The increase in noninterest income reflected a full six months of activity from the acquisition of PMB and was mainly due to higher customer service fees, income from bank-owned life insurance, and all other income. Customer services fees increased $1.3 million due mostly to higher deposit activity fees of $1.8 million attributed to higher average deposit balances, offset by lower loan fees of $594 thousand. Income from bank-owned life insurance increased $244 thousand due to higher average balances. The $3.3 million increase in all other income is due mostly to higher income from equity investments of $2.4 million and a $771 thousand gain related to a sale-leaseback transaction during the first quarter of 2022.

Noninterest expense

Q2-2022 vs Q1 - 2022

Noninterest expense increased $2.0 million to $48.6 million for the second quarter compared to the first quarter. The increase was due mostly to (i) higher professional fees of $1.2 million, due mostly to higher legal fees and (ii) higher net loss in alternative energy partnership investments of $885 thousand, offset by a decrease in salaries and employee benefits of $723 thousand attributed to higher payroll-related items typical of the first quarter. Professional fees included net indemnified legal expenses of $455 thousand in the second quarter compared to net recoveries of $106 thousand during the first quarter.

Total operating costs, defined as noninterest expense adjusted for certain expense items (refer to section Non-GAAP Measures ), increased $570 thousand to $47.1 million for the second quarter compared to $46.5 million for the prior quarter. This increase is due mostly to higher professional fees of $639 thousand and all other expenses of $580 thousand due mostly to loan-related expenses, offset by lower salaries and benefits of $723 thousand as the higher payroll-related items typical of the first quarter were lower in the second quarter.

YTD 2022 vs YTD 2021

Noninterest expense for the six months ended June 30, 2022 increased $8.2 million to $95.2 million compared to the prior year. The increase was primarily due to: (i) higher salaries and employee benefits of $6.5 million and occupancy and equipment of $1.3 million due to the increases in personnel and facilities from the acquisition of PMB, (ii) higher professional fees of $1.2 million, due mostly to a $1.9 million increase in legal fees, net of insurance recoveries, offset by a $619 thousand decrease in other professional fees and (iii) higher all other expenses of $2.2 million due to including the operations of PMB. These increases were partially offset by: (i) higher reversal of loan repurchase reserves of $730 thousand, (ii) lower merger-related costs of $1.4 million and (iii) lower loss in alternative energy partnership investments of $1.6 million.

Income taxes

Q2-2022 vs Q1 - 2022

Income tax expense totaled $10.2 million for the second quarter resulting in an effective tax rate of 27.6% compared to $18.8 million for the first quarter and an effective tax rate of 27.9%. The effective tax rate for 2022 is expected to be similar to the effective income tax rate for the second quarter.

YTD 2022 vs YTD 2021

Income tax expense totaled $28.9 million for the six months ended June 30, 2022, representing an effective tax rate of 27.8%, compared to $8.9 million and an effective tax rate of 20.9% for 2021. The effective tax rate for the six months ended June 30, 2022 was higher than the comparable 2021 period due mostly to the first quarter of 2021 including a net tax benefit of $2.1 million resulting from the exercise of all previously issued outstanding stock appreciation rights.

Balance Sheet

At June 30, 2022, total assets were $9.50 billion, which represented a linked-quarter decrease of $81.4 million. The following table shows selected balance sheet line items as of the dates indicated:

Investments

Securities held-to-maturity totaled $329.3 million at June 30, 2022 and included $215.1 million in agency securities and $114.2 million in municipal securities.

Securities available-for-sale decreased $33.3 million during the second quarter to $865.4 million at June 30, 2022, including principal payments of $12.2 million and higher unrealized net losses of $21.0 million. The higher net unrealized losses were due mostly to the impact of increases in longer-term market interest rates on the value of each class of securities. As of June 30, 2022, the securities available-for-sale portfolio included $478.2 million of CLOs, $165.4 million of agency securities, $163.3 million of corporate debt securities, $45.5 million of residential collateralized mortgage obligations, and $13.1 million of SBA securities. The CLO portfolio, which is comprised only of AA and AAA rated securities, represented 40% of the total securities portfolio and the carrying value included an unrealized net loss of $14.6 million at June 30, 2022, compared to 40% of the total securities portfolio and an unrealized net loss of $4.8 million at March 31, 2022.

Loans

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

Total loans ended the second quarter of 2022 at $7.45 billion, relatively unchanged from March 31, 2022, due to growth in commercial real estate, multifamily, commercial and industrial and single-family residential mortgage, which was offset by a decrease in commercial and industrial - warehouse lending and SBA. Loan fundings of $1.21 billion in the second quarter included single-family residential purchases of $277.2 million and were offset by paydowns and payoffs of $793.5 million and net warehouse paydowns of $414.4 million. At June 30, 2022, SBA loans included $28.4 million of PPP loans, compared to $58.3 million at March 31, 2022. Total commercial loans, excluding PPP loans and warehouse lending, increased $256.2 million, or 25.1% on an annualized basis during the second quarter.

Deposits

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

Total deposits increased $79.0 million during the second quarter of 2022 to $7.56 billion at June 30, 2022, due mostly to higher certificate of deposit balances of $228.7 million and savings and money market balances of $17.8 million, offset by lower noninterest-bearing checking balances of $132.0 million and lower interest-bearing checking balances of $35.5 million. Noninterest-bearing deposits totaled $2.83 billion and represented 37.4% of total deposits at June 30, 2022, compared to $2.96 billion, or 39.6% of total deposits, at March 31, 2022.

Debt

Advances from the FHLB decreased $44.7 million during the second quarter to $511.7 million at June 30, 2022, due to lower overnight advances. At June 30, 2022, FHLB advances included $105.0 million of overnight borrowings and $411.0 million in term advances with a weighted average life of 3.5 years and weighted average interest rate of 2.53%. Other borrowings totaled $98.0 million at June 30, 2022, down from $190.0 million at March 31, 2022, and related mostly to unsecured overnight borrowings from various financial institutions through the American Financial Exchange platform.

Equity

During the second quarter total stockholders’ equity decreased by $29.9 million to $949.1 million and tangible common equity decreased by $29.6 million to $849.3 million at June 30, 2022. The decrease in total common stockholders’ equity for the second quarter included the repurchase of common stock of $38.9 million, accumulated other comprehensive net loss of $14.9 million, and dividends to common stockholders of $3.7 million, partially offset by net income of $26.7 million and share-based award compensation of $1.5 million. Book value per common share increased to $15.70 as of June 30, 2022, from $15.65 at March 31, 2022. Tangible book value per common share (refer to section Non-GAAP Measures ) remained unchanged at $14.05 as of June 30, 2022 compared to March 31, 2022.

During the second quarter of 2022, common stock repurchased under the program authorized during the first quarter of 2022 totaled 2,113,176 shares at a weighted average price of $18.38. As of June 30, 2022, the Company had $31.9 million remaining under the current stock repurchase authorization. Through July 20, 2022, repurchases of Company common stock total 2,813,978 shares at a weighted average price of $18.45 per share, or $51.9 million under the stock repurchase plan. The repurchased shares represent approximately 4% of the shares outstanding at the time this $75 million program was authorized.

Capital ratios remain strong with total risk-based capital at 13.68% and a tier 1 leverage ratio of 9.59% at June 30, 2022. 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 9 basis points at June 30, 2022. The following table sets forth our regulatory capital ratios as of the dates indicated:

Credit Quality

Total delinquent loans increased $1.2 million in the second quarter to $62.2 million at June 30, 2022, due mostly to additions of $29.2 million, offset by $21.7 million returning to current status and $6.3 million in other reductions including paydowns. The additions included (i) $18.1 million in single-family residential mortgage loans, (ii) $6.0 million in commercial and industrial loans and (iii) $4.6 million in SBA loans. At June 30, 2022, delinquent loans included (i) SFR loans of $32.5 million, (ii) SBA loans of $15.0 million, of which $12.6 million are guaranteed, and (iii) other loans of $14.7 million.

Non-performing loans decreased $10.1 million to $44.4 million as of June 30, 2022, of which $18.4 million, or 41%, relates to loans in a current payment status. The second quarter decrease was due mostly to $5.7 million in loans returning to accrual status and $4.7 million in payoffs, paydowns, and charge-offs, offset by additions of $259 thousand. At June 30, 2022, non-performing loans included (i) a $12.4 million commercial and industrial loan acquired in the PMB acquisition, (ii) SBA loans totaling $10.5 million, of which $8.6 million is guaranteed, (iii) SFR loans totaling $7.3 million, and (iv) other commercial loans of $13.9 million.

Allowance for Credit Losses

The allowance for expected credit losses (ACL), which includes the reserve for unfunded loan commitments, totaled $99.7 million, or 1.34% of total loans, at June 30, 2022, compared to $98.6 million, or 1.32% of total loans, at March 31, 2022. The $1.1 million increase in the ACL was due primarily to: (i) net recoveries of $1.1 million, (ii) higher specific reserves of $484 thousand, and (iii) higher reserve for unfunded commitments of $500 thousand, offset by lower general loan reserves of $1.0 million. The ACL coverage of non-performing loans was 224% at June 30, 2022 compared to 181% at March 31, 2022.

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 released by the model provider during June 2022. The published forecasts consider rising inflation, higher oil prices, ongoing supply chain issues and the military conflict between Russia and Ukraine, among other factors.

Conference Call

The Company will host a conference call to discuss its second quarter 2022 financial results at 10:00 a.m. Pacific Time (PT) on Thursday, July 21, 2022. Interested parties are welcome to attend the conference call by dialing (888) 317-6003, and referencing event code 1795053. 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 8741948.

About Banc of California, Inc.

Banc of California, Inc. (NYSE: BANC) is a bank holding company with $9.5 billion in assets at June 30, 2022 and one wholly-owned banking subsidiary, Banc of California, N.A. (the Bank). The Bank has 36 offices including 31 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. 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.