Banc of California, Inc. Reports First Quarter 2024 Financial Results with Improved Profitability and Strengthened Balance Sheet

Banc of California, Inc. (NYSE:BANC):

Banc of California, Inc. (NYSE:BANC) ("Banc of California"), the parent company of wholly-owned subsidiary Banc of California (the "Bank"), today reported financial results for the first quarter ended March 31, 2024. The Company recorded net earnings available to common and equivalent stockholders of $28.2 million, or $0.17 per diluted common share, for the first quarter of 2024. On an adjusted basis, excluding the FDIC special assessment accrued for the first quarter, net earnings available to common and equivalent stockholders was $31.7 million, or $0.19 per diluted common share⁽¹⁾. This compares to a net loss of $492.9 million, or a loss of $4.55 per diluted common share, for the fourth quarter of 2023. The fourth quarter of 2023 included pre-tax amounts of $442.4 million of losses on security sales relating to our balance sheet repositioning strategy, merger costs of $111.8 million, and an FDIC special assessment of $32.7 million.

First quarter highlights include:

• Net interest income increased by $88.1 million, or 58%, in the first quarter to $239.1 million, reflecting the benefits of our balance sheet repositioning which continued into the first quarter.
• Net interest margin of 2.78%, an increase of 109 basis points from 1.69% in the fourth quarter.
• The average total cost of deposits decreased by 28 basis points to 2.66% for the first quarter compared to 2.94% in the fourth quarter.
• Improved overall deposit mix, with noninterest-bearing deposits increasing over $59 million in the first quarter and the noninterest-bearing percentage of total deposits increasing from 26% at December 31, 2023 to 27% at March 31, 2024.
• Noninterest expenses declined by over $41 million to $210.5 million (excluding merger costs).
• High liquidity levels, with available on-balance sheet liquidity and unused borrowing capacity of $16.8 billion at March 31, 2024, which was 2.4 times greater than uninsured and uncollateralized deposits.
• Allowance for credit losses of 1.26% at March 31, 2024, up from 1.22% at December 31, 2023, after a first quarter provision for credit losses of $10.0 million.
• Net charge-offs of $1.2 million, or 2 basis points of average loans and leases.
• Strong capital ratios well above the regulatory thresholds for "well capitalized" banks at March 31, 2024, including an estimated 16.43% Total risk-based capital ratio, 12.41% Tier 1 capital ratio, 10.12% CET1 capital ratio, and 9.14% Tier 1 leverage ratio.
• Book value per share increased to $17.18 and tangible book value per share⁽¹⁾ increased to $15.07.

Jared Wolff, President & CEO of Banc of California, commented, "Our first full quarter results as a combined company reflect strong execution on the key initiatives that will lead to achieving the profitability targets we set for the fourth quarter of 2024. We began to realize the benefits of the balance sheet repositioning following the closing of the merger and generated a significantly higher level of net interest income and significantly lower operating expenses. Our deposit gathering engine generated an increase in noninterest-bearing deposits during the first quarter, which contributed to a lower average cost of deposits and the expansion in our net interest margin."

Mr. Wolff continued, "We are positioned with a strong balance sheet that has good levels of capital, liquidity, and loan loss reserves, and a stable loan portfolio. While remaining disciplined and conservative in new loan originations, core loans grew 4% annualized in the quarter, offset by runoff in our discontinued portfolio. We are benefitting from our market position, seeing good opportunities to bring over new banking relationships that provide both operating deposit accounts and high-quality loans. We remain on track with our initiatives to reduce both interest expense and operating expenses and expect to make steady progress as we move through the year toward our stated profitability targets."

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Q1-2024 vs Q4-2023

Net interest income increased by $88.1 million, or 58.3%, to $239.1 million for the first quarter from $151.1 million for the fourth quarter due to lower borrowing balances and costs, higher asset yields that were driven by changes in the interest-earning asset mix, and lower deposit costs.

Average interest-earning assets decreased by $809.5 million to $34.6 billion for the first quarter due to the full quarter impact of our fourth quarter securities sales and lower cash balances, which were used to pay down higher-cost funding sources. The overall decline in average interest-earning assets was offset partially by the increase in average loans and leases during the first quarter due mostly to the full quarter impact of legacy Banc of California loans acquired in the fourth quarter. The net interest margin increased by 109 basis points to 2.78% for the first quarter compared to 1.69% for the fourth quarter due to the average yield on interest-earning assets increasing by 45 basis points, while the average total cost of funds decreased by 66 basis points, which was positively impacted by an increase in average noninterest-bearing deposits.

The average yield on interest-earning assets increased by 45 basis points to 5.68% for the first quarter from 5.23% in the fourth quarter due mainly to the change in the interest-earning asset mix. This was driven by the increase in the balance of average loans and leases as a percentage of average interest-earning assets to 74% for the first quarter from 67% for the fourth quarter, the decrease in the balance of average investment securities as a percentage of average interest-earning assets to 14% for the first quarter from 17% for the fourth quarter, and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets to 13% for the first quarter from 16% for the fourth quarter.

The average yield on loans and leases increased by 41 basis points to 6.23% for the first quarter from 5.82% for the fourth quarter as a result of higher discount accretion income and changes in portfolio mix and a full quarter benefit from the acquired loans and leases.

The average total cost of funds decreased by 66 basis points to 3.02% for the first quarter from 3.68% in the fourth quarter due mainly to decreases in higher-cost borrowings and interest-bearing deposits combined with an increase in average noninterest-bearing deposits. The average cost of interest-bearing liabilities decreased by 59 basis points to 3.92% for the first quarter from 4.51% in the fourth quarter. The average total cost of deposits decreased by 28 basis points to 2.66% for the first quarter compared to 2.94% in the fourth quarter. Average noninterest-bearing deposits increased by $1.4 billion for the first quarter compared to the fourth quarter and average total deposits increased by $1.5 billion.

Provision For Credit Losses

Q1-2024 vs Q4-2023

The provision for credit losses was $10.0 million for the first quarter. The first quarter provision was driven by an increase in qualitative reserves related to loans secured by office properties and an increase in quantitative reserves due to an increase in nonaccrual and classified loans and leases. The provision for credit losses was $47.0 million for the fourth quarter and included an initial provision of $22.2 million for acquired legacy Banc of California non-PCD loans. Outside this initial provision, the fourth quarter's expense was driven by $13.2 million of net charge-offs and a need for increased quantitative reserves resulting from revising the economic forecast to reflect a 60% probability weighting on recessionary scenarios and updating expected prepayment speeds based on a high interest rate environment.

Noninterest Income

Q1-2024 vs Q4-2023

Noninterest income increased by $434.2 million to $33.8 million for the first quarter due almost entirely to a decrease in the loss on sale of securities of $442.4 million. As part of our balance sheet repositioning strategy, we sold $2.7 billion of legacy PacWest available-for-sale securities in the fourth quarter resulting in losses of $442.4 million. There were no securities sales in the first quarter of 2024.

Noninterest Expense

Q1-2024 vs Q4-2023

Noninterest expense decreased by $153.1 million to $210.5 million for the first quarter due mainly to fourth quarter acquisition, integration and reorganization costs of $111.8 million related to our merger with PacWest and a decrease in insurance and assessments expense of $39.6 million, which includes $32.7 million for the FDIC special assessment for the fourth quarter.

Income Taxes

Q1-2024 vs Q4-2023

Income tax expense of $14.3 million was recorded for the first quarter resulting in an effective tax rate of 27.3% compared to a benefit of $177.0 million for the fourth quarter and an effective tax rate of 26.8%.

BALANCE SHEET HIGHLIGHTS

Securities

The balance of securities held-to-maturity ("HTM") remained consistent through the first quarter and totaled $2.3 billion at March 31, 2024. As of March 31, 2024, HTM securities had aggregate unrealized net after-tax losses in AOCI of $175.6 million remaining from the balance established at the time of transfer on June 1, 2022.

Securities available-for-sale ("AFS") decreased by $60.2 million during the first quarter to $2.3 billion at March 31, 2024. AFS securities had aggregate unrealized net after-tax losses in AOCI of $265.3 million. These AFS unrealized net losses related primarily to changes in overall interest rates and spreads and the resulting impact on valuations.

Loans and Leases

The following table sets forth the composition, by loan category, of our loan and lease portfolio held for investment, net of deferred fees, as of the dates indicated:

Total loans and leases held for investment, net of deferred fees, remained consistent through the first quarter and totaled $25.5 billion at March 31, 2024. Loan fundings were $141.7 million in the first quarter at a weighted-average interest rate of 8.31%.

Deposits and Client Investment Funds

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

Total deposits decreased by $1.5 billion during the first quarter to $28.9 billion at March 31, 2024, due primarily to decreases of $1.2 billion in money market accounts and $377.4 million in non-brokered time deposits.

Noninterest-bearing checking totaled $7.83 billion and represented 27% of total deposits at March 31, 2024, compared to $7.77 billion, or 26% of total deposits, at December 31, 2023.

Uninsured and uncollateralized deposits of $7.1 billion represented 24% of total deposits at March 31, 2024, compared to uninsured and uncollateralized deposits of $7.0 billion or 23% of total deposits at December 31, 2023.

In addition to deposit products, we also offer alternative, non-depository corporate treasury solutions for select clients to invest excess liquidity. These alternative options include investments managed by BofCal Asset Management Inc. ("BAM"), our registered investment advisor subsidiary, and third-party sweep products. Total off-balance sheet client investment funds were $0.6 billion as of December 31, 2023 and increased to $1.2 billion at March 31, 2024, of which $0.6 billion was managed by BAM.

Borrowings

Borrowings decreased by $771.8 million from $2.9 billion at December 31, 2023, to $2.1 billion at March 31, 2024 due primarily to the paydown of $1.1 billion of the Bank Term Funding Program balance, offset partially by $300 million in FHLB borrowings. We chose to extend the $1.5 billion remaining Bank Term Funding Program balance to March 2025 in order to have the flexibility to pay down or pay off the balance at our discretion as business needs dictate.

Equity

During the first quarter, total stockholders' equity increased by $10.7 million to $3.4 billion and tangible common equity⁽¹⁾ increased by $18.9 million to $2.5 billion at March 31, 2024. The increase in total stockholders' equity for the first quarter resulted primarily from net earnings in the first quarter, offset partially by dividends declared and paid.

At March 31, 2024, book value per common share increased to $17.18, compared to $17.12 at December 31, 2023, and tangible book value per common share⁽¹⁾ increased to $15.07, compared to $14.96 at December 31, 2023.

CAPITAL AND LIQUIDITY

Capital ratios remain strong with total risk-based capital at 16.43% and a tier 1 leverage ratio of 9.14% at March 31, 2024.

The following table sets forth our regulatory capital ratios as of the dates indicated:

At March 31, 2024, immediately available cash and cash equivalents were $2.9 billion, a decrease of $2.3 billion from December 31, 2023. Combined with total available borrowing capacity of $12.6 billion and unpledged AFS securities of $1.4 billion, total available liquidity was $16.8 billion at the end of the first quarter.

CREDIT QUALITY

At March 31, 2024, total delinquent loans and leases were $236.2 million, compared to $144.2 million at December 31, 2023. The $92.0 million increase in total delinquent loans was due mostly to a $56.8 million increase in commercial real estate mortgage loans that were 30 to 89 days delinquent and a $35.1 million increase in other residential real estate mortgage loans that were 90 or more days delinquent. Total delinquent loans and leases as a percentage of total loans and leases increased to 0.93% at March 31, 2024, as compared to 0.57% at December 31, 2023.

At March 31, 2024, nonperforming assets were $158.5 million, or 0.44% of total assets, compared to $81.7 million, or 0.21% of total assets, as of December 31, 2023.

At March 31, 2024, nonperforming loans were $146.0 million, and included $66.7 million of CRE loans, $61.8 million of other residential loans (mostly Civic), $15.7 million of commercial and industrial loans, $1.0 million of multi-family loans, and $0.8 million of consumer loans. During the first quarter, nonperforming loans increased by $71.7 million due to additions of $90.9 million, offset partially by borrowers that became current of $12.8 million, payoffs and paydowns of $5.0 million, and net charge-offs of $1.4 million.

Nonperforming loans and leases as a percentage of total loans and leases increased to 0.57% at March 31, 2024 compared to 0.29% at December 31, 2023. Four CRE credits drove the majority of the increase to nonperforming loans during the period, which included 3 office properties and 1 retail property. Specific reserves were established for two office properties which contributed to the increase in the provision. The legacy Civic portfolio also contributed to the increase in both delinquencies and nonperforming loans. The nonperforming loan increase was driven mainly by the four CRE properties which represented 60% of the increase, Civic represented 29% of the increase, and SFR/consumer loans represented 7% of the increase.

At March 31, 2024, nonperforming assets included $12.5 million of other real estate owned, consisting entirely of single-family residences.

ALLOWANCE FOR CREDIT LOSSES - LOANS

The allowance for credit losses, which includes the reserve for unfunded loan commitments, totaled $320.1 million, or 1.26% of total loans and leases, at March 31, 2024, compared to $311.3 million, or 1.22% of total loans and leases, at December 31, 2023. The $8.8 million increase in the allowance was due to a $10.0 million provision, offset partially by net charge-offs of $1.2 million. The ACL coverage of nonperforming loans was 219% at March 31, 2024 compared to 419% at December 31, 2023.

Net charge-offs were 0.02% of average loans and leases (annualized) for the first quarter, compared to 0.22% for the fourth quarter. The decrease in net charge-offs in the first quarter was due primarily to $5.3 million of charge-offs related to the transfer of Civic loans to held for sale in the fourth quarter.

Conference Call

The Company will host a conference call to discuss its first quarter 2024 financial results at 10:00 a.m. Pacific Time (PT) on Tuesday, April 23, 2024. Interested parties are welcome to attend the conference call by dialing (888) 317-6003 and referencing event code 1537279. 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 4374649.

About Banc of California, Inc.

Banc of California, Inc. (NYSE:BANC) is a bank holding company with over $36 billion in assets and the parent company of Banc of California. Banc of California is one of the nation's premier relationship-based business banks, providing banking and treasury management services to small-, middle-market, and venture-backed businesses. Banc of California is the third largest bank headquartered in California and offers a broad range of loan and deposit products and services through more than 90 full-service branches throughout California and in Denver, Colorado, and Durham, North Carolina, as well as through regional offices nationwide. The bank also provides full-stack payment processing solutions through its subsidiary, Deepstack Technologies, and serves the Community Association Management industry nationwide with its technology-forward platform, SmartStreet™. The bank is committed to its local communities by supporting organizations that provide financial literacy and job training, small business support, affordable housing, and more. 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. Words or phrases such as "believe," "will," "should," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "plans," "strategy," or similar expressions are intended to identify these forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. 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. (the "Company") with the Securities and Exchange Commission ("SEC"). The Company undertakes no obligation to revise or publicly release any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to: (i) changes in general economic conditions, either nationally or in our market areas, including the impact of supply chain disruptions, and the risk of recession or an economic downturn; (ii) changes in the interest rate environment, including the recent and potential future changes in the FRB benchmark rate, which could adversely affect our revenue and expenses, the value of assets and obligations, the realization of deferred tax assets, the availability and cost of capital and liquidity, and the impacts of continuing inflation; (iii) the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial condition of borrowers, and the operational risk of lending activities, including the effectiveness of our underwriting practices and the risk of fraud, any of which may lead to increased loan delinquencies, losses, and non-performing assets, and may result in our allowance for credit losses not being adequate; (iv) fluctuations in the demand for loans, and fluctuations in commercial and residential real estate values in our market area; (v) the quality and composition of our securities portfolio; (vi) our ability to develop and maintain a strong core deposit base, including among our venture banking clients, or other low cost funding sources necessary to fund our activities particularly in a rising or high interest rate environment; (vii) the rapid withdrawal of a significant amount of demand deposits over a short period of time; (viii) the costs and effects of litigation; (ix) risks related to the Company's acquisitions, including disruption to current plans and operations; difficulties in customer and employee retention; fees, expenses and charges related to these transactions being significantly higher than anticipated; and our inability to achieve expected revenues, cost savings, synergies, and other benefits; and in the case of our recent acquisition of PacWest Bancorp ("PacWest"), reputational risk, regulatory risk and potential adverse reactions of the Company's or PacWest's customers, suppliers, vendors, employees or other business partners; (x) results of examinations by regulatory authorities of the Company and the possibility that any such regulatory authority may, among other things, limit our business activities, restrict our ability to invest in certain assets, refrain from issuing an approval or non-objection to certain capital or other actions, increase our allowance for credit losses, result in write-downs of asset values, restrict our ability or that of our bank subsidiary to pay dividends, or impose fines, penalties or sanctions; (xi) legislative or regulatory changes that adversely affect our business, including changes in tax laws and policies, accounting policies and practices, privacy laws, and regulatory capital or other rules; (xii) the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses; (xiii) errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in valuation; (xiv) failures or security breaches with respect to the network, applications, vendors and computer systems on which we depend, including due to cybersecurity threats; (xv) our ability to attract and retain key members of our senior management team; (xvi) the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; (xvii) the impact of bank failures or other adverse developments at other banks on general depositor and investor sentiment regarding the stability and liquidity of banks; (xviii) the possibility that our recorded goodwill could become impaired, which may have an adverse impact on our earnings and capital; (xix) our existing indebtedness, together with any future incurrence of additional indebtedness, could adversely affect our ability to raise additional capital and to meet our debt obligations; (xx) the risk that we may incur significant losses on future asset sales; and (xxi) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this press release and from time to time in other documents that we file with or furnish to the SEC.