Executive Summary / Key Takeaways

• Banc of California has successfully integrated PacWest Bancorp (PACW), completing core system conversion and branch consolidation, positioning the combined entity for profitable growth.
• Strategic balance sheet repositioning, including the sale of lower-yielding assets and reduction of high-cost funding, has significantly expanded the net interest margin, with further improvement expected.
• The company is leveraging its enhanced scale and market disruption in California to drive loan growth, particularly in targeted commercial segments like warehouse, lender finance, and fund finance, alongside a focus on attracting low-cost, relationship-based deposits.
• A conservative approach to credit risk management, including proactive downgrades and robust reserve levels, aims to mitigate future headwinds despite recent upticks in classified assets.
• Strong liquidity and capital levels, coupled with opportunistic share buybacks and investments in technology, underscore management's confidence in enhancing shareholder value and supporting future expansion.

The Rebirth of a California Business Bank

Banc of California, Inc., rooted in its 2002 origins as a California-focused financial institution, has recently undergone a profound transformation. The strategic merger with PacWest Bancorp in late 2023 was not merely an acquisition but a deliberate move to forge a leading relationship-based business bank in a dynamic market reshaped by recent industry events. This combination aimed to fill the void left by other institutions, leveraging the combined entity's scale and expertise to serve small-, middle-market, and venture-backed businesses across California and expanding national footprints. The post-merger period has been marked by intense internal work, including the successful integration of core systems and consolidation of physical branches, laying the operational foundation for the next phase: external growth.

The competitive landscape in California banking is fierce, populated by national giants like Bank of America (BAC), Wells Fargo (WFC), and JPMorgan Chase (JPM), alongside other regional players like U.S. Bancorp (USB). While these larger institutions possess immense scale, technological resources, and broader product suites, their size can sometimes lead to less personalized service for the commercial clients BANC targets. BANC strategically positions itself as an agile, relationship-focused alternative, emphasizing deep client understanding and faster decision-making. Its regional branch network fosters strong local ties, enabling higher recurring revenue from loyal depositors compared to purely digital competitors.

Technologically, BANC is investing to enhance its competitive standing. The successful conversion onto the FIS core system was a critical step, providing a unified platform. Beyond core banking, the company is developing differentiated capabilities. Its Deepstack Technologies subsidiary offers full-stack payment processing solutions, a valuable tool for commercial clients and a potential source of non-interest income, with management anticipating a more significant impact in 2025. The SmartStreet platform caters specifically to the community association management industry, driving a stable base of HOA deposits, albeit with rate-sensitive earnings credit rate (ECR) expenses. Internal initiatives, including implementing Salesforce for enhanced client relationship management and investing in data harmonization projects, aim to improve operational efficiency and provide better insights for both employees and clients. While precise, publicly disclosed quantitative metrics comparing BANC's technology speed or cost advantages directly against all competitors are not detailed, management's commentary highlights the strategic intent to leverage these investments to improve efficiency and client experience, areas where larger banks often hold an edge through sheer R&D scale. The focus on niche platforms like SmartStreet and specialized lending systems provides a tailored approach that larger, more generalized competitors may struggle to replicate efficiently.

Financial Performance Reflecting Strategic Repositioning

The financial results for the first quarter of 2025 demonstrate the tangible benefits of the post-merger transformation and balance sheet repositioning. Net earnings available to common and equivalent stockholders reached $43.6 million, or $0.26 per diluted common share. This performance reflects positive trends in core earnings drivers, building on the momentum seen in the prior quarter.

Net interest income, while slightly down sequentially in Q1 2025 to $232.4 million due to factors like lower day count and reduced loan prepayments, showed a significant increase compared to $229.1 million in Q1 2024. This expansion was primarily driven by a substantial decrease in interest expense, benefiting from lower average balances and costs of interest-bearing deposits (including a $26.3 million reduction in non-brokered interest-bearing deposit expense year-over-year) and borrowings, alongside an improved funding mix. The average total cost of deposits declined to 2.12% in Q1 2025, down 54 basis points from Q1 2024, reflecting the impact of federal funds rate cuts and a strategic shift away from higher-cost wholesale funding. Average noninterest-bearing deposits remained stable at 29% of average total deposits in Q1 2025, up from 26% a year prior, underscoring the success of the relationship-based deposit strategy.

The net interest margin expanded to 3.08% in Q1 2025, a 4 basis point increase from Q4 2024 and a notable 42 basis point increase from Q1 2024. This expansion was primarily fueled by the lower cost of funds, partially offset by a decrease in the average yield on interest-earning assets. While average loan yields declined slightly to 5.90% in Q1 2025, impacted by lower prepayments and market rates, the average yield on investment securities increased to 3.24%, benefiting from the securities portfolio repositioning executed in 2024. This repositioning involved selling lower-yielding securities and purchasing higher-yielding ones, a move expected to generate additional interest income.

Noninterest income saw a sequential increase in Q1 2025 to $33.7 million, driven by higher gains on equity investments (specifically SBICs), increased loan-related and customer service fees, and a positive fair value adjustment on credit-linked notes. Year-over-year, noninterest income was relatively stable, with growth in fees offsetting declines in leased equipment income and certain investment gains.

Noninterest expense totaled $183.7 million in Q1 2025. While sequentially higher due to typical first-quarter seasonality in compensation expenses (resets for incentives, payroll taxes, and benefits), this represented a significant $26.9 million decrease compared to Q1 2024. The year-over-year reduction was primarily attributable to lower insurance and assessment costs (following incremental FDIC special assessments in Q1 2024), reduced compensation (reflecting headcount optimization), lower customer-related expenses (driven by declining ECRs), and decreased occupancy and loan expenses (benefiting from branch consolidations and the Civic loan sale). Management expects quarterly noninterest expenses to normalize in the range of $190 million to $195 million for the remainder of 2025, anticipating positive operating leverage as net interest income continues to grow.

Balance Sheet Strength and Credit Profile

Banc of California maintains a robust balance sheet designed to support growth and withstand potential economic volatility. Total assets stood at $33.8 billion at March 31, 2025.

Loan and leases held for investment increased by $344.9 million in Q1 2025 to $24.1 billion, representing 6% annualized growth. This growth was broad-based across commercial portfolios, with particular strength in warehouse, lender finance, and fund finance, partially offset by declines in construction loans. New loan production in Q1 2025 totaled $2.6 billion with a weighted average interest rate of 7.20%, accretive to the overall portfolio yield. The portfolio mix is strategically shifting towards lower-risk, shorter-duration categories like warehouse, fund finance, and lender finance, which now constitute 25% of total loans, up from 17% at the end of 2023.

Total deposits remained stable at $27.2 billion at March 31, 2025. Noninterest-bearing deposits accounted for 28% of the total, a key focus area for management aiming to reach over 30% in 2025. Brokered deposits stood at $2.7 billion, with management actively reducing reliance on higher-cost wholesale funding sources.

Liquidity remains a significant strength. Available on-balance sheet liquidity and unused borrowing capacity totaled $15.1 billion at March 31, 2025, providing a substantial coverage ratio of 205% relative to uninsured and uncollateralized deposits ($7.4 billion). This high level of liquidity, representing 56% of total deposits, positions the bank well to fund anticipated loan growth and manage potential deposit fluctuations.

Capital ratios are strong and comfortably exceed regulatory requirements for well-capitalized institutions. At March 31, 2025, the CET1 ratio was 10.45%, the Tier 1 capital ratio was 12.86%, and the Total capital ratio was 16.93%. While the CET1 ratio saw a slight sequential decrease due to share repurchases and loan growth outpacing earnings, management is focused on building capital through core profitability and believes its levels are adequate, though perhaps not as high as some peers. The completion of the CECL phase-in in Q1 2025 means regulatory capital now fully reflects expected credit losses.

Credit quality metrics saw an uptick in classified loans and nonaccrual loans in Q1 2025. Nonaccrual loans increased to $213.5 million, primarily driven by a single commercial real estate (CRE) hotel loan with full recourse and adequate collateral coverage, which management believes is an isolated risk. Classified loans increased to $764.7 million, largely due to the migration of rate-sensitive multi-family loans. Management attributes these increases to a deliberately conservative risk rating posture, emphasizing quick downgrades and slow upgrades when signs of weakness appear, even if loans are current and well-collateralized. This proactive approach aims to get ahead of potential credit issues. Despite the migration, 84% of the inflows to classified loans in Q1 2025 were current, and 81% of all classified assets were current, supported by strong collateral and low loan-to-values. The Allowance for Credit Losses (ACL) remained mostly flat at 1.10% of total loans, with an economic coverage ratio (including purchase accounting marks and CreditLink notes coverage) of 1.66%, which management views as appropriate and conservative, particularly given the shift towards lower-risk loan categories.

Outlook and Strategic Priorities

Banc of California is now focused on leveraging its strengthened position for external growth. Management has adjusted its 2025 loan growth outlook to a mid-single-digit range, a prudent reflection of potential economic uncertainties and tariff impacts in the latter half of the year, while still striving for higher growth if conditions permit. Growth is expected to be broad-based across commercial segments, capitalizing on market opportunities and the bank's ability to attract talent.

The net interest margin is projected to expand further, with a 2025 outlook targeting a range of 3.20% to 3.30%, assuming no further Fed rate cuts. This expansion will be driven by the full impact of balance sheet repositioning, continued reduction in funding costs, and higher yields on new and repricing loans. Management views the NIM as an output of their strategy, prioritizing long-term profitability.

Noninterest expense is expected to average $190 million to $195 million per quarter in 2025, reflecting normalized levels after merger integration and seasonal adjustments. Management anticipates positive operating leverage as revenue growth outpaces expenses. Deposit growth is targeted in the mid to upper-single-digit range for 2025, with a specific focus on increasing noninterest-bearing deposits to over 30% of the total base.

Capital management remains a priority. The company recently completed its initial $150 million common stock buyback program and subsequently upsized it to $300 million, expanding it to include preferred stock. While management intends to be opportunistic with buybacks, they do not expect to deploy the full remaining capacity immediately, balancing capital deployment with the need to build CET1 and support future growth. The repayment of the $174 million Senior Notes in April 2025 further optimizes the funding structure.

Key risks to the outlook include potential deterioration in macroeconomic conditions, particularly the impact of interest rate changes on asset values and credit quality, and the competitive environment for both loans and deposits. While management has taken steps to mitigate these risks through conservative underwriting, proactive credit management, and maintaining high liquidity, these external factors could impact performance. The concentration in California real estate, while a market opportunity, also presents a specific risk exposure.

Conclusion

Banc of California has emerged from a period of significant transformation with a stronger balance sheet, improved profitability drivers, and a clear strategic direction focused on growth in its core commercial banking markets. The successful integration of PacWest, coupled with proactive balance sheet management and investments in technology, has positioned the bank to capitalize on market disruption in California. While challenges remain, particularly regarding credit quality in certain segments and the uncertain economic backdrop, management's disciplined approach to risk, coupled with robust liquidity and capital, provides a solid foundation. The investment thesis hinges on the continued execution of the growth strategy, successful attraction of low-cost deposits, and the realization of further operating efficiencies, all of which are expected to drive sustainable earnings expansion and enhance shareholder value in the coming quarters.