1st Capital Bancorp Announces Fourth Quarter 2020 Financial Results

SALINAS, CA / ACCESSWIRE / January 29, 2021 / 1st Capital Bancorp FISB reported unaudited net income of $1.59 million for the three months ended December 31, 2020, an increase of 67.1% compared to net income of $953 thousand in the third quarter of 2020 and a decrease of 8.1% compared to net income of $1.73 million in the fourth quarter of 2019. Earnings per share were $0.28 (diluted) for the fourth quarter of 2020, compared to $0.17 (diluted) for the prior quarter, and $0.31 (diluted) for the fourth quarter of 2019.

Unaudited net income for the year ended December 31, 2020 was $4.50 million, a decrease of 36.5% compared to net income of $7.09 million for the year ended December 31, 2019. Year-to-date earnings per share were $0.81 (diluted) and $1.27 (diluted) for the years ended December 31, 2020 and 2019, respectively.

"During the fourth quarter, we continued to focus on building our core loan portfolio," said Jon D. Ditlevsen, president. "New loans funded during the quarter totaled $21.2 million. In 2020, each of our four major markets, Salinas, Monterey, Santa Cruz, and San Luis Obispo, contributed more than $30 million to our annual production, which was a record $133 million."

Net loans held for investment decreased $23.1 million, or 3.7%, during the fourth quarter, from $619.4 million at September 30, 2020 to $596.3 million at December 31, 2020. Paycheck Protection Program ("PPP") loans outstanding decreased $16.2 million, or 15.2%, as borrowers' loans were forgiven by the U.S. Small Business Administration ("SBA"), and single-family loans purchased by the Company in prior quarters declined $12.1 million, or 12.9%, while the core portfolio of non-PPP commercial and industrial and commercial real estate loans originated by the Company increased $5.2 million, or 1.2%.

As of December 31, 2020, the Company's allowance for loan and lease losses was $8.8 million, or 1.46% percent of loans held for investment, compared to $8.8 million, or 1.40% of loans held for investment, as of September 30, 2020. Operating results reflect no provision for loan losses in the fourth quarters of 2020 and 2019, compared to a provision of $650 thousand in the third quarter of 2020, which recognized incurred losses in the Company's loan portfolio, attributable primarily to the COVID-19 outbreak and consequent action taken by governmental officials to curtail the operations of businesses deemed nonessential.

"In the fourth quarter, the Company's exposure to credit losses came into clearer focus," said Dale R. Diederick, chief credit officer. "The upward trend in coronavirus cases is placing short-term stress on the economy and continuing to affect the value and market absorption of commercial real estate. This has caused downward migration in certain loan risk ratings, while others have improved. At the same time, we are beginning to see the resolution of certain troubled assets. Because these trends offset one another, we determined that no provision for loan losses for the current quarter of 2020 was warranted."

Total assets increased $83.5 million in the fourth quarter, from $749.0 million as of September 30, 2020 to $832.6 million as of December 31, 2020, an increase of 11.1%. More than 70% of the increase was caused by depositors moving funds from off-balance sheet Insured Cash Sweep accounts into on-balance sheet demand deposit and money market accounts. Following year-end, these balances declined, as depositors made distributions to investors and estimated income tax payments, and total deposits were $683.3 million as of January 28, 2021, compared to $748.5 as of December 31, 2020.

"On October 30, 2020, the Company completed the formation of a bank holding company, 1^st Capital Bancorp," said Samuel D. Jimenez, chief executive officer. "We believe the holding company structure will provide us with a wider range of options to manage capital, which in turn will lead to greater shareholder value."

Fourth Quarter Highlights:

• Return on average equity was 8.60%, compared to 5.26% for the third quarter of 2020 and 10.21% for the fourth quarter of 2019.
• Return on average assets was 0.82%, compared to 0.51% for the third quarter of 2020 and 1.11% for the fourth quarter of 2019.
• Gross loans held for investment decreased $23.0 million, or 3.7%, during the fourth quarter of 2020, from $628.2 million at September 30, 2020 to $605.2 million at December 31, 2020.
• Non-accrual loans were $1.3 million, or 0.21% of loans outstanding, at December 31, 2020, compared to $1.5 million at September 30, 2020 and $492 thousand at December 31, 2019. Loans 30 to 89 days delinquent decreased from $8.0 million at September 30, 2020 to $617 thousand at December 31, 2020.
• The Company's net loans-to-deposits ratio decreased from 93.6% at September 30, 2020 to 79.7% at December 31, 2020 as transitory deposits came onto the balance sheet.
• Sources of liquidity comprising secured borrowing capacity with the Federal Home Loan Bank of San Francisco and deposits eligible to be moved onto the Company's balance sheet in the form of reciprocal deposits totaled $197.4 million at December 31, 2020. $25.0 million of additional liquidity under Federal funds facilities also was available.
• Deposits totaled $748.3 million at December 31, 2020, compared to $661.6 million at September 30, 2020, an increase of $86.8 million, or 13.1%.
• Demand deposits increased $30.0 million, or 8.4%, from $356.7 million at September 30, 2020 to $386.7 million at December 31, 2020 and made up 51.7% of total deposits at December 31, 2020.
• The Company's cost of funds was 0.13% in the third and fourth quarters of 2020.
• Non-interest income decreased from $326 thousand in the third quarter of 2020 to $233 thousand in the fourth quarter of 2020.
• Non-interest expenses increased 1.4%, from $4.58 million in the third quarter of 2020 to $4.64 million in the fourth quarter of 2020.
• 1^st Capital Bank's common equity Tier 1 ("CET1") risked-based capital ratio was 14.01%, and its Tier 1 leverage ratio was 9.44% at December 31, 2020, compared to 14.16% and 9.58%, respectively, at September 30, 2020.
• Net interest margin increased from 3.45% in the third quarter of 2020 to 3.54% in the fourth quarter of 2020 as the Bank began to recognize increased levels of deferred PPP loan fees in income as PPP loan payoffs increased.
• Deferred loan origination fees (net of unamortized direct loan origination costs) on PPP loans totaled $1.71 million at December 31, 2020, compared to $2.49 million at September 30, 2020.

Throughout the fourth quarter of 2020, all branch offices of 1^st Capital Bank (the "Bank"), other than the limited service branch at the Company's headquarters office, which historically has had very limited transaction activity, remained open. Approximately 65% of Company employees were working remotely. Nine of the Bank's 98 employees have tested positive for the coronavirus, and all have recovered and returned to work after quarantine periods.

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES

Net interest income before provision for credit losses was $6.62 million in the fourth quarter of 2020, an increase of $401 thousand, or 6.4%, compared to $6.22 million in the third quarter of 2020 and an increase of $817 thousand, or 14.1%, compared to $5.81 million in the fourth quarter of 2019.

Average earning assets were $744.0 million during the fourth quarter of 2020, an increase of 3.5% compared to $718.6 million in the third quarter of 2020. The yield on earning assets was 3.65% in the fourth quarter of 2020, compared to 3.55% in the third quarter of 2020. The increase in yield reflected a higher yield on the loan portfolio, which increased from 3.86% in the third quarter of 2020 to 4.19% in the fourth quarter of 2020, offset by a lower tax-equivalent yield on the investment portfolio, which decreased from 1.78% in the third quarter of 2020 to 1.52% in the fourth quarter of 2020, and higher average cash balances, which increased from $24.8 million in the third quarter of 2020 to $46.9 million in the fourth quarter of 2020.

Net loans held for investment decreased $23.1 million, or 3.7%, during the fourth quarter, from $619.4 million at September 30, 2020 to $596.4 million at December 31, 2020. PPP loans outstanding decreased $16.2 million, or 15.2%, as borrowers' loans were forgiven by the SBA. Single-family loans purchased by the Company in prior quarters declined $12.1 million, or 12.9%, while the portfolio of non-PPP loans originated by the Company increased $5.2 million, or 1.2%. Growth in the core loan portfolio was concentrated in commercial real estate loans, which increased $8.4 million, or 3.5%. Commercial and industrial loans decreased $1.0 million, or 2.0%, while multi-family residential loans increased $5.0 million, or 6.3%. Undrawn, available credit increased $2.5 million, from $88.8 million at September 30, 2020 to $91.3 million at December 31, 2020.

The Company recognizes income on its net investment in PPP loans (outstanding principal plus direct loan origination costs less deferred loan fees paid by the SBA) based on the amortization schedule of the underlying loan. Unamortized loan fees are taken into income at the time a loan is paid off. Interest income on PPP loans in the fourth quarter totaled $972 thousand, compared to $693 thousand in the third quarter. Fourth quarter income included $717 thousand of net deferred fee amortization, compared to $420 thousand in the third quarter, as borrowers began to participate in the SBA's loan forgiveness process. During the fourth quarter, the average balance of PPP loans was $99.3 million, with a yield incorporating both interest and deferred fee recognition of 3.89%, compared to $105.7 million, with a yield of 2.66%, in the third quarter. As of December 31, 2020, unamortized net deferred fees not yet taken into income totaled $1.71 million.

The yields on non-PPP commercial and industrial and commercial real estate loans in the fourth quarter of 2020 were 3.96% and 4.16% on average balances of $49.5 million and $244.6 million, respectively, compared to 4.16% and 4.72% on average balances of $48.7 million and $243.7 million in the third quarter of 2020. The average balance of multi-family residential loans increased to $82.0 million in the fourth quarter of 2020 from $76.1 million in the third quarter of 2020, while the respective yields were 4.25% and 4.21%. The portfolio of single-family residential first liens (purchased and originated in-house) yielded 3.47% and 3.24% on average balances of $108.9 million and $121.3 million in the fourth and third quarters of 2020, respectively.

The average balance of the investment portfolio increased $13.7 million, from $61.3 million in the third quarter of 2020 to $75.0 million in the fourth quarter of 2020, and the tax-equivalent yield decreased from 1.78% in the third quarter of 2020 to 1.52% in the fourth quarter of 2020, as the Company invested funds in short-term U.S. Treasury securities.

The cost of interest-bearing liabilities was 0.28% in both the fourth quarter and third quarter of 2020, while the average balance of interest-bearing liabilities increased 6.9% from $297.6 million in the third quarter of 2020 to $318.1 million in the fourth quarter of 2020.

The Company's portfolio of certificates of deposit had average balances of $17.7 million in the third quarter of 2020 and $15.9 million in the fourth quarter of 2020, and an average cost of funds of 0.79% and 0.51%, respectively.

On May 28, 2020, the Bank drew down $10.0 million under the Federal Home Loan Bank of San Francisco's zero interest rate Recovery Advance program. $5.0 million of this amount was repaid November 27, 2020, and the remaining $5.0 million is payable May 27, 2021.

The Company's overall cost of funds was 0.13% in the third and fourth quarters of 2020.

CREDIT QUALITY AND PROVISION FOR CREDIT LOSSES

The Company's core market comprises Monterey, San Luis Obispo, and Santa Cruz Counties, all of which are located along California's Central Coast. As of December 31, 2020, approximately $72.3 million, or 82.9%, of owner-occupied commercial real estate loans, $159.8 million, or 91.6%, of investor real estate loans, $24.9 million, or 22.9%, of single-family residential loans, and substantially all multi-family, construction, and farmland loans, as well as all home equity lines of credit, were collateralized by properties located within the Company's market area. An additional $15.5 million of commercial real estate loans was collateralized by properties located in neighboring San Benito and Santa Clara Counties. All single-family residential loans were collateralized by properties located in California, and substantially all commercial and industrial loans were to businesses operating within the Company's market area or San Benito County.

Effective January 25, 2021, the State of California returned to a system of county-by-county risk ratings and assigned a "widespread" pandemic risk rating (the most severe of four ratings) to counties making up 99.9% of the state population. These included Monterey, San Luis Obispo, and Santa Cruz Counties. The State of California has indicated that under a "widespread" risk rating, many non-essential business operations (including shopping malls, retailers not offering merchandise deemed essential, bars, restaurants not offering take-out and/or outdoor dining, and most personal services) are closed.

A summary of loans outstanding by industry sector as of December 31, 2020 is provided within the disclosure of Condensed Financial Data.

Single-family mortgages totaling $84.7 million as of December 31, 2020 are serviced by the Company's outside single-family loan servicers in conformity with guidance issued by the Government-Sponsored Entities, including forbearance under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company services all other loans (including all home equity lines of credit) in its portfolio.

As of December 31, 2020, the Company had in place one forbearance agreement as defined by the CARES Act in effect on an $885 thousand non-conforming single-family residential ("SFR") loan serviced by the Company's outside servicer with an original loan-to-value ratio of 55.9%. The forbearance agreement calls for the deferral of payments until January 2021.

As of December 31, 2020, non-accrual loans totaled $1.3 million or 0.21% of the Company's loans held for investment, compared with $1.5 million, or 0.24%, as of September 30, 2020, and $492 thousand, or 0.10%, as of December 31, 2019. Non-accrual loans comprised two relationships that in aggregate included five commercial and industrial loans totaling $1.3 million as of December 31, 2020.

The provision for credit losses is a charge against current earnings in an amount determined by management to be necessary to maintain the allowance for loan losses at a level sufficient to absorb estimated probable losses inherent in the loan portfolio in light of losses historically incurred by the Company and adjusted for qualitative factors associated with the loan portfolio.

The Company recorded a provision for loan losses of $2.1 million in the year ended December 31, 2020: $825 thousand in the first quarter, $650 thousand in the second quarter, $650 thousand in the third quarter, and no provision in the fourth quarter of 2020. The Company recorded no provision in the year ended December 31, 2019.

The historical loss rates associated with the various types of loans in the Company's portfolio were largely unchanged in the fourth quarter of 2020 compared to the prior quarter. The level of impaired loans increased, and the amount of impairment also increased $323 thousand during the quarter, causing an increase in the impairment component of the allowance for loan and lease losses ("ALLL") of such amount. The level of other classified loans decreased, which drove a decrease in the related quantitative factor within the Company's ALLL model. At the same time, the level of criticized loans (i.e., those exhibiting some deterioration, but of insufficient amount to be deemed classified) increased, resulting in an increase in the related quantitative factor of lesser amount, and loans on the Company's watch list, but not yet criticized, declined substantially, driving a quantitative factor decrease. In the fourth quarter, there was a lessening in concentrations by loan type, particularly single-family mortgages, which resulted in a decrease in the related qualitative factor. In addition, during the fourth quarter it became apparent that the COVID pandemic was worsening and economic conditions would continue to be affected by it longer than originally anticipated. The changes in the amount of impairment and the quantitative and qualitative factors used to compute the ALLL offset one another in the fourth quarter of 2020, and accordingly management determined no provision for loan losses was warranted.

As of December 31, 2020, the Company's allowance for loan and lease losses was $8.8 million, or 1.46% percent of loans held for investment, compared to $8.8 million, or 1.40% of loans held for investment, as of September 30, 2020, and $6.6 million, or 1.29% of loans held for investment, as of December 31, 2019. The allowance for loan losses as of December 31, 2020 was 1.71% of loans held for investment excluding its net investment of $90.4 million in loans insured under the PPP, compared to 1.69% as of September 30, 2020.

Gross impaired loans totaled $1.2 million as of December 31, 2020, compared to $836 thousand as of September 30, 2020 and $652 thousand as of December 31, 2019, and were extended to borrowers engaged in manufacturing, retail trade, and business services. The amount of impairment was $804 thousand at December 31, 2020, compared to $481 thousand at September 30, 2020 and $326 thousand at December 31, 2019. The Company recognized net recoveries of $12 thousand, $61 thousand, and $12 thousand in the fourth quarter of 2020, the third quarter of 2020, and the fourth quarter of 2019, respectively, and recognized no loan or lease charge-offs in such periods.

NON-INTEREST INCOME

Non-interest income recognized in the fourth quarter of 2020 was $233 thousand, compared to $326 thousand in the third quarter of 2020. A $63 thousand decrease in mortgage referral fees was the primary cause of the decrease.

NON-INTEREST EXPENSES

Non-interest expenses increased $62 thousand, or 1.4%, to $4.64 million in the fourth quarter of 2020, compared to $4.58 million for the third quarter of 2020, and increased $895 thousand, or 23.9%, compared to $3.74 million recognized in the fourth quarter of 2019.

Salaries and benefits increased $233 thousand, or 8.6%, to $2.94 million in the fourth quarter of 2020 from $2.70 million in the third quarter of 2020, and increased $800 thousand, or 37.4%, compared to $2.14 million in the fourth quarter of 2019. Employee salaries increased $163 thousand, or 7.4%, sequentially and $430 thousand, or 22.2%, year over year, reflecting expansion in the Company's headcount.

Professional fees decreased $227 thousand, or 64.9%, to $123 thousand in the fourth quarter of 2020 from $350 thousand in the third quarter of 2020, and decreased $112 thousand, or 47.7%, compared to $235 thousand in the fourth quarter of 2019. The decrease is attributable to sequential decreases of $124 thousand in legal fees and $124 thousand in executive recruiting fees and a year-over-year decrease of $147 thousand in consulting fees.

The efficiency ratio (non-interest expenses divided by the sum of net interest income before provision for loan losses and non-interest income) was 67.6% for the fourth quarter of 2020, compared to 69.9% for the third quarter of 2020 and 61.3% for the fourth quarter of 2019. Annualized non-interest expenses as a percent of average total assets were 2.44%, 2.45%, and 2.45% for the fourth quarter of 2020, the third quarter of 2020, and the fourth quarter of 2019, respectively.

About 1st Capital Bancorp

The Company's primary target markets are commercial enterprises, professionals, real estate investors, family business entities, and residents along the Central Coast region of California. The Company's subsidiary, 1^st Capital Bank, provides a wide range of credit products, including loans under various government programs such as those provided through the U.S. Small Business Administration and the U.S. Department of Agriculture. A full suite of deposit accounts also is furnished, complemented by robust cash management services. The Bank operates full service branch offices in Monterey, Salinas, King City, San Luis Obispo, and Santa Cruz County. The Company's corporate offices are located at 150 Main Street, Suite 150, Salinas, California 93901. The Company's website is www.1stCapital.bank. The main telephone number is 831.264.4000. The primary facsimile number is 831.264.4001. Member FDIC / Equal Opportunity Lender / SBA Preferred Lender

Forward-Looking Statements

Certain of the statements contained herein that are not historical facts are "forward-looking statements" within the meaning of and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words or phrases including, but not limited, to: "believe," "expect," "anticipate," "intend," "estimate," "target," "plans," "may increase," "may fluctuate," "may result in," "are projected," and variations of those words and similar expressions. All such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause such a difference include, among other matters, changes in interest rates; economic conditions including inflation and real estate values in California and the Company's market areas; governmental regulation and legislation; credit quality; competition affecting the Company's businesses generally; the risk of natural disasters and future catastrophic events including pandemics, terrorist related incidents and other factors beyond the Company's control; and other factors. The Company does not undertake, and specifically disclaims any obligation, to update or revise any forward-looking statements, whether to reflect new information, future events, or otherwise, except as required by law.

This news release is available at the www.1stCapital.bank internet site for no charge.

For further information, please contact:

- financial data follow -

1ST CAPITAL BANCORP
CONDENSED FINANCIAL DATA
(Unaudited)
(Dollars in thousands, except per share data)

1 = Loans receivable held for investment are presented according to definitions applicable to the regulatory Call Report.
2 = Includes cash letters in the process of collection settled through the Federal Reserve Bank.
3 = Federal Home Loan Bank
4 = Some items in prior periods have been reclassified to conform to the current presentation.

1ST CAPITAL BANCORP
CONDENSED FINANCIAL DATA
(Unaudited)
(Dollars in thousands, except per share data)

1 = Earnings per common share and weighted average common shares outstanding have been restated to reflect the effect of the 7% stock dividend to shareholders of record November 22, 2019 and paid December 20, 2019.

1ST CAPITAL BANCORP
CONDENSED FINANCIAL DATA
(Unaudited)
(Dollars in thousands, except per share data)

1 = Earnings per common share and weighted average common shares outstanding have been restated to reflect the effect of the 7% stock dividend to shareholders of record November 22, 2019 and paid December 20, 2019.

1ST CAPITAL BANCORP
CONDENSED FINANCIAL DATA
(Unaudited)
(Dollars in thousands)

1 = All Selected Financial Ratios are annualized other than the Efficiency Ratio.
2 = Net interest margin calculated on a tax equivalent yield basis. Prior periods have been updated to conform to current presentation.

1ST CAPITAL BANCORP
CONDENSED FINANCIAL DATA
(Unaudited)
(Dollars in thousands)

1 = All Selected Financial Ratios are annualized other than the Efficiency Ratio.
2 = Net interest margin calculated on a tax equivalent yield basis. Prior periods have been updated to conform to current presentation.

1ST CAPITAL BANCORP
CONDENSED FINANCIAL DATA
(Unaudited)
(Dollars in thousands)

SOURCE: 1st Capital Bank