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What changed in BANC OF CALIFORNIA, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of BANC OF CALIFORNIA, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+820 added−697 removedSource: 10-K (2024-02-29) vs 10-K (2023-02-27)

Top changes in BANC OF CALIFORNIA, INC.'s 2023 10-K

820 paragraphs added · 697 removed · 211 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

63 edited+196 added−155 removed10 unchanged
Biggest changeIn October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the NYSE, to require policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding a required accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
Biggest changeThe Company believes it and the Bank are currently in compliance with these requirements. 26 Other Regulations On October 26, 2022, the SEC adopted a final rule under the Dodd-Frank Act directing national securities exchanges and associations, including the NYSE, to establish listing standards requiring listed companies to adopt policies providing for the recovery (or “clawback”) of erroneously awarded incentive-based compensation received by current or former executive officers in connection with a required accounting restatement.
In addition, as an insured depository institution the Bank is also subject to regulation by the FDIC.
In addition, as an FDIC-insured depository institution, the Bank is also subject to regulation by the FDIC.
Our deposit products include checking, savings, money market, certificates of deposit, retirement accounts and safe deposit boxes. Additional products and services leverage other technology and include automated bill payment, cash and treasury management, master demand accounts, foreign exchange, interest rate swaps, card payment services, remote and mobile deposit capture, automated clearing house origination, wire transfer and direct deposit.
Our deposit products include checking, savings, money market, certificates of deposit, retirement accounts and safe deposit boxes. Additional products and services leverage other technology and include automated bill payments, cash and treasury management, master demand accounts, foreign exchange, interest rate swaps, card payment services, remote and mobile deposit capture, automated clearing house origination, wire transfer and direct deposit.
When we refer to the “parent” or the “holding company", we are referring to Banc of California, Inc., the parent company, on a stand-alone basis. When we refer to “we,” “us,” “our,” or the “Company”, we are referring to Banc of California, Inc. and its consolidated subsidiaries including the Bank, collectively.
When we refer to the “parent” or the “holding company”, we are referring to Banc of California, Inc., the parent company, on a stand-alone basis. When we refer to “we,” “us,” “our,” or the “Company”, we are referring to Banc of California, Inc. and its consolidated subsidiaries including the Bank, collectively.
In the case of a bank holding company applying for approval to acquire a bank, the FRB will assess the records of each subsidiary depository institution of the applicant bank holding company, and that record may be the basis for denying the application.
Also, in the case of a bank holding company applying for approval to acquire a bank, the FRB will assess the records of each subsidiary depository institution of the applicant bank holding company, and that record may be the basis for denying the application.
For example, the California Consumer Privacy Act became effective on January 1, 2020 and key provisions of an additional law strengthening the protection became effective on January 1, 2023.
For example, the California Consumer Privacy Act became effective on January 1, 2020, and key provisions of an additional law strengthening the protection, the California Privacy Rights Act of 2020, became effective on January 1, 2023.
“Financial in nature” activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking. Acquisitions.
“Financial in nature” activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking.
Commercial and industrial loan growth also assists in the growth of our deposits because many commercial and industrial loan borrowers establish deposit accounts and utilize treasury management services. Those deposit accounts help us to reduce the overall cost of funds and those banking service relationships provide a source of noninterest fee income.
Commercial loan and lease growth also assists in the growth of our deposits because many commercial loan borrowers establish deposit accounts and utilize treasury management services. Those deposit accounts help us to reduce the overall cost of funds and those banking service relationships provide a source of noninterest fee income.
This regulation and supervision by the federal banking agencies is intended primarily for the protection of clients and depositors, the stability of the U.S. financial system, and the Deposit Insurance Fund administered by the FDIC and not for the benefit of stockholders or debt holders.
This regulation and supervision by the banking agencies is intended primarily for the protection of clients and depositors, the public, the stability of the U.S. financial system, and the Deposit Insurance Fund administered by the FDIC and not for the benefit of stockholders or debt holders.
As a bank holding company that has elected to be a financial holding company pursuant to the BHCA, Banc of California, Inc. may affiliate with securities firms and insurance companies and engage, directly or indirectly, in other activities that are (i) financial in nature or incidental or (ii) complementary to activities that are financial in nature and that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
As a bank holding company that has elected to be a financial holding company pursuant to the BHCA, the Company may affiliate with securities firms and insurance companies and engage, directly or indirectly, in other activities that are (i) financial in nature or incidental or (ii) complementary to activities that are financial in nature and that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Notice to the FRB would include, but may not be limited to, background information on a redemption, pro-forma financial statements that reflect the planned transaction including impact to the Company and stress testing that incorporates the transaction.
Notice to the FRB would include, but may not be limited to, background information on a redemption, pro-forma financial statements that reflect the planned transaction including impact to a bank holding company and stress testing that incorporates the transaction.
The Company and its affiliates, including the Bank, maintain programs to meet the limitations on transactions with affiliates and restrictions on loans to insiders and the Company believes it and the Bank are currently in compliance with these requirements.
The Company and its affiliates, including the Bank, maintain programs to comply with the limitations on transactions with affiliates and restrictions on loans to insiders and the Company believes it and the Bank are currently in compliance with these requirements.
Deepstack provides us a proprietary payments solution that allow us to offer payment processing services to our current business customers as well as integrated software vendors, e-commerce marketplaces, fintechs and other merchants. As of January 2023, we completed the integration of Deepstack's technology into our internal platform and have begun processing payments for select, small clients.
Deepstack is a proprietary payments solution that allows us to offer payment processing services to our current business customers as well as integrated software vendors, e-commerce marketplaces, fintechs and other merchants. As of January 2023, we completed the integration of Deepstack's technology into our internal platform and have begun processing payments for select, small clients.
Identity Theft Under the Fair and Accurate Credit Transactions Act, the Bank is required to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with the opening of certain accounts or certain existing accounts.
Identity Theft Under the Fair and Accurate Credit Transactions Act (the “FACT Act”), the Bank is required to develop and implement a written Identity Theft Prevention Program (the “Program”) to detect, prevent and mitigate identity theft “red flags” in connection with the opening of certain accounts or certain existing accounts.
Permissible Activities. In general, the BHCA limits the activities permissible for bank holding companies to the business of banking, managing or controlling banks and such other activities as the FRB has determined to be so closely related to banking as to be properly incidental thereto.
Banc of California, Inc. Permissible Activities. In general, the BHCA limits the activities permissible for bank holding companies to the business of banking, managing or controlling banks and such other activities as the FRB has determined to be so closely related to banking as to be properly incidental thereto.
In addition, subject to certain exceptions, the Federal Reserve Act and related regulations place quantitative and other restrictions on loans to executive officers, directors and principal stockholders of the Bank and its affiliates, including a requirement that loans to directors, executive officers and principal stockholders be made on terms substantially the same as those offered in comparable transactions to other persons, and not involve more than the normal risk of repayment or present other unfavorable features.
In addition, subject to certain exceptions, the Federal Reserve Act and related regulations place quantitative and other restrictions on the extension of credit to executive officers, directors and principal stockholders (including the Company) and their related interests of the Bank and its affiliates, including a requirement that loans to directors, executive officers and principal stockholders be made on terms substantially the same as those offered in comparable transactions to other persons, and not involve more than the normal risk of repayment or present other unfavorable features.
The BHCA requires every bank holding company to obtain the prior approval of the FRB before: (i) it may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition, the bank holding company will directly or indirectly own or control 5.0% or more of the voting shares of the institution; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or (iii) it may merge or consolidate with any other bank holding company.
The BHCA and regulations thereunder require every bank holding company to obtain the prior approval of the FRB before it: (i) may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition, the bank holding company will directly or indirectly own or control 5% or more of the voting shares of the institution; (ii) or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or (iii) may merge or consolidate with any other bank holding company.
This notification requirement does not apply to a bank holding company that qualifies as well-capitalized, received a composite rating and a rating for management of “1” or “2” in its last examination and is not subject to any unresolved supervisory issue.
This notification requirement does not apply to a bank holding company that qualifies as well-capitalized, received a composite rating and a rating for management of satisfactory or better in its last examination and is not subject to any unresolved supervisory issue.
Volcker Rule The so-called “Volcker Rule” issued under the Dodd-Frank Act, which became effective in July 2015, imposes certain restrictions on the ability of the Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading.
Volcker Rule The so-called “Volcker Rule” issued under the Dodd-Frank Act, which became effective in July 2015, imposes certain restrictions on the ability of the Company and its subsidiaries, including the Bank, to sponsor, invest in, or conduct certain other activities with private funds or to engage in certain types of short-term proprietary trading.
We are focused on fostering relationships with businesses in our markets and verticals to establish this understanding and provide an exceptional level of service. We offer a wide variety of deposit, loan and other financial services to both large and small businesses, non-profit organizations, business owners, entrepreneurs, professionals and high-net worth individuals.
We are focused on fostering relationships with businesses in our markets and verticals to establish this understanding and provide an exceptional level of service. 7 We offer a wide variety of deposit, loan and other financial services to small and middle-market businesses, venture capital firms, non-profit organizations, business owners, entrepreneurs, professionals and high-net worth individuals.
Our lending activities are focused on providing thoughtful financing solutions to our clients. We consistently invest in automated solutions and our technology infrastructure to gain operating efficiencies and to improve the client experience as we deliver our high standard of service. Recent Acquisitions Pacific Mercantile Bancorp Acquisition.
Our lending activities are focused on providing thoughtful financing solutions to our clients. We consistently invest in automated solutions and our technology infrastructure to gain operating efficiencies and to improve the client experience as we deliver our high standard of service.
An institution that fails to meet these standards may be subject to regulatory sanctions. The Bank has established compliance programs designed to comply with the Bank Secrecy Act, the Patriot Act and applicable Sanctions Laws. Community Reinvestment Act The Bank is subject to the provisions of the CRA.
An institution that fails to meet these standards may be subject to civil or criminal enforcement actions. The Bank has established compliance programs designed to comply with the Bank Secrecy Act, the Patriot Act and applicable Sanctions Laws. Community Reinvestment Act The Bank is subject to the provisions of the CRA.
The OCC must approve an acquisition of the Bank and the Bank’s acquisition of other financial institutions and certain other acquisitions. For a discussion of the factors considered by the OCC in connection with such acquisitions, see “--Banc of California, Inc.-Acquisitions” above.
The FRB and the DFPI must approve an acquisition of the Bank and the Bank’s acquisition of other financial institutions and certain other acquisitions. For a discussion of the factors considered by the FRB and DFPI in connection with such acquisitions, see “ — Banc of California, Inc. — Acquisitions ” above. Lending Limits.
In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other 12 Table of Contents things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's managerial and financial resources, the applicant's performance record under the Community Reinvestment Act of 1977, as amended (“CRA”), fair housing laws and other consumer compliance laws, and the effectiveness of the banks in combating money laundering activities.
In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s managerial and financial resources, the applicant’s performance record under the CRA, fair housing laws and other consumer compliance laws, and the effectiveness of the banks in combating money laundering activities.
Consumer Protection Laws and Regulations; Other Regulations The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers, including but not limited to the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Secure and Fair Enforcement in Mortgage Licensing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement the foregoing.
The Bank maintains a Program to meet the requirements of the FACT Act and the Bank believes it is currently in compliance with these requirements. 25 Consumer Protection Laws and Regulations We are subject to a broad array of federal, state and local consumer protection laws and regulations that govern almost every aspect of our business relationships with consumers, including but not limited to the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Secure and Fair Enforcement in Mortgage Licensing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement the foregoing.
FRB policy also provides that a bank holding company should inform the FRB reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Regarding dividends, see “Capital Requirements” below. Source of Strength.
FRB policy also provides that a bank holding company should inform the FRB reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
The assessment base is based upon average consolidated total assets less average tangible equity. In October 2022, the FDIC finalized a rule to increase the initial base deposit insurance assessment rate schedules for all insured depository institutions by 2.0 basis points, beginning with the first quarterly assessment period of 2023.
In October 2022, the FDIC finalized a rule to increase the initial base deposit insurance assessment rate schedules for all insured depository institutions by 2.0 basis points, beginning with the first quarterly assessment period of 2023.
These include, among others, obligations of or guaranteed by the United States or an agency or GSE of the United States, obligations of a State of the United States or a political subdivision thereof, and municipal securities.
Trading in certain government obligations is not prohibited. These include, among others, obligations of or guaranteed by the United States or an agency or GSE of the United States, obligations of a State of the United States or a political subdivision thereof, and municipal securities.
The increased assessment rate is intended to improve the likelihood that the Deposit Insurance Fund reserve ratio will reach the required minimum of 1.35% by the statutory deadline of September 30, 2028. Capital Requirements The Company and the Bank are subject to capital regulations adopted by the FRB and the OCC.
The increased assessment rate is intended to improve the likelihood that the Deposit Insurance Fund reserve ratio will reach the required minimum of 1.35% by the statutory deadline of September 30, 2028.
The current regulations establish required minimum ratios for common equity Tier 1 (CET1) capital, Tier 1 capital and total capital and a leverage ratio; set risk-weighting for assets and certain other items for purposes of the risk-based capital ratios; require an additional capital conservation buffer over the minimum required capital ratios; and define what qualifies as capital for purposes of meeting the capital requirements.
These regulations establish required minimum ratios for common equity Tier 1 (the “CET1”) capital, Tier 1 capital and total capital and a leverage ratio; set risk-weighting for assets and certain other items for purposes of the risk-based capital ratios; require an additional capital conservation buffer over the minimum required capital ratios in order to avoid certain limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses; and define what qualifies as capital for purposes of meeting the capital requirements.
On May 5, 2022, the FRB, FDIC and the OCC issued a notice of proposed rulemaking proposing revisions to the agencies' CRA regulations, including with respect to the delineation of assessment areas, the overall evaluation framework and performance standards and metrics, the definition of community development activities, and data collection and reporting.
On October 23, 2023, the FRB, FDIC and the OCC issued a final rule revising the agencies’ CRA regulations, including with respect to the delineation of assessment areas, the overall evaluation framework and performance standards and metrics, the definition of community development activities, and data collection and reporting.
Capital Requirements. As a bank holding company, Banc of California, Inc. is subject to the regulations of the FRB imposing capital requirements for a bank holding company, which establish a capital framework as described in “Capital Requirements” below.
Capital Requirements. As a bank holding company, the Company is subject to the regulations of the FRB imposing capital requirements for a bank holding company, which establish a capital framework as described in “ Capital Requirements and Prompt Corrective Action ” below.
Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates (collectively, banking entities), are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in a “covered fund.” Trading in certain government obligations is not prohibited.
Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates (collectively, banking entities), are generally prohibited, subject to certain exemptions, from short-term proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in, or conducting certain other activities with, a “covered fund.” These requirements do not currently have a material impact and are not expected to have a future material impact on the Company’s investing and trading activities.
Banc of California, Inc. must give the FRB prior notice of any purchase or redemption of its equity securities if the consideration for the purchase or redemption, when combined with the consideration for all such purchases or redemptions in the preceding 12 months, is equal to 10.0% or more of its consolidated net worth.
The Federal Reserve Board's Regulation Y, for example, generally requires a bank holding company to give the FRB prior notice of any purchase or redemption of its equity securities if the consideration for the purchase or redemption, when combined with the consideration for all such purchases or redemptions in the preceding 12 months, is equal to 10% or more of its consolidated net worth.
The Bank is required to maintain sufficient liquidity to ensure safe and sound operations. For additional information, see Liquidity included in Item 7 of this Annual Report on Form 10-K. Safety and Soundness.
The Bank Liquidity. The Bank is subject to a variety of requirements under federal law. The Bank is required to maintain sufficient liquidity to ensure safe and sound operations. For additional information, see Liquidity included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. Safety and Soundness.
Item 1. Business General Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the holding company for its wholly owned subsidiary, Banc of California, National Association (the “Bank ” ), a California-based bank.
ITEM 1. BUSINESS General Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the holding company for its wholly owned subsidiary, Banc of California (the “Bank”), a California state-chartered bank and a member of the Board of Governors of the Federal Reserve System (the “FRB”).
We expect this trend of state-level activity and consumer expectations in those areas to continue to heighten, and we are continually monitoring for developments in the states in which our clients are located.
We expect this trend of state-level activity and consumer expectations in those areas to continue to heighten, and we are continually monitoring for developments in the states in which our clients are located. Our regulators regularly examine us for compliance with applicable laws, and adherence to industry best practices, with respect to these topics.
For additional discussion of the risks associated with our CLO portfolio, please refer to Part I, Item 1A. - Risk Factors in this Annual Report. Payment Processing We acquired Deepstack to advance our goal to be the hub of the financial services ecosystem for clients while creating another driver of profitable long-term growth and franchise value.
Payment Processing We acquired Deepstack to advance our goal to be the hub of the financial services ecosystem for clients while creating another driver of profitable long-term growth and franchise value.
On November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.
For example, they will evaluate our security of user and customer credentials, business continuity planning, and the ability to identify and thwart cyber-attacks. On November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.
The Bank offers a variety of financial products and services designed around our clients in order to serve their banking and financial needs. Strategy Our strategic objective is to be the premier relationship-focused business bank in California by delivering outstanding service to our banking clients through our team's ability to collaborate, execute and perform superior to our competition.
Our Business Strategy Our strategic objective is to be one of the nation's premier relationship-based business banks by delivering outstanding service to our banking clients through our team's ability to collaborate, execute and perform at a level superior to our competition.
To that end, we post our open positions to dozens of minority-specific recruiting websites. In 2020, we formed an employee-led Inclusion, Diversity, Engagement, and Awareness (“IDEA”) Committee to bring together voices and ideas to help fuel and foster a culture of openness and inclusion in all that we do.
To help accomplish this, our Human Resources Department is supported by an employee-led Inclusion, Diversity, Engagement and Awareness (IDEA) Committee to bring together voices and ideas to help fuel and foster a culture of openness and inclusion in all that we do.
The proposed rule would adjust CRA evaluations based on bank size and type, with many of the proposed changes applying only to banks with over $2.0 billion in assets, such as the Company, and several applying only to banks with over $10.0 billion in assets. 15 Table of Contents Financial Privacy Under the Requirements of the Gramm-Leach-Bliley Act The Company and its subsidiaries are required periodically to disclose to their retail clients the Company’s policies and practices with respect to the sharing of nonpublic client information with its affiliates and others, and the confidentiality and security of that information.
The final rule would adjust CRA evaluations based on bank size and type, with many of the proposed changes applying only to banks with over $2 billion in assets and several applying only to banks with over $10 billion in assets, such as the Company. 24 Financial Privacy Under the Requirements of the Gramm-Leach-Bliley Act We are subject to various laws related to the privacy of consumer information.
The Bank is also subject to regulation under the International Emergency Economic Powers Act and the Trading with the Enemy Act, as administered by the United States Treasury Department's Office of Foreign Assets Control (such regulations, "Sanctions Laws"). The Sanctions Laws are intended to restrict transactions with persons, companies or foreign governments sanctioned by U.S. authorities.
The Bank is also subject to regulation under economic or financial sanctions imposed, administered, or enforced from time to time by the U.S. government, including as administered by OFAC (such regulations, “Sanctions Laws”). The Sanctions Laws are intended to restrict transactions with persons, companies or foreign governments sanctioned by U.S. authorities.
Anti-Money Laundering and Suspicious Activity Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) require all financial institutions, including banks, to implement policies and procedures relating to anti-money laundering and anti-terrorism compliance, suspicious activity and currency transaction reporting and conduct due diligence on clients.
Anti-Money Laundering and Suspicious Activity We are subject to several federal laws related to anti-money laundering (“AML”), economic sanctions and prevention of financial crime, including the Bank Secrecy Act, the Money Laundering Control Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) and economic sanctions programs.
The Dodd-Frank Act also imposes a variety of requirements on entities that service mortgage loans. The Bank is a member of the FHLB, which makes loans or advances to members. All advances are required to be fully secured by sufficient collateral as determined by the FHLB.
The Bank is a member of the FHLB, which makes loans or advances to members. All advances are required to be fully secured by sufficient collateral as determined by the FHLB. To be a FHLB member, financial institutions must demonstrate that they originate and/or purchase long-term home mortgage loans or mortgage-backed securities.
We cannot predict whether any of these proposals will be enacted or adopted or, if they are, the effect they would have on our business, our operations or financial condition.
We cannot predict whether new legislation will be enacted or adopted and, if enacted or adopted, the effect that it, or any implementing regulations, would have on us and our subsidiaries’ business, financial condition or results of operations. The majority of these changes will be implemented over time by various regulatory agencies.
The bank’s record may be the basis for denying the application. Performance under the CRA also is considered when the FRB or the OCC reviews applications to acquire, merge or consolidate with another banking institution or, in the case of the FRB, its holding company.
The FRB regularly assesses the Bank on its record in meeting the credit needs of the communities it serves, including low-income and moderate-income neighborhoods. Performance under the CRA also is considered when the FRB reviews applications to acquire, merge or consolidate with another banking institution or its holding company.
Under the FRB’s policy statement on the payment of cash dividends, a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with its capital needs, asset quality, and overall financial condition.
It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future capital needs, asset quality, and overall financial condition.
To be a FHLB member, financial institutions must demonstrate that they originate and/or purchase long-term home mortgage loans or mortgage-backed securities. The Bank is required to purchase and maintain stock in the FHLB. At December 31, 2022, the Bank had $22.6 million in FHLB stock, which was in compliance with this requirement.
The Bank is required to purchase and maintain stock in the FHLB. At December 31, 2023, the Bank had $17.3 million in FHLB stock, which was in compliance with this requirement.
Set forth below is a brief description of material information regarding certain laws and regulations that are applicable to the Company and the Bank. This description, as well as other descriptions of laws and regulations in this Form 10-K, is not complete and is qualified in its entirety by reference to applicable laws and regulations. Banc of California, Inc.
The description below, as well as other descriptions of laws and regulations in this Form 10-K, is not complete and is qualified in its entirety by reference to applicable laws and regulations and is not intended to summarize all laws and regulations applicable to us and our subsidiaries, and is based upon the statutes, regulations, policies, interpretive letters and other written guidance that are in effect as of the date of this Annual Report on Form 10-K.
Warehouse lending is a line of credit given to a loan originator, the funds from which are used to originate or purchase mortgage loans and hold until sale in the secondary market, either directly or through securitization.
The loans can be up to five years and are secured by a specific asset or assets of the borrower. • Warehouse loans . Warehouse lending is a line of credit given to a loan originator, the funds from which are used to originate or purchase mortgage loans. The loans have one year terms and generally renew annually.
As of December 31, 2022, Banc of California, Inc. had capital ratios in excess of the minimums required to be considered "well capitalized". Repurchases/Redemptions; Dividends.
As of December 31, 2023, the Company had capital ratios in excess of the minimums required to be considered “well capitalized.” Repurchases/Redemptions; Dividends. The ability of the Company to buy back stock and make other capital distributions is limited by regulatory capital rules and other aspects of the regulatory framework.
OCC regulations impose various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other items.
As of December 31, 2023, the Bank has no loans in excess of its loans-to-one borrower limit. Dividends. The Company’s primary source of liquidity is dividend payments from the Bank. The regulatory regime imposes various restrictions on the ability of the Bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other items.
We adopted this phase in option during 2020 and elected to phase in the full effect of CECL on regulatory capital over the five-year transition period. Prompt Corrective Action The Bank is required to maintain specified levels of regulatory capital under the capital and prompt corrective action regulations of the OCC.
We adopted this phase in option and elected to phase in the full effect of CECL on regulatory capital over the five-year transition period. The add-back as of December 31, 2023 ranged from 0 basis points to 5 basis points on our various capital ratios.
Our portfolio of SBA loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns on the economy; (ii) interest rate increases; (iii) deterioration of the value of the underlying collateral; and (iv) deterioration of a borrower's or guarantor's financial capabilities.
The primary sources of repayment for loans to municipalities are tax collections from their tax jurisdictions. 13 Our portfolio of commercial loans and leases is subject to certain risks including, but not limited to, the following: • the economic conditions of the United States; • interest rate increases; • deterioration of the value of the underlying collateral; • increased competition in pricing and loan structure; • the deterioration of a borrower’s or guarantor’s financial capabilities; and • various environmental risks, including natural disasters, which can negatively affect a borrower’s business.
Under FRB regulations and federal law, a bank holding company, such as the Company, must act as a source of financial and managerial strength for its insured depository institution subsidiaries, such as the Bank, particularly when such subsidiaries are in financial distress. The Bank Liquidity. The Bank is subject to a variety of requirements under federal law.
Under FRB regulations, which were codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act, a bank holding company, such as the Company, must serve as a source of financial and managerial strength for any FDIC-insured depository institution that it controls, such as the Bank.
Deposits consist of interest-bearing and noninterest-bearing demand accounts, savings accounts, money market deposit accounts, and certificates of deposit. We solicit deposits primarily in our market area, excluding brokered deposits. We primarily rely on our relationships from our lending activities, competitive pricing policies, marketing and exceptional client service to attract and retain deposits.
We primarily rely on our relationships from our lending activities, competitive pricing policies, marketing and exceptional client service to attract and retain deposits. We also provide international banking services, multi-state deposit services, and asset management services. The Bank’s deposits are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to applicable legal limits.
Future Legislation or Regulation In light of recent conditions in the United States economy and the financial services industry, the current administration, Congress, the regulators and various states continue to focus attention on the financial services industry. Additional proposals 17 Table of Contents that affect the industry have been, and will likely continue to be, introduced.
Following the completion of various studies on investment advisers and broker-dealers required by the Dodd-Frank Act, the SEC has, among other things, recommended to Congress that it consider various means to enhance the SEC’s examination authority over investment advisers, which may have an impact on BAM that we cannot currently assess. 27 Future Legislation or Regulation In light of recent conditions in the United States economy and the financial services industry, the current administration, Congress, the regulators and various states continue to focus attention on the financial services industry.
Among other things, these laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits, making loans, servicing loans and providing other services. If the Bank fails to comply with these laws and regulations, it may be subject to various penalties.
Among other things, these laws and regulations relate to the content and adequacy of disclosures, pricing and fees, fair lending, anti-discrimination, privacy, cybersecurity, usury, mortgages and housing finance, lending to service members, escheatment, debt collection, loan servicing, collateral secured lending, and unfair, deceptive or abusive acts or practice, and regulate the manner in which financial institutions must deal with clients when taking deposits, making loans, servicing loans and providing other services.
While the Company and the Bank are below $10 billion in assets and therefore are not subject to supervision and examination by the CFPB, we continue to be subject to CFPB regulation regarding consumer 16 Table of Contents financial services and products.
The Bank has assets in excess of $10 billion; therefore, we are subject to the supervision, examination and primary enforcement jurisdiction of the CFPB with respect to federal consumer financial protection laws. Information Technology and Cybersecurity We are subject to laws and regulatory requirements related to information technology and cybersecurity.
On October 18, 2021, we completed our merger with Pacific Mercantile Bancorp (“PMB”), pursuant to which PMB merged (the “PMB Acquisition”) with and into the Company, with the Company as the surviving corporation. Promptly thereafter, Pacific Mercantile Bank, a California-chartered bank and wholly owned subsidiary of PMB, merged with and into the Bank, with the Bank as the surviving bank.
On November 30, 2023, Banc of California, Inc. completed its transformational merger with PacWest Bancorp ( “PacWest”), pursuant to which PacWest merged into Banc of California, Inc., with Banc of California, Inc. continuing as the surviving legal corporation, and, as of December 1, 2023, Banc of California, N.A. merged into Pacific Western Bank, with Pacific Western Bank continuing under the Banc of California name and brand as the Bank.
In 2020, the U.S. federal bank regulatory agencies approved a final rule that allowed banking organizations to elect to delay temporarily the estimated effects of adopting CECL on regulatory capital until January 2022 and subsequently to phase in the effects through January 2025.
In 2020, the federal bank regulatory authorities approved a rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL.
Removed
We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System (the “FRB ” ) and the Bank is regulated by the Office of the Comptroller of the Currency (the “OCC ” ).
Added
As a bank holding company, the holding company is subject to ongoing and comprehensive supervision, regulation examination, and enforcement by the FRB.
Removed
Our principal executive office is currently located at 3 MacArthur Place, Santa Ana, California, and our telephone number is (855) 361-2262. Our common stock trades on the New York Stock Exchange under the trading symbol “BANC”. Business Overview The Bank is a relationship-focused business bank.
Added
As a California state-chartered bank that is a member of the FRB, the Bank is subject to ongoing and comprehensive supervision, regulation, examination, and enforcement by the California Department of Financial Protection and Innovation (the “DFPI”) and the FRB.
Removed
We deliver comprehensive products and solutions for businesses, business owners, and individuals within California through our 28 full service branches extending from San Diego to Santa Barbara. We have served California markets since 1941 through the Bank and its predecessors.
Added
See Note 2. Business Combinations of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” for additional information. Our principal executive office is currently located at 11611 San Vicente Boulevard, Suite 500, Los Angeles, California, and our telephone number is (855) 361-2262.
Removed
Pacific Mercantile Bank operated seven banking offices, including three full-service branches, located throughout Southern California. PMB’s size, business focus, and deposit profile aligned with our operations, which accelerated our growth and operating scale in key markets. Deepstack Acquisition.
Added
Our common stock trades on the New York Stock Exchange under the trading symbol “BANC” and our Series F preferred depositary shares trade on the New York Stock Exchange under the trading symbol “BANC/ PF.” The Bank is one of the nation’s premier relationship-based business banks focused on providing banking and treasury management services to small-, middle-market, and venture-backed businesses.
Removed
On September 15, 2022, we completed the acquisition of the assets of Global Payroll Gateway, Inc. and its wholly owned subsidiary, Deepstack Technologies, LLC (collectively, "Deepstack" and such acquisition, the "Deepstack Acquisition").
Added
The Bank provides 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 full-stack payment processing solutions through its subsidiary, Deepstack Technologies, LLC (“Deepstack”).
Removed
Deepstack is a differentiated software-led and e-commerce payments platform that provides clients with payment solutions, including merchant processing, payments acceptance and disbursements, tokenization, virtual accounts, fraud protection tools, chargeback management, and reconciliation and reporting services.
Added
Banc of California also 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.
Removed
We acquired Deepstack Technologies to be able to offer full stack payment processing solutions and become the hub of the financial services ecosystem for our clients . For additional information, see “Business Combinations” under “Executive Overview” in Item 7 of this Annual Report on Form 10-K.
Added
The Bank is organized into four business groups – Community Banking, Specialty Banking, Deposit Services, and Payment Solutions. Community Banking provides in-market relationship lending and deposit gathering through regional offices and over 90 branch locations throughout California, in Denver, Colorado and in Durham, North Carolina.
Removed
Products Offered We offer a full array of competitively priced and client-tailored commercial loan and deposit products and services. Loan Products We offer a number of loan products including commercial and industrial loans; commercial real estate loans and multifamily loans; SBA loans; and construction loans.
Added
Specialty Banking is focused on serving clients in niche verticals by industry, including HOA (or homeowner associations), venture banking, SBA lending, mortgage warehouse lending, media and entertainment and equipment finance.
Removed
In addition, we have a SFR mortgage loan portfolio that we service, however we no 5 Table of Contents longer originate this type of loan product, although we may purchase SFR loans from time to time. We also originate, on a limited basis, certain types of consumer loans.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeInterest Rate and Credit Risks • If actual losses on our loans exceed our estimates used to establish our allowance for credit losses, our business, financial condition and profitability may suffer. • There are risks associated with our lending activities, and our allowance for credit losses may be insufficient. • Our business may be adversely affected by difficult economic conditions, including inflationary pressures or volatility in the financial markets, which may impact our business, financial position and results of operations. • Our business may be adversely affected by credit risk associated with residential property and declining property values. • Our loan portfolio possesses increased risk due to our level of adjustable rate loans. • Our underwriting practices may not protect us against losses in our loan portfolio. • Our non-traditional and interest only SFR loans expose us to increased lending risk. • Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default. • We are exposed to risks of environmental liabilities with respect to real properties acquired. • Secondary mortgage market conditions could have a material adverse impact on our business, results of operations, financial condition or liquidity. • Any breach of representations and warranties made by us to our residential mortgage loan purchasers or credit default on our loan sales may require us to repurchase such loans. • Credit impairment in our investment securities portfolio could result in losses and adversely affect our continuing operations. • Collateralized loan obligations represent a significant portion of our assets. • Our income property loans, consisting of commercial real estate and multifamily loans, involve higher principal amounts than other loans and repayments of these loans may be dependent on factors outside our control or the control of our borrowers. 18 Table of Contents • Our business is subject to interest rate risk and variations in interest rates may hurt our profits. • Uncertainty relating to the LIBOR transition process and phasing out of LIBOR may adversely affect us.
Biggest changeRisks Related to Credit and Interest Rate • If actual losses on our loans exceed our estimates used to establish our allowance for credit losses, our business, financial condition, and profitability may suffer. • There are risks associated with our lending activities, and our allowance for credit losses may be insufficient. • Our business and operating results could be adversely affected by the political environment and governmental fiscal and monetary policies. • Our business may be adversely affected by difficult economic conditions. • Our business may be adversely affected by credit risk associated with residential property and declining property values. • Our loan portfolio possesses increased risk due to our level of adjustable rate loans. • Our underwriting practices may not protect us against losses in our loan portfolio. • Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may not be sufficient to repay the loan. • Secondary mortgage market conditions could have a material adverse impact on our business. • Any breach of representations and warranties made by us to our residential mortgage loan purchasers or credit default on our loan sales may require us to repurchase such loans. • Credit impairment in our investment securities portfolio could adversely affect our continuing operations. • Our income property loans involve higher principal amounts than other loans and repayments of these loans may be dependent on factors outside our control or the control of our borrowers. 29 • Our business is subject to interest rate risk and variations in interest rates may hurt our profits. • A reduction in our credit ratings could adversely affect our access to capital and could increase our cost of funds. • We have a number of large credit relationships and individual commitments.
Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a decline in revenues and increased governmental oversight.
Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a decline in revenues and/or increased governmental oversight.
These transition matters could have an adverse effect on us for an undetermined amount of time after the completion of any acquisition. If we fail to comply with the applicable requirements of the payment card networks or NACHA, they could seek to fine us, suspend us or terminate our registrations. Our subsidiary, Deepstack, offers payment processing solutions to clients.
These transition matters could have an adverse effect on us for an undetermined amount of time after the completion of any acquisition. 32 If we fail to comply with the applicable requirements of the payment card networks or NACHA, they could seek to fine us, suspend us or terminate our registrations. Our subsidiary, Deepstack, offers payment processing solutions to clients.
The standard changed the previous incurred loss impairment methodology in GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The CECL model materially impacts how we determine our allowance for credit losses and required us to significantly increase our allowance for credit losses.
The standard changed the previous incurred loss impairment methodology in GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The CECL model materially impacts how we determine our allowance for credit losses and required us to increase our allowance for credit losses.
In addition, any claims asserted against us in the future by loan purchasers may result in liabilities or legal expenses that could have a material adverse effect on our results of operations and financial condition. Credit impairment in our investment securities portfolio could result in losses and adversely affect our continuing operations.
In addition, any claims asserted against us in the future by loan purchasers may result in liabilities or legal expenses that could have a material adverse effect on our results of operations and financial condition. 39 Credit impairment in our investment securities portfolio could result in losses and adversely affect our continuing operations.
The foregoing summary of risks should be read in conjunction with the more detailed Risk Factors below and is not an exhaustive summary of all risks facing our business. Risks Relating to Our Operations New lines of business, new products and services, or strategic project initiatives, or new partnerships may subject us to additional risks.
The foregoing summary of risks should be read in conjunction with the more detailed Risk Factors below and is not an exhaustive summary of all risks facing our business. 30 Risks Relating to Our Operations New lines of business, new products and services, or strategic project initiatives, or new partnerships may subject us to additional risks.
One aspect of our business that we believe presents risks in this particular area is the conflict between federal and state law, including but not limited to cannabis and cannabis related businesses, which are legal in the State of California and prohibited by federal law.
One aspect of our business that we believe presents risks in this particular area is the conflict between federal and state law, including but not limited to cannabis and cannabis related businesses, which are legal in the State of California and the State of Colorado and prohibited by federal law.
Any rise in prevailing market interest rates may result in increased payments for some borrowers who have adjustable rate mortgage loans, increasing the possibility of defaults. Our underwriting practices may not protect us against losses in our loan portfolio.
Any rise in prevailing market interest rates may result in increased payments for some borrowers who have adjustable rate loans, increasing the possibility of defaults. Our underwriting practices may not protect us against losses in our loan portfolio.
Any new laws, rules and regulations such as the California Consumer Privacy Act (“CCPA”) could make compliance more difficult, expensive, costly to implement or may otherwise adversely affect our business, financial condition or growth prospects.
Any new laws, rules and regulations such as the California Consumer Privacy Act (the “CCPA”) and the Colorado Privacy Act could make compliance more difficult, expensive, costly to implement or may otherwise adversely affect our business, financial condition or growth prospects.
Privacy laws in the State of California, for example, require regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
Privacy laws in the State of California and the State of Colorado, for example, require regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
The Company monitors to ensure it has adequate credit support and, as of December 31, 2022 we believed there was no credit losses and did not have the intent to sell any of our securities in an unrealized loss position and it is likely that we will not be required to sell such securities before their anticipated recovery.
The Company monitors to ensure it has adequate credit support and, as of December 31, 2023 we believed there was no credit losses and did not have the intent to sell any of our securities in an unrealized loss position and it is likely that we will not be required to sell such securities before their anticipated recovery.
The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial 22 Table of Contents condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations.
The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations.
In a competitive market, depositors have many choices as to where to place their deposit accounts. As 28 Table of Contents the Bank continues to grow its core deposit base and seeks to reduce its exposure to high rate/high volatility accounts, it may experience a net deposit outflow, which could negatively impact our business, financial condition and results of operations.
In a competitive market, depositors have many choices as to where to place their deposit accounts. As the Bank continues to grow its core deposit base and seeks to reduce its exposure to high rate/high volatility accounts, it may experience a net deposit outflow, which could negatively impact our business, financial condition, and results of operations.
Such information may be posted on social media or other Internet forums or published by news organizations and the speed and pervasiveness with which information can be disseminated through these channels, in particular social media, may magnify risks relating to negative publicity. We depend on key management personnel.
Such information has in the past and may in the future be posted on social media or other Internet forums or published by news organizations and the speed and pervasiveness with which information can be disseminated through these channels, in particular social media, may magnify risks relating to negative publicity. We depend on key management personnel.
Our income property loans, consisting of commercial real estate and multifamily loans, involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers. We originate commercial real estate and multifamily loans for individuals and businesses for various purposes, which are secured by commercial properties.
Our income property loans, consisting of commercial real estate and multi-family loans, involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers. We originate commercial real estate and multi-family loans for individuals and businesses for various purposes, which are secured by commercial properties.
A worsening in economic conditions in the market areas we serve may impact our earnings adversely and could increase the credit risk of our loan portfolio. 32 Table of Contents We cannot accurately predict the possibility of the national or local economy’s return to recessionary conditions or to a period of economic weakness, which would adversely impact the markets we serve.
A worsening in economic conditions in the market areas we serve may impact our earnings adversely and could increase the credit risk of our loan portfolio. We cannot accurately predict the possibility of the national or local economy’s return to recessionary conditions or to a period of economic weakness, which would adversely impact the markets we serve.
Commercial real estate and multifamily loans also expose us to credit risk because the collateral securing these loans often cannot be sold easily. In addition, many of our commercial real estate and multifamily loans are not fully amortizing and contain large balloon payments upon maturity.
Commercial real estate and multi-family loans also expose us to credit risk because the collateral securing these loans often cannot be sold easily. In addition, many of our commercial real estate and multi-family loans are not fully amortizing and contain large balloon payments upon maturity.
In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further charge-offs (which will in turn also require an increase in the provision for credit losses if the charge-offs exceed the allowance for credit losses), based on judgments different than that of management.
In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further charge-offs (which may in turn also require an increase in the provision for credit losses), based on judgments different than that of management.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans, and other sources has had, and could continue to have, a substantial negative effect on our liquidity.
Ongoing geopolitical instability, including as a result of Russia’s invasion of Ukraine, has negatively impacted, and could in the future negatively impact, the global and U.S. economies, including by causing supply chain disruptions, rising prices for oil and other commodities, volatility in capital markets and foreign currency exchange rates, rising interest rates and heightened cybersecurity risks.
Ongoing geopolitical instability, including as a result of Russia’s invasion of Ukraine and the recent Middle East conflict, has negatively impacted, and could in the future negatively impact, the global and U.S. economies, including by causing supply chain disruptions, rising prices for oil and other commodities, volatility in capital markets and foreign currency exchange rates, rising interest rates and heightened cybersecurity risks.
Acquiring other banks, bank branches, other assets or other businesses, such as the Deepstack Acquisition, also involve risks associated with integration, which may cause us to not fully realize the benefits of an acquisition. The success of any such transaction will depend on, among other things, our ability to combine and integrate the acquired assets or business into our business.
Acquiring other banks, bank branches, other assets or other businesses, such as the Merger, also involves risks associated with integration, which may cause us to not fully realize the benefits of an acquisition. The success of any such transaction will depend on, among other things, our ability to combine and integrate the acquired assets or business into our business.
Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry.
Our ability to borrow has also been, and could continue to be, impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry.
Holders of our common stock are only entitled to receive such dividends as our board of directors declares out of funds legally available for such payments.
Holders of our common stock and NVCE stock are only entitled to receive such dividends as our Board of Directors declares out of funds legally available for such payments.
In addition, the U.S. banking regulatory agencies recently adopted a rule requiring us to notify the FRB within 36 hours of any significant computer security incident, and in March 2022, the SEC proposed new rules that would require reporting on Form 8-K of material cybersecurity incidents. Several states and their governmental agencies also have adopted or proposed cybersecurity laws.
In addition, the U.S. banking regulatory agencies recently adopted a rule requiring us to notify the FRB within 36 hours of any significant computer security incident, and in July 2023, the SEC adopted new rules that require reporting on Form 8-K of material cybersecurity incidents. Several states and their governmental agencies also have adopted or proposed cybersecurity laws.
Changes in interest rates can affect numerous aspects of our business and may impact our future performance. Prolonged periods of inflation may impact our profitability by negatively impacting our costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services.
Changes in interest rates can affect numerous aspects of our business and may impact our future performance. 37 Prolonged periods of inflation have impacted, and may continue to impact, our profitability by negatively impacting our costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services.
The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to: 23 Table of Contents • An ongoing review of the quality, size and diversity of the loan portfolio; • Evaluation of nonperforming loans; • Historical default and loss experience; • Historical recovery experience; • Existing and forecasted economic conditions; • Risk characteristics of the various classifications of loans; and • The amount and quality of collateral, including guarantees, securing the loans.
The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to: • An ongoing review of the quality, size and diversity of the loan portfolio; • Evaluation of nonaccrual loans; • Historical default and loss experience; • Historical recovery experience; • Existing and forecasted economic conditions; • Risk characteristics of the various classifications of loans; and • The amount and quality of collateral, including guarantees, securing the loans.
The failure to properly execute on these strategic initiatives could adversely impact our business and results of operations. 19 Table of Contents Increasingly, community banks, including the Bank, are partnering with fintech providers to distribute or market our products and services.
The failure to properly execute on these strategic initiatives could adversely impact our business and results of operations. Increasingly, community banks, including the Bank, are partnering with fintech providers to distribute or market their products and services.
Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.
Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us has been, and could continue to be, impaired by factors that affect us specifically or the financial services industry or economy in general.
Our cyber-security measures may not be sufficient to mitigate losses or exposure to cyber-attack or cyber theft.
Our cybersecurity measures may not be sufficient to mitigate losses or exposure to cyber-attack or cyber theft.
These conditions may fluctuate or even worsen in the future. 25 Table of Contents From time to time, as part of our balance sheet management process, we may also sell SFR loans and other types of mortgage loans from our portfolio, including multifamily loans. We may use the proceeds of loan sales for generating new loans or for other purposes.
These conditions may fluctuate or even worsen in the future. From time to time, as part of our balance sheet management process, we may also sell SFR loans and other types of mortgage loans from our portfolio, including multi-family loans. We may use the proceeds of loan sales for generating new loans or for other purposes.
As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial condition and results of operations. Our loan portfolio possesses increased risk due to our level of adjustable rate loans. A majority of our real estate secured loans held-for-investment are adjustable rate loans.
As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial condition and results of operations. Our loan portfolio possesses increased risk due to our level of adjustable rate loans. Approximately 31% of our loans held for investment are adjustable rate loans.
A decline in residential real estate values as a result of a downturn in the California housing markets may reduce the value of the real estate collateral securing these types of loans and increase the risk that we would incur losses if borrowers default on their loans.
A decline in residential real estate values as a result of a downturn in the California housing markets has reduced in some areas, and may continue to reduce, the value of the real estate collateral securing these types of loans and increase the risk that we would incur losses if borrowers default on their loans.
Risks Relating to Our Operations • New lines of business, new products and services, or strategic project initiatives, or new partnerships may subject us to additional risks. • We are subject to certain risks in connection with our use of technology. • To the extent we acquire other banks, bank branches, other assets or other businesses, such as the Deepstack Acquisition, we may be negatively impacted by certain risks inherent with such acquisitions. • If we fail to comply with the applicable requirements of the payment card networks or NACHA, we could be fined, suspended or have our registrations terminated. • Fraud by merchants or others could adversely affect our business, and our merchants may be unable to satisfy obligations, including chargebacks, for which we may also be liable. • We face significant operational risks. • Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses. • Managing reputational risk is important to attracting and maintaining clients, investors and employees. • We depend on key management personnel. • We rely on numerous external vendors. • We have a net deferred tax asset that may or may not be fully realized.
Risks Relating to Our Operations • New lines of business, new products and services, or strategic project initiatives, or new partnerships may subject us to additional risks. • We are subject to certain risks in connection with our use of technology. • To the extent we acquire other banks, bank branches, other assets or other businesses, we may be negatively impacted by certain risks inherent with such acquisitions. • If we fail to comply with the applicable requirements of the payment card networks or NACHA, we could be fined, suspended or have our registrations terminated. • Fraud by merchants or others could adversely affect our business, and our merchants may be unable to satisfy obligations, including chargebacks, for which we may also be liable. • We face operational risks, including fraud and loss due to execution errors, data processing and technology errors. • Our enterprise risk management framework may not be effective in mitigating risk and losses. • Managing reputational risk is important to attracting and maintaining clients, investors and employees. • We depend on key management personnel. • We rely on numerous external vendors. • We have a net deferred tax asset that may not be fully realized. • Our level of indebtedness could adversely affect our ability to raise capital and meet our debt obligations.
A deterioration in economic conditions could result in a number of consequences, including but not limited to the following, any of which could have a material adverse effect on our business, financial condition and results of operations: • Demand for our products and services may decline; • Loan delinquencies, problem assets and foreclosures may increase; • Collateral for our loans may decline in value; and • The amount of our low cost or noninterest-bearing deposits may decrease.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may affect our profitability adversely. 48 A deterioration in economic conditions could result in a number of consequences, including but not limited to the following, any of which could have a material adverse effect on our business, financial condition, and results of operations: • Demand for our products and services may decline; • Loan delinquencies, problem assets and foreclosures may increase; • Collateral for our loans may decline in value; and • The amount of our low cost or noninterest-bearing deposits may decrease.
Our security measures may not protect us from systems failures or interruptions. While we have established policies and technical controls to prevent or limit the impact of systems failures and interruptions, there are no absolute assurances that such events will not occur or that the resulting damages will be adequately mitigated.
While we have established policies and technical controls to prevent or limit the impact of systems failures and interruptions, there are no absolute assurances that such events will not occur or that the resulting damages will be adequately mitigated.
Furthermore, we may experience more fluctuations in our allowance for credit losses, which may be significant. There are risks associated with our lending activities and our allowance for credit losses may prove to be insufficient to absorb actual losses in our loan portfolio. Lending money is a substantial part of our business.
There are risks associated with our lending activities and our allowance for credit losses may prove to be insufficient to absorb actual losses in our loan portfolio. Lending money is a substantial part of our business.
The extent to which such geopolitical instability, such as Russia’s invasion of Ukraine, adversely affects our business, financial condition and results of operations, as well as our liquidity and capital profile, will depend on future developments, which are highly uncertain and unpredictable, including with respect to Russia’s invasion, the extent and duration of the invasion and economic sanctions imposed on Russia, and the humanitarian toll inflicted on Ukraine.
The extent to which such geopolitical instability adversely affects our business, financial condition and results of operations, as well as our liquidity and capital profile, will depend on future developments, which are highly uncertain and unpredictable, including with respect to Russia’s invasion of Ukraine and the Middle East conflict, and the extent and duration of the conflict in Ukraine and in the Middle East, and the humanitarian toll inflicted by such conflicts.
To recognize the potential loan repurchase or indemnification losses on all SFR mortgage and multifamily loans sold, we maintained a total reserve of $3.0 million as of December 31, 2022. Increases to this reserve as a result of the sale of loans are a reduction in our gain on the sale of loans.
To recognize the potential loan repurchase or indemnification losses on all SFR mortgage and multi-family loans sold, we maintained a total reserve of $2.1 million as of December 31, 2023. Increases to this reserve as a result of the sale of loans are a reduction in our gain on the sale of loans.
Legal and Compliance Risks We are a party to a variety of litigation and other actions. We are subject to a variety of litigation pertaining to fiduciary and other claims and legal proceedings. Currently, there are certain legal proceedings pending against us in the ordinary course of business.
We are subject to a variety of litigation pertaining to fiduciary and other claims and legal proceedings in the ordinary course of business and in connection with the Merger. Currently, there are certain legal proceedings pending against us in the ordinary course of business and in connection with the Merger.
Any compromise of personal electronic device security could jeopardize the confidential information of our clients (including user names and passwords) and expose our clients to account take-overs (“ATO”) and the possibility for financial crimes such as fraud or identity theft and deter clients from using our internet banking services.
Any compromise of personal electronic device security could jeopardize the confidential information of our clients (including user names and passwords) and expose our clients to account take-overs and the possibility for financial crimes such as fraud or identity theft and deter clients from using our internet banking services. We rely on and employ industry-standard tools and processes to safeguard data.
An allowance for credit losses is established for losses on debt securities held-to-maturity and available-for-sale due to credit losses and is reported as a component of provision for credit losses. Accrued interest is excluded from our expected credit loss estimates.
An allowance for credit losses is established for losses on debt securities held-to-maturity and available-for-sale due to credit losses and is reported as a component of provision for credit losses. Accrued interest is excluded from our expected credit loss estimates. For more information about ASC Topic 326, see Note 1.
Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Also, the FRB regulates the supply of money and credit in the United States.
We rely on and employ industry-standard tools and processes to safeguard data. These precautions may not protect our systems from future vulnerabilities, data breaches or other cyber threats. Losses due to unauthorized account activity could harm our reputation and may have a material adverse effect on our business, financial condition, results of operations and prospects.
These precautions may not protect our systems from future vulnerabilities, data breaches or other cyber threats. Losses due to unauthorized account activity could harm our reputation and may have a material adverse effect on our business, financial condition, results of operations, and prospects. 31 Our security measures may not protect us from systems failures or interruptions.
As of December 31, 2022, we had $868.3 million of securities available-for-sale, as compared with $1.32 billion of securities available-for-sale as of December 31, 2021. As of December 31, 2022, securities available-for-sale that were in an unrealized loss position had a total fair value of $865.4 million with aggregate unrealized losses of $41.3 million.
As of December 31, 2023, we had $2.3 billion of securities available-for-sale, as compared with $4.8 billion of securities available-for-sale as of December 31, 2022. As of December 31, 2023, securities available-for-sale that were in an unrealized loss position had a total fair value of $2.3 billion with aggregate unrealized losses of $352.5 million.
This risk is affected by, among other things: • Cash flow of the borrower and/or the project being financed; • In the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; • The credit history of a particular borrower; • Changes in interest rates; • Changes in economic and industry conditions; and • The duration of the loan.
This risk is affected by, among other things: • Cash flow of the borrower and/or the project being financed; • In the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; • The credit history of a particular borrower; • Changes in interest rates; • Changes in economic and industry conditions; and • The duration of the loan. 36 We maintain an allowance for credit losses which we believe is appropriate to provide for probable losses inherent in our loan portfolio.
Accordingly, if we make any errors in judgment in the collectability of our commercial real estate and multifamily loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
Additionally, commercial real estate and multi-family loans generally have relatively large balances to single borrowers or groups of related borrowers. Accordingly, if we make any errors in judgment in the collectability of our commercial real estate and multi-family loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
These unrealized losses related primarily to changes in overall interest rates and the resulting impact on valuations of mortgage-backed securities, collateralized mortgage obligations, municipal securities and collateralized loan obligations. As of December 31, 2021, securities available-for-sale that were in an unrealized loss position had a fair value of $580.7 million and aggregate unrealized losses of $7.3 million.
As of December 31, 2022, securities available-for-sale that were in an unrealized loss position had a total fair value of $4.8 billion with aggregate unrealized losses of $811.1 million These unrealized losses related primarily to changes in overall interest rates and the resulting impact on valuations of mortgage-backed securities, U.S. Treasury securities, collateralized mortgage obligations and municipal securities.
As of December 31, 2022, $1.94 billion, or 27.2% of our total loans held-for-investment, was secured by SFR mortgage loans and HELOCs, as compared with $1.44 billion, or 19.9% of our total loans held-for-investment, as of December 31, 2021.
As of December 31, 2023, $5.1 billion, or 19.9% of our total loans held for investment, was secured by SFR mortgage loans and HELOCs, as compared with $6.3 billion, or 21.9% of our total loans held for investment, as of December 31, 2022.
We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance.
Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial condition and results of operations. We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance.
Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, fraud and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Our allowance for credit losses was 1.28% of total loans held-for-investment and 165.18% of nonperforming loans as of December 31, 2022.
Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, fraud and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.
Legal and Compliance Risks • We are a party to a variety of litigation and other actions. • Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial condition and results of operations. • We operate in a highly regulated environment and our operations and income may be adversely affected by changes in laws, rules and regulations governing our operations. • We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties. • Non-compliance with laws and regulations could result in fines or sanctions or operating restrictions. • The Volcker Rule covered fund provisions could adversely affect us.
Legal and Compliance Risks • We operate in a highly regulated environment and our business, operations and income may be adversely affected by changes in laws, rules and regulations governing our operations. • We are a party to a variety of litigation and other actions. • Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial condition and results of operations. • Failure to comply with applicable laws or regulations, or to satisfy our regulators’ supervisory expectations, could subject us to supervisory or enforcement action. • Non-compliance with laws and regulations could result in fines or sanctions or operating restrictions. • We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties. • We are subject to a wide range of laws related to anti-money laundering, economic sanctions, and prevention of financial crime, which could increase our costs or subject us to significant penalties.
Debt securities held-to-maturity and available-for-sale are analyzed for credit losses under ASC 326, Financial Instruments - Credit Losses . For debt securities held-to-maturity, the Company estimates current expected credit losses. For debt securities available-for-sale, the Company determines whether impairment exists as of the reporting date and whether that impairment is due to credit losses.
Debt securities held-to-maturity and available-for-sale are analyzed for credit losses under ASC 326, Financial Instruments - Credit Losses . For debt securities held-to-maturity and available-for-sale, the Company estimates current expected credit losses.
Funding and Liquidity Risks • We may not be able to develop and maintain a strong core deposit base or other low cost funding sources. • Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. • We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed or on acceptable terms. • Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of funds for cash dividends to our stockholders. • There can be no assurance as to the level of dividends we may pay on our common stock.
Funding and Liquidity Risks • We may not be able to develop and maintain a strong core deposit base or other low cost funding sources. • Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. • Problems encountered by, or adverse news concerning, other financial institutions may adversely affect financial and capital markets generally as well as the Bank. • We are subject to regulatory capital requirements, which could be made more stringent by our regulators. • The FRB may require us to commit capital resources or take other action to support the Bank. • We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed or on acceptable terms. • Our holding company relies on dividends from the Bank for substantially all of its income. • There can be no assurance as to the level of dividends we may pay on our common stock.
The loss of any of these individuals could negatively affect our ability to achieve our business plan and could have a material adverse effect on our results of operations and financial condition. We rely on numerous external vendors . We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations.
The loss of any of these individuals could negatively affect our ability to achieve our business plan and could have a material adverse effect on our results of operations and financial condition.
We may also be required to add compliance personnel or incur other significant compliance-related expenses. Our business, financial condition, results of operations and/or competitive position may be adversely affected as a result. We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
We may also be required to add compliance personnel or incur other significant compliance-related expenses. Our business, financial condition, results of operations and/or competitive position may be adversely affected as a result.
Failure to effectively manage these risks and prevent fraud could increase our chargeback liability or other liabilities due to merchant failures. Increases in chargebacks or other liabilities not paid by our merchants could have a material adverse effect on our business, financial condition and results of operations. We face significant operational risks.
Increases in chargebacks or other liabilities not paid by our merchants could have a material adverse effect on our business, financial condition, and results of operations. We face significant operational risks, including fraud and loss due to execution errors, data processing and technology errors.
Such risks have increased with the work-from-home arrangements implemented in response to the COVID-19 pandemic. If one or more of these events occur, this could jeopardize our clients' confidential and other information that we process and store, or otherwise cause interruptions in our operations or the operations of our clients or counterparties.
If one or more of these events occur, this could jeopardize our clients' confidential and other information that we process and store, or otherwise cause interruptions in our operations or the operations of our clients or counterparties.
Our exposure to repurchases under our representations and warranties could include the current unpaid balance of all loans we have sold. During the years ended December 31, 2022, 2021 and 2020, we sold multifamily and SFR mortgage loans aggregating zero, $10.7 million, and $17.4 million, respectively.
Our exposure to repurchases under our representations and warranties could include the current unpaid balance of all loans we have sold. During the years ended December 31, 2023, 2022, and 2021, we sold multi-family and SFR mortgage loans aggregating $3.0 billion, $33.5 million, and $11.8 million, respectively.
The valuation of our investment securities also is influenced by external market and other factors, including implementation of SEC and FASB guidance on fair value accounting. Accordingly, if market conditions deteriorate further and we determine our holdings of other investment securities have experienced credit losses, our future earnings, stockholders’ equity, regulatory capital and continuing operations could be materially adversely affected.
Accordingly, if market conditions deteriorate further and we determine our holdings of other investment securities have experienced credit losses, our future earnings, stockholders’ equity, regulatory capital and continuing operations could be materially adversely affected.
Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements.
Our primary market area is concentrated in the greater Los Angeles, Orange, San Diego, and Santa Barbara counties. Adverse economic conditions in any of these areas can reduce our rate of growth, affect our clients’ ability to repay loans and adversely impact our financial condition and earnings.
Adverse economic conditions in any of these areas can reduce our rate of growth, affect our clients’ ability to repay loans and adversely impact our financial condition and earnings.
In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from its clients. As of December 31, 2022, our commercial and industrial loans totaled $1.85 billion, or 25.9% of our total loans held-for-investment.
In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from its clients.
In a rapidly changing interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition and results of operations. Uncertainty relating to the LIBOR transition process and phasing out of LIBOR may adversely affect us.
In a rapidly changing interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition and results of operations. A reduction in our credit ratings could adversely affect our access to capital and could increase our cost of funds.
Finally, we may have higher credit risk, or experience higher credit losses, to the extent our loans are concentrated by loan type, 24 Table of Contents industry segment, borrower type, or location of the borrower or collateral.
Finally, we may have higher credit risk, or experience higher credit losses, to the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. Deterioration in real estate values and underlying economic conditions in Southern California could result in significantly higher credit losses to our portfolio.
Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.
Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. The COVID-19 pandemic has had a potentially long-term negative impact on some commercial real estate portfolios.
Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of funds for cash dividends to our preferred and common stockholders.
If we fail to maintain capital to meet regulatory requirements, our liquidity, business, financial condition, and results of operations could be adversely affected. Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of funds for cash dividends to our preferred, common, and NVCE stockholders.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities computed using enacted tax rates.
We have a net deferred tax asset that may not be fully realized. We have a net DTA and cannot assure that it will be fully realized. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities computed using enacted tax rates.
The law's limitation on the mortgage interest deduction and state and local tax deduction for individual taxpayers has increased the after-tax cost of owning a home for many of our existing clients. The Inflation Reduction Act, which was signed into law in the United States in August 2022, among other things, imposes a surcharge on stock repurchases.
The law's limitation on the mortgage interest deduction and state and local tax deduction for individual taxpayers has increased the after-tax cost of owning a home for many of our existing clients.
As of December 31, 2022, we had a net DTA of $50.5 million. For additional information, see Note 13 — Income Taxes of the Notes to Consolidated Financial Statements included in Item 8.
As of December 31, 2023, we had a net DTA of $739.1 million. For additional information, see Note 16. Income Taxes of the Notes to Consolidated Financial Statements included in Item 8. We have suffered significant losses from the balance sheet repositioning and may suffer significant losses from future asset sales.
Changes in policies of the FRB are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict. The Company and the Bank are heavily regulated.
Changes in policies of the FRB are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict. 45 We are a party to a variety of litigation and other actions in the ordinary course of business and in connection with the Merger.
Our business may be adversely affected by difficult economic conditions, including inflationary pressures or volatility in the financial markets, which may impact our business, financial position and results of operations. Robust demand, labor shortages and supply chain constraints have led to persistent inflationary pressures throughout the economy.
Changes in policies of the FRB are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict. Our business may be adversely affected by difficult economic conditions, including inflationary pressures or volatility in the financial markets, which may impact our business, financial position, and results of operations.
We depend on checking, savings and money market deposit account balances and other forms of deposits as the primary source of funding for our lending activities. Our future growth will largely depend on our ability to expand core deposits, to provide a less costly and stable source of funding.
Funding and Liquidity Risks We may not be able to develop and maintain a strong core deposit base or other low cost funding sources. We depend on checking, savings and money market deposit account balances and other forms of deposits as the primary source of funding for our lending activities.
If financial markets remain volatile, this may impact the future performance of various segments of our business, including the value of our investment securities portfolio. We continue to closely monitor economic conditions and the pace of inflation and the impacts of inflation on the larger market, including labor and supply chain impacts.
We continue to closely monitor economic conditions and the pace of inflation and the impacts of inflation on the larger market, including labor and supply chain impacts.
We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients. Our business could be negatively affected as a result of actions by activist stockholders.
We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients. 49 ITEM 1B. UNRESOLVED STAFF COMMENTS None.
In response to these inflationary pressures, the FRB has raised benchmark interest rates in the past year and is expected to continue raising interest rates in response to economic conditions, particularly a continued high rate of inflation. Amidst these uncertainties, including potential recessionary economic conditions, financial markets have continued to experience volatility.
Robust demand, labor shortages, and supply chain constraints have led to persistent inflationary pressures throughout the economy. In response to these inflationary pressures, the FRB has raised benchmark interest rates in the past two years and may continue raising interest rates in response to economic conditions, particularly a continued high rate of inflation.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, our financial performance and a number of other factors, many of which are outside our control. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us.
Our ability to raise additional capital depends on conditions in the capital markets, economic conditions, and a number of other factors, including investor perceptions regarding the financial services and banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we may be unable to raise additional capital if needed or on acceptable terms.
Additionally, interruptions in service and security breaches could lead existing clients to terminate their banking relationships with us and could make it more difficult for us to attract new banking clients in the future. 20 Table of Contents To the extent we acquire other banks, bank branches, other assets or other businesses, such as the Deepstack Acquisition, we may be negatively impacted by certain risks inherent with such acquisitions.
Additionally, interruptions in service and security breaches could lead existing clients to terminate their banking relationships with us and could make it more difficult for us to attract new banking clients in the future.
Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses. Our enterprise risk management framework seeks to mitigate risk and loss to us.
Our enterprise risk management framework seeks to mitigate risk and loss to us.
For a detailed discussion on current legal proceedings, see Item 3 — Legal Proceedings , and Note 26 — Litigation of the Notes to Consolidated Financial Statements included in Item 8. Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial condition and results of operations.
However, if actual results differ from our expectations, it could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. For a discussion on current legal proceedings, see "Item 3. Legal Proceedings," and Note 13. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8.
Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could be negatively affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit extensions.
Additionally, inflation has led to, and may continue to lead to, a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services.

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Item 2. Properties

Properties — owned and leased real estate

1 edited+1 added−1 removed0 unchanged
Biggest changeFor additional information, see Not e 6 — Premises and Equipment, net and Note 7— Leases of the Notes to Consolidated Financial Statements included in Item 8.
Biggest changeWe lease our principal office, which is located at 11611 San Vicente Blvd., Suite 500, Los Angeles, CA 90049. For additional information regarding properties of the Company and Pacific Western, see Note 6. Premises and Equipment, Net of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
Removed
Item 2. Properties As of December 31, 2022, we conduct our operations from 34 offices, including our main and executive offices at 3 MacArthur Place, Santa Ana, Californi a and 28 branch offices in Los Angeles, Orange, San Diego, and Santa Barbara counties in California. We also lease additional office space outside of our headquarters and branch locations.
Added
ITEM 2. PROPERTIES As of January 31, 2024, we had a total of 155 properties consisting of 95 full-service branch offices and 60 other offices. We own six locations and the remaining properties are leased. Our properties are located throughout the United States, however, approximately 86% are located in California.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

0 edited+1 added−2 removed0 unchanged
Removed
Item 3. Legal Proceedings From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict.
Added
ITEM 3. LEGAL PROCEEDINGS See Note 13. Commitments and Contingencies of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.” That information is incorporated into this item by reference. ITEM 4. MINE SAFETY DISCLOSURE Not applicable. 51 PART II
Removed
In the opinion of management, based upon information currently available to us, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

8 edited+23 added−7 removed2 unchanged
Biggest changeThere were three holders of record of our Class B non-voting common stock as of December 31, 2022. At December 31, 2022, there were 65,168,380 shares and 58,544,534 shares of voting common stock issued and outstanding, respectively, and 477,321 shares of Class B non-voting common stock issued and outstanding.
Biggest changeAs of December 31, 2023, we had 477,321 shares of Class B non-voting common stock outstanding and held by three holders of record. Our NVCE stock is not listed or traded on any national securities exchange or automated quotation system, and there currently is no established trading market for such stock.
Stock Performance Graph The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that we specifically incorporate it by reference into a filing.
Five-Year Stock Performance Graph The following chart and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that we specifically incorporate it by reference into a filing.
See in Item 1A. — Risk Factors of this Annual Report on Form 10-K for a discussion regarding the holding company's reliance on dividends from the Bank for substantially all of its income and as a result the primary source of funds for cash dividends to our preferred and common stockholders.
See “Item 1A. - Risk Factors ” for a discussion regarding the holding company’s reliance on dividends from the Bank for substantially all of its income and as a result the primary source of funds for cash dividends to our preferred and common stockholders.
As of December 31, 2022, we had no shares of preferred stock issued and outstanding. Dividend Policy The timing and amount of cash dividends paid to our preferred and common stockholders depends on our earnings, capital requirements, financial condition, regulatory approval and other relevant factors, including the discretion of the Board of Directors with respect to common stockholder dividends.
Dividends The timing and amount of cash dividends paid to our preferred and common stockholders depends on our earnings, capital requirements, financial condition, regulatory approval and other relevant factors, including the discretion of the Board of Directors with respect to common stockholder dividends.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our voting common stock (symbol BANC) is listed on the NYSE. Our Class B non-voting common stock is not listed or traded on any national securities exchange or automated quotation system, and there currently is no established trading market for such stock.
Certain shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. Our Class B non-voting common stock is not listed or traded on any national securities exchange or automated quotation system, and there currently is no established trading market for such stock.
During the year ended December 31, 2022, the holding company paid dividends in the amount of $14.5 million to its common stockholders and $1.7 million to its preferred stockholders. The Bank paid dividends of $126.0 million to the holding company during the year ended December 31, 2022.
During the year ended December 31, 2023 and prior to the completion of the Merger, PacWest Bancorp paid dividends in the amount of $48.9 million to its common stockholders and $39.8 million to its preferred stockholders.
The following graph shows a comparison of stockholder total return on Banc of California, Inc.’s voting common stock with the cumulative total returns for: (i) the NYSE Composite Index; (ii) the KBW NASDAQ Regional Banking Index, and (iii) the S&P U.S. BMI Banks - Western Region Index.
The Company's total cumulative return was 11.45% over the five year period ending December 31, 2023 compared to returns of 67.12%, 43.17% and 8.54% for the NYSE Composite Index, KBW NASDAQ Regional Banking Index and S&P U.S. BMI Banks - Western Region Index.
The graph assumes an initial investment of $100 on December 31, 2017, in our common stock and the comparison indices and assumes the reinvestment of dividends.
(the "S&P U.S. BMI Banks - West Regional Index"). This comparison assumes $100 was invested on December 31, 2018, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.
Removed
The approximate number of holders of record of our voting common stock as of December 31, 2022 was 1,203. Certain shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Added
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Marketplace Designation and Holders Our voting common stock is listed on the NYSE and is traded under the symbol “BANC.” As of February 20, 2024, and based on the records of our transfer agent, there were approximate ly 2,144 record holders of our voting common stock.
Removed
During 2022, we redeemed all outstanding Series E Preferred Stock, and the corresponding depositary shares, each representing a 1/40th interest in a share of the Series E Preferred Stock. The redemption price for the Series E Preferred Stock was $1,000 per share (equivalent to $25 per Series E Depositary Share).
Added
As of December 31, 2023, we had 10,829,990 shares of NVCE stock outstanding and held by two holders of record. As of December 31, 2023, we had 513,250 shares of preferred stock outstanding, all of which were shares of our 7.75% fixed rate reset non-cumulative perpetual preferred stock, Series F, liquidation amount $1,000 per share (“Series F Preferred Stock”).
Removed
Upon redemption, the Series E Preferred Stock and the Series E Depositary Shares were no longer outstanding and all rights with respect to such stock and depositary shares ceased and terminated, except the right to payment of the redemption price. Also upon redemption, the Series E Depositary Shares were delisted from trading on the New York Stock Exchange.
Added
Depositary shares each representing 1/40th of a share of the Series F Preferred Stock are listed on the NYSE and traded under the symbol “BANC/PF.” The Series F Preferred Stock ranks senior to our common stock and NVCE stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of Banc of California, Inc.
Removed
For a description of the regulatory restrictions on the ability of the Bank to pay dividends to the holding company, and on the ability of Banc of California, Inc. to pay dividends to its stockholders, see Item 1 — Regulation and Supervision included in this Annual Report on Form 10-K. 35 Table of Contents Issuer Purchases of Equity Securities Purchases of Equity Securities by the Issuer ($ in thousands, except per share data) Total Number of Shares Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans Total Number of Shares (or Approximate Dollar Value) That May Yet be Purchased Under the Plan Common Stock: From October 1, 2022 to October 31, 2022 876,014 $ 16.60 876,014 $ 4,368,180 From November 1, 2022 to November 30, 2022 210,556 $ 16.51 209,910 $ 902,055 From December 1, 2022 to December 31, 2022 59,908 $ 15.52 57,900 $ — Total 1,146,478 $ 16.53 1,143,824 During the three months and year ended December 31, 2022, purchases of shares of common stock related to shares purchased under our stock repurchase program and shares surrendered by employees in order to pay employee tax liabilities associated with vested awards under our employee stock benefit plans.
Added
Legacy Pacific Western Bank paid dividends of $46.0 million to PacWest Bancorp during the year ended December 31, 2023, all of which were paid prior to the completion of the Merger. For a discussion of dividend restrictions on the Company's common stock, or of dividends from the Company's subsidiaries to the Company, see “Item 1.
Removed
On March 15, 2022, we announced a repurchase program of up to $75 million of our common stock. As of December 31, 2022, we completed the authorized common stock repurchase program totaled $75 million, or 4,212,882 shares at a weighted average price of $17.80 per share.
Added
Business - Supervision and Regulation - Dividends and Share Repurchases ” and Note 22. Dividend Availability and Regulatory Matters of the Notes to Consolidated Financial Statements contained in “Item 8.
Removed
The graph is historical only and may not be indicative of possible future performance. 36 Table of Contents December 31, Index 2017 2018 2019 2020 2021 2022 Banc of California, Inc. $ 100.00 $ 66.32 $ 87.42 $ 76.43 $ 103.23 $ 84.99 NYSE Composite $ 100.00 $ 91.05 $ 114.28 $ 122.26 $ 147.54 $ 133.75 KBW NASDAQ Regional Banking Index $ 100.00 $ 82.50 $ 102.15 $ 93.25 $ 127.42 $ 118.59 S&P U.S.
Added
Financial Statements and Supplementary Data.” 52 Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2023 regarding securities issued and to be issued under our equity compensation plan in effect during fiscal year 2023: Number of Securities Weighted Number of Securities to be Issued Upon Average Exercise Remaining Available Exercise of Price of for Future Issuance Outstanding Outstanding Under Equity Options, Options, Compensation Plans Warrants, and Warrants, and (Excluding Securities Rights Rights Reflected in Column (a)) Plan Category Plan Name (a) (b) (c) Amended and Restated Equity compensation Banc of California, plans approved by Inc. 2018 Stock security holders Incentive Plan (1) 13,068 (2) $ — 8,756,260 (3) Equity compensation plans not approved by security holders None — — — Total 13,068 $ — 8,756,260 __________________________________ (1) The Amended and Restated Banc of California, Inc. 2018 Stock Incentive Plan (the “Amended and Restated 2018 Plan”) was approved by our stockholders at our November 22, 2023 Special Meeting of Stockholders, authorizing 8,789,197 shares for issuance, representing 2,489,197 shares available for new awards under the existing 2018 Stock Incentive Plan as of the merger close date, plus 6,300,000 shares added as a result of the approval of the Amended and Restated 2018 Plan.
Removed
BMI Banks - Western Region Index $ 100.00 $ 79.17 $ 96.55 $ 72.25 $ 111.40 $ 86.45
Added
(2) Amount does not include 501,050 shares of unvested time-based restricted stock units ("RSUs") granted under the Amended and Restated 2018 Plan and 861,403 unvested time-based restricted shares outstanding under the Amended and Restated PacWest Bancorp 2017 Stock Incentive Plan as of December 31, 2023.
Added
(3) The Amended and Restated 2018 Plan permits these remaining shares to be issued in the form of options, PRSUs, RSUs, restricted stock, or stock appreciation rights. 53 Recent Sales of Unregistered Securities Concurrently with the Merger on November 30, 2023 (the “Closing Date”), Banc of California, Inc.
Added
(a) issued and sold to affiliates of funds managed by Warburg Pincus LLC (the “Warburg Investors”) and certain investment vehicles sponsored, managed or advised by Centerbridge Partners, L.P. and its affiliates (the “Centerbridge Investor” and, together with the Warburg Investors, the “Investors”), for $12.30 per share and an aggregate purchase price of $400 million, approximately (i) 21.7 million shares of Banc of California, Inc.’s common stock and (ii) 10.8 million shares of Banc of California, Inc.’s NVCE stock and (b) issued to the (i) Warburg Investors warrants to purchase approximately 15.9 million shares of Banc of California, Inc.’s NVCE stock and (ii) Centerbridge Investor warrants to purchase approximately 3.0 million shares of Banc of California, Inc.’s common stock, in each case, with such warrants having an exercise price of $15.375 (a 25% premium to the price paid on our common stock and NVCE stock) per share (the “Warrants”).
Added
The Warrants carry a term of seven years but are subject to mandatory exercise when the market price of Banc of California, Inc.’s common stock reaches or exceeds $24.60 (a 100% premium to the price paid by the Warburg Investors and the Centerbridge Investor for Banc of California, Inc.’s common stock and NVCE stock) for 20 or more trading days during any 30-consecutive trading day period.
Added
The Warrants may be settled on a “net share” basis by applying shares otherwise issuable under the Warrants in satisfaction of the exercise price.
Added
The issuance and sale were made pursuant to the investment agreements, each dated as of July 25, 2023, entered into by Banc of California, Inc. with the Warburg Investors (such agreement, the “Warburg Investment Agreement”) and the Centerbridge Investor (together with the Warburg Investment Agreement, the “Investment Agreements”), respectively.
Added
Subject to certain exceptions, the Investors are prohibited from transferring any securities acquired pursuant to the Investment Agreements for 90 days following the Closing Date (the “Lock-Up Period”).
Added
Following the Lock-Up Period, until the 180-day anniversary of the Closing Date, subject to certain exceptions, the Warburg Investors are prohibited from transferring 25% of the securities acquired pursuant to the Warburg Investment Agreement. The Warburg Investors are subject to certain additional transfer restrictions following the expiration of such 180-day period.
Added
The offering and sale of shares of Banc of California, Inc.’s common stock, NVCE stock, and the Warrants were made in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”).
Added
On the Closing Date, Banc of California, Inc. entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with each Investor, pursuant to which Banc of California, Inc. agreed to provide customary registration rights to the Investors and their affiliates and certain permitted transferees with respect to the shares of our common stock purchased under the Investment Agreements and the shares of Banc of California, Inc.’s common stock issued upon the conversion of shares of our NVCE stock purchased under the Warburg Investment Agreement or issued upon the exercise of the Warrants.
Added
Under the Registration Rights Agreement, the Investors will, following the Lock-Up Period, be entitled to S-3 shelf registration rights (or S-1 demand registration rights, if applicable), rights to request a certain number of underwritten shelf takedowns, as well as piggyback registration rights, in each case, subject to certain limitations as set forth in the Registration Rights Agreement.
Added
The foregoing description of the Investment Agreements, the Registration Rights Agreement, the Warrants, and the transactions contemplated thereby are not complete and are qualified in their entirety by reference to the full text of the Investment Agreements, which are filed as Exhibits 10.1 and 10.2 to this Annual Report on Form 10-K, the Registration Rights Agreement, which is filed as Exhibit 10.3 to this Annual Report on Form 10-K, and the Warrants, which are filed as Exhibits 4.4 and 4.5 to this Annual Report on Form 10-K, and in each case incorporated by reference herein. 54 Repurchases of Common Stock The following table presents stock repurchases we made during the fourth quarter of 2023: Total Number of Maximum Dollar Shares Purchased Value of Shares Total as Part of That May Yet Number of Average Publicly Be Purchased Shares Price Paid Announced Under the Purchase Dates Purchased (1) Per Share Program (2) Program (2) (Dollars in thousands, except per share amounts) October 1 - October 31, 2023 — $ — — $ 13,852,812 November 1 - November 30, 2023 2,971 $ 11.40 — $ 13,852,812 December 1 - December 31, 2023 9,445 $ 12.77 — $ 13,852,812 Total 12,416 $ 12.44 — ___________________________________ (1) Includes shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards.
Added
(2) On February 9, 2023, the Company's Board of Directors approved a stock repurchase program to buy back shares of its common stock for an aggregate purchase price not to exceed $35 million, which expired on February 9, 2024.
Added
The chart compares the yearly percentage change in the cumulative stockholder return on our common stock based on the closing price during the five years ended December 31, 2023, with (1) the Total Return Index for U.S. companies traded on The New York Stock Exchange (the “NYSE Composite Index”), (2) the Total Return Index for KBW NASDAQ Regional Bank Stocks (the “KBW NASDAQ Regional Banking Index”) and (3) the Total Return Index for bank constituents of the S&P United States Board Market Index that fall within the Western region of the U.S.
Added
The chart is historical only and may not be indicative of possible future performance. 55 ___________________________________ * $100 invested on December 31, 2018 in stock or index, including reinvestment of dividends.
Added
Year Ended December 31, Index 2018 2019 2020 2021 2022 2023 Banc of California, Inc. $ 100.00 $ 131.81 $ 115.24 $ 155.66 $ 128.16 $ 111.45 NYSE Composite Index 100.00 125.51 134.28 162.04 146.89 167.12 KBW NASDAQ Regional Banking Index 100.00 123.81 113.03 154.45 143.75 143.17 S&P U.S.
Added
BMI Banks - Western Region Index 100.00 121.94 91.26 140.71 109.19 108.54

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

22 edited+278 added−228 removed0 unchanged
Biggest changeAt December 31, 2022, the Bank had $210.0 million in pre-established unsecured federal funds lines of credit with correspondent banks. There were no borrowings with these correspondent banks at December 31, 2022 and 2021. The availability of unsecured borrowings through the AFX platform fluctuates regularly and is subject to the counterparties' discretion and totaled $445.0 million at December 31, 2022.
Biggest changeIn addition to its secured lines of credit with the FHLB and FRBSF, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $290.0 million in the aggregate with several correspondent banks. As of December 31, 2023, there was no balance outstanding related to these unsecured lines of credit.
The cost of total deposits is calculated as total interest expense on interest-bearing deposits divided by average total deposits. (7) Total funding is the sum of interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as total interest expense on interest-bearing liabilities divided by average total funding.
The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits. (5) Total funds is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.
The determination of whether impairment has occurred is based on an assessment of several factors, including, but not limited to, operating results, business plans, economic projections, anticipated future cash flows, and current market data. Any impairment identified as part of this testing is recognized through a charge to noninterest expense.
The determination of whether impairment has occurred is based on an assessment of several factors including operating results, business plans, economic projections, anticipated future cash flows, and current market data.
The fair values of other intangibles are determined utilizing information available near the acquisition date based on expectations and assumptions that are deemed reasonable by management. The estimates used to determine the fair values of assets and liabilities acquired in a business combination can be complex and require judgment, as such we typically engage third-party valuation specialists for significant items.
The estimates and assumptions used to determine the fair values of assets and liabilities acquired or assumed in a business combination can be complex and require judgment, as such, we typically engage third-party valuation specialists for significant items.
Business combinations are accounted for using the acquisition method of accounting under ASC Topic 805, Business Combinations . Under the acquisition method, we measure the identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination at fair value on acquisition date.
Under the acquisition method, we measure the identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination at their estimated fair values on the acquisition date.
This disclosure should not be viewed as a substitute for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. 40 Table of Contents The following tables provide reconciliations of the non-GAAP measures with financial measures defined by GAAP.
The reconciliations of these non-GAAP measures to the GAAP measures are presented in the following tables for and as of the years presented. Such disclosures should not be viewed as substitutes for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
The cost of average interest-bearing liabilities increased 36 basis points to 1.08% for the year ended December 31, 2022 compared to 0.72% for the same period in 2021 and included a 35 basis point increase in the cost of average interest-bearing deposits to 0.62%.
The cost of average interest-bearing liabilities increased by 296 basis points to 4.14% for the year ended December 31, 2023 compared to 1.18% for the same period in 2022, driven primarily by a 249 basis point increase in the cost of average interest-bearing deposits to 3.46% from 0.97% for the same period in 2022.
(2) Amounts used include $20.0 million of overnight advances. Banc of California, Inc. The primary sources of funds for Banc of California, Inc., on a stand-alone holding company basis, are dividends and intercompany tax payments from the Bank, outside borrowing, and its ability to raise capital and issue debt securities.
The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and Banc of California, Inc.'s ability to raise capital, issue subordinated debt, and secure outside borrowings.
The yield on average interest-earning assets increased to 4.26% for the year ended December 31, 2022, from 3.74% for the same period in 2021 due mostly to higher market interest rates and changes in the mix of interest-earning assets. Average loans represented 82.8% of average earnings assets in 2022 compared to 78.8% for the full year in 2021.
The yield on average interest-earning assets increased by 101 basis points to 5.21% for the year ended December 31, 2023 from 4.20% for the same period in 2022 due mainly to higher market interest rates, partially offset by the changes in the mix of average interest-earning assets.
Goodwill is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.
Goodwill is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The fair value of other intangibles are determined utilizing information available near the acquisition date based on expectations and assumptions that are deemed reasonable by management.
The net interest margin increased 33 basis points to 3.59% as the average earning-assets yield increased 52 basis points and the average cost of total funding increased 19 basis points between periods.
The net interest margin decreased by 151 basis points to 1.98% as the cost of average total funds increased by 260 basis points, while the yield on average interest-earning assets increased by 101 basis points.
At December 31, 2022, Banc of California, Inc. had $25.9 million in cash, all of which was on deposit at the Bank. In December 2021, the holding company entered into a $50.0 million revolving line of credit. The line of credit matures on December 18, 2023.
At December 31, 2023, Banc of California, Inc. had $285.8 million in cash and cash equivalents, of which a portion is on deposit at the Bank.
Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Estimates We follow accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8.
Our significant accounting policies and practices are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in "Item 8.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. 39 Table of Contents Recent Accounting Pronouncements See Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 for information on recent accounting pronouncements and their expected impact, if any, on our consolidated financial statements.
Financial Statements and Supplementary Data.” Recent Accounting Pronouncements See Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” for information on recent accounting pronouncements and their expected impact, if any, on our consolidated financial statements. 101
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Net interest i ncome increased $60.6 million, or 23.9%, to $314.4 million for the year ended December 31, 2022 due to higher average balances and yield on interest-earning assets, partially offset by higher average balances and costs of interest-bearing liabilities.
Average noninterest-bearing deposits represented 25% of total average deposits for the year ended December 31, 2023 compared to 40% for the same period in 2022. 2022 Compared to 2021 Net interest income increased by $186.9 million to $1.3 billion for the year ended December 31, 2022 compared to $1.1 billion for the year ended December 31, 2021 due mainly to higher interest income on loans and leases and investment securities, offset partially by higher interest expense.
Management has identified our most critical accounting policies and accounting estimates as: allowance for credit losses, business combinations, valuation of acquired loans, goodwill and deferred income taxes. See Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 for a description of these policies. Allowance for Credit Losses (“ACL”).
Nature of Operations and Summary of Significant Accounting Policies - Allowance for Credit Losses on Loans and Leases Held for Investment of the Notes to Consolidated Financial Statements contained in "Item 8.
Financial Highlights For the years ended December 31, 2022, 2021 and 2020, net income (loss) available to common stockholders was $115.8 million, $50.6 million and $(1.1) million, or $1.89, $0.95, and $(0.02) per diluted common share.
(2) See "- Non-GAAP Financial Measures." 66 2023 Compared to 2022 Net loss available to common and equivalent stockholders for the year ended December 31, 2023 was $1.9 billion , or $22.71 per diluted share , compared to net earnings available to common stockholders for the year ended December 31, 2022 of $404.3 million , or $5.14 per diluted share.
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The average cost of total deposits increased 19 basis points to 0.38% for the year ended December 31, 2022 compared to the full year of 2021. 49 Table of Contents Rate/Volume Analysis The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.
The cost of average total deposits increased by 202 basis points to 2.61% for the year ended December 31, 2023 compared to the same period in 2022.
The yield on average investment securities and other interest-earning assets increased 100 basis points and 149 basis points, respectively, for the year ended December 31, 2022, compared to the full year of 2021. The average cost of funds increased 19 basis points to 0.71% for the year ended December 31, 2022 from 0.52% for 2021.
Average loans and leases represented 67% of average interest-earning assets for the year ended December 31, 2023 compared to 70% for the year ended December 31, 2022.
The reversal of credit losses for the year ended December 31, 2022 was due to a $31.3 million recovery from the settlement of a loan previously charged-off in 2019.
The increase in the provision for credit losses was due to a $52.0 million provision for 2023 compared to a provision of $24.5 million for 2022.
The purchase was 45 Table of Contents accounted for as a business combination under U.S. GAAP and assets purchased and liabilities assumed were recorded at their respective acquisition date estimated fair values.
The Merger was accounted for as a reverse merger using the acquisition method of accounting, therefore, PacWest Bancorp was deemed the accounting acquirer, even though Banc of California, Inc. was the legal acquirer. We recorded the legacy Banc of California, Inc. acquired assets and assumed liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date.
Removed
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses on the Consolidated Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities.
Added
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the holding company for its wholly owned subsidiary, Banc of California (the “Bank”), a California state-chartered bank and member of the FRB.
Removed
While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to significant change.
Added
When we refer to the “parent” or the “holding company", we are referring to Banc of California, Inc., the parent company, on a stand-alone basis. When we refer to “we,” “us,” “our,” or the “Company”, we are referring to Banc of California, Inc. and its consolidated subsidiaries including the Bank, collectively.
Removed
Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions.
Added
The Bank is a relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses. The Bank offers a broad range of loan and lease and deposit products and services through full-service branches throughout California and in Durham, North Carolina and Denver, Colorado, and loan production offices around the country.
Removed
The ACL is estimated on a quarterly basis and represents management’s estimate of CECL in our loan portfolio. The ACL estimate is based on the accounting standard commonly known as CECL. Under the CECL method, pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually.
Added
Presentation of Results – PacWest Bancorp Merger On November 30, 2023, PacWest Bancorp merged with and into Banc of California, Inc. (the “Merger” or "PACW Merger"), with Banc of California, Inc. continuing as the surviving legal corporation and Banc of California, Inc. concurrently closed a $400 million equity capital raise.
Removed
Collective loss estimates are determined by applying loss factors, designed to estimate current expected credit losses, to amortized cost balances over the remaining life of the collectively evaluated portfolio.
Added
The Merger was accounted for as a reverse merger using the acquisition method of accounting, therefore, PacWest Bancorp was deemed the acquirer for financial reporting purposes, even though Banc of California, Inc. was the legal acquirer. The Merger was an all-stock transaction and has been accounted for as a business combination.
Removed
The allowance for loan losses includes qualitative adjustments to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including those described in the federal banking agencies' joint interagency policy statement on ALL.
Added
Banc of California, Inc.'s financial results for all periods ended prior to November 30, 2023 reflect PacWest Bancorp results only on a standalone basis.
Removed
These factors include, among others, inherent imprecision in forecasting economic variables, including determining the depth and duration of economic cycles and their impact to relevant economic variables; qualitative adjustments based on our evaluation of different forecast scenarios and known recent events impacting relevant economic variables; data factors that address the risk that certain model inputs may not reflect all available information including (i) risk factors that have not been fully addressed in internal risk ratings, (ii) changes in lending policies and procedures, (iii) changes in the level and quality of experience held by lending management, (iv) imprecision in the risk rating system and (v) limitations in data available for certain loan portfolios.
Added
In addition, Banc of California, Inc.'s reported financial results for the year ended December 31, 2023 reflect PacWest Bancorp financial results only on a standalone basis until the closing of the Merger on November 30, 2023, and results of the combined company for the month of December 2023.
Removed
The ACL process also includes challenging and calibrating the model and model results against observed information, trends and events within the loan portfolio, among others. The ACL and provision for credit losses include amounts and changes from both the allowance for loan losses and the reserve for unfunded noncancellable loan commitments. Business Combinations.
Added
The number of shares issued and outstanding, earnings per share, and all references to share quantities or metrics of Banc of California, Inc. have been retrospectively restated to reflect the equivalent number of shares issued in the Merger as the Merger was accounted for as a reverse merger.
Removed
For example, we generally value core deposit intangible assets using a discounted cash flow approach, which require a number of critical estimates that include, but are not limited to, future expected cash flows from depositor relationships, expected "decay" rates, and the determination of discount rates.
Added
Under the reverse merger method of accounting, the assets and liabilities of legacy Banc of California, Inc. as of November 30, 2023 were recorded at their respective fair values.
Removed
We use the multi-period excess earnings method to value developed technology, the foregone cash flow method to value client relationships, and the relief from royalty method to value trademarks.
Added
The following table presents balance sheet data as of the dates indicated: December 31, 2023 2022 2021 (In thousands) Balance Sheet Data: Total assets $ 38,534,064 $ 41,228,936 $ 40,443,344 Interest-earning deposits in financial institutions 5,175,149 2,027,949 3,944,686 Securities available-for-sale 2,346,864 4,843,487 10,694,458 Securities held-to-maturity 2,287,291 2,269,135 — Loans and leases held for investment, net of deferred fees 25,612,444 28,674,205 22,941,548 Goodwill 198,627 1,376,736 1,405,736 Core deposit and customer relationship intangibles 165,477 31,381 44,957 Total liabilities 35,143,299 37,278,405 36,443,714 Noninterest-bearing deposits 7,774,254 11,212,357 14,543,133 Interest-bearing deposits 22,627,515 22,723,977 20,454,624 Total deposits 30,401,769 33,936,334 34,997,757 Borrowings 2,911,322 1,764,030 — Subordinated debt 936,599 867,087 863,283 Stockholders’ equity 3,390,765 3,950,531 3,999,630 57 At December 31, 2023, the Company had total assets of $38.5 billion , including $25.6 billion of total loans and leases, net of deferred fees, and $2.3 billion of securities available-for-sale, $2.3 billion of securities held-to-maturity, and $5.2 billion of interest-earning deposits in financial institutions, compared to $41.2 billion of total assets, including $28.7 billion of total loans and leases, net of deferred fees, $4.8 billion of securities available-for-sale, $2.3 billion securities held-to-maturity, and $2.0 billion of interest-earning deposits in financial institutions at December 31, 2022.
Removed
Non-compete agreements are estimated using a with and without scenario where cash flows are projected through the term of the non-compete agreement assuming the agreement is in place and compare to cash flows assuming it is not in place.
Added
The $2.7 billion decrease in total assets since year-end 2022 was due primarily to a $3.1 billion decrease in loans and leases, net of deferred fees, and a $2.5 billion decrease in securities available-for-sale, offset partially by a $3.1 billion increase in interest-earning deposits in financial institutions.
Removed
In valuing these intangibles, we make forward looking assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, useful lives and other estimates.
Added
The decrease in loans and leases is mainly due to $5.2 billion of loan sales in the second quarter of 2023, partially offset by the loans acquired in the Company's merger with PacWest Bancorp (the "Merger").
Removed
These critical estimates are difficult to predict and may result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our initial valuation of net assets and liabilities acquired. 38 Table of Contents Goodwill. Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired.
Added
The decrease in securities available-for-sale was due mainly to a $2.7 billion sale of securities in the fourth quarter of 2023 as part of our balance sheet repositioning strategy.
Removed
Goodwill is not subject to amortization and is evaluated for impairment at least annually, normally during the fourth fiscal quarter, or more frequently in the interim if events occur or circumstances change indicating impairment may have occurred.
Added
Contributing to the increase in interest-earning deposits at financial institutions was the Company's desire to have more on-balance sheet liquidity in response to the deposit volatility caused by the failures of three regional banks in the first and second quarters of 2023.
Removed
The assessment of impairment discussed above incorporate inherent uncertainties, including projected operating results and future market conditions, which are often difficult to predict and may result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. Acquired Loans.
Added
At December 31, 2023, the Company had total liabilities of $35.1 billion , including total deposits of $30.4 billion and borrowings of $2.9 billion , compared to $37.3 billion of total liabilities, including $33.9 billion of total deposits and $1.8 billion borrowings at December 31, 2022.
Removed
At acquisition date, loans are evaluated to determine whether they meet the criteria of a PCD loan. PCD loans are loans that in management's judgment have experienced more than insignificant deterioration in credit quality since origination.
Added
The $2.1 billion decrease in total liabilities since year-end 2022 was due mainly to decreases of $3.5 billion in total deposits, offset partially by an increase of $1.1 billion in borrowings. The decrease in total deposits was due to the loss of deposits during the period of volatility after the failures of three regional banks in 2023.
Removed
Factors that indicate a loan may have experienced more than insignificant credit deterioration include delinquency, downgrades in credit rating, non-accrual status, and other negative factors identified by management at the time of initial assessment. PCD loans are initially recorded at fair value, with the resulting non-credit discount or premium being amortized or accreted into interest income using the interest method.
Added
The increase in borrowings was due to the Company's desire to have more on-balance sheet liquidity in response to the deposit volatility caused by the failures of three regional banks in the first and second quarters of 2023. At December 31, 2023, the Company had total stockholders' equity of $3.39 billion compared to $3.95 billion at December 31, 2022.
Removed
In addition to the fair value adjustment, at the date of acquisition, an ACL is established with a corresponding increase to the overall acquired loan balance. This initial ACL is determined using our application of the CECL method.
Added
The $559.8 million decrease in stockholder s' equity sin ce year-end 2022 was due mainly to the net loss of $1.9 billion in 2023 attributable primarily to a $1.38 billion goodwill impairment charge in the first quarter of 2023, partially offset by an increase in accumulated other comprehensive income (loss) of $358.8 million attributable to an increase in the fair value of the investment securities portfolio and the shares issued as consideration for the Merger and the related $400 million capital raise.
Removed
Acquired loans that are not considered PCD loans (“non-PCD loans”) are also recognized at fair value at the acquisition date, with the resulting credit and non-credit discount or premium being amortized or accreted into interest income using the interest method.
Added
Recent Events PacWest Bancorp Merger On November 30, 2023, Banc of California, Inc. completed the Merger, pursuant to which PacWest Bancorp merged with and into Banc of California, Inc., with Banc of California, Inc. continuing as the surviving legal corporation and, as of December 1, 2023, Banc of California, N.A. merged into Pacific Western Bank with Pacific Western Bank continuing under the Banc of California name and brand as the Bank.
Removed
In addition to the fair value adjustment, at the time of acquisition, we establish an initial ACL for acquired non-PCD loans through a charge to the provision for credit losses. This initial ACL is determined using our application of the CECL method.
Added
Concurrent with the completion of the Merger, Banc of California, Inc. also completed its $400 million equity raise from affiliates of funds managed by Warburg Pincus LLC and certain investment vehicles sponsored, managed, or advised by Centerbridge Partners, L.P. and its affiliates. The stock issued by Banc of California, Inc. as consideration in the Merger totaled approximately $663 million.
Removed
Subsequent to acquisition date, the ACL for both PCD and non-PCD loans is determined using the same methodology to determine current expected credit losses that is applied to all other loans in our portfolio.
Added
The application of the acquisition method of accounting resulted in goodwill of $198.6 million. The Bank is headquartered in Los Angeles, California, and operates more than 90 branches in California, as well as branches in North Carolina and Colorado.
Removed
The estimates used to determine the fair values of PCD and non-PCD acquired loans can be complex and require significant judgment regarding items such as default rates, timing and amount of future cash flows, prepayment rates and other factors.
Added
We completed the Merger to, among other things, enhance our scale and presence in California and augment and diversify our sources of revenue. For further information, see Note 2. Business Combinations. 58 Balance Sheet Repositioning In connection with the Merger, we also implemented our previously announced balance sheet repositioning strategy.
Removed
These critical estimates are difficult to predict and may result in provisions for credit losses in future periods if actual losses materially differ from the estimated assumptions utilized in our initial valuation of acquired loans. Deferred Income Taxes.
Added
From the announcement of the Merger on July 25, 2023, through the end of the year, the combined company, legacy PacWest Bancorp and legacy Banc of California, Inc., sold assets totaling $6.1 billion and completed the paydown of $8.6 billion of high-cost liabilities, which improved the mix of earning assets and reduced the amount of higher-cost funding.
Removed
Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Accounting guidance requires that companies assess whether a valuation allowance should be established against the deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.
Added
The sold assets included $3.9 billion of securities from both the legacy Banc of California, Inc. and PacWest Bancorp portfolios, and $1.5 billion of single-family loans and $0.7 billion of multi-family loans from the legacy Banc of California, Inc. portfolios.
Removed
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
Added
The liabilities that were paid down included $4.7 billion of borrowings and $3.9 billion of brokered deposits from both legacy entities.
Removed
In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence on a quarterly basis, including the consideration of several sources of future taxable income, such as future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future tax planning strategies.
Added
Key Performance Indicators Among other factors, our operating results generally depend on the following key performance indicators: The Level of Net Interest Income Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities.
Removed
Although we believe our assessments of the realizability of deferred income taxes are reasonable, no assurance can be given that their realizability will not be different from that which is reflected in our net deferred tax asset balance.
Added
Net interest margin is net interest income (annualized if related to a quarterly period) expressed as a percentage of average interest-earning assets. Tax equivalent net interest income is net interest income increased by an adjustment for tax-exempt interest on certain loans and investment securities based on a 21% federal statutory tax rate.
Removed
Tax positions that are uncertain but meet a "more-likely-than-not" recognition threshold are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.
Added
Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets. Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. Our primary interest-earning assets are loans and investment securities, and our primary interest-bearing liabilities are deposits and borrowings.
Removed
The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management's judgment. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Added
Contributing to our positive net interest margin is our healthy yield on loans and leases in excess of our core deposit costs. While our deposit balances will fluctuate depending on our customers’ liquidity and cash flow, market conditions, and competitive pressures, we seek to minimize the impact of these variances by attracting a high percentage of noninterest-bearing deposits.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeGiven the uncertainty of the magnitude, timing and direction of future interest rate movements, as well as the shape of the yield curve, actual results may vary from those predicted by our models. 74 Table of Contents The following table presents the projected change in the Company’s economic value of equity at December 31, 2022 and net interest income over the next twelve months, that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change: Change in Interest Rates in Basis Points (bps) (1) ($ in thousands) Economic Value of Equity Net Interest Income Amount Amount Change Percentage Change Amount Amount Change Percentage Change December 31, 2022 +200 bps $ 1,663,256 $ (1,069) (0.1) % $ 342,138 $ 6,999 2.1 % +100 bps 1,668,040 3,715 0.2 % 338,711 3,572 1.1 % 0 bps 1,664,325 335,139 -100 bps 1,637,298 (27,027) (1.6) % 328,276 (6,863) (2.0) % -200bps 1,587,893 (76,432) (4.6) % 318,317 (16,822) (5.0) % (1) Assumes an instantaneous uniform change in interest rates at all maturities and no rate shock has a rate lower than zero percent.
Biggest changeThe following table presents the projected change in the Company’s economic value of equity at December 31, 2023 and net interest income over the next twelve months, that would occur upon an immediate change in interest rates, but without giving effect to any steps that management might take to counteract that change: Change in Interest Rates in Basis Points (bps) (1) Economic Value of Equity Net Interest Income Amount Percentage Amount Percentage December 31, 2023 Amount Change Change Amount Change Change (Dollars in millions) +200 bps $ 5,588 $ (468) (7.7) % $ 991 $ (47) (4.5) % +100 bps $ 5,826 $ (230) (3.8) % $ 1,009 $ (29) (2.8) % 0 bps $ 6,056 $ 1,038 -100 bps $ 6,281 $ 225 3.7 % $ 1,064 $ 26 2.5 % -200 bps $ 6,491 $ 435 7.2 % $ 1,099 $ 61 5.9 % ____________________ (1) Assumes an instantaneous uniform change in interest rates at all maturities and no rate shock has a rate lower than zero percent. 104
As part of its procedures, the ALCOs regularly review interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and economic value of equity. Interest Rate Sensitivity of Economic Value of Equity and Net Interest Income Interest rate risk results from our banking activities and is the primary market risk for us.
As part of its procedures, the ALCOs regularly review interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and our economic value of equity. Interest Rate Sensitivity of Economic Value of Equity and Net Interest Income Interest rate risk results from our banking activities and is the primary market risk for us.
The balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net interest margin, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities.
The balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net interest income, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we have established asset/liability committees to monitor our interest rate risk.
As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we have established asset/liability committees to monitor our interest rate risk.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCOs may decide to increase our interest rate risk position within the asset/liability 73 Table of Contents tolerance set forth by our Board of Directors.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCOs may decide to increase our interest rate risk position within the asset/liability tolerance set forth by our Board of Directors.
In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.
In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates. MALCO is comprised of select members of senior management.
Board ALCO delegates the day to day management of interest rate risk to the Management ALCO. Management ALCO ensures that the Bank is following the appropriate and current regulatory guidance in the formulation and implementation of our interest rate risk program.
Management of our interest rate risk is overseen by the Finance Committee of the Board, which delegates the day to day management of interest rate risk to the MALCO. MALCO ensures that the Bank is following the appropriate and current regulatory guidance in the formulation and implementation of our interest rate risk program.
Conversely, the balance sheet is considered “liability sensitive” when an increase in short-term interest rates is expected to compress our net interest margin, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets. At December 31, 2022, our interest rate risk profile reflects a mildly “asset sensitive” position.
Conversely, the balance sheet is considered “liability sensitive” when an increase in short-term interest rates is expected to compress our net interest income, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets.
Treasuries, U.S. Prime Rate, SOFR and London Interbank Offered Rate. Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Management of our interest rate risk is overseen by the Board ALCO.
Treasuries, U.S. Prime Rate, SOFR, and LIBOR. Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income.
In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we evaluate various strategies including: • Originating and purchasing adjustable rate mortgage loans, • Selling longer duration fixed or hybrid mortgage loans, • Originating shorter-term consumer loans, • Managing the level of investments and duration of investment securities, • Managing our deposits to establish stable deposit relationships, • Using FHLB advances and/or certain derivatives such as swaps to align maturities and repricing terms, and • Managing the percentage of fixed rate loans in our portfolio.
In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we evaluate various strategies including: • Complementing our current loan origination platform through strategic acquisitions of whole loans, • Strategically managing multiple warehouse relationships, • Originating shorter-term consumer loans, • Managing the level of investments and duration of investment securities, • Managing our deposits to establish stable deposit relationships, and • Using FHLB advances and/or certain derivatives such as swaps as hedges to align maturities and repricing terms.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic repricing characteristics of our assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
Effective management of interest rate risk begins with understanding the dynamic repricing characteristics of our assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
Board ALCO reviews the results of our interest rate risk modeling quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable. In addition to our annual review of our asset liability management policy, our Board of Directors periodically reviews the interest rate risk policy limits.
The Finance Committee of the Board reviews the results of our interest rate risk modeling quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable.
Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time.
The Merger has resulted in reduced interest rate risk of the Company by increasing capital, reducing the volume of fixed-rate assets, and paying down borrowings and brokered deposits. Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time.
We maintain both a management asset/liability committee (“Management ALCO”), comprised of select members of senior management, and a joint asset/liability committee of the Boards of Directors of the Company and the Bank (“Board ALCO”, together with Management ALCO, “ALCOs”).
The Company also has a Finance Committee of the Boards of Directors of the Company and the Bank (together with MALCO, the “ALCOs”).
Removed
We believe we are well positioned in the current cycle of rising interest rates.
Added
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk - Foreign Currency Exchange We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps and foreign exchange forward contracts to hedge exposures to loans and debt instruments denominated in foreign currencies.
Removed
Due to the transformation of the franchise to our relationship-based banking model, with higher percentages of noninterest-bearing deposits and variable rate commercial loans, our one year gap ratio, which compares the percentage of earning assets that are scheduled to mature or reprice within one year to the percentage of rate sensitive term liabilities that are scheduled to mature or reprice within one year, has increased since December 31, 2019.
Added
We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar and the derivatives that hedge those exposures. As of December 31, 2023, the U.S.
Removed
At December 31, 2022, our one year gap ratio stood at 20%. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table.
Added
Dollar notional amounts of loans receivable and subordinated debt payable denominated in a foreign currency were $8.8 million and $28.5 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge this foreign currency exposures were $8.8 million and $28.5 million.
Removed
For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.
Added
We recognized a foreign currency translation net loss of $0.3 million for the year ended December 31, 2023 and net gains of $2.0 million, and $0.3 million for the years ended December 31, 2022 and 2021, respectively. Asset/Liability Management and Interest Rate Sensitivity Interest Rate Risk - Company Governance.
Removed
Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.
Added
On a monthly basis, we measure our IRR position using two methods: (i) Net Interest Income ("NII") simulation analysis and (ii) Market Value of Equity ("MVE") modeling. MALCO and the Finance Committee of the Company's Board of Directors review the results of these analyses at least quarterly.
Removed
Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.
Added
As discussed in more detail below, if projected changes to interest rates cause changes to our simulated net present value of equity and/or net interest income to be outside our pre-established IRR limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.
Removed
Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not directly impact us in the normal course of our business activities and operations. 75 Table of Contents
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The pre-established IRR Limits are recommended by management, determined based on analytical review and available peer data published by regulatory agencies about the IRR Limits utilized by other regional banks, and documented in the Company's ALCO Policy. The ALCO Policy is approved by MALCO and the Finance Committee of the Board of Directors annually.
Added
We believe our ALCO Policy IRR Limits are consistent with prevailing practice in the regional banking industry. We use a balance sheet simulation model (the "IRR Model") to estimate changes in NII and MVE that would result from immediate and sustained changes in interest rates as of the measurement date.
Added
This IRR Model assesses the changes in NII and MVE that would occur in response to an instantaneous and sustained increase and decrease in market interest rates of +-100, +-200, +-300, and +400 basis points. This model is an IRR management tool, and the results are not necessarily an indication of our future net interest income.
Added
The IRR Model has inherent limitations and the model's results are based on a given set of rate changes and assumptions at a single point in time. The IRR Model is updated monthly and the IRR Model results are reported to MALCO and the Finance Committee of the Company's Board of Directors at each monthly or quarterly meeting, as applicable.
Added
During the banking stress event from March through May 2023, legacy PacWest management kept the legacy PacWest Executive ALM Committee and Finance Committee informed of the IRR and liquidity stresses legacy PacWest was facing.
Added
As previously discussed in the "Liquidity Management" section, legacy PacWest management formulated a strategic plan to retain customers and attract new customer deposits and, consistent with its previously disclosed strategy, legacy PacWest began to reposition the balance sheet by selling certain large loan pools. These actions were designed to improve liquidity and the IRR profile of legacy PacWest over time.
Added
The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk. 102 How We Measure Our Risk of Interest Rate Changes.
Added
In addition to our annual review of our asset liability management policy, our Board of Directors periodically reviews the interest rate risk policy limits. 103 Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities.
Added
At December 31, 2023, our interest rate risk profile is slightly “liability sensitive”, as compared to a “neutral” interest rate risk profile position as of December 31, 2022.
Added
This shift is primarily due to the change in the mix of assets and funding sources during 2023 due to the Merger and the balance sheet repositioning completed in the fourth quarter of 2023.
Added
Given the uncertainty of the magnitude, timing and direction of future interest rate movements, as well as the shape of the yield curve, actual results may vary materially from those predicted by our model.

Other BANC 10-K year-over-year comparisons