0001169770pacw:OriginationDate2020Memberpacw:VentureCapitalLoansMemberpacw:TermLoansByOriginationDateMemberpacw:VentureCapitalLoansMemberpacw:A34PassMember2024-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
FORM 10-Q
(Mark One)
| | | | | |
☒☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 |
For the quarterly period ended June 30, 2023
or
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ______ |
For the transition period from to
Commission file numberFile No. 001-35522
BANC OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Maryland | | 04-3639825 |
| (State of Incorporation) | | (I.R.S. Employer Identification No.) |
Maryland11611 San Vicente Boulevard, Suite 500
(State or other jurisdiction of
incorporation or organization)
04-3639825
(IRS Employer Identification No.)
3 MacArthur Place, Santa Ana, CaliforniaLos Angeles, CA 90049
(Address of principal executive offices)
92707
(Principal Executive Offices, Including Zip Code)
(855) 361-2262
(Registrant’s telephone number, including area code)Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Common Stock, par value $0.01 per share | | BANC | | New York Stock Exchange |
| | | | |
| Depositary Shares, each representing a 1/40th interest | | | | |
| in a share of 7.75% fixed rate reset non-cumulative | | | | |
| perpetual preferred stock, Series F | | BANC/PF | | New York Stock Exchange |
| (Title of Each Class) | | (Trading Symbol) | | (Name of Exchange on Which Registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ ☑No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ ☑No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| ☑ | Large accelerated filer | | ☒☐ | | Accelerated filer | ☐ | ☐ |
| | | |
| Non-accelerated filer |
| ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | | ☐
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Act).Yes ☐ No ☒No☑
Securities registered pursuant to Section 12(b)As of May 2, 2024, there were 157,745,771 shares of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | BANC | | New York Stock Exchange |
| | | | |
| | | | |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
As of August 4, 2023, the registrant had outstanding 56,956,386 shares ofregistrant's voting common stock and 477,321outstanding, excluding 637,617 shares of Classunvested restricted stock, and there were 477,321 shares of the registrant's class B non-voting common stock.stock outstanding.
BANC OF CALIFORNIA, INC.
MARCH 31, 2024 QUARTERLY REPORT ON FORM 10-Q QUARTERLY REPORT
June 30, 2023TABLE OF CONTENTS
Table of Contents
| | | | | | | | |
| | Page |
|
| PART I. FINANCIAL INFORMATION |
| |
| | |
Item 1 –1. | | |
| | |
| | |
| | |
| | |
| | |
| Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) | |
| | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |
Item 2 –2. | | |
| | |
Item 3 –3. | | |
| Item 4. | Controls and Procedures | |
|
| PART II. OTHER INFORMATION |
| | |
| Item 1. | Legal Proceedings | |
Item 4 –1A. | Risk Factors | | |
| |
| |
| | |
Item 1 –2. | | |
| | |
Item 1A – | | |
| | |
Item 2 – | | |
| Item 3. | Defaults Upon Senior Securities | |
Item 3 –4. | Mine Safety Disclosures | | |
| Item 5. | Other Information | |
Item 4 –6. | Exhibits | | |
| | |
Item 5 –Signatures | | |
PART I. FINANCIAL INFORMATION
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Quarterly Report on Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
| | | | | | | | | | | | | | |
| ACL | Allowance for Credit Losses | | HFS | Held for Sale |
Item 6 –AFS | | | 86HLBV | Hypothetical Liquidation at Book Value |
| AFX | American Financial Exchange | | HTM | Held-to-Maturity |
| 87Allowance for Loan and Lease Losses | | ICS | IntraFi Cash Service |
| ALM | Asset Liability Management | | IRR | Interest Rate Risk |
| ASC | Accounting Standards Codification | | LIBOR | London Inter-bank Offered Rate |
| ASU | Accounting Standards Update | | LIHTC | Low Income Housing Tax Credit |
| BAM | BofCal Asset Management Inc. | | LOCOM | Lower of Cost or Market |
| Basel III | A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013 | | MBS | Mortgage-Backed Securities |
| BOLI | Bank Owned Life Insurance | | MVE | Market Value of Equity |
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act | | NAV | Net Asset Value |
| CDI | Core Deposit Intangible Assets | | NII | Net Interest Income |
| CECL | Current Expected Credit Loss | | NIM | Net Interest Margin |
| CET1 | Common Equity Tier 1 | | NVCE | Non-Voting Common Stock Equivalents |
| Civic | Civic Financial Services, LLC (a company acquired on February 1, 2021) | | OREO | Other Real Estate Owned |
| CMBS | Commercial Mortgage-Backed Securities | | PCD | Purchased Credit Deteriorated |
| CMOs | Collateralized Mortgage Obligations | | PRSUs | Performance-Based Restricted Stock Units |
| COVID-19 | Coronavirus Disease | | ROU | Right-of-use |
| CRA | Community Reinvestment Act | | RSUs | Restricted Stock Units |
| CRE | Commercial Real Estate | | S&P | Standard & Poor's |
| CRI | Customer Relationship Intangible Assets | | SBA | Small Business Administration |
| DFPI | California Department of Financial Protection and Innovation | | SBIC | Small Business Investment Company |
| DTAs | Deferred Tax Assets | | SEC | Securities and Exchange Commission |
| FASB | Financial Accounting Standards Board | | SOFR | Secured Overnight Financing Rate |
| FDIC | Federal Deposit Insurance Corporation | | Tax Equivalent Net Interest Income | Net interest income reflecting adjustments related to tax-exempt interest on certain loans and investment securities |
| FHLB | Federal Home Loan Bank of San Francisco | | Tax Equivalent NIM | NIM reflecting adjustments related to tax-exempt interest on certain loans and investment securities |
| FRB | Board of Governors of the Federal Reserve System | | TRSAs | Time-Based Restricted Stock Awards |
| FRBSF | Federal Reserve Bank of San Francisco | | U.S. GAAP | U.S. Generally Accepted Accounting Principles |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Forward-Looking Statements
When used in this report and in documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the “Safe-Harbor” provisions of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements. These statements may relate to future financial performance, strategic plans or objectives, revenue, expense or earnings projections, or other financial items of Banc of California, Inc. and its affiliates (“BANC,” the “Company”, “we”, “us” or “our”). By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.
Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following:
i.changes in general economic conditions, either nationally or in our market areas, including the impact of supply chain disruptions, and the risk of recession or an economic downturn;
ii.risks related to the proposed merger with PacWest Bancorp (“PacWest”) including, among others, (a) the risk that the proposed merger may not be completed in a timely manner or at all; (b) the failure to satisfy the conditions to the consummation of the proposed merger, including obtaining the requisite approval of the Company stockholders and PacWest stockholders within the time period provided in the merger agreement; (c) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement or the related investment agreements; (d) the inability to obtain alternative capital in the event it becomes necessary to complete the proposed merger; (e) the effect of the announcement or pendency of the proposed merger on Company’s and PacWest’s business relationships, operating results and business generally; (f) risks that the proposed transaction disrupts current plans and operations of the Company and PacWest; (g) potential difficulties in retaining the Company and PacWest customers and employees as a result of the proposed transaction; (h) diversion of management’s attention from ongoing business operations and opportunities; and (i) certain restrictions during the pendency of the proposed transaction that may impact the parties’ ability to pursue certain business opportunities or strategic transactions;
iii.changes in the interest rate environment, including the recent and anticipated increases in the FRB benchmark rate, which could adversely affect our revenue and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;
iv.the impacts of continuing inflation;
v.the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial condition of borrowers, and the operational risk of lending activities, including the effectiveness of our underwriting practices and the risk of fraud, any of which may lead to increased loan delinquencies, losses, and nonperforming assets, and may result in our allowance for credit losses not being adequate;
vi.fluctuations in the demand for loans, and fluctuations in commercial and residential real estate values in our market area;
vii.the quality and composition of our securities portfolio;
viii.our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our activities particularly in a rising or high interest rate environment;
ix.the rapid withdrawal of a significant amount of demand deposits over a short period of time;
x.the costs and effects of litigation;
xi.risks related to the Company’s acquisitions, including disruption to current plans and operations; difficulties in customer and employee retention; fees, expenses and charges related to these transactions being significantly higher than anticipated; and our inability to achieve expected revenues, cost savings, synergies, and other benefits; and in the case of our recent acquisition of Deepstack Technologies, LLC (Deepstack), reputational risk, regulatory risk and potential adverse reactions of the Company’s or Deepstack’s customers, suppliers, vendors, employees or other business partners;
xii.results of examinations by regulatory authorities of the Company and the possibility that any such regulatory authority may, among other things, limit our business activities, restrict our ability to invest in certain assets, refrain from issuing an approval or non-objection to certain capital or other actions, increase our allowance for credit losses, result in write-downs of asset values, restrict our ability or that of our bank subsidiary to pay dividends, or impose fines, penalties or sanctions;
xiii.legislative or regulatory changes that adversely affect our business, including changes in tax laws and policies, accounting policies and practices, privacy laws, and regulatory capital or other rules;
xiv.the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses;
xv.errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in valuation;
xvi.failures or security breaches with respect to the network, applications, vendors and computer systems on which we depend, including due to cybersecurity threats
xvii.our ability to attract and retain key members of our senior management team;
xviii.the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;
xix.the impact of bank failures or other adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks;
xx.the possibility that our recorded goodwill could become impaired, which may have an adverse impact on our earnings and capital;
xxi.the risks, uncertainties and assumptions set forth under the heading, “Cautionary Note Regarding Forward-Looking Statements” in the joint press release issued by the Company and PacWest Bancorp on the date hereof with respect to the proposed merger transaction between the Company and PacWest Bancorp; and
xxii.other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this report and from time to time in other documents that we file with or furnish to the SEC, including, without limitation, the risks described under “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share and per share data)
(Unaudited)
| | | | | | | | | | | |
| June 30,
2023 | | December 31,
2022 |
| ASSETS | | | |
| Cash and due from banks | $ | 42,532 | | | $ | 47,434 | |
| Interest-earning deposits in financial institutions | 241,197 | | | 181,462 | |
| Total cash and cash equivalents | 283,729 | | | 228,896 | |
| | | |
| Securities held-to-maturity, at amortized cost (fair value of $267,045 and $262,460 at June 30, 2023 and December 31, 2022) | 328,405 | | | 328,641 | |
| Securities available-for-sale, at fair value (amortized cost of $977,249 and $909,563 at June 30, 2023 and December 31, 2022; allowance for credit losses of $1,036 and $0 at June 30, 2023 and December 31, 2022) | 922,091 | | | 868,297 | |
| | | |
| | | |
| Loans receivable | 7,156,206 | | | 7,115,038 | |
| Allowance for loan losses | (80,883) | | | (85,960) | |
| Loans receivable, net | 7,075,323 | | | 7,029,078 | |
| Federal Home Loan Bank and other bank stock, at cost | 60,281 | | | 57,092 | |
| | | |
| | | |
| | | |
| Premises and equipment, net | 108,235 | | | 107,345 | |
| Bank owned life insurance | 128,973 | | | 127,122 | |
| | | |
| | | |
| Deferred income taxes, net | 64,001 | | | 50,518 | |
| | | |
| Goodwill | 114,312 | | | 114,312 | |
| Other intangibles | 6,603 | | | 7,526 | |
| | | |
| Other assets | 278,312 | | | 278,189 | |
| Total assets | $ | 9,370,265 | | | $ | 9,197,016 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Noninterest-bearing deposits | $ | 2,446,693 | | | $ | 2,809,328 | |
| Interest-bearing deposits | 4,424,383 | | | 4,311,593 | |
| Total deposits | 6,871,076 | | | 7,120,921 | |
| Federal Home Loan Bank (FHLB) advances, net and Federal Reserve Bank (FRB) borrowings | 1,147,997 | | | 727,348 | |
| | | |
| | | |
| Long-term debt, net | 274,121 | | | 274,906 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Accrued expenses and other liabilities | 120,017 | | | 114,223 | |
| Total liabilities | 8,413,211 | | | 8,237,398 | |
| Commitments and contingent liabilities | | | |
| | | |
| Common stock, $0.01 par value per share, 446,863,844 shares authorized; 65,328,043 shares issued and 56,944,706 shares outstanding at June 30, 2023; 65,168,380 shares issued and 58,544,534 shares outstanding at December 31, 2022 | 653 | | | 651 | |
| Class B non-voting non-convertible common stock, $0.01 par value per share, 3,136,156 shares authorized; 477,321 shares issued and outstanding at June 30, 2023 and December 31, 2022 | 5 | | | 5 | |
| Additional paid-in capital | 867,994 | | | 866,478 | |
| Retained earnings | 275,430 | | | 248,988 | |
| Treasury stock, at cost (8,383,337 and 6,623,846 shares at June 30, 2023 and December 31, 2022) | (137,270) | | | (115,907) | |
| Accumulated other comprehensive loss, net | (49,758) | | | (40,597) | |
| Total stockholders’ equity | 957,054 | | | 959,618 | |
| Total liabilities and stockholders’ equity | $ | 9,370,265 | | | $ | 9,197,016 | |
See accompanying notes to consolidated financial statements (unaudited)
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| March 31, | | December 31, |
| | 2024 | | 2023 |
| (Unaudited) |
| | (Dollars in thousands, except par value amounts) |
| ASSETS: | | | |
| Cash and due from banks | $ | 199,922 | | | $ | 202,427 | |
| Interest-earning deposits in financial institutions | 2,885,306 | | | 5,175,149 | |
| Total cash, cash equivalents, and restricted cash | 3,085,228 | | | 5,377,576 | |
| Securities available-for-sale, at fair value, net of allowance for credit losses | | | |
(amortized cost of $2,657,281 and $2,699,255, respectively) | 2,286,682 | | | 2,346,864 | |
| Securities held-to-maturity, at amortized cost, net of allowance for credit losses (fair value of | | | |
$2,153,349 and $2,168,316, respectively) | 2,291,984 | | | 2,287,291 | |
| FRB and FHLB stock, at cost | 129,314 | | | 126,346 | |
| Total investment securities | 4,707,980 | | | 4,760,501 | |
| Loans held for sale | 80,752 | | | 122,757 | |
| Loans and leases held for investment | 25,517,028 | | | 25,534,730 | |
| Deferred fees, net | (44,006) | | | (45,043) | |
| Allowance for loan and lease losses | (291,503) | | | (281,687) | |
| Total loans and leases held for investment, net | 25,181,519 | | | 25,208,000 | |
| Equipment leased to others under operating leases | 339,925 | | | 344,325 | |
| Premises and equipment, net | 144,912 | | | 146,798 | |
| Bank owned life insurance | 341,806 | | | 339,643 | |
| Goodwill | 198,627 | | | 198,627 | |
| Intangible assets, net | 157,226 | | | 165,477 | |
| Deferred tax asset, net | 741,158 | | | 739,111 | |
| Other assets | 1,094,383 | | | 1,131,249 | |
| Total assets | $ | 36,073,516 | | | $ | 38,534,064 | |
| LIABILITIES: | | | |
| Noninterest-bearing deposits | $ | 7,833,608 | | | $ | 7,774,254 | |
| Interest-bearing deposits | 21,058,799 | | | 22,627,515 | |
| Total deposits | 28,892,407 | | | 30,401,769 | |
Borrowings (including $123,824 and $123,116 at fair value, respectively) | 2,139,498 | | | 2,911,322 | |
| Subordinated debt | 937,717 | | | 936,599 | |
| Accrued interest payable and other liabilities | 709,744 | | | 893,609 | |
| Total liabilities | 32,679,366 | | | 35,143,299 | |
| Commitments and contingencies | | | |
| STOCKHOLDERS' EQUITY: | | | |
| Preferred stock | 498,516 | | | 498,516 | |
Common stock ($0.01 par value, 158,390,708 shares issued and 157,608,893 outstanding at | | | |
| March 31, 2024; 157,651,752 shares issued and 156,790,349 outstanding at December 31, 2023) | 1,583 | | | 1,577 | |
Class B non-voting common stock ($0.01 par value, 477,321 shares issued at March 31, 2024 | | | |
| and 477,321 shares issued at December 31, 2023) | 5 | | | 5 | |
Non-voting common stock equivalents ($0.01 par value, 10,145,600 shares issued at | | | |
| March 31, 2024 and 10,829,990 shares issued at December 31, 2023) | 101 | | | 108 | |
| Additional paid-in capital | 3,827,777 | | | 3,840,974 | |
| Retained deficit | (497,396) | | | (518,301) | |
| Accumulated other comprehensive loss, net | (436,436) | | | (432,114) | |
| Total stockholders' equity | 3,394,150 | | | 3,390,765 | |
| Total liabilities and stockholders' equity | $ | 36,073,516 | | | $ | 38,534,064 | |
See Notes to Condensed Consolidated Financial Statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSEARNINGS (LOSS)
(Amounts in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended
June 30, | | |
| June 30,
2023 | | March 31,
2023 | | June 30,
2022 | | 2023 | | 2022 | | |
| Interest and dividend income | | | | | | | | | | | |
| Loans, including fees | $ | 92,889 | | | $ | 87,418 | | | $ | 78,895 | | | $ | 180,307 | | | $ | 155,129 | | | |
| Securities | 15,804 | | | 14,909 | | | 8,124 | | | 30,713 | | | 15,433 | | | |
| Other interest-earning assets | 7,458 | | | 4,592 | | | 1,399 | | | 12,050 | | | 2,125 | | | |
| Total interest and dividend income | 116,151 | | | 106,919 | | | 88,418 | | | 223,070 | | | 172,687 | | | |
| Interest expense | | | | | | | | | | | |
| Deposits | 28,118 | | | 20,527 | | | 3,180 | | | 48,645 | | | 4,568 | | | |
| FHLB advances and FRB borrowings | 14,703 | | | 9,648 | | | 3,114 | | | 24,351 | | | 6,067 | | | |
| | | | | | | | | | | |
| Other interest-bearing liabilities | 3,698 | | | 3,691 | | | 3,825 | | | 7,389 | | | 7,312 | | | |
| Total interest expense | 46,519 | | | 33,866 | | | 10,119 | | | 80,385 | | | 17,947 | | | |
| Net interest income | 69,632 | | | 73,053 | | | 78,299 | | | 142,685 | | | 154,740 | | | |
| Provision for (reversal of) credit losses | 1,900 | | | 2,000 | | | — | | | 3,900 | | | (31,542) | | | |
| Net interest income after provision for (reversal of) credit losses | 67,732 | | | 71,053 | | | 78,299 | | | 138,785 | | | 186,282 | | | |
| Noninterest income | | | | | | | | | | | |
| Customer service fees | 2,022 | | | 1,979 | | | 2,578 | | | 4,001 | | | 5,012 | | | |
| Loan servicing income | 574 | | | 547 | | | 109 | | | 1,121 | | | 321 | | | |
| | | | | | | | | | | |
| Income from bank owned life insurance | 951 | | | 900 | | | 810 | | | 1,851 | | | 1,606 | | | |
| | | | | | | | | | | |
| Net gain on sale of securities available-for-sale | — | | | — | | | — | | | — | | | 16 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| All other income | 2,477 | | | 4,433 | | | 3,689 | | | 6,910 | | | 6,141 | | | |
| Total noninterest income | 6,024 | | | 7,859 | | | 7,186 | | | 13,883 | | | 13,096 | | | |
| Noninterest expense | | | | | | | | | | | |
| Salaries and employee benefits | 28,282 | | | 29,656 | | | 28,264 | | | 57,938 | | | 57,251 | | | |
| | | | | | | | | | | |
| Occupancy and equipment | 5,603 | | | 5,526 | | | 5,741 | | | 11,129 | | | 11,378 | | | |
| Professional fees | 4,001 | | | 4,072 | | | 4,001 | | | 8,073 | | | 6,840 | | | |
| | | | | | | | | | | |
| Data processing | 1,686 | | | 1,563 | | | 1,782 | | | 3,249 | | | 3,610 | | | |
| | | | | | | | | | | |
| Regulatory assessments | 1,301 | | | 1,202 | | | 1,021 | | | 2,503 | | | 1,796 | | | |
| Software and technology | 3,579 | | | 3,274 | | | 2,747 | | | 6,853 | | | 5,447 | | | |
| (Gain) loss on investments in alternative energy partnerships | (36) | | | 1,618 | | | 1,043 | | | 1,582 | | | 1,201 | | | |
| Reversal of loan repurchase reserves | (808) | | | (11) | | | (490) | | | (819) | | | (961) | | | |
| Amortization of other intangibles | 462 | | | 461 | | | 313 | | | 923 | | | 754 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other expense | 5,062 | | | 3,878 | | | 4,190 | | | 8,940 | | | 7,892 | | | |
| Total noninterest expense | 49,132 | | | 51,239 | | | 48,612 | | | 100,371 | | | 95,208 | | | |
| Income before income taxes | 24,624 | | | 27,673 | | | 36,873 | | | 52,297 | | | 104,170 | | | |
| Income tax expense | 6,745 | | | 7,395 | | | 10,161 | | | 14,140 | | | 28,946 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | 17,879 | | | 20,278 | | | 26,712 | | | 38,157 | | | 75,224 | | | |
| Preferred stock dividends | — | | | — | | | — | | | — | | | 1,420 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Impact of preferred stock redemption | — | | | — | | | — | | | — | | | 3,747 | | | |
| Net income available to common stockholders | $ | 17,879 | | | $ | 20,278 | | | $ | 26,712 | | | $ | 38,157 | | | $ | 70,057 | | | |
| Earnings per common share: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Basic | $ | 0.31 | | | $ | 0.34 | | | $ | 0.44 | | | $ | 0.65 | | | $ | 1.13 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Diluted | $ | 0.31 | | | $ | 0.34 | | | $ | 0.43 | | | $ | 0.65 | | | $ | 1.13 | | | |
| Earnings per class B common share: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Basic | $ | 0.31 | | | $ | 0.34 | | | $ | 0.44 | | | $ | 0.65 | | | $ | 1.13 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Diluted | $ | 0.31 | | | $ | 0.34 | | | $ | 0.44 | | | $ | 0.65 | | | $ | 1.13 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | March 31, | | |
| | 2024 | | 2023 | | 2023 | | | | |
| (Unaudited) |
| | (In thousands, except per share amounts) |
| Interest income: | | | | | | | | | |
| Loans and leases | $ | 385,465 | | | $ | 346,308 | | | $ | 430,685 | | | | | |
| Investment securities | 34,303 | | | 41,280 | | | 44,237 | | | | | |
| Deposits in financial institutions | 58,936 | | | 79,652 | | | 42,866 | | | | | |
| Total interest income | 478,704 | | | 467,240 | | | 517,788 | | | | | |
| Interest expense: | | | | | | | | | |
| Deposits | 194,807 | | | 207,760 | | | 155,892 | | | | | |
| Borrowings | 38,124 | | | 92,474 | | | 69,122 | | | | | |
| Subordinated debt | 16,671 | | | 15,955 | | | 13,502 | | | | | |
| Total interest expense | 249,602 | | | 316,189 | | | 238,516 | | | | | |
| Net interest income | 229,102 | | | 151,051 | | | 279,272 | | | | | |
| Provision for credit losses | 10,000 | | | 47,000 | | | 3,000 | | | | | |
| Net interest income after provision for credit losses | 219,102 | | | 104,051 | | | 276,272 | | | | | |
| Noninterest income: | | | | | | | | | |
| Leased equipment income | 11,716 | | | 12,369 | | | 13,857 | | | | | |
| Other commissions and fees | 8,142 | | | 8,860 | | | 10,344 | | | | | |
| Service charges on deposit accounts | 4,705 | | | 4,562 | | | 3,573 | | | | | |
| (Loss) gain on sale of loans and leases | (448) | | | (3,526) | | | 2,962 | | | | | |
| Loss on sale of securities | — | | | (442,413) | | | — | | | | | |
| Dividends and gains on equity investments | 3,068 | | | 8,138 | | | 1,098 | | | | | |
| Warrant income (loss) | 178 | | | (173) | | | (333) | | | | | |
| LOCOM HFS adjustment | 330 | | | 3,175 | | | — | | | | | |
| Other income | 6,125 | | | 8,606 | | | 4,890 | | | | | |
| Total noninterest income (loss) | 33,816 | | | (400,402) | | | 36,391 | | | | | |
| Noninterest expense: | | | | | | | | | |
| Compensation | 92,236 | | | 89,354 | | | 88,476 | | | | | |
| Insurance and assessments | 20,461 | | | 60,016 | | | 11,717 | | | | | |
| Customer related expense | 30,919 | | | 45,826 | | | 24,005 | | | | | |
| Occupancy | 17,968 | | | 15,925 | | | 15,067 | | | | | |
| Information technology and data processing | 15,418 | | | 13,099 | | | 12,979 | | | | | |
| Leased equipment depreciation | 7,520 | | | 7,447 | | | 9,375 | | | | | |
| Other professional services | 5,075 | | | 2,980 | | | 6,073 | | | | | |
| Loan expense | 4,491 | | | 4,446 | | | 6,524 | | | | | |
| Intangible asset amortization | 8,404 | | | 4,230 | | | 2,411 | | | | | |
| Acquisition, integration and reorganization costs | — | | | 111,800 | | | 8,514 | | | | | |
| Goodwill impairment | — | | | — | | | 1,376,736 | | | | | |
| Other expense | 8,026 | | | 8,515 | | | 11,126 | | | | | |
| Total noninterest expense | 210,518 | | | 363,638 | | | 1,573,003 | | | | | |
| Earnings (loss) before income taxes | 42,400 | | | (659,989) | | | (1,260,340) | | | | | |
| Income tax expense (benefit) | 11,548 | | | (177,034) | | | (64,916) | | | | | |
| Net earnings (loss) | 30,852 | | | (482,955) | | | (1,195,424) | | | | | |
| Preferred stock dividends | 9,947 | | | 9,947 | | | 9,947 | | | | | |
| Net earnings (loss) available to common and equivalent stockholders | $ | 20,905 | | | $ | (492,902) | | | $ | (1,205,371) | | | | | |
| | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | |
| Basic | $ | 0.12 | | | $ | (4.55) | | | $ | (15.56) | | | | | |
| Diluted | $ | 0.12 | | | $ | (4.55) | | | $ | (15.56) | | | | | |
See accompanying notesNotes to consolidated financial statements (unaudited)Condensed Consolidated Financial Statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | |
| March 31, | | December 31, | | March 31, | | |
| 2024 | | 2023 | | 2023 | | | | |
| (Unaudited) |
| (In thousands) |
| Net earnings (loss) | $ | 30,852 | | | $ | (482,955) | | | $ | (1,195,424) | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | |
| | | | | | | | | |
| Unrealized net holding (losses) gains on securities available-for-sale arising during the period | (18,208) | | | 161,900 | | | 67,971 | | | | | |
| | | | | | | | | |
| Income tax benefit (expense) related to unrealized net holding gains (losses) arising during the period | 5,167 | | | (44,206) | | | (18,828) | | | | | |
| | | | | | | | | |
| Unrealized net holding (losses) gains on securities available-for-sale, net of tax | (13,041) | | | 117,694 | | | 49,143 | | | | | |
| | | | | | | | | |
Reclassification adjustment for net losses included in net earnings (1) | — | | | 442,413 | | | — | | | | | |
| | | | | | | | | |
| Income tax benefit related to reclassification adjustment | — | | | (120,797) | | | — | | | | | |
| | | | | | | | | |
| Reclassification adjustment for net losses included in net earnings, net of tax | — | | | 321,616 | | | — | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Amortization of unrealized net loss on securities | | | | | | | | | |
| transferred from available-for-sale to held-to-maturity | 8,110 | | | 8,136 | | | 7,884 | | | | | |
| Income tax expense related to amortization of unrealized net loss on | | | | | | | | | |
| | | | | | | | | |
| securities transferred from available-for-sale to held-to-maturity | (2,302) | | | (2,254) | | | (2,184) | | | | | |
| Amortization of unrealized net loss on securities transferred from | | | | | | | | | |
| | | | | | | | | |
| available-for-sale to held-to-maturity, net of tax | 5,808 | | | 5,882 | | | 5,700 | | | | | |
| Change in fair value of credit-linked notes | (1,251) | | | 687 | | | — | | | | | |
| | | | | | | | | |
| Income tax benefit (expense) related to change in fair value of credit-linked notes | 355 | | | (254) | | | — | | | | | |
| | | | | | | | | |
| Change in fair value of credit-linked notes, net of tax | (896) | | | 433 | | | — | | | | | |
| Unrealized gain (loss) on cash flow hedges arising during the period | 5,425 | | | (5,714) | | | — | | | | | |
| Income tax (expense) benefit related to unrealized gain (loss) on | | | | | | | | | |
| cash flow hedges arising during the period | (1,618) | | | 1,657 | | | — | | | | | |
| Unrealized gain (loss) on cash flow hedges, net of tax | 3,807 | | | (4,057) | | | — | | | | | |
| Other comprehensive (loss) income, net of tax | (4,322) | | | 441,568 | | | 54,843 | | | | | |
| Comprehensive income (loss) | $ | 26,530 | | | $ | (41,387) | | | $ | (1,140,581) | | | | | |
(1)Entire amounts are recognized in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended
June 30, |
| June 30,
2023 | | March 31,
2023 | | June 30,
2022 | | 2023 | | 2022 |
| Net income | $ | 17,879 | | | $ | 20,278 | | | $ | 26,712 | | | $ | 38,157 | | | $ | 75,224 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | |
| Unrealized loss on available-for-sale securities: | | | | | | | | | |
| Unrealized loss arising during the period | (5,215) | | | (3,926) | | | (15,113) | | | (9,141) | | | (42,026) | |
| | | | | | | | | |
| | | | | | | | | |
| Reclassification adjustment for gain included in net income | — | | | — | | | — | | | — | | | (11) | |
| Total change in unrealized loss on available-for-sale securities | (5,215) | | | (3,926) | | | (15,113) | | | (9,141) | | | (42,037) | |
| Unrealized gain (loss) on cash flow hedge: | | | | | | | | | |
| Unrealized gain (loss) arising during the period | 5,764 | | | (6,146) | | | — | | | (382) | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity | 182 | | | 180 | | | 226 | | | 362 | | | 235 | |
| Total other comprehensive income (loss) | 731 | | | (9,892) | | | (14,887) | | | (9,161) | | | (41,802) | |
| Comprehensive income | $ | 18,610 | | | $ | 10,386 | | | $ | 11,825 | | | $ | 28,996 | | | $ | 33,422 | |
See accompanying notesNotes to consolidated financial statements (unaudited)Condensed Consolidated Financial Statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Voting | | Class B
Non-Voting | | | | | |
| Three Months Ended June 30, 2023 | | | | | | | | | | | | | | | |
| Balance at March 31, 2023 | | | $ | 653 | | | $ | 5 | | | $ | 866,306 | | | $ | 263,524 | | | $ | (121,092) | | | $ | (50,489) | | | $ | 958,907 | |
| | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | |
| Net income | | | — | | | — | | | — | | | 17,879 | | | — | | | — | | | 17,879 | |
| Other comprehensive loss, net | | | — | | | — | | | — | | | — | | | — | | | 731 | | | 731 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Purchase of 1,348,545 shares of treasury stock, including excise tax | | | — | | | — | | | — | | | — | | | (16,178) | | | — | | | (16,178) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Share-based compensation expense | | | — | | | — | | | 1,726 | | | — | | | — | | | — | | | 1,726 | |
| | | | | | | | | | | | | | | |
| Restricted stock surrendered due to employee tax liability | | | — | | | — | | | (38) | | | — | | | — | | | — | | | (38) | |
| | | | | | | | | | | | | | | |
| Shares purchased under the Dividend Reinvestment Plan | | | — | | | — | | | — | | | (93) | | | — | | | — | | | (93) | |
| | | | | | | | | | | | | | | |
| Dividends declared ($0.10 per common share) | | | — | | | — | | | — | | | (5,880) | | | — | | | — | | | (5,880) | |
| | | | | | | | | | | | | | | |
| Balance at June 30, 2023 | | | $ | 653 | | | $ | 5 | | | $ | 867,994 | | | $ | 275,430 | | | $ | (137,270) | | | $ | (49,758) | | | $ | 957,054 | |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | | | | | | | | | | | | | | |
| Balance at March 31, 2022 | | | $ | 646 | | | $ | 5 | | | $ | 855,198 | | | $ | 187,457 | | | $ | (45,125) | | | $ | (19,172) | | | $ | 979,009 | |
| | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | |
| Net income | | | — | | | — | | | — | | | 26,712 | | | — | | | — | | | 26,712 | |
| Other comprehensive loss, net | | | — | | | — | | | — | | | — | | | — | | | (14,887) | | | (14,887) | |
| Issuance of common stock | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Repurchase of 2,113,176 shares of common stock | | | — | | | — | | | — | | | — | | | (38,888) | | | — | | | (38,888) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Share-based compensation expense | | | — | | | — | | | 1,482 | | | — | | | — | | | — | | | 1,482 | |
| Restricted stock surrendered due to employee tax liability | | | — | | | — | | | (600) | | | — | | | — | | | — | | | (600) | |
| | | | | | | | | | | | | | | |
| Shares purchased under the Dividend Reinvestment Plan | | | — | | | — | | | — | | | (30) | | | — | | | — | | | (30) | |
| | | | | | | | | | | | | | | |
| Dividends declared ($0.06 per common share) | | | — | | | — | | | — | | | (3,668) | | | — | | | — | | | (3,668) | |
| | | | | | | | | | | | | | | |
| Balance at June 30, 2022 | | | $ | 647 | | | $ | 5 | | | $ | 856,079 | | | $ | 210,471 | | | $ | (84,013) | | | $ | (34,059) | | | $ | 949,130 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| | | | | | | Non- | | | | | | | | |
| | | Common Stock | | Voting | | | | | | Accumulated | | |
| | | | | Class B | | Common | | Additional | | | | Other | | |
| Preferred | | | | Non- | | Stock | | Paid-in | | Retained | | Comprehensive | | |
| | Stock | | Voting | | Voting | | Equivalents | | Capital | | Deficit | | Loss | | Total |
| (Unaudited) |
| (In thousands, except per share amount) |
| Balance, December 31, 2023 | $ | 498,516 | | | $ | 1,577 | | | $ | 5 | | | $ | 108 | | | $ | 3,840,974 | | | $ | (518,301) | | | $ | (432,114) | | | $ | 3,390,765 | |
| Net earnings | — | | | — | | | — | | | — | | | — | | | 30,852 | | | — | | | 30,852 | |
| Other comprehensive loss, | | | | | | | | | | | | | | | |
| net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (4,322) | | | (4,322) | |
| Restricted stock awarded and | | | | | | | | | | | | | | | |
| earned stock compensation, | | | | | | | | | | | | | | | |
| net of shares forfeited | — | | | 6 | | | — | | | (7) | | | 4,657 | | | — | | | — | | | 4,656 | |
| Restricted stock surrendered | — | | | — | | | — | | | — | | | (1,238) | | | — | | | — | | | (1,238) | |
| Shares repurchased under the | | | | | | | | | | | | | | | |
| Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | 70 | | | — | | | — | | | 70 | |
| Cash dividends paid: | | | | | | | | | | | | | | | |
Preferred stock, $0.48/share | — | | | — | | | — | | | — | | | — | | | (9,947) | | | — | | | (9,947) | |
Common stock, $0.10/share | — | | | — | | | — | | | — | | | (16,686) | | | — | | | — | | | (16,686) | |
| Balance, March 31, 2024 | $ | 498,516 | | | $ | 1,583 | | | $ | 5 | | | $ | 101 | | | $ | 3,827,777 | | | $ | (497,396) | | | $ | (436,436) | | | $ | 3,394,150 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 | | | | | | | | |
| | | | | | | Non-Voting | | | | | | | | |
| | | Common Stock | | Common | | | | | | | | |
| Preferred | | | | Class B | | Stock | | | | | | | | |
| Stock | | Voting | | Non-Voting | | Equivalents | | | | | | | | |
| (Unaudited) | | | | | | | | |
| (In ones) | | | | | | | | |
| Number of shares, December 31, 2023 | 513,250 | | | 157,651,752 | | | 477,321 | | | 10,829,990 | | | | | | | | | |
| Restricted stock awarded and earned stock | | | | | | | | | | | | | | | |
| compensation, net of shares forfeited | — | | | 67,209 | | | — | | | — | | | | | | | | | |
| Restricted stock surrendered | — | | | (17,364) | | | — | | | — | | | | | | | | | |
| Shares purchased under Dividend Reinvestment Plan | — | | | 4,721 | | | — | | | — | | | | | | | | | |
| Conversion of non-voting common stock equivalents | | | | | | | | | | | | | | | |
| to voting common stock | — | | | 684,390 | | | — | | | (684,390) | | | | | | | | | |
| Number of shares, March 31, 2024 | 513,250 | | | 158,390,708 | | | 477,321 | | | 10,145,600 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
See accompanying notesNotes to consolidated financial statements (unaudited)Condensed Consolidated Financial Statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’CHANGES IN STOCKHOLDERS' EQUITY continued
(Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| | | | | | | Non- | | | | | | | | |
| | | Common Stock | | Voting | | | | | | Accumulated | | |
| | | | | Class B | | Common | | Additional | | | | Other | | |
| Preferred | | | | Non- | | Stock | | Paid-in | | Retained | | Comprehensive | | |
| | Stock | | Voting | | Voting | | Equivalents | | Capital | | Earnings | | Loss | | Total |
| (Unaudited) |
| (In thousands, except per share amount) |
| Balance, December 31, 2022 | $ | 498,516 | | | $ | 1,230 | | | $ | — | | | $ | — | | | $ | 2,821,064 | | | $ | 1,420,624 | | | $ | (790,903) | | | $ | 3,950,531 | |
| Net loss | — | | | | | | | | | | | (1,195,424) | | | — | | | (1,195,424) | |
| Other comprehensive income, | | | | | | | | | | | | | | | |
| net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 54,843 | | | 54,843 | |
| Restricted stock awarded and | | | | | | | | | | | | | | | |
| earned stock compensation, | | | | | | | | | | | | | | | |
| net of shares forfeited | — | | | 2 | | | — | | | — | | | 4,981 | | | | | — | | | 4,983 | |
| Restricted stock surrendered | — | | | — | | | — | | | — | | | (4,053) | | | — | | | — | | | (4,053) | |
| Cash dividends paid: | | | | | | | | | | | | | | | |
| Preferred stock, $0.48/share | — | | | — | | | — | | | — | | | — | | | (9,947) | | | — | | | (9,947) | |
| Common stock, $0.25/share | — | | | | | — | | | — | | | (29,456) | | | | | — | | | (29,456) | |
| Balance, March 31, 2023 | $ | 498,516 | | | $ | 1,232 | | | $ | — | | | $ | — | | | $ | 2,792,536 | | | $ | 215,253 | | | $ | (736,060) | | | $ | 2,771,477 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Voting | | Class B
Non-Voting | | | | | |
| Six Months Ended June 30, 2023 | | | | | | | | | | | | | | | |
| Balance at December 31, 2022 | $ | — | | | $ | 651 | | | $ | 5 | | | $ | 866,478 | | | $ | 248,988 | | | $ | (115,907) | | | $ | (40,597) | | | $ | 959,618 | |
| | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | 38,157 | | | — | | | — | | | 38,157 | |
| Other comprehensive loss, net | — | | | — | | | — | | | — | | | — | | | — | | | (9,161) | | | (9,161) | |
| Issuance of common stock | — | | | 3 | | | — | | | (3) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Purchase of 1,759,491 shares of treasury stock, including excise tax | — | | | — | | | — | | | — | | | — | | | (21,363) | | | — | | | (21,363) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Share-based compensation expense | — | | | — | | | — | | | 3,181 | | | — | | | — | | | — | | | 3,181 | |
| | | | | | | | | | | | | | | |
| Restricted stock surrendered due to employee tax liability | — | | | (1) | | | — | | | (1,662) | | | — | | | — | | | — | | | (1,663) | |
| | | | | | | | | | | | | | | |
| Shares purchased under the Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | (189) | | | — | | | — | | | (189) | |
| | | | | | | | | | | | | | | |
| Dividends declared ($0.20 per common share) | — | | | — | | | — | | | — | | | (11,526) | | | — | | | — | | | (11,526) | |
| Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance at June 30, 2023 | $ | — | | | $ | 653 | | | $ | 5 | | | $ | 867,994 | | | $ | 275,430 | | | $ | (137,270) | | | $ | (49,758) | | | $ | 957,054 | |
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | $ | 94,956 | | | $ | 646 | | | $ | 5 | | | $ | 854,873 | | | $ | 147,894 | | | $ | (40,827) | | | $ | 7,743 | | | $ | 1,065,290 | |
| | | | | | | | | | | | | | | |
| Comprehensive loss: | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | 75,224 | | | — | | | — | | | 75,224 | |
| Other comprehensive loss, net | — | | | — | | | — | | | — | | | — | | | — | | | (41,802) | | | (41,802) | |
| Issuance of common stock | — | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Redemption of preferred stock | (94,956) | | | — | | | — | | | — | | | (3,747) | | | — | | | — | | | (98,703) | |
| | | | | | | | | | | | | | | |
| Repurchase of 2,328,726 shares of common stock | — | | | — | | | — | | | — | | | — | | | (43,186) | | | — | | | (43,186) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Share-based compensation expense | — | | | — | | | — | | | 2,767 | | | — | | | — | | | — | | | 2,767 | |
| Restricted stock surrendered due to employee tax liability | — | | | — | | | — | | | (1,560) | | | — | | | — | | | — | | | (1,560) | |
| | | | | | | | | | | | | | | |
| Shares purchased under the Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | (60) | | | — | | | — | | | (60) | |
| | | | | | | | | | | | | | | |
| Dividends declared ($0.12 per common share) | — | | | — | | | — | | | — | | | (7,420) | | | — | | | — | | | (7,420) | |
| Preferred stock dividends | — | | | — | | | — | | | — | | | (1,420) | | | — | | | — | | | (1,420) | |
| Balance at June 30, 2022 | $ | — | | | $ | 647 | | | $ | 5 | | | $ | 856,079 | | | $ | 210,471 | | | $ | (84,013) | | | $ | (34,059) | | | $ | 949,130 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| | | | | | | Non-Voting |
| | | Common Stock | | Common |
| Preferred | | | | Class B | | Stock |
| Stock | | Voting | | Non-Voting | | Equivalents |
| (Unaudited) |
| (In ones) |
| Number of shares, December 31, 2022 | 513,250 | | | 78,973,869 | | | — | | | — | |
| Restricted stock awarded and earned stock | | | | | | | |
| compensation, net of shares forfeited | — | | | 110,661 | | | — | | | — | |
| Restricted stock surrendered | — | | | (96,106) | | | — | | | — | |
| | | | | | | |
| Number of shares, March 31, 2023 | 513,250 | | | 78,988,424 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notesNotes to consolidated financial statements (unaudited)Condensed Consolidated Financial Statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) | | | | | | | | | | | |
| Three Months Ended |
| | March 31, |
| | 2024 | | 2023 |
| (Unaudited) |
| | (In thousands) |
| Cash flows from operating activities: | | | |
| Net earnings (loss) | $ | 30,852 | | | $ | (1,195,424) | |
| Adjustments to reconcile net earnings (loss) to net cash used in operating activities: | | | |
| Goodwill impairment | — | | | 1,376,736 | |
| Depreciation and amortization | 13,875 | | | 13,939 | |
| Amortization of net premiums on investment securities | 6,138 | | | 9,526 | |
| Decrease in deferred loan fees and discounts, net | (24,087) | | | (16,013) | |
| Amortization of intangible assets | 8,404 | | | 2,411 | |
| Amortization of operating lease ROU assets | 8,204 | | | 6,655 | |
| Provision for credit losses | 10,000 | | | 3,000 | |
| Gain on sale of foreclosed assets | (321) | | | (196) | |
| Provision for losses on foreclosed assets | 297 | | | 527 | |
| Loss (gain) on sale of loans and leases | 448 | | | (2,962) | |
| Gain on sale of premises and equipment | (1) | | | (7) | |
| | | |
| Gain on BOLI death benefit | — | | | (350) | |
| Unrealized loss (gain) on derivatives, foreign currencies, and credit-linked notes, net | 513 | | | (1,781) | |
| LOCOM HFS adjustment | (330) | | | — | |
| Earned stock compensation | 4,656 | | | 4,983 | |
| | | |
| Decrease (increase) in other assets | 31,579 | | | (129,223) | |
| Decrease in accrued interest payable and other liabilities | (178,623) | | | (108,825) | |
| Net cash used in operating activities | (88,396) | | | (37,004) | |
| | | |
| Cash flows from investing activities: | | | |
| | | |
| Net increase in loans and leases | (202,957) | | | (77,243) | |
| Proceeds from sales of loans and leases | 273,241 | | | 290,228 | |
| Proceeds from maturities and paydowns of securities available-for-sale | 44,517 | | | 56,956 | |
| | | |
| Purchases of securities available-for-sale | (5,558) | | | (550) | |
| Proceeds from maturities and paydowns of securities held-to-maturity | 294 | | | 288 | |
| Purchases of FHLB and FRB stock | (2,968) | | | (194,041) | |
| Redemptions of FHLB and FRB stock | — | | | 81,181 | |
| Proceeds from sales of foreclosed assets | 5,893 | | | 5,124 | |
| Purchases of premises and equipment, net | (1,942) | | | (9,236) | |
| Proceeds from sales of premises and equipment | 2 | | | 13 | |
| Proceeds from BOLI death benefit | — | | | 1,844 | |
| Net increase in equipment leased to others under operating leases | (3,120) | | | (5,097) | |
| Net cash provided by investing activities | 107,402 | | | 149,467 | |
| | | |
| Cash flows from financing activities: | | | |
| Net increase (decrease) in noninterest-bearing deposits | 59,354 | | | (4,181,598) | |
| Net decrease in interest-bearing deposits | (1,568,716) | | | (1,567,175) | |
| Repayments of borrowings | (1,074,191) | | | (251,657) | |
| Proceeds from borrowings | 300,000 | | | 10,371,337 | |
| | | |
| | | |
| Shares purchased under the Dividend Reinvestment Plan | 70 | | | — | |
| Restricted stock surrendered | (1,238) | | | (4,053) | |
| Preferred stock dividends paid | (9,947) | | | (9,947) | |
| Common stock dividends paid | (16,686) | | | (29,456) | |
| Net cash (used in) provided by financing activities | (2,311,354) | | | 4,327,451 | |
| | | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (2,292,348) | | | 4,439,914 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 5,377,576 | | | 2,240,222 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 3,085,228 | | | $ | 6,680,136 | |
| | | |
(Unaudited)See Notes to Condensed Consolidated Financial Statements.
| | | | | | | | | | | |
| Six Months Ended
June 30, |
| 2023 | | 2022 |
| Cash flows from operating activities: | | | |
| Net income | $ | 38,157 | | | $ | 75,224 | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | |
| Provision for (reversal of) credit losses | 3,900 | | | (31,542) | |
| | | |
| Reversal of loan repurchase reserves | (819) | | | (961) | |
| Depreciation on premises and equipment | 7,345 | | | 7,920 | |
| Amortization of other intangibles | 923 | | | 754 | |
| Amortization of debt issuance costs | 864 | | | 837 | |
| Net amortization of premium on securities | 184 | | | 587 | |
| | | |
| | | |
| | | |
| Net (accretion) amortization of deferred loan costs (fees) and purchased premiums (discounts) | 684 | | | 571 | |
| | | |
| | | |
| Deferred income tax expense | 1,669 | | | 975 | |
| Bank owned life insurance income | (1,851) | | | (1,606) | |
| Share-based compensation expense | 3,181 | | | 2,767 | |
| Income (loss) from interest rate swaps | 14 | | | (185) | |
| Loss on investments in alternative energy partnerships and affordable housing investments | 4,520 | | | 3,456 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Net gain on sale of securities available-for-sale | — | | | (16) | |
| | | |
| | | |
| Gain on redemption of senior notes | (80) | | | — | |
| Gain on sale-leaseback of branch | — | | | (771) | |
| Loss on disposal of property and equipment | — | | | 8 | |
| | | |
| | | |
| | | |
| Repurchase of mortgage loans | (609) | | | (1,262) | |
| | | |
| | | |
| Proceeds from sales of and principal collected on loans held-for-sale | 346 | | | — | |
| | | |
| | | |
| | | |
| Change in accrued interest receivable and other assets | (15,319) | | | 26,514 | |
| | | |
| Change in accrued interest payable and other liabilities | 7,327 | | | (8,122) | |
| Net cash provided by operating activities | 50,436 | | | 75,148 | |
| | | |
| Cash flows from investing activities: | | | |
| Proceeds from sales of securities available-for-sale | — | | | 17,645 | |
| Proceeds from maturities and calls of securities available-for-sale | 20,000 | | | 38,500 | |
| Purchases of securities available-for-sale | (101,740) | | | (15,000) | |
| Proceeds from principal repayments of securities held-to-maturity and available-for-sale | 14,613 | | | 20,495 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Loan originations and principal collections, net | 9,277 | | | 474,252 | |
| Purchases of loans | (61,420) | | | (641,556) | |
| Redemption of FHLB stock | 30,543 | | | — | |
| Purchases of FHLB and other bank stock | (33,732) | | | (6,857) | |
| | | |
| | | |
| | | |
| Purchase of mortgage servicing rights | — | | | (20,563) | |
| | | |
| Purchases of premises and equipment | (5,016) | | | (1,381) | |
| Proceeds from sale-leaseback of branch | — | | | 2,400 | |
| | | |
| Funding of equity investments | (3,597) | | | (3,950) | |
| Decrease in investments in alternative energy partnerships | 717 | | | 1,156 | |
| Net cash used in investing activities | (130,355) | | | (134,859) | |
| | | |
| Cash flows from financing activities: | | | |
| Net (decrease) increase in deposits | (249,777) | | | 119,248 | |
| Net increase in short-term FHLB advances and FRB borrowings | 320,000 | | | 35,000 | |
| | | |
| Proceeds from FHLB long-term advances and FRB borrowings | 100,000 | | | — | |
| | | |
| | | |
| Net increase in other borrowings | — | | | 73,000 | |
| | | |
| | | |
| Redemption of preferred stock | — | | | (98,703) | |
| | | |
| | | |
| Redemption of long term debt | (920) | | | — | |
| Purchase of treasury stock | (21,363) | | | (43,186) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Purchase of stock surrendered to pay tax liability | (1,662) | | | (1,560) | |
| | | |
| Dividends paid on preferred stock | — | | | (1,727) | |
| Dividends paid on common stock | (11,526) | | | (7,420) | |
| Net cash provided by financing activities | 134,752 | | | 74,652 | |
| Net change in cash and cash equivalents | 54,833 | | | 14,941 | |
| Cash and cash equivalents at beginning of period | 228,896 | | | 228,123 | |
| Cash and cash equivalents at end of period | $ | 283,729 | | | $ | 243,064 | |
| | | |
| Supplemental cash flow information | | | |
| Interest paid on deposits and borrowed funds | 71,734 | | | 16,574 | |
| Income taxes paid | — | | | 9,692 | |
| | | |
| | | |
| Supplemental disclosure of non-cash activities | | | |
| Transfer from loans to other real estate owned, net | 882 | | | — | |
| | | |
| | | |
| Reclassification of securities available-for-sale to held-to-maturity | — | | | 329,416 | |
| | | |
| | | |
| Operating lease right-of-use assets received in exchange for lease liabilities | 1,633 | | | 1,253 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Commitments to fund low income housing tax credit investments | — | | | 7,000 | |
| Goodwill adjustments for purchase accounting | — | | | 826 | |
| | | |
| | | |
| | | |
See accompanying notes to consolidated financial statements (unaudited)
9
10
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)OF CASH FLOWS
June 30, 2023 | | | | | | | | | | | |
| Three Months Ended |
| | March 31, |
| | 2024 | | 2023 |
| (Unaudited) |
| | (In thousands) |
| Supplemental disclosures of cash flow information: | | | |
| Cash paid for interest | $ | 360,934 | | | $ | 209,340 | |
| Cash (received) paid for income taxes | (7,193) | | | 786 | |
| Loans transferred to foreclosed assets | 10,964 | | | 2,568 | |
| Transfers from loans held for investment to loans held for sale | 7,466 | | | 2,796,365 | |
| Transfers to loans held for investment from loans held for sale | 1,179 | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
See Notes to Condensed Consolidated Financial Statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 –1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
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.California state-chartered bank and member of the FRB. 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. We are regulated asAs a bank holding company, Banc of California, Inc. is subject to ongoing and comprehensive supervision, regulation, examination, and enforcement by the FRBFRB. As a California state-chartered bank and the Bank operates under a national bank charter issued by the Office of the Comptroller of the Currency (“OCC”), the Bank’s primary regulator. The Bank is a member of the Federal Home LoanFRB, the Bank (“FHLB”)is subject to ongoing and comprehensive supervision, regulation, examination, and enforcement by the DFPI and the FRB. The Bank is also a member of the FHLB system, and maintains insurance onits deposit accounts withare insured by the Federal Deposit Insurance Corporation (“FDIC”Fund (the "DIF"). of the FDIC.
Banc of California 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. The Bank offersprovides a varietybroad range of financialloan and deposit products and services to meet the banking and financial needs of the communities it serves, with operations conducted through 33 offices including 27more than 90 full-service branches located throughout Southern California and in Denver, Colorado, and Durham, North Carolina, as well as full-stack payment processing solutions through its subsidiary, Deepstack Technologies, LLC (“Deepstack”). Banc of June 30, 2023.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.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including treasury management and investment management services. Our major operating expenses are interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.
Significant Accounting Policies
BasisOur accounting policies are described in Note 1. Nature of Presentation:Operations and Summary of Significant Accounting Policies The accompanying unaudited interim, of our audited consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in theour Annual ReportReport on Form 10-K for the year ended December 31, 2022 filed by us with the SEC. Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications are immaterial and have no effect on net income, comprehensive income (loss), total assets or total shareholders’ equity previously reported.
In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations2023 as of the dates and for the periods presented. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Principles of Consolidation: The accompanying unaudited consolidated financial statements include the accounts of the Company and its consolidated subsidiaries as of June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and June 30, 2022. Significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its then wholly-owned subsidiaries.
Significant Accounting Policies: The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. We have not made any changes in our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC, except for those described below, which reflectSecurities and Exchange Commission ("Form 10-K").
Accounting Standards Adopted in 2024
Effective January 1, 2024, the Company adopted ASU 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." This standard clarifies that a new accounting policy adoptedcontractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and the impact of the adoption of ASU 2022-02:
Derivative Instruments - Cash Flow Hedgequantitative information about such securities.: The Company applies hedge accounting for certain derivative instruments used to manage interest rate risk. A cash flow hedge is a derivative instrument used to manage the variabilitydoes not take into account contractual sale restrictions in future expected cash flows that would otherwise be impacted by movements in interest rates. To quality for hedge accounting, the cash flow hedge must be highly effective at reducing the risk associated with the hedged exposure. The effectiveness of the hedging relationship is documented at inception and is monitored at least quarterly through the life of the transaction.
A cash flow hedge that is designated as highly effective is carried at fair value with the change in fair value included in the assessment of hedge effectiveness recorded in other comprehensive income (loss) (“AOCI”) and subsequently recognized in earnings in the same period that the hedged forecasted transaction affects earnings. At that time, the amount reclassified from AOCI is presented in the same income statement line item in which the hedged transaction is reported (interest income or expense). If the cash flow hedge becomes ineffective, the change in fair value is reclassified from AOCI to earnings.
Loan Modifications to Borrowers Experiencing Financial Difficulty:Prior to the adoption of ASU 2022-02, we accounted for the modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a troubled debt restructuring (“TDR”). Effective January 1, 2023, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2023. Loans that were considered a TDR prior to the adoption of ASU 2022-02 will continue to be accounted for under the superseded TDR accounting guidance until the loan is paid off, liquidated, or subsequently modified. Since adoption of ASU 2022-02 on January 1, 2023, we have
evaluated all loan modifications under ASC 310-20 to determine whether a modification made to a borrower results in a new loan or is a continuation of the existing loan.
Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and disclosures provided, and actual results could differ. The allowance for credit losses (“ACL”) (which includes the allowance for loan losses (“ALL”) and the reserve for unfunded noncancellable loan commitments (“RUC”)), loan repurchase reserve, realization of deferred tax assets,determining the fair value of assets and liabilities acquired in business combinations and related purchase price allocation,its equity securities, therefore, the valuationadoption of goodwill and other intangible assets, other derivatives, hypothetical liquidation at book value (“HLBV”) of investments in alternative energy partnerships, and the fair value measurement of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.
Recently Adopted Accounting Guidance: In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, which addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (“ASU 2016-13”) that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhances the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We adopted ASU 2022-02 on January 1, 2023 and the impact of adoptionthis amendment did not have a material effectimpact on ourthe Company's consolidated financial statements.
Recently Issued Accounting Guidance Not Yet Adopted:In March 2023,Effective January 1, 2024, the FASB issuedCompany adopted ASU 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)(“ASU 2023-02”), which permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using." This standard expands the proportional amortization method whichto account for investments in all tax credit structures. That accounting method was previously allowed only for low-income housing tax credit (“LIHTC”("LIHTC") investments, if certain conditions are met. ASU 2023-02but now is effectiveavailable, by election, to all community development tax credit investment reporting that meets five conditions. Under the new guidance, reporting entities can make accounting policy elections on a tax-credit-program-by-tax-credit-program basis, rather than for fiscal years beginning after December 15, 2023, and including interim periods within those fiscal years. The amendment must be applied on either a modified retrospectiveindividual investments or a retrospective basis, and early adoption is permitted.at the reporting entity level. The Company is currently evaluating the impact ofadopted this update on itsa prospective basis and determined that the adoption of this amendment did not have a material impact on the Company's consolidated financial statements.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Basis of Presentation
The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we may refer to as U.S. GAAP. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements have been included.
On November 30, 2023, PacWest Bancorp merged with and into Banc of California, Inc. (the “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. 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. 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. 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. 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. 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. The interim condensed consolidated financial statements and related disclosures, including assessing eligibility to applynotes thereto should be read in conjunction with the updated guidance toaudited consolidated financial statements and notes thereto included in our investments in alternative energy partnerships currently accounted for using the HLBV methodForm 10-K.
Use of the equity methodEstimates
The Company has made a number of accounting.
NOTE 2 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Value Hierarchy
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputsestimates and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:
•Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significantrelating to the fair value measurement.
Assets and Liabilities Measured on a Recurring Basis
Securities Available-for-Sale (“AFS”): The fair values of AFS securities are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, we primarily employ independent pricing services that utilize pricing models to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and respective terms and conditions for debt instruments (Level 2). We adhere to established processes to monitor the pricing services’ assumptions and challenge the valuations that appear unusual or unexpected. Multiple quotes or prices may be obtained in this process and we determine which fair value is most appropriate based on market information and analysis. Quotes obtained through this process are generally non-binding. We follow established procedures to ensure that assets and liabilities are properly classifiedand the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the fairnear term include, among other items, the allowance for credit losses (the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments), the carrying value hierarchy. Level 2 securities include SBA loan pool securities, U.S. government agencyof goodwill and U.S. government sponsored enterprise residential mortgage-backed securities, non-agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, collateralized loan obligations, and corporate debt securities. When a market is illiquid or there is a lack of transparency around the inputs to valuation, including at least one unobservable input, the securities are classified as Level 3 and reliance is placed upon internally developed models and management’s judgment and evaluation for valuation.
Derivative Assets and Liabilities:
Cash Flow Hedge. We have entered into pay-fixed, receive-variable interest rate swap contracts with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in interest rates on our deposits and borrowings. We estimateother intangible assets, the fair value of these contracts based on inputs from a third-party pricing model, which incorporates such factors as the Treasury curve, SOFR rates,assets and liabilities acquired in business combinations and the pay rate onrelated purchase price allocation, and the interest rate swaps.realization of deferred tax assets. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period's presentation format.
NOTE 2. RESTRICTED CASH
The fair value of these derivativesCompany is required to maintain reserve balances with the FRBSF. Such reserve requirements are based on a discountedpercentage of deposit liabilities and may be satisfied by cash flow approach. Dueon hand. There were no average reserves required to be held at the observable natureFRBSF for the period ended March 31, 2024 and 2023. As of March 31, 2024 and December 31, 2023, we pledged cash collateral for our derivative contracts of $2.9 million and $3.3 million. In connection with the issuance of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.
Interest Rate Swaps. We offer interest rate swap products to certain loan clients to allow them to hedge the risk of rising interest ratescredit-linked notes on their variable rate loans. We originate a variable rate loan and enter into a variable-to-fixed interest rate swap with the client. We also enter into an offsetting swap withSeptember 29, 2022, legacy Pacific Western Bank established a correspondent bank. These back-to-back agreements are intended to offset each other and allow us to originatebank account at a variable rate loan while providing a contract for fixed interest paymentsthird party financial institution as the collateral account for the client.credit-linked notes. The net cash flow for usrepayment of principal on the credit-linked notes is equal to the interest income received fromsecured by this collateral account, which had a variable rate loan originated with the client plus a fee.
The fair valuebalance of these derivatives is based on a discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.
Foreign Exchange Contracts. We offer short-term foreign exchange contracts to customers to purchase and/or sell foreign currencies$124.3 million at set ratesMarch 31, 2024 and $125.2 million at December 31, 2023. Starting in the future. These products allow customerssecond quarter of 2023, we began to hedgepledge cash to secure the foreign exchange rate riskstandby letters of their depositscredit that we have issued on behalf of our customers. As of March 31, 2024 and loans denominated in foreign currencies. In conjunction with these products, we also enter into offsetting back-to-back contracts with institutional counterparties to hedge our foreign exchange rate risk. These back-to-back contracts are intended to offset each otherDecember 31, 2023, the balance of such restricted cash totaled $57.3 million and allow us to offer our customers foreign exchange products. The fair value of both of these offsetting asset and liability instruments is based on the change in the underlying foreign exchange rate. We are subject to counterparty risk in the event our customers or institutional counterparties default under these contracts. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and typically result in no adjustments to the valuation of the short-term foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of these contracts is classified as Level 2.$56.6 million.
The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Level |
| ($ in thousands) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| June 30, 2023 | | | | | | | | |
| Assets | | | | | | | | |
| Securities available-for-sale: | | | | | | | | |
| SBA loan pools securities | | $ | 9,215 | | | $ | — | | | $ | 9,215 | | | $ | — | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 81,708 | | | — | | | 81,708 | | | — | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 89,260 | | | — | | | 89,260 | | | — | |
| | | | | | | | |
| Non-agency residential mortgage-backed securities | | 111,508 | | | — | | | 111,508 | | | — | |
| | | | | | | | |
| Collateralized loan obligations | | 482,831 | | | — | | | 482,831 | | | — | |
| Corporate debt securities | | 147,569 | | | — | | | 147,569 | | | — | |
| | | | | | | | |
| | | | | | | | |
| Derivative assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and foreign exchange contracts(1) | | 2,199 | | | — | | | 2,199 | | | — | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Cash flow hedges(2) | | 454 | | | — | | | 454 | | | — | |
Interest rate swaps and foreign exchange contracts(2) | | 2,172 | | | — | | | 2,172 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| December 31, 2022 | | | | | | | | |
| Assets | | | | | | | | |
| Securities available-for-sale: | | | | | | | | |
| SBA loan pools securities | | $ | 11,187 | | | $ | — | | | $ | 11,187 | | | $ | — | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 40,206 | | | — | | | 40,206 | | | — | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 93,191 | | | — | | | 93,191 | | | — | |
| Municipal securities | | — | | | — | | | — | | | — | |
| Non-agency residential mortgage-backed securities | | 80,492 | | | — | | | 80,492 | | | — | |
| | | | | | | | |
| Collateralized loan obligations | | 476,603 | | | — | | | 476,603 | | | — | |
| Corporate debt securities | | 166,618 | | | — | | | 166,618 | | | — | |
| | | | | | | | |
| | | | | | | | |
| Derivative assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and foreign exchange contracts(1) | | 2,292 | | | — | | | 2,292 | | | — | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and foreign exchange contracts(2) | | 2,251 | | | — | | | 2,251 | | | — | |
| | | | | | | | |
(1)
Included in other assets in the consolidated statements of financial condition.
(2)Included in accrued expenses and other liabilities in the consolidated statements of financial condition.
There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2023 and 2022.
Assets and Liabilities Measured on a Non-Recurring Basis
Individually Evaluated Loans:
The fair value of individually evaluated loans with specific allocations of the ACL based on collateral values is generally derived from recent real estate appraisals and automated valuation models (“AVMs”). These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers for differences between the comparable sales and income data available. Such adjustments are typically deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification.
Other Real Estate Owned (“OREO”):The fair value of OREO is generally based on recent real estate appraisals, less estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers for differences between the comparable sales and income data available. Such adjustments are typically deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification.
The following table presents our financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Level |
| ($ in thousands) | | Fair
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| June 30, 2023 | | | | | | | | |
| Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Individually evaluated loans: | | | | | | | | |
| | | | | | | | |
| Commercial and industrial | | $ | 756 | | | $ | — | | | $ | — | | | $ | 756 | |
| | | | | | | | |
| | | | | | | | |
| SBA | | 16 | | | — | | | — | | | 16 | |
| Other consumer | | 93 | | | — | | | — | | | 93 | |
| | | | | | | | |
| | | | | | | | |
| Other real estate owned: | | | | | | | | |
| Single family residential | | 882 | | | — | | | — | | | 882 | |
| | | | | | | | |
| December 31, 2022 | | | | | | | | |
| Assets | | | | | | | | |
| Individually evaluated loans: | | | | | | | | |
| Single family residential mortgage | | $ | 3,600 | | | $ | — | | | $ | — | | | $ | 3,600 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Commercial and industrial | | 7,115 | | | — | | | — | | | 7,115 | |
| SBA | | 3,704 | | | — | | | — | | | 3,704 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The following table presents the gains (losses) recognized on assets measured at fair value on a non-recurring basis for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Individually evaluated loans: | | | | | | | | |
| Single family residential mortgage | | $ | — | | | $ | (1) | | | $ | (43) | | | $ | (340) | |
| Commercial and industrial | | (5,157) | | | (564) | | | (12,300) | | | (1,198) | |
| SBA | | (470) | | | (198) | | | (75) | | | (172) | |
| Other consumer | | (152) | | | (216) | | | (170) | | | (243) | |
| Commercial real estate | | — | | | — | | | (300) | | | — | |
| | | | | | | | |
| Other real estate owned: | | | | | | | | |
| Single family residential | | (165) | | | — | | | (165) | | | — | |
| | | | | | | | |
| | | | | | | | |
Estimated Fair Values of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Measurement Level |
| ($ in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
| June 30, 2023 | | | | | | | | | | |
| Financial assets | | | | | | | | | | |
| Cash and cash equivalents | | $ | 283,729 | | | $ | 283,729 | | | $ | — | | | $ | — | | | $ | 283,729 | |
| | | | | | | | | | |
| Securities held-to-maturity | | 328,405 | | | — | | | 267,045 | | | — | | | 267,045 | |
| Securities available-for-sale | | 922,091 | | | — | | | 922,091 | | | — | | | 922,091 | |
| Federal Home Loan Bank and other bank stock | | 60,281 | | | — | | | 60,281 | | | — | | | 60,281 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Loans receivable, net of allowance for credit losses | | 7,075,323 | | | — | | | — | | | 6,578,187 | | | 6,578,187 | |
| Accrued interest receivable | | 35,821 | | | 35,821 | | | — | | | — | | | 35,821 | |
| Interest rate swaps and foreign exchange contracts | | 2,199 | | | — | | | 2,199 | | | — | | | 2,199 | |
| Financial liabilities | | | | | | | | | | |
| Deposits | | 6,871,076 | | | 5,217,484 | | | 1,642,237 | | | — | | | 6,859,721 | |
| Advances from Federal Home Loan Bank and Federal Reserve Bank borrowings | | 1,147,997 | | | — | | | 1,116,711 | | | — | | | 1,116,711 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Long-term debt | | 274,121 | | | — | | | 256,378 | | | — | | | 256,378 | |
| Cash flow hedges | | 454 | | | | | 454 | | | | | 454 | |
| Interest rate swaps and foreign exchange contracts | | 2,172 | | | — | | | 2,172 | | | — | | | 2,172 | |
| Accrued interest payable | | 14,791 | | | 14,791 | | | — | | | — | | | 14,791 | |
| | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | |
| Financial assets | | | | | | | | | | |
| Cash and cash equivalents | | $ | 228,896 | | | $ | 228,896 | | | $ | — | | | $ | — | | | $ | 228,896 | |
| | | | | | | | | | |
| Securities held-to-maturity | | 328,641 | | | — | | | 262,460 | | | — | | | 262,460 | |
| Securities available-for-sale | | 868,297 | | | — | | | 868,297 | | | — | | | 868,297 | |
| Federal Home Loan Bank and other bank stock | | 57,092 | | | — | | | 57,092 | | | — | | | 57,092 | |
| | | | | | | | | | |
| Loans receivable, net of allowance for credit losses | | 7,029,078 | | | — | | | — | | | 6,526,916 | | | 6,526,916 | |
| Accrued interest receivable | | 37,942 | | | 37,942 | | | — | | | — | | | 37,942 | |
| Interest rate swaps and foreign exchange contracts | | 2,292 | | | — | | | 2,292 | | | — | | | 2,292 | |
| Financial liabilities | | | | | | | | | | |
| Deposits | | 7,120,921 | | | 5,931,500 | | | 1,175,857 | | | — | | | 7,107,357 | |
| Advances from Federal Home Loan Bank | | 727,348 | | | — | | | 699,730 | | | — | | | 699,730 | |
| | | | | | | | | | |
| Long-term debt | | 274,906 | | | — | | | 269,673 | | | — | | | 269,673 | |
| Interest rate swaps and foreign exchange contracts | | 2,251 | | | — | | | 2,251 | | | — | | | 2,251 | |
| Accrued interest payable | | 7,004 | | | 7,004 | | | — | | | — | | | 7,004 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 3 –3. INVESTMENT SECURITIES
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance
for
Credit Losses | | Fair
Value |
| June 30, 2023 | | | | | | | | | | |
| Securities held-to-maturity: | | | | | | | | | | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 152,843 | | | $ | — | | | $ | (27,987) | | | $ | — | | | $ | 124,856 | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 61,359 | | | — | | | (11,937) | | | — | | | 49,422 | |
| Municipal securities | | 114,203 | | | — | | | (21,436) | | | — | | | 92,767 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total securities held-to-maturity | | $ | 328,405 | | | $ | — | | | $ | (61,360) | | | $ | — | | | $ | 267,045 | |
| Securities available-for-sale: | | | | | | | | | | |
| SBA loan pool securities | | $ | 9,251 | | | $ | 7 | | | $ | (43) | | | $ | — | | | $ | 9,215 | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 82,913 | | | — | | | (1,205) | | | — | | | 81,708 | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 95,760 | | | — | | | (6,500) | | | — | | | 89,260 | |
| | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | 122,995 | | | — | | | (11,487) | | | — | | | 111,508 | |
| | | | | | | | | | |
| Collateralized loan obligations | | 490,534 | | | — | | | (7,703) | | | — | | | 482,831 | |
| Corporate debt securities | | 175,796 | | | — | | | (27,191) | | | (1,036) | | | 147,569 | |
| Total securities available-for-sale | | $ | 977,249 | | | $ | 7 | | | $ | (54,129) | | | $ | (1,036) | | | $ | 922,091 | |
| December 31, 2022 | | | | | | | | | | |
| Securities held-to-maturity: | | | | | | | | | | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 153,033 | | | $ | — | | | $ | (29,807) | | | $ | — | | | $ | 123,226 | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 61,404 | | | — | | | (11,946) | | | — | | | 49,458 | |
| Municipal securities | | 114,204 | | | — | | | (24,428) | | | — | | | 89,776 | |
| Total securities held-to-maturity | | $ | 328,641 | | | $ | — | | | $ | (66,181) | | | $ | — | | | $ | 262,460 | |
| Securities available-for-sale: | | | | | | | | | | |
| SBA loan pool securities | | $ | 11,241 | | | $ | — | | | $ | (54) | | | $ | — | | | $ | 11,187 | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 40,431 | | | — | | | (225) | | | — | | | 40,206 | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 99,075 | | | — | | | (5,884) | | | — | | | 93,191 | |
| | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | 90,832 | | | — | | | (10,340) | | | — | | | 80,492 | |
| | | | | | | | | | |
| Collateralized loan obligations | | 492,203 | | | — | | | (15,600) | | | — | | | 476,603 | |
| Corporate debt securities | | 175,781 | | | 32 | | | (9,195) | | | — | | | 166,618 | |
| Total securities available-for-sale | | $ | 909,563 | | | $ | 32 | | | $ | (41,298) | | | $ | — | | | $ | 868,297 | |
During the first quarter of 2022, certain longer-duration fixed-rate mortgage-backed securities and municipal securities with an amortized cost basis of $346.0 million were transferred from the available-for-sale (“AFS”) portfolio to the held-to-maturity (“HTM”) portfolio. At the time of the transfer, the securities had an unrealized gross loss of $16.6 million, which became part of the securities’ amortized cost basis. This amount, along with the unrealized loss included in accumulated other comprehensive income, is subsequently amortized over the remaining life of the security as an adjustment to its yield using the interest method. As a result, there is no impact on the consolidated statements of operations. At June 30, 2023, the gross unrealized loss included in accumulated other comprehensive income was $15.3 million.
At June 30, 2023, our investment securities portfolio consisted of agency securities, municipal securities, mortgage-backed securities (“MBS”), collateralized loan obligations (“CLOs”), and corporate debt securities. The expected maturities of these types of securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Accrued interest receivable on AFS and HTM securities totaled $10.4 million and $9.2 million at June 30, 2023 and December 31, 2022, and is included within other assets in the accompanying consolidated statements of financial condition.
At June 30, 2023 and December 31, 2022, there were no holdings of any one issuer, other than U.S. government agency and sponsored enterprises, in an amount greater than 10 percent of our stockholders’ equity.
Pledged Securities
Investment securities with carrying values of $535.1 million and $356.5 million as of June 30, 2023 and December 31, 2022 were pledged to secure FHLB advances, FRB borrowings, public deposits and for other deposits as required or permitted by law.
Securities Available-for-Sale
The following table presents proceeds from sales and calls of AFS securities and the associatedamortized cost, gross unrealized gains and losses, realized through earnings upon the sales and callsfair values of AFS securities for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Gross realized gains | | $ | — | | | $ | — | | | $ | — | | | $ | 209 | |
| Gross realized losses | | — | | | — | | | — | | | (193) | |
| Net realized gains on sales and calls | | $ | — | | | $ | — | | | $ | — | | | $ | 16 | |
| Proceeds from sales and calls | | $ | 20,000 | | | $ | 38,500 | | | $ | 20,000 | | | $ | 56,146 | |
| | | | | | | | |
The following table summarizes the AFS investment securities with unrealized losses by security type and length of time in a continuous, unrealized loss positionavailable-for-sale as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
| ($ in thousands) | | Fair
Value | | Gross Unrealized Losses | | Fair
Value | | Gross Unrealized Losses | | Fair
Value | | Gross Unrealized Losses |
| June 30, 2023 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | |
| SBA loan pool securities | | $ | — | | | $ | — | | | $ | 7,461 | | | $ | (43) | | | $ | 7,461 | | | $ | (43) | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 81,708 | | | (1,205) | | | — | | | — | | | 81,708 | | | (1,205) | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 51,780 | | | (767) | | | 37,478 | | | (5,733) | | | 89,258 | | | (6,500) | |
| | | | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | 71,394 | | | (1,734) | | | 40,114 | | | (9,753) | | | 111,508 | | | (11,487) | |
| | | | | | | | | | | | |
| Collateralized loan obligations | | 41,278 | | | (481) | | | 441,552 | | | (7,222) | | | 482,830 | | | (7,703) | |
| Corporate debt securities | | 95,031 | | | (10,265) | | | 52,538 | | | (16,926) | | | 147,569 | | | (27,191) | |
| Total securities available-for-sale | | $ | 341,191 | | | $ | (14,452) | | | $ | 579,143 | | | $ | (39,677) | | | $ | 920,334 | | | $ | (54,129) | |
| | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | |
| SBA loan pool securities | | $ | 2,260 | | | $ | (3) | | | $ | 8,927 | | | $ | (51) | | | $ | 11,187 | | | $ | (54) | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 40,206 | | | (225) | | | — | | | — | | | 40,206 | | | (225) | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 76,441 | | | (2,533) | | | 16,750 | | | (3,351) | | | 93,191 | | | (5,884) | |
| | | | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | 80,492 | | | (10,340) | | | — | | | — | | | 80,492 | | | (10,340) | |
| | | | | | | | | | | | |
| Collateralized loan obligations | | 235,936 | | | (7,492) | | | 240,667 | | | (8,108) | | | 476,603 | | | (15,600) | |
| Corporate debt securities | | 159,492 | | | (8,374) | | | 4,180 | | | (821) | | | 163,672 | | | (9,195) | |
| Total securities available-for-sale | | $ | 594,827 | | | $ | (28,967) | | | $ | 270,524 | | | $ | (12,331) | | | $ | 865,351 | | | $ | (41,298) | |
At June 30, 2023, our AFS securities portfolio consisted of 86 securities, of which 85 securities were in an unrealized loss position. At December 31, 2022, our AFS securities portfolio consisted of 77 securities, of which 76 securities were in an unrealized loss position. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | | Allowance | | | | Gross | | Gross | | |
| Amortized | | for Credit | | Net Carrying | | Unrealized | | Unrealized | | Fair |
| Security Type | Cost | | Losses | | Amount | | Gains | | Losses | | Value |
| | (In thousands) |
| Agency residential MBS | $ | 1,364,245 | | | $ | — | | | $ | 1,364,245 | | | $ | — | | | $ | (226,776) | | | $ | 1,137,469 | |
| | | | | | | | | | | |
| Agency commercial MBS | 260,116 | | | — | | | 260,116 | | | — | | | (16,729) | | | 243,387 | |
| Agency residential CMOs | 317,605 | | | — | | | 317,605 | | | — | | | (36,036) | | | 281,569 | |
| Municipal securities | 34,645 | | | — | | | 34,645 | | | — | | | (1,386) | | | 33,259 | |
| Corporate debt securities | 327,447 | | | (199) | | | 327,248 | | | 1,592 | | | (51,642) | | | 277,198 | |
| Private label residential CMOs | 190,508 | | | — | | | 190,508 | | | — | | | (37,096) | | | 153,412 | |
| Collateralized loan obligations | 109,167 | | | — | | | 109,167 | | | — | | | (89) | | | 109,078 | |
| Private label commercial MBS | 20,725 | | | — | | | 20,725 | | | — | | | (1,234) | | | 19,491 | |
| Asset-backed securities | 18,906 | | | — | | | 18,906 | | | 2 | | | — | | | 18,908 | |
| SBA securities | 13,917 | | | — | | | 13,917 | | | — | | | (1,006) | | | 12,911 | |
| Total | $ | 2,657,281 | | | $ | (199) | | | $ | 2,657,082 | | | $ | 1,594 | | | $ | (371,994) | | | $ | 2,286,682 | |
We monitor our securities portfolio for identification
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | | Allowance | | | | Gross | | Gross | | |
| Amortized | | for Credit | | Net Carrying | | Unrealized | | Unrealized | | Fair |
| Security Type | Cost | | Losses | | Amount | | Gains | | Losses | | Value |
| | (In thousands) |
| Agency residential MBS | $ | 1,388,801 | | | $ | — | | | $ | 1,388,801 | | | $ | — | | | $ | (201,192) | | | $ | 1,187,609 | |
| U.S. Treasury securities | 4,965 | | | — | | | 4,965 | | | 3 | | | — | | | 4,968 | |
| Agency commercial MBS | 268,639 | | | — | | | 268,639 | | | — | | | (15,333) | | | 253,306 | |
| Agency residential CMOs | 320,984 | | | — | | | 320,984 | | | — | | | (36,650) | | | 284,334 | |
| Municipal securities | 29,192 | | | — | | | 29,192 | | | — | | | (1,109) | | | 28,083 | |
| Corporate debt securities | 327,426 | | | (199) | | | 327,227 | | | 259 | | | (60,254) | | | 267,232 | |
| Private label residential CMOs | 193,071 | | | — | | | 193,071 | | | — | | | (34,659) | | | 158,412 | |
| Collateralized loan obligations | 109,168 | | | — | | | 109,168 | | | — | | | (752) | | | 108,416 | |
| Private label commercial MBS | 22,126 | | | — | | | 22,126 | | | — | | | (1,313) | | | 20,813 | |
| Asset-backed securities | 20,241 | | | — | | | 20,241 | | | — | | | (289) | | | 19,952 | |
| SBA securities | 14,642 | | | — | | | 14,642 | | | — | | | (903) | | | 13,739 | |
| Total | $ | 2,699,255 | | | $ | (199) | | | $ | 2,699,056 | | | $ | 262 | | | $ | (352,454) | | | $ | 2,346,864 | |
As of potential credit impairment. DuringMarch 31, 2024, the three and six months ended June 30, 2023, we recognized a $1.0 million provisionCompany had recorded an allowance for credit losses on three corporate debt securities available-for-sale of other financial institutions that were downgraded to below investment grade by external credit agencies. During the three and six months ended June 30, 2022, there was no provision for credit losses related to AFS or HTM securities.
Except for the corporate debt securities noted above, we believe there was no credit impairment and the decline in fair value of our securities since acquisition was attributable to a combination of changes in interest rates and general volatility in market conditions. As of June 30, 2023, we did$199,000. We do not have the intentcurrently intend to sell any of the securities in an unrealized loss position and further believe it is more likely than not that we will not be required to sell these securities before their anticipated recovery.
As of June 30, 2023, 82March 31, 2024, securities available-for-sale with a fair value of our 85 AFS$771.1 million were pledged as collateral solely for the Bank Term Funding Program borrowings.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Realized Gains and Losses on Securities Available-for-Sale
The were no investment securities sales for the three months ended March 31, 2024 and 2023.
Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | | Gross | | | | Gross | | | | Gross |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Security Type | Value | | Losses | | Value | | Losses | | Value | | Losses |
| | (In thousands) |
| Agency residential MBS | $ | — | | | $ | — | | | $ | 1,137,469 | | | $ | (226,776) | | | $ | 1,137,469 | | | $ | (226,776) | |
| | | | | | | | | | | |
| Agency commercial MBS | — | | | — | | | 243,387 | | | (16,729) | | | 243,387 | | | (16,729) | |
| Agency residential CMOs | — | | | — | | | 281,569 | | | (36,036) | | | 281,569 | | | (36,036) | |
| Municipal securities | — | | | — | | | 33,259 | | | (1,386) | | | 33,259 | | | (1,386) | |
| Corporate debt securities | — | | | — | | | 274,022 | | | (51,642) | | | 274,022 | | | (51,642) | |
| Private label residential CMOs | — | | | — | | | 153,412 | | | (37,096) | | | 153,412 | | | (37,096) | |
| Collateralized loan obligations | — | | | — | | | 17,811 | | | (89) | | | 17,811 | | | (89) | |
| Private label commercial MBS | — | | | — | | | 19,491 | | | (1,234) | | | 19,491 | | | (1,234) | |
| | | | | | | | | | | |
| SBA securities | — | | | — | | | 12,911 | | | (1,006) | | | 12,911 | | | (1,006) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | — | | | $ | — | | | $ | 2,173,331 | | | $ | (371,994) | | | $ | 2,173,331 | | | $ | (371,994) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | | Gross | | | | Gross | | | | Gross |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Security Type | Value | | Losses | | Value | | Losses | | Value | | Losses |
| | (In thousands) |
| Agency residential MBS | $ | — | | | $ | — | | | $ | 1,187,609 | | | $ | (201,192) | | | $ | 1,187,609 | | | $ | (201,192) | |
| | | | | | | | | | | |
| Agency commercial MBS | — | | | — | | | 253,306 | | | (15,333) | | | 253,306 | | | (15,333) | |
| Agency residential CMOs | — | | | — | | | 265,431 | | | (36,650) | | | 265,431 | | | (36,650) | |
| Municipal securities | — | | | — | | | 284,334 | | | (1,109) | | | 284,334 | | | (1,109) | |
| Corporate debt securities | — | | | — | | | 19,952 | | | (60,254) | | | 19,952 | | | (60,254) | |
| Private label residential CMOs | — | | | — | | | 158,412 | | | (34,659) | | | 158,412 | | | (34,659) | |
| Collateralized loan obligations | — | | | — | | | 66,886 | | | (752) | | | 66,886 | | | (752) | |
| Private label commercial MBS | — | | | — | | | 28,083 | | | (1,313) | | | 28,083 | | | (1,313) | |
| Asset-backed securities | — | | | — | | | 20,813 | | | (289) | | | 20,813 | | | (289) | |
| SBA securities | — | | | — | | | 13,739 | | | (903) | | | 13,739 | | | (903) | |
| Total | $ | — | | | $ | — | | | $ | 2,298,565 | | | $ | (352,454) | | | $ | 2,298,565 | | | $ | (352,454) | |
The securities that were in an unrealized loss position received an investment gradeat March 31, 2024, were considered impaired and required further review to determine if the unrealized losses were credit-related. We concluded the unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit rating,ratings or other indicators of deterioration of the underlying issuers' ability to repay. We also considered the seniority of the tranches and all of our HTM securities inU.S. government agency guarantees, if any, to assess whether an unrealized loss position receivedwas credit-related. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "Accumulated other comprehensive loss, net" of "Stockholders' equity" on the condensed consolidated balance sheets. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Contractual Maturities of Securities Available-for-Sale
The following tables present the contractual maturities of our securities available-for-sale portfolio based on amortized cost and fair value as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | | Due After | | Due After | | | | |
| Due | | One Year | | Five Years | | Due | | |
| Within | | Through | | Through | | After | | |
| Security Type | One Year | | Five Years | | Ten Years | | Ten Years | | Total |
| (In thousands) |
| Amortized Cost: | | | | | | | | | |
| Agency residential MBS | $ | — | | | $ | — | | | $ | — | | | $ | 1,364,245 | | | $ | 1,364,245 | |
| | | | | | | | | |
| Agency commercial MBS | — | | | 168,889 | | | 73,834 | | | 17,393 | | | 260,116 | |
| Agency residential CMOs | — | | | 36,144 | | | 15,122 | | | 266,339 | | | 317,605 | |
| Municipal securities | — | | | 16,878 | | | 17,767 | | | — | | | 34,645 | |
| Corporate debt securities | — | | | 5,000 | | | 322,447 | | | — | | | 327,447 | |
| Private label residential CMOs | — | | | — | | | — | | | 190,508 | | | 190,508 | |
| Collateralized loan obligations | — | | | — | | | 109,167 | | | — | | | 109,167 | |
| Private label commercial MBS | — | | | — | | | 1,250 | | | 19,475 | | | 20,725 | |
| Asset-backed securities | — | | | — | | | — | | | 18,906 | | | 18,906 | |
| SBA securities | — | | | 2,431 | | | — | | | 11,486 | | | 13,917 | |
| Total | $ | — | | | $ | 229,342 | | | $ | 539,587 | | | $ | 1,888,352 | | | $ | 2,657,281 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | | Due After | | Due After | | | | |
| Due | | One Year | | Five Years | | Due | | |
| Within | | Through | | Through | | After | | |
| Security Type | One Year | | Five Years | | Ten Years | | Ten Years | | Total |
| (In thousands) |
| Fair Value: | | | | | | | | | |
| Agency residential MBS | $ | — | | | $ | — | | | $ | — | | | $ | 1,137,469 | | | $ | 1,137,469 | |
| | | | | | | | | |
| Agency commercial MBS | — | | | 159,271 | | | 67,780 | | | 16,336 | | | 243,387 | |
| Agency residential CMOs | — | | | 33,651 | | | 14,020 | | | 233,898 | | | 281,569 | |
| Municipal securities | — | | | 16,411 | | | 16,848 | | | — | | | 33,259 | |
| Corporate debt securities | — | | | 4,825 | | | 272,373 | | | — | | | 277,198 | |
| Private label residential CMOs | — | | | — | | | — | | | 153,412 | | | 153,412 | |
| Collateralized loan obligations | — | | | — | | | 109,078 | | | — | | | 109,078 | |
| Private label commercial MBS | — | | | — | | | 1,206 | | | 18,285 | | | 19,491 | |
| Asset-backed securities | — | | | — | | | — | | | 18,908 | | | 18,908 | |
| SBA securities | — | | | 2,312 | | | — | | | 10,599 | | | 12,911 | |
| Total | $ | — | | | $ | 216,470 | | | $ | 481,305 | | | $ | 1,588,907 | | | $ | 2,286,682 | |
CMBS, CMOs, and MBS have contractual maturity dates, but require periodic payments based upon scheduled amortization terms. Actual principal collections on these securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the underlying loan collateral.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Securities Held-to-Maturity
The following table presents amortized cost, allowance for credit losses, gross unrealized gains and losses, and fair values of securities held-to-maturity as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | | Allowance | | | | | | | | |
| | | for | | Net | | Gross | | Gross | | |
| Amortized | | Credit | | Carrying | | Unrealized | | Unrealized | | Fair |
| Security Type | Cost | | Losses | | Amount | | Gains | | Losses | | Value |
| | (In thousands) |
| | | | | | | | | | | |
| Municipal securities | $ | 1,248,355 | | | $ | (140) | | | $ | 1,248,215 | | | $ | 676 | | | $ | (42,079) | | | $ | 1,206,812 | |
| Agency commercial MBS | 435,467 | | | — | | | 435,467 | | | — | | | (34,619) | | | 400,848 | |
| Private label commercial MBS | 351,688 | | | — | | | 351,688 | | | — | | | (28,499) | | | 323,189 | |
| U.S. Treasury securities | 187,759 | | | — | | | 187,759 | | | — | | | (15,421) | | | 172,338 | |
| Corporate debt securities | 70,215 | | | (1,360) | | | 68,855 | | | — | | | (18,693) | | | 50,162 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total (1) | $ | 2,293,484 | | | $ | (1,500) | | | $ | 2,291,984 | | | $ | 676 | | | $ | (139,311) | | | $ | 2,153,349 | |
__________________________(1) Excludes accrued interest receivable of $11.3 million at March 31, 2024 which is recorded in "Other assets" on the condensed consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | | Allowance | | | | | | | | |
| | | for | | Net | | Gross | | Gross | | |
| Amortized | | Credit | | Carrying | | Unrealized | | Unrealized | | Fair |
| Security Type | Cost | | Losses | | Amount | | Gains | | Losses | | Value |
| | (In thousands) |
| | | | | | | | | | | |
| Municipal securities | $ | 1,247,310 | | | $ | (140) | | | $ | 1,247,170 | | | $ | 1,760 | | | $ | (28,170) | | | $ | 1,220,760 | |
| Agency commercial MBS | 433,827 | | | — | | | 433,827 | | | — | | | (30,665) | | | 403,162 | |
| Private label commercial MBS | 350,493 | | | — | | | 350,493 | | | — | | | (29,289) | | | 321,204 | |
| U.S. Treasury securities | 187,033 | | | — | | | 187,033 | | | — | | | (11,454) | | | 175,579 | |
| Corporate debt securities | 70,128 | | | (1,360) | | | 68,768 | | | — | | | (21,157) | | | 47,611 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total (1) | $ | 2,288,791 | | | $ | (1,500) | | | $ | 2,287,291 | | | $ | 1,760 | | | $ | (120,735) | | | $ | 2,168,316 | |
__________________________(1) Excludes accrued interest receivable of $13.4 million at December 31, 2023 which is recorded in "Other assets" on the condensed consolidated balance sheets.
As of March 31, 2024, securities held-to-maturity with an investment gradeamortized cost of $2.2 billion and a fair value of $2.1 billion were pledged as collateral primarily for the FRB secured line of credit, rating.Bank Term Funding Program borrowings, and public deposits.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses on Securities Held-to-Maturity
The following table presents the changes by major security type in our allowance for credit losses on securities held-to-maturity for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for | | Provision | | | | | | Allowance for |
| Credit Losses, | | for | | | | | | Credit Losses, |
| Beginning | | Credit | | | | | | End of |
| Security Type | of Period | | Losses | | Charge-offs | | Recoveries | | Period |
| (In thousands) |
| Three Months Ended March 31, 2024 | | | | | | | | | |
| Municipal securities | $ | 140 | | | $ | — | | | $ | — | | | $ | — | | | $ | 140 | |
| Corporate debt securities | 1,360 | | | — | | | — | | | — | | | 1,360 | |
| Total | $ | 1,500 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,500 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for | | Provision | | | | | | Allowance for |
| Credit Losses, | | for | | | | | | Credit Losses, |
| Beginning | | Credit | | | | | | End of |
| Security Type | of Period | | Losses | | Charge-offs | | Recoveries | | Period |
| (In thousands) |
| Three Months Ended March 31, 2023 | | | | | | | | | |
| Municipal securities | $ | 140 | | | $ | — | | | $ | — | | | $ | — | | | $ | 140 | |
| Corporate debt securities | 1,360 | | | — | | | — | | | — | | | 1,360 | |
| Total | $ | 1,500 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,500 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Credit losses on HTM securities are recorded at the time of purchase, acquisition, or when the Company designates securities as held-to-maturity. Credit losses on HTM securities are representative of current expected credit losses that may be incurred over the life of the investment. Accrued interest receivable on HTM securities, which is included in other assets on the condensed consolidated balance sheets, is excluded from the estimate of expected credit losses. HTM U.S. treasury securities and agency-backed MBS securities are considered to have no risk of loss as they are either explicitly or implicitly guaranteed by the U.S. government. The change in fair value in the HTM private label CMBS portfolio is solely driven by changes in interest rates. The Company has no knowledge of any underlying credit issues and the cash flows underlying the debt securities have not changed and are not expected to be impacted by changes in interest rates and, thus, there is no related ACL for this portfolio. The underlying bonds in the Company’s HTM municipal securities and HTM corporate debt securities portfolios are evaluated for credit losses in conjunction with management’s estimate of the allowance for credit losses based primarily on credit ratings.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Securities Held-to-Maturity by Credit Quality Indicator
The Company uses S&P, Moody's, Fitch, Kroll, and Egan Jones ratings as the credit quality indicators for its held-to-maturity securities. The following table presents our securities held-to-maturity portfolio at amortized cost by the lowest available credit rating as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| Security Type | AAA | | AA+ | | AA | | AA- | | A+ | | A | | A- | | BBB | | NR | | Total |
| (In thousands) |
| Amortized Cost: | | | | | | | | | | | | | | | | | | | |
| Municipal securities | $ | 564,266 | | | $ | 399,503 | | | $ | 166,758 | | | $ | 86,334 | | | $ | 12,001 | | | $ | 1,783 | | | $ | — | | | $ | — | | | $ | 17,710 | | | $ | 1,248,355 | |
| Agency commercial | | | | | | | | | | | | | | | | | | | |
| MBS | — | | | 435,467 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 435,467 | |
| Private label | | | | | | | | | | | | | | | | | | | |
| commercial MBS | 351,688 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 351,688 | |
| U.S. Treasury | | | | | | | | | | | | | | | | | | | |
| securities | — | | | 187,759 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 187,759 | |
| Corporate debt | | | | | | | | | | | | | | | | | | | |
| securities | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 44,405 | | | 25,810 | | | 70,215 | |
| Total | $ | 915,954 | | | $ | 1,022,729 | | | $ | 166,758 | | | $ | 86,334 | | | $ | 12,001 | | | $ | 1,783 | | | $ | — | | | $ | 44,405 | | | $ | 43,520 | | | $ | 2,293,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Security Type | AAA | | AA+ | | AA | | AA- | | A+ | | A | | A- | | BBB | | NR | | Total |
| (In thousands) |
| Amortized Cost: | | | | | | | | | | | | | | | | | | | |
| Municipal securities | $ | 564,127 | | | $ | 397,542 | | | $ | 167,905 | | | $ | 86,243 | | | $ | 12,007 | | | $ | 1,787 | | | $ | — | | | $ | — | | | $ | 17,699 | | | $ | 1,247,310 | |
| Agency commercial | | | | | | | | | | | | | | | | | | | |
| MBS | — | | | 433,827 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 433,827 | |
| Private label | | | | | | | | | | | | | | | | | | | |
| commercial MBS | 350,493 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 350,493 | |
| U.S. Treasury | | | | | | | | | | | | | | | | | | | |
| securities | — | | | 187,033 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 187,033 | |
| Corporate debt | | | | | | | | | | | | | | | | | | | |
| securities | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 44,371 | | | 25,757 | | | 70,128 | |
| Total | $ | 914,620 | | | $ | 1,018,402 | | | $ | 167,905 | | | $ | 86,243 | | | $ | 12,007 | | | $ | 1,787 | | | $ | — | | | $ | 44,371 | | | $ | 43,456 | | | $ | 2,288,791 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Contractual Maturities of ContentsSecurities Held-to-Maturity
The following tables present the contractual maturities of our securities held-to-maturity portfolio based on amortized cost and fair value as of the date indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | | Due After | | Due After | | | | |
| Due | | One Year | | Five Years | | Due | | |
| Within | | Through | | Through | | After | | |
| Security Type | One Year | | Five Years | | Ten Years | | Ten Years | | Total |
| (In thousands) |
| Amortized Cost: | | | | | | | | | |
| | | | | | | | | |
| Municipal securities | $ | — | | | $ | 17,710 | | | $ | 394,075 | | | $ | 836,570 | | | $ | 1,248,355 | |
| Agency commercial MBS | — | | | — | | | 435,467 | | | — | | | 435,467 | |
| Private label commercial MBS | — | | | — | | | 36,515 | | | 315,173 | | | 351,688 | |
| U.S. Treasury securities | — | | | — | | | 187,759 | | | — | | | 187,759 | |
| Corporate debt securities | — | | | — | | | 10,181 | | | 60,034 | | | 70,215 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | $ | — | | | $ | 17,710 | | | $ | 1,063,997 | | | $ | 1,211,777 | | | $ | 2,293,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | | Due After | | Due After | | | | |
| Due | | One Year | | Five Years | | Due | | |
| Within | | Through | | Through | | After | | |
| Security Type | One Year | | Five Years | | Ten Years | | Ten Years | | Total |
| (In thousands) |
| Fair Value: | | | | | | | | | |
| | | | | | | | | |
| Municipal securities | $ | — | | | $ | 17,550 | | | $ | 376,643 | | | $ | 812,619 | | | $ | 1,206,812 | |
| Agency commercial MBS | — | | | — | | | 400,848 | | | — | | | 400,848 | |
| Private label commercial MBS | — | | | — | | | 34,328 | | | 288,861 | | | 323,189 | |
| U.S. Treasury securities | — | | | — | | | 172,338 | | | — | | | 172,338 | |
| Corporate debt securities | — | | | — | | | 9,350 | | | 40,812 | | | 50,162 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | $ | — | | | $ | 17,550 | | | $ | 993,507 | | | $ | 1,142,292 | | | $ | 2,153,349 | |
Commercial MBS have contractual maturity dates, but require periodic payments based upon scheduled amortization terms. Actual principal collections on these securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the underlying loan collateral.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities, including available-for-sale and held-to-maturity, for the periods indicated:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2024 | | 2023 | | | | |
| (In thousands) |
| Taxable interest | $ | 27,601 | | | $ | 38,692 | | | | | |
| Non-taxable interest | 4,720 | | | 4,903 | | | | | |
| Dividend income | 1,982 | | | 642 | | | | | |
| Total interest income on investment securities | $ | 34,303 | | | $ | 44,237 | | | | | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 4. LOANS AND LEASES
Our loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired and purchased loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2024 | | 2023 |
| (In thousands) |
| Real estate mortgage | $ | 16,217,186 | | | $ | 16,378,537 | |
Real estate construction and land (1) | 3,266,639 | | | 3,183,357 | |
| Commercial | 5,831,666 | | | 5,780,346 | |
| Consumer | 440,470 | | | 454,474 | |
| Total gross loans and leases held for investment | 25,755,961 | | | 25,796,714 | |
Unearned discounts, net (2) | (238,933) | | | (261,984) | |
| Deferred fees, net | (44,006) | | | (45,043) | |
| Total loans and leases held for investment, net of unearned discounts and deferred fees | 25,473,022 | | | 25,489,687 | |
| Allowance for loan and lease losses | (291,503) | | | (281,687) | |
Total loans and leases held for investment, net (3) | $ | 25,181,519 | | | $ | 25,208,000 | |
____________________
(1) Includes land and acquisition and development loans of $235.7 million and $228.9 million at March 31, 2024 and December 31, 2023.
(2) Represents net acquisition discounts of $308.9 million and purchase premiums of $70.0 million at March 31, 2024, and net acquisition discounts of $334.2 million and purchase premiums of $72.2 million at December 31, 2023.
(3) Excludes accrued interest receivable of $109.3 million and $111.3 million at March 31, 2024 and December 31, 2023, respectively, which is recorded in "Other assets" on the condensed consolidated balance sheets.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| 30 - 89 | | 90 or More | | | | | | |
| Days | | Days | | Total | | | | |
| Past Due | | Past Due | | Past Due | | Current | | Total |
| | (In thousands) |
| Real estate mortgage: | | | | | | | | | |
| Commercial | $ | 69,213 | | | $ | 6,828 | | | $ | 76,041 | | | $ | 4,820,503 | | | $ | 4,896,544 | |
| Multi-family | 9,046 | | | — | | | 9,046 | | | 6,112,426 | | | 6,121,472 | |
| Other residential | 75,158 | | | 39,396 | | | 114,554 | | | 4,834,829 | | | 4,949,383 | |
| Total real estate mortgage | 153,417 | | | 46,224 | | | 199,641 | | | 15,767,758 | | | 15,967,399 | |
| Real estate construction and land: | | | | | | | | | |
| Commercial | — | | | — | | | — | | | 775,021 | | | 775,021 | |
| Residential | 4,606 | | | — | | | 4,606 | | | 2,465,727 | | | 2,470,333 | |
| Total real estate construction and land | 4,606 | | | — | | | 4,606 | | | 3,240,748 | | | 3,245,354 | |
| Commercial: | | | | | | | | | |
| Asset-based | 11,701 | | | 2,325 | | | 14,026 | | | 2,046,990 | | | 2,061,016 | |
| Venture capital | — | | | — | | | — | | | 1,513,641 | | | 1,513,641 | |
| Other commercial | 5,887 | | | 8,440 | | | 14,327 | | | 2,231,583 | | | 2,245,910 | |
| Total commercial | 17,588 | | | 10,765 | | | 28,353 | | | 5,792,214 | | | 5,820,567 | |
| Consumer | 2,810 | | | 584 | | | 3,394 | | | 436,308 | | | 439,702 | |
| Total | $ | 178,421 | | | $ | 57,573 | | | $ | 235,994 | | | $ | 25,237,028 | | | $ | 25,473,022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| 30 - 89 | | 90 or More | | | | | | |
| Days | | Days | | Total | | | | |
| Past Due | | Past Due | | Past Due | | Current | | Total |
| | (In thousands) |
| Real estate mortgage: | | | | | | | | | |
| Commercial | $ | 12,618 | | | $ | 15,168 | | | $ | 27,786 | | | $ | 4,998,711 | | | $ | 5,026,497 | |
| Multi-family | 2,302 | | | 1,020 | | | 3,322 | | | 6,021,857 | | | 6,025,179 | |
| Other residential | 93,042 | | | 4,341 | | | 97,383 | | | 4,962,926 | | | 5,060,309 | |
| Total real estate mortgage | 107,962 | | | 20,529 | | | 128,491 | | | 15,983,494 | | | 16,111,985 | |
| Real estate construction and land: | | | | | | | | | |
| Commercial | — | | | — | | | — | | | 759,585 | | | 759,585 | |
| Residential | — | | | — | | | — | | | 2,399,684 | | | 2,399,684 | |
| Total real estate construction and land | — | | | — | | | — | | | 3,159,269 | | | 3,159,269 | |
| Commercial: | | | | | | | | | |
| Asset-based | 608 | | | 2,689 | | | 3,297 | | | 2,185,788 | | | 2,189,085 | |
| Venture capital | — | | | — | | | — | | | 1,446,362 | | | 1,446,362 | |
| Other commercial | 1,276 | | | 6,993 | | | 8,269 | | | 2,121,591 | | | 2,129,860 | |
| Total commercial | 1,884 | | | 9,682 | | | 11,566 | | | 5,753,741 | | | 5,765,307 | |
| Consumer | 3,461 | | | 670 | | | 4,131 | | | 448,995 | | | 453,126 | |
| Total | $ | 113,307 | | | $ | 30,881 | | | $ | 144,188 | | | $ | 25,345,499 | | | $ | 25,489,687 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more (unless the loan is both well secured and in the process of collection) or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| Nonaccrual | | Performing | | Total | | Nonaccrual | | Performing | | Total |
| | (In thousands) |
| Real estate mortgage: | | | | | | | | | | | |
| Commercial | $ | 66,527 | | | $ | 4,830,017 | | | $ | 4,896,544 | | | $ | 15,669 | | | $ | 5,010,828 | | | $ | 5,026,497 | |
| Multi-family | 953 | | | 6,120,519 | | | 6,121,472 | | | 1,020 | | | 6,024,159 | | | 6,025,179 | |
| Other residential | 61,754 | | | 4,887,629 | | | 4,949,383 | | | 31,041 | | | 5,029,268 | | | 5,060,309 | |
| Total real estate mortgage | 129,234 | | | 15,838,165 | | | 15,967,399 | | | 47,730 | | | 16,064,255 | | | 16,111,985 | |
| Real estate construction and land: | | | | | | | | | | | |
| Commercial | — | | | 775,021 | | | 775,021 | | | — | | | 759,585 | | | 759,585 | |
| Residential | — | | | 2,470,333 | | | 2,470,333 | | | — | | | 2,399,684 | | | 2,399,684 | |
| Total real estate construction and land | — | | | 3,245,354 | | | 3,245,354 | | | — | | | 3,159,269 | | | 3,159,269 | |
| Commercial: | | | | | | | | | | | |
| Asset-based | 2,325 | | | 2,058,691 | | | 2,061,016 | | | 2,689 | | | 2,186,396 | | | 2,189,085 | |
| Venture capital | — | | | 1,513,641 | | | 1,513,641 | | | 325 | | | 1,446,037 | | | 1,446,362 | |
| Other commercial | 13,390 | | | 2,232,520 | | | 2,245,910 | | | 10,972 | | | 2,118,888 | | | 2,129,860 | |
| Total commercial | 15,715 | | | 5,804,852 | | | 5,820,567 | | | 13,986 | | | 5,751,321 | | | 5,765,307 | |
| Consumer | 836 | | | 438,866 | | | 439,702 | | | 811 | | | 452,315 | | | 453,126 | |
| Total | $ | 145,785 | | | $ | 25,327,237 | | | $ | 25,473,022 | | | $ | 62,527 | | | $ | 25,427,160 | | | $ | 25,489,687 | |
At March 31, 2024, nonaccrual loans and leases included $57.6 million of loans and leases 90 or more days past due, $59.6 million of loans and leases 30 to 89 days past due, and $28.6 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. At December 31, 2023, nonaccrual loans and leases included $19.1 million of loans and leases 90 or more days past due, $11.4 million of loans and leases 30 to 89 days past due, and $32.0 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of March 31, 2024, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $46.3 million and represented 32% of total nonaccrual loans and leases.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present the credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| Classified | | Special Mention | | Pass | | Total |
| (In thousands) |
| Real estate mortgage: | | | | | | | |
| Commercial | $ | 174,525 | | | $ | 196,450 | | | $ | 4,525,569 | | | $ | 4,896,544 | |
| Multi-family | 74,646 | | | 94,218 | | | 5,952,608 | | | 6,121,472 | |
| Other residential | 66,410 | | | 31,599 | | | 4,851,374 | | | 4,949,383 | |
| Total real estate mortgage | 315,581 | | | 322,267 | | | 15,329,551 | | | 15,967,399 | |
| Real estate construction and land: | | | | | | | |
| Commercial | — | | | — | | | 775,021 | | | 775,021 | |
| Residential | — | | | 3,005 | | | 2,467,328 | | | 2,470,333 | |
| Total real estate construction and land | — | | | 3,005 | | | 3,242,349 | | | 3,245,354 | |
| Commercial: | | | | | | | |
| Asset-based | 8,495 | | | 11,316 | | | 2,041,205 | | | 2,061,016 | |
| Venture capital | 10,453 | | | 198,311 | | | 1,304,877 | | | 1,513,641 | |
| Other commercial | 31,222 | | | 15,080 | | | 2,199,608 | | | 2,245,910 | |
| Total commercial | 50,170 | | | 224,707 | | | 5,545,690 | | | 5,820,567 | |
| Consumer | 978 | | | 6,530 | | | 432,194 | | | 439,702 | |
| Total | $ | 366,729 | | | $ | 556,509 | | | $ | 24,549,784 | | | $ | 25,473,022 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Classified | | Special Mention | | Pass | | Total |
| (In thousands) |
| Real estate mortgage: | | | | | | | |
| Commercial | $ | 75,739 | | | $ | 219,687 | | | $ | 4,731,071 | | | $ | 5,026,497 | |
| Multi-family | 74,954 | | | 108,356 | | | 5,841,869 | | | 6,025,179 | |
| Other residential | 38,155 | | | 54,197 | | | 4,967,957 | | | 5,060,309 | |
| Total real estate mortgage | 188,848 | | | 382,240 | | | 15,540,897 | | | 16,111,985 | |
| Real estate construction and land: | | | | | | | |
| Commercial | — | | | — | | | 759,585 | | | 759,585 | |
| Residential | — | | | 2,757 | | | 2,396,927 | | | 2,399,684 | |
| Total real estate construction and land | — | | | 2,757 | | | 3,156,512 | | | 3,159,269 | |
| Commercial: | | | | | | | |
| Asset-based | 4,561 | | | 12,506 | | | 2,172,018 | | | 2,189,085 | |
| Venture capital | 7,805 | | | 98,633 | | | 1,339,924 | | | 1,446,362 | |
| Other commercial | 26,044 | | | 9,984 | | | 2,093,832 | | | 2,129,860 | |
| Total commercial | 38,410 | | | 121,123 | | | 5,605,774 | | | 5,765,307 | |
| Consumer | 1,159 | | | 7,192 | | | 444,775 | | | 453,126 | |
| Total | $ | 228,417 | | | $ | 513,312 | | | $ | 24,747,958 | | | $ | 25,489,687 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the amortized costour nonaccrual loans and fair value of the investment securitiesleases by loan portfolio as of June 30, 2023, based on the earlier of contractual maturity dates or next repricing date:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Held-to-Maturity | | Available-for-Sale |
| ($ in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Earlier of maturity or next repricing date: | | | | | | | | |
| Within one year | | $ | — | | | $ | — | | | $ | 505,106 | | | $ | 497,279 | |
| One to five years | | — | | | — | | | 171,438 | | | 144,892 | |
| Five to ten years | | 37,339 | | | 31,963 | | | 42,240 | | | 34,914 | |
| Greater than ten years | | 291,066 | | | 235,082 | | | 258,465 | | | 245,006 | |
| Total | | $ | 328,405 | | | $ | 267,045 | | | $ | 977,249 | | | $ | 922,091 | |
Contractual maturities may not reflect the actual maturities of the investments. The average lives for MBSsegment and collateralized mortgage obligations (“CMOs”) will likely be shorter than their contractual maturities due to prepaymentsclass and amortization.
The following table presents the fair valueby with and weighted average yields using amortized cost of the AFS securities portfolio as of June 30, 2023, based on the earlier of contractual maturity dates or next repricing dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One year or less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total |
| ($ in thousands) | | Fair
Value | | Weighted-Average Yield | | Fair
Value | | Weighted-Average Yield | | Fair
Value | | Weighted-Average Yield | | Fair
Value | | Weighted-Average Yield | | Fair
Value | | Weighted-Average Yield |
| Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | |
| SBA loan pool securities | | $ | 9,215 | | | 3.87 | % | | $ | — | | | — | % | | $ | — | | | —�� | % | | $ | — | | | — | % | | $ | 9,215 | | | 3.87 | % |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 81,708 | | | 5.54 | % | | 81,708 | | | 5.54 | % |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 5,233 | | | 5.70 | % | | 7,795 | | | 3.61 | % | | 24,442 | | | 3.14 | % | | 51,790 | | | 5.19 | % | | 89,260 | | | 4.45 | % |
| | | | | | | | | | | | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 111,508 | | | 3.92 | % | | 111,508 | | | 3.92 | % |
| | | | | | | | | | | | | | | | | | | | |
| Collateralized loan obligations | | 482,831 | | | 6.88 | % | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 482,831 | | | 6.88 | % |
| Corporate debt securities | | — | | | — | % | | 137,097 | | | 4.82 | % | | 10,472 | | | 5.73 | % | | — | | | — | % | | 147,569 | | | 4.89 | % |
| Total securities available-for-sale | | $ | 497,279 | | | 6.81 | % | | $ | 144,892 | | | 4.76 | % | | $ | 34,914 | | | 3.95 | % | | $ | 245,006 | | | 4.70 | % | | $ | 922,091 | | | 5.77 | % |
The following table presents the amortized cost and weighted average yields using amortized cost of the HTM securities portfolio as of June 30, 2023, based on the earlier of contractual maturity dates or next repricing dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One year or less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total |
| ($ in thousands) | | Amortized
Cost | | Weighted-Average Yield | | Amortized
Cost | | Weighted-Average Yield | | Amortized
Cost | | Weighted-Average Yield | | Amortized
Cost | | Weighted-Average Yield | | Amortized
Cost | | Weighted-Average Yield |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 9,344 | | | 2.52 | % | | $ | 143,499 | | | 2.70 | % | | $ | 152,843 | | | 2.69 | % |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 61,359 | | | 2.64 | % | | 61,359 | | | 2.64 | % |
| Municipal securities | | — | | | — | % | | — | | | — | % | | 27,995 | | | 2.32 | % | | 86,208 | | | 2.72 | % | | 114,203 | | | 2.62 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Total securities held-to-maturity | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 37,339 | | | 2.37 | % | | $ | 291,066 | | | 2.69 | % | | $ | 328,405 | | | 2.66 | % |
NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table presents the balances in our loan portfoliowithout an allowance recorded as of the dates indicated:
| | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | June 30,
2023 | | December 31,
2022 |
| | | | | | | | |
| Commercial: | | | | | | | | |
Commercial and industrial(1) | | | | | | $ | 2,000,408 | | | $ | 1,845,960 | |
| Commercial real estate | | | | | | 1,266,438 | | | 1,259,651 | |
| Multifamily | | | | | | 1,654,152 | | | 1,689,943 | |
| SBA | | | | | | 62,898 | | | 68,137 | |
| Construction | | | | | | 264,684 | | | 243,553 | |
| | | | | | | | |
| Consumer: | | | | | | | | |
| Single family residential mortgage | | | | | | 1,820,721 | | | 1,920,806 | |
| | | | | | | | |
| | | | | | | | |
| Other consumer | | | | | | 86,905 | | | 86,988 | |
| Total loans | | | | | | $ | 7,156,206 | | | $ | 7,115,038 | |
| | | | | | | | |
| Allowance for loan losses | | | | | | (80,883) | | | (85,960) | |
| Loans receivable, net | | | | | | $ | 7,075,323 | | | $ | 7,029,078 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1)Includes warehouse lending balances of $786.1 milliondate indicated and $602.5 million at June 30, 2023 and December 31, 2022.
The following table presents the balances of total loans as of the dates indicated:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31,
2022 |
| Unpaid principal balance | | $ | 7,148,929 | | | $ | 7,107,897 | |
| Unamortized net premiums | | 16,997 | | | 18,319 | |
| Unamortized net deferred (fees) costs | | (1,238) | | | (1,880) | |
| | | | |
Fair value adjustment(1) | | (8,482) | | | (9,298) | |
| Total loans | | $ | 7,156,206 | | | $ | 7,115,038 | |
(1)At June 30, 2023, includes $7.4 million related to the acquisition of Pacific Mercantile Bancorp (“PMB”), of which $3.7 million related to purchased credit deteriorated (“PCD”) loans. At December 31, 2022, includes $8.0 million related to the PMB Acquisition, of which $4.1 million related to PCD loans.
Credit Quality Indicators
We categorize loans into risk categories basedinterest income recognized on relevant information about the ability of borrowers to repay their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze the associated risks in the current loan portfolio and individually grade each loan for credit risk. This analysis includes all loans delinquent over 60 days and non-homogeneous loans such as commercial and commercial real estate (“CRE”) loans. We use the following definitions for risk ratings:
Pass: Loans risk rated “Pass” are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weakness as defined under “Special Mention”, “Substandard” or “Doubtful.”
Special Mention: Loans risk rated “Special Mention” have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of our credit position at some future date.
Substandard: Loans risk rated “Substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or a weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans risk rated “Doubtful” have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following table presents the risk categories for total loans by class ofnonaccrual loans and origination year as of June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | |
| ($ in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Amortized Cost Basis
Converted to Term | | Total |
| June 30, 2023 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 50,265 | | | $ | 250,300 | | | $ | 172,125 | | | $ | 54,809 | | | $ | 38,087 | | | $ | 219,373 | | | $ | 1,120,399 | | | $ | 17,845 | | | $ | 1,923,203 | |
| Special mention | | — | | | 1,568 | | | 3,761 | | | — | | | 8,817 | | | 9,660 | | | 6,800 | | | 392 | | | 30,998 | |
| Substandard | | — | | | 4,051 | | | 135 | | | 2,422 | | | 301 | | | 13,056 | | | 14,167 | | | 2,716 | | | 36,848 | |
Doubtful (1) | | 3,910 | | | — | | | — | | | 71 | | | — | | | — | | | 5,378 | | | — | | | 9,359 | |
| Commercial and industrial | | 54,175 | | | 255,919 | | | 176,021 | | | 57,302 | | | 47,205 | | | 242,089 | | | 1,146,744 | | | 20,953 | | | 2,000,408 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | |
| Pass | | 25,752 | | | 393,803 | | | 342,564 | | | 59,987 | | | 82,821 | | | 343,679 | | | 2,265 | | | 57 | | | 1,250,928 | |
| Special mention | | — | | | — | | | 5,352 | | | — | | | 6,899 | | | — | | | — | | | — | | | 12,251 | |
| Substandard | | — | | | 1,761 | | | — | | | — | | | — | | | 658 | | | — | | | 840 | | | 3,259 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial real estate | | 25,752 | | | 395,564 | | | 347,916 | | | 59,987 | | | 89,720 | | | 344,337 | | | 2,265 | | | 897 | | | 1,266,438 | |
| Multifamily | | | | | | | | | | | | | | | | | | |
| Pass | | 23,474 | | | 624,664 | | | 387,413 | | | 153,613 | | | 225,130 | | | 212,731 | | | 3 | | | 9,215 | | | 1,636,243 | |
| Special mention | | — | | | — | | | — | | | 2,995 | | | — | | | — | | | — | | | — | | | 2,995 | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | 14,914 | | | — | | | — | | | 14,914 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Multifamily | | 23,474 | | | 624,664 | | | 387,413 | | | 156,608 | | | 225,130 | | | 227,645 | | | 3 | | | 9,215 | | | 1,654,152 | |
| SBA | | | | | | | | | | | | | | | | | | |
| Pass | | — | | | 9,288 | | | 12,199 | | | 3,543 | | | 5,787 | | | 19,274 | | | 326 | | | 447 | | | 50,864 | |
| Special mention | | — | | | — | | | 676 | | | — | | | — | | | 579 | | | — | | | 1 | | | 1,256 | |
| Substandard | | — | | | — | | | — | | | 303 | | | 877 | | | 8,443 | | | 351 | | | 502 | | | 10,476 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 302 | | | 302 | |
| SBA | | — | | | 9,288 | | | 12,875 | | | 3,846 | | | 6,664 | | | 28,296 | | | 677 | | | 1,252 | | | 62,898 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | | | | | | | | | | | | | | | | | | |
| Pass | | 1,996 | | | 96,130 | | | 113,770 | | | 27,795 | | | — | | | 24,984 | | | 9 | | | — | | | 264,684 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Construction | | 1,996 | | | 96,130 | | | 113,770 | | | 27,795 | | | — | | | 24,984 | | | 9 | | | — | | | 264,684 | |
| Consumer: | | | | | | | | | | | | | | | | | | |
| Single family residential mortgage | | | | | | | | | | | | | | | | | | |
| Pass | | — | | | 595,050 | | | 768,940 | | | 70,311 | | | 44,030 | | | 302,777 | | | 2,445 | | | — | | | 1,783,553 | |
| Special mention | | — | | | — | | | 680 | | | — | | | — | | | 2,321 | | | — | | | — | | | 3,001 | |
| Substandard | | — | | | 9,656 | | | 6,607 | | | 2,161 | | | — | | | 13,876 | | | 1,867 | | | — | | | 34,167 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Single family residential mortgage | | — | | | 604,706 | | | 776,227 | | | 72,472 | | | 44,030 | | | 318,974 | | | 4,312 | | | — | | | 1,820,721 | |
| Other consumer | | | | | | | | | | | | | | | | | | |
| Pass | | 16,210 | | | 18,972 | | | 13,592 | | | 7,650 | | | 4,288 | | | 15,541 | | | 8,696 | | | 1,183 | | | 86,132 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | 1 | | | 349 | | | 52 | | | 402 | |
| Substandard | | — | | | — | | | 111 | | | — | | | 122 | | | 57 | | | 81 | | | — | | | 371 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Other consumer | | 16,210 | | | 18,972 | | | 13,703 | | | 7,650 | | | 4,410 | | | 15,599 | | | 9,126 | | | 1,235 | | | 86,905 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 121,607 | | | $ | 2,005,243 | | | $ | 1,827,925 | | | $ | 385,660 | | | $ | 417,159 | | | $ | 1,201,924 | | | $ | 1,163,136 | | | $ | 33,552 | | | $ | 7,156,206 | |
| | | | | | | | | | | | | | | | | | |
| Total loans | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 117,697 | | | $ | 1,988,207 | | | $ | 1,810,603 | | | $ | 377,708 | | | $ | 400,143 | | | $ | 1,138,359 | | | $ | 1,134,143 | | | $ | 28,747 | | | $ | 6,995,607 | |
| Special mention | | — | | | 1,568 | | | 10,469 | | | 2,995 | | | 15,716 | | | 12,561 | | | 7,149 | | | 445 | | | 50,903 | |
| Substandard | | — | | | 15,468 | | | 6,853 | | | 4,886 | | | 1,300 | | | 51,004 | | | 16,466 | | | 4,058 | | | 100,035 | |
Doubtful (1) | | 3,910 | | | — | | | — | | | 71 | | | — | | | — | | | 5,378 | | | 302 | | | 9,661 | |
| Total loans | | $ | 121,607 | | | $ | 2,005,243 | | | $ | 1,827,925 | | | $ | 385,660 | | | $ | 417,159 | | | $ | 1,201,924 | | | $ | 1,163,136 | | | $ | 33,552 | | | $ | 7,156,206 | |
(1) Doubtful loans in origination year 2023 included one commercial and industrial loan that was modified and accounted for as a new loan.
The following table presents the risk categories for total loans by class of loans and origination year as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | |
| ($ in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Amortized Cost Basis
Converted to Term | | Total |
| December 31, 2022 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 269,367 | | | $ | 170,513 | | | $ | 62,931 | | | $ | 53,001 | | | $ | 76,811 | | | $ | 164,394 | | | $ | 932,464 | | | $ | 19,803 | | | $ | 1,749,284 | |
| Special mention | | — | | | 19,203 | | | 1,042 | | | — | | | 1 | | | 11,528 | | | 17,142 | | | 483 | | | 49,399 | |
| Substandard | | 3,833 | | | 64 | | | 3,002 | | | 502 | | | 3,630 | | | 2,729 | | | 23,012 | | | 6,501 | | | 43,273 | |
| Doubtful | | — | | | — | | | — | | | 4,004 | | | — | | | — | | | — | | | — | | | 4,004 | |
| Commercial and industrial | | 273,200 | | | 189,780 | | | 66,975 | | | 57,507 | | | 80,442 | | | 178,651 | | | 972,618 | | | 26,787 | | | 1,845,960 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | |
| Pass | | 348,298 | | | 363,335 | | | 60,564 | | | 94,772 | | | 155,790 | | | 224,213 | | | 1,163 | | | 61 | | | 1,248,196 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | 1,745 | | | — | | | — | | | 1,745 | |
| Substandard | | — | | | — | | | — | | | — | | | 1 | | | 8,799 | | | 910 | | | — | | | 9,710 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial real estate | | 348,298 | | | 363,335 | | | 60,564 | | | 94,772 | | | 155,791 | | | 234,757 | | | 2,073 | | | 61 | | | 1,259,651 | |
| Multifamily | | | | | | | | | | | | | | | | | | |
| Pass | | 626,186 | | | 390,928 | | | 154,636 | | | 229,511 | | | 109,887 | | | 138,063 | | | 3 | | | 9,307 | | | 1,658,521 | |
| Special mention | | — | | | — | | | 2,997 | | | — | | | — | | | — | | | — | | | — | | | 2,997 | |
| Substandard | | — | | | — | | | — | | | — | | | 11,069 | | | 17,356 | | | — | | | — | | | 28,425 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Multifamily | | 626,186 | | | 390,928 | | | 157,633 | | | 229,511 | | | 120,956 | | | 155,419 | | | 3 | | | 9,307 | | | 1,689,943 | |
| SBA | | | | | | | | | | | | | | | | | | |
| Pass | | 9,421 | | | 15,468 | | | 4,009 | | | 5,899 | | | 1,176 | | | 19,090 | | | 603 | | | 123 | | | 55,789 | |
| Special mention | | — | | | — | | | — | | | — | | | 201 | | | 598 | | | — | | | 1 | | | 800 | |
| Substandard | | — | | | — | | | 320 | | | 339 | | | 385 | | | 9,097 | | | 628 | | | 779 | | | 11,548 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| SBA | | 9,421 | | | 15,468 | | | 4,329 | | | 6,238 | | | 1,762 | | | 28,785 | | | 1,231 | | | 903 | | | 68,137 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | | | | | | | | | | | | | | | | | | |
| Pass | | 85,430 | | | 98,572 | | | 27,704 | | | 6,495 | | | — | | | 25,352 | | | — | | | — | | | 243,553 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Construction | | 85,430 | | | 98,572 | | | 27,704 | | | 6,495 | | | — | | | 25,352 | | | — | | | — | | | 243,553 | |
| Consumer: | | | | | | | | | | | | | | | | | | |
| Single family residential mortgage | | | | | | | | | | | | | | | | | | |
| Pass | | 627,213 | | | 797,744 | | | 72,658 | | | 47,284 | | | 89,492 | | | 255,520 | | | — | | | — | | | 1,889,911 | |
| Special mention | | 1,716 | | | 218 | | | — | | | 1,537 | | | 3,378 | | | 2,252 | | | — | | | — | | | 9,101 | |
| Substandard | | 3,571 | | | — | | | 2,171 | | | — | | | 8,573 | | | 7,479 | | | — | | | — | | | 21,794 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Single family residential mortgage | | 632,500 | | | 797,962 | | | 74,829 | | | 48,821 | | | 101,443 | | | 265,251 | | | — | | | — | | | 1,920,806 | |
| Other consumer | | | | | | | | | | | | | | | | | | |
| Pass | | 23,340 | | | 15,986 | | | 8,805 | | | 5,524 | | | 3,363 | | | 15,920 | | | 10,914 | | | 2,747 | | | 86,599 | |
| Special mention | | — | | | — | | | — | | | 3 | | | — | | | 19 | | | 62 | | | 54 | | | 138 | |
| Substandard | | — | | | — | | | 56 | | | — | | | 83 | | | 31 | | | 81 | | | — | | | 251 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Other consumer | | 23,340 | | | 15,986 | | | 8,861 | | | 5,527 | | | 3,446 | | | 15,970 | | | 11,057 | | | 2,801 | | | 86,988 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 1,998,375 | | | $ | 1,872,031 | | | $ | 400,895 | | | $ | 448,871 | | | $ | 463,840 | | | $ | 904,185 | | | $ | 986,982 | | | $ | 39,859 | | | $ | 7,115,038 | |
| | | | | | | | | | | | | | | | | | |
| Total loans | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 1,989,255 | | | $ | 1,852,546 | | | $ | 391,307 | | | $ | 442,486 | | | $ | 436,519 | | | $ | 842,552 | | | $ | 945,147 | | | $ | 32,041 | | | $ | 6,931,853 | |
| Special mention | | 1,716 | | | 19,421 | | | 4,039 | | | 1,540 | | | 3,580 | | | 16,142 | | | 17,204 | | | 538 | | | 64,180 | |
| Substandard | | 7,404 | | | 64 | | | 5,549 | | | 841 | | | 23,741 | | | 45,491 | | | 24,631 | | | 7,280 | | | 115,001 | |
| Doubtful | | — | | | — | | | — | | | 4,004 | | | — | | | — | | | — | | | — | | | 4,004 | |
| Total loans | | $ | 1,998,375 | | | $ | 1,872,031 | | | $ | 400,895 | | | $ | 448,871 | | | $ | 463,840 | | | $ | 904,185 | | | $ | 986,982 | | | $ | 39,859 | | | $ | 7,115,038 | |
Past Due Loans
The following table presents the aging of the recorded investment in past due loans, excluding accrued interest receivable (which is not considered to be material), by class of loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | Greater than 89 Days Past due | | Total Past Due | | Current | | Total |
| June 30, 2023 | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | 1,430 | | | 4,442 | | | 16,631 | | | 22,503 | | | 1,977,905 | | | 2,000,408 | |
| Commercial real estate | | 2,047 | | | 831 | | | 1,760 | | | 4,638 | | | 1,261,800 | | | 1,266,438 | |
| Multifamily | | — | | | 1,124 | | | — | | | 1,124 | | | 1,653,028 | | | 1,654,152 | |
| SBA | | 735 | | | 247 | | | 9,193 | | | 10,175 | | | 52,723 | | | 62,898 | |
| Construction | | — | | | — | | | — | | | — | | | 264,684 | | | 264,684 | |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | 43,956 | | | 9,466 | | | 12,504 | | | 65,926 | | | 1,754,795 | | | 1,820,721 | |
| Other consumer | | 119 | | | 349 | | | 81 | | | 549 | | | 86,356 | | | 86,905 | |
| Total | | $ | 48,287 | | | $ | 16,459 | | | $ | 40,169 | | | $ | 104,915 | | | $ | 7,051,291 | | | $ | 7,156,206 | |
| | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | 4,002 | | | 481 | | | 13,833 | | | 18,316 | | | 1,827,644 | | | 1,845,960 | |
| Commercial real estate | | 311 | | | — | | | 910 | | | 1,221 | | | 1,258,430 | | | 1,259,651 | |
| Multifamily | | — | | | — | | | — | | | — | | | 1,689,943 | | | 1,689,943 | |
| SBA | | 287 | | | — | | | 10,299 | | | 10,586 | | | 57,551 | | | 68,137 | |
| Construction | | — | | | — | | | — | | | — | | | 243,553 | | | 243,553 | |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | 36,338 | | | 5,068 | | | 19,431 | | | 60,837 | | | 1,859,969 | | | 1,920,806 | |
| Other consumer | | 163 | | | 16 | | | 81 | | | 260 | | | 86,728 | | | 86,988 | |
| Total | | $ | 41,101 | | | $ | 5,565 | | | $ | 44,554 | | | $ | 91,220 | | | $ | 7,023,818 | | | $ | 7,115,038 | |
Nonaccrual Loans
The following table presents nonaccrual loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | June 30, 2023 | | | | | | December 31, 2022 |
| ($ in thousands) | | | | | Total
Nonaccrual Loans | | Nonaccrual Loans with no ACL | | | | | | Total
Nonaccrual Loans | | Nonaccrual Loans with no ACL |
| Nonaccrual loans | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | | $ | 21,228 | | | $ | 10,824 | | | | | | | $ | 22,613 | | | $ | 10,959 | |
| Commercial real estate | | | | | 2,600 | | | 2,600 | | | | | | | 910 | | | 910 | |
| | | | | | | | | | | | | | | |
| SBA | | | | | 9,611 | | | 9,502 | | | | | | | 10,417 | | | 5,613 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | |
| Single family residential mortgage | | | | | 33,496 | | | 33,495 | | | | | | | 21,116 | | | 17,187 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other consumer | | | | | 371 | | | 260 | | | | | | | 195 | | | 195 | |
| Total nonaccrual loans | | | | | $ | 67,306 | | | $ | 56,681 | | | | | | | $ | 55,251 | | | $ | 34,864 | |
| | | | | | | | | | | | | | | |
At June 30, 2023 and December 31, 2022, there were no loans that were past due 90 days or more and still accruing.
Other Real Estate Owned, Net and Loans in Process of Foreclosure
At June 30, 2023, other real estate owned totaled $0.9 million and consisted of one single-family residence acquired as a result of foreclosure in the second quarter. There was no other real estate owned at December 31, 2022.
At June 30, 2023, there were 4 single-family residential mortgage loans totaling $3.2 million in process of foreclosure. There were 9 single-family residential mortgage loans totaling $11.7 million in process of foreclosure at December 31, 2022.
Allowance for Credit Losses - Loans
The ACL methodology uses a nationally recognized, third-party model that includes many assumptions based on historical and peer loss data, current loan portfolio risk profile including risk ratings, and economic forecasts including macroeconomic variables released by the model provider during June 2023. The published forecasts consider the Federal Reserve’s monetary policy, labor market constraints, inflation levels, global oil prices and changes in real estate values, among other factors.
The ACL also incorporates qualitative factors to account for certain loan portfolio characteristics that are not taken into consideration by the third-party model including underlying strengths and weaknesses in various segments of the loan portfolio. As is the case with all estimates, the ACL is expected to be impacted in future periods by economic volatility, changing economic forecasts, underlying model assumptions, and asset quality metrics, all of which may be better or worse than current estimates.
The ACL process involves subjective and complex judgments as well as adjustments for numerous factors including those described in the federal banking agencies’ joint interagency policy statement on ALL, which include underwriting experience and collateral value changes, among others.
The RUC is established to cover the current expected credit losses for the estimated level of funding of these loan commitments, except for unconditionally cancellable commitments for which no reserve is required under ASC 326. At June 30, 2023 and December 31, 2022, the reserve for unfunded loan commitments was $4.0 million and $5.3 million and was included in accrued expenses and other liabilities on the consolidated statements of financial condition.
The following table presents a summary of activity in the ACLleases for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| ($ in thousands) | | 2023 | | 2022 | | | | |
| | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | | | |
| Balance at beginning of period | | $ | 84,560 | | | $ | 4,805 | | | $ | 89,365 | | | $ | 93,226 | | | $ | 5,405 | | | $ | 98,631 | | | | | |
| | | | | | | | | | | | | | | | |
| Charge-offs | | (5,667) | | | — | | | (5,667) | | | (494) | | | — | | | (494) | | | | | |
| Recoveries | | 326 | | | — | | | 326 | | | 1,561 | | | — | | | 1,561 | | | | | |
| Net (charge-offs) recoveries | | (5,341) | | | — | | | (5,341) | | | 1,067 | | | — | | | 1,067 | | | | | |
| | | | | | | | | | | | | | | | |
| Provision for (reversal of) credit losses | | 1,664 | | | (800) | | | 864 | | | (500) | | | 500 | | | — | | | | | |
| Balance at end of period | | $ | 80,883 | | | $ | 4,005 | | | $ | 84,888 | | | $ | 93,793 | | | $ | 5,905 | | | $ | 99,698 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| ($ in thousands) | | 2023 | | 2022 | | | | |
| | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | | | |
| Balance at beginning of period | | $ | 85,960 | | | $ | 5,305 | | | $ | 91,265 | | | $ | 92,584 | | | $ | 5,605 | | | $ | 98,189 | | | | | |
| | | | | | | | | | | | | | | | |
| Charge-offs | | (9,616) | | | — | | | (9,616) | | | (725) | | | — | | | (725) | | | | | |
| Recoveries | | 375 | | | — | | | 375 | | | 33,776 | | | — | | | 33,776 | | | | | |
| Net (charge-offs) recoveries | | (9,241) | | | — | | | (9,241) | | | 33,051 | | | — | | | 33,051 | | | | | |
| | | | | | | | | | | | | | | | |
| Provision for (reversal of) credit losses | | 4,164 | | | (1,300) | | | 2,864 | | | (31,842) | | | 300 | | | (31,542) | | | | | |
| Balance at end of period | | $ | 80,883 | | | $ | 4,005 | | | $ | 84,888 | | | $ | 93,793 | | | $ | 5,905 | | | $ | 99,698 | | | | | |
| | | | | | | | | | | | | | | | |
During the six months ended June 30, 2022, total recoveries included $31.3 million related to a recovery from the settlement of a loan previously charged-off in 2019. This recovery resulted in a reversal of provision for credit losses during the same period.
Accrued interest receivable on loans receivable, net totaled $25.1 million and $28.6 million at June 30, 2023 and December 31, 2022, and is included within other assets in the accompanying consolidated statements of financial condition. Accrued interest receivable is excluded from the allowance of credit losses.
The following table presents the activity and balance in the ALL as of or for the three and six months ended June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Commercial and Industrial | | Commercial Real Estate | | Multifamily | | SBA | | Construction | | | | Single Family Residential Mortgage | | Other Consumer | | | | Total |
| ALL: | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023: | | | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2023 | | $ | 32,644 | | | $ | 16,119 | | | $ | 15,038 | | | $ | 2,097 | | | $ | 6,425 | | | | | $ | 11,481 | | | $ | 756 | | | | | $ | 84,560 | |
| | | | | | | | | | | | | | | | | | | | |
| Charge-offs | | (4,450) | | | — | | | — | | | (1,081) | | | — | | | | | — | | | (136) | | | | | (5,667) | |
| Recoveries | | 22 | | | — | | | — | | | 286 | | | — | | | | | 1 | | | 17 | | | | | 326 | |
| Net (charge-offs) recoveries | | (4,428) | | | — | | | — | | | (795) | | | — | | | | | 1 | | | (119) | | | | | (5,341) | |
| | | | | | | | | | | | | | | | | | | | |
| Provision for (reversal of) credit losses - loans | | 4,607 | | | (352) | | | (341) | | | 85 | | | (372) | | | | | (1,964) | | | 1 | | | | | 1,664 | |
| Balance at June 30, 2023 | | $ | 32,823 | | | $ | 15,767 | | | $ | 14,697 | | | $ | 1,387 | | | $ | 6,053 | | | | | $ | 9,518 | | | $ | 638 | | | | | $ | 80,883 | |
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2023: | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2022 | | $ | 34,156 | | | $ | 15,977 | | | $ | 14,696 | | | $ | 2,648 | | | $ | 5,850 | | | | | $ | 12,050 | | | $ | 583 | | | | | $ | 85,960 | |
| | | | | | | | | | | | | | | | | | | | |
| Charge-offs | | (7,711) | | | (300) | | | — | | | (1,081) | | | — | | | | | (372) | | | (152) | | | | | (9,616) | |
| Recoveries | | 39 | | | — | | | — | | | 310 | | | — | | | | | 2 | | | 24 | | | | | 375 | |
| Net (charge-offs) recoveries | | (7,672) | | | (300) | | | — | | | (771) | | | — | | | | | (370) | | | (128) | | | | | (9,241) | |
| | | | | | | | | | | | | | | | | | | | |
| Provision for (reversal of) credit losses - loans | | 6,339 | | | 90 | | | 1 | | | (490) | | | 203 | | | | | (2,162) | | | 183 | | | | | 4,164 | |
| Balance at June 30, 2023 | | $ | 32,823 | | | $ | 15,767 | | | $ | 14,697 | | | $ | 1,387 | | | $ | 6,053 | | | | | $ | 9,518 | | | $ | 638 | | | | | $ | 80,883 | |
The following table presents the activity and balance in the ALL as of or for the three and six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Commercial and Industrial | | Commercial Real Estate | | Multifamily | | SBA | | Construction | | | | Single Family Residential Mortgage | | Other Consumer | | | | Total |
| ALL: | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022: | | | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2022 | | $ | 39,967 | | | $ | 16,490 | | | $ | 15,337 | | | $ | 3,041 | | | $ | 6,268 | | | | | $ | 11,029 | | | $ | 1,094 | | | | | $ | 93,226 | |
| | | | | | | | | | | | | | | | | | | | |
| Charge-offs | | (138) | | | — | | | — | | | (139) | | | — | | | | | — | | | (217) | | | | | (494) | |
| Recoveries | | 1,400 | | | — | | | — | | | 3 | | | — | | | | | 154 | | | 4 | | | | | 1,561 | |
| Net recoveries (charge-offs) | | 1,262 | | | — | | | — | | | (136) | | | — | | | | | 154 | | | (213) | | | | | 1,067 | |
| | | | | | | | | | | | | | | | | | | | |
| Provision for (reversal of) credit losses - loans | | 184 | | | (748) | | | 341 | | | 128 | | | (2,013) | | | | | 1,622 | | | (14) | | | | | (500) | |
| Balance at June 30, 2022 | | $ | 41,413 | | | $ | 15,742 | | | $ | 15,678 | | | $ | 3,033 | | | $ | 4,255 | | | | | $ | 12,805 | | | $ | 867 | | | | | $ | 93,793 | |
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022: | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | $ | 33,557 | | | $ | 21,727 | | | $ | 17,893 | | | $ | 3,017 | | | $ | 5,622 | | | | | $ | 9,608 | | | $ | 1,160 | | | | | $ | 92,584 | |
| | | | | | | | | | | | | | | | | | | | |
| Charge-offs | | (320) | | | — | | | — | | | (152) | | | — | | | | | (10) | | | (243) | | | | | (725) | |
| Recoveries | | 32,817 | | | — | | | — | | | 761 | | | — | | | | | 192 | | | 6 | | | | | 33,776 | |
| Net recoveries (charge-offs) | | 32,497 | | | — | | | — | | | 609 | | | — | | | | | 182 | | | (237) | | | | | 33,051 | |
| | | | | | | | | | | | | | | | | | | | |
| (Reversal of) provision for credit losses - loans | | (24,641) | | | (5,985) | | | (2,215) | | | (593) | | | (1,367) | | | | | 3,015 | | | (56) | | | | | (31,842) | |
| Balance at June 30, 2022 | | $ | 41,413 | | | $ | 15,742 | | | $ | 15,678 | | | $ | 3,033 | | | $ | 4,255 | | | | | $ | 12,805 | | | $ | 867 | | | | | $ | 93,793 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months | | | | | | Three Months | | |
| | | Ended | | | | | | Ended | | |
| March 31, | | March 31, | | | | March 31, | | March 31, | | |
| | 2024 | | 2024 | | | | 2023 | | 2023 | | |
| Nonaccrual | | Interest | | | | Nonaccrual | | Interest | | |
| Recorded | | Income | | | | Recorded | | Income | | |
| Investment | | Recognized | | | | Investment | | Recognized | | |
| | (In thousands) |
| With An Allowance Recorded: | | | | | | | | | | | |
| Real estate mortgage: | | | | | | | | | | | |
| Commercial | $ | 32,106 | | | $ | — | | | | | $ | 60 | | | $ | — | | | |
| Multi-family | — | | | — | | | | | — | | | — | | | |
| Other residential | 389 | | | — | | | | | 364 | | | — | | | |
| Real estate construction and land: | | | | | | | | | | | |
| Commercial | — | | | — | | | | | — | | | — | | | |
| Residential | — | | | — | | | | | — | | | — | | | |
| Commercial: | | | | | | | | | | | |
| Asset-based | 701 | | | — | | | | | — | | | — | | | |
| Venture capital | — | | | — | | | | | — | | | — | | | |
| Other commercial | 816 | | | — | | | | | 927 | | | — | | | |
| Consumer | 832 | | | — | | | | | 525 | | | — | | | |
| With No Related Allowance Recorded: | | | | | | | | | | | |
| Real estate mortgage: | | | | | | | | | | | |
| Commercial | $ | 34,421 | | | $ | 5 | | | | | $ | 32,936 | | | $ | 3 | | | |
| Multi-family | 953 | | | — | | | | | — | | | — | | | |
| Other residential | 61,365 | | | — | | | | | 49,696 | | | — | | | |
| Real estate construction and land: | | | | | | | | | | | |
| Commercial | — | | | — | | | | | — | | | — | | | |
| Residential | — | | | — | | | | | — | | | — | | | |
| Commercial: | | | | | | | | | | | |
| Asset-based | 1,624 | | | — | | | | | 420 | | | — | | | |
| Venture capital | — | | | — | | | | | — | | | — | | | |
| Other commercial | 12,574 | | | — | | | | | 2,196 | | | 1 | | | |
| Consumer | 4 | | | — | | | | | — | | | — | | | |
| Total Loans and Leases With and | | | | | | | | | | | |
| Without an Allowance Recorded: | | | | | | | | | | | |
| Real estate mortgage | $ | 129,234 | | | $ | 5 | | | | | $ | 83,056 | | | $ | 3 | | | |
| Real estate construction and land | — | | | — | | | | | — | | | — | | | |
| Commercial | 15,715 | | | — | | | | | 3,543 | | | 1 | | | |
| Consumer | 836 | | | — | | | | | 525 | | | — | | | |
| Total | $ | 145,785 | | | $ | 5 | | | | | $ | 87,124 | | | $ | 4 | | | |
The following table presents the gross charge-offs by class of loans and origination year as of June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Charge-offs | | | | | | |
| ($ in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | | | Total |
| Three Months Ended June 30, 2023 | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | $ | — | | | $ | (4,118) | | | $ | (332) | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | (4,450) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| SBA | | — | | | — | | | (64) | | | — | | | — | | | (1,017) | | | | | | | (1,081) | |
| | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Other consumer | | — | | | — | | | — | | | (59) | | | — | | | (77) | | | | | | | (136) | |
| Total loans | | $ | — | | | $ | (4,118) | | | $ | (396) | | | $ | (59) | | | $ | — | | | $ | (1,094) | | | | | | | $ | (5,667) | |
| | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2023 | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | $ | — | | | $ | (5,717) | | | $ | (1,085) | | | $ | — | | | $ | — | | | $ | (909) | | | | | | | $ | (7,711) | |
| Commercial real estate | | — | | | — | | | — | | | — | | | — | | | (300) | | | | | | | (300) | |
| | | | | | | | | | | | | | | | | | |
| SBA | | — | | | — | | | (64) | | | — | | | — | | | (1,017) | | | | | | | (1,081) | |
| | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | |
| Single family residential mortgage | | — | | | — | | | — | | | (372) | | | — | | | — | | | | | | | (372) | |
| Other consumer | | — | | | (16) | | | — | | | (59) | | | — | | | (77) | | | | | | | (152) | |
| Total loans | | $ | — | | | $ | (5,733) | | | $ | (1,149) | | | $ | (431) | | | $ | — | | | $ | (2,303) | | | | | | | $ | (9,616) | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Collateral DependentThe following tables present our loans held for investment by loan portfolio segment and class, by credit quality indicator (internal risk ratings), and by year of origination (vintage year) as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
| March 31, 2024 | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
| Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | 26,137 | | | $ | 15,151 | | | $ | 13,787 | | | $ | 88,693 | | | $ | 1 | | | $ | — | | | $ | 143,769 | |
| 4-6 Pass | 2,941 | | | 169,935 | | | 918,384 | | | 759,995 | | | 508,887 | | | 1,924,197 | | | 62,325 | | | 35,136 | | | 4,381,800 | |
| 7 Special mention | — | | | — | | | 14,054 | | | 80,551 | | | 3,579 | | | 98,266 | | | — | | | — | | | 196,450 | |
| 8-9 Classified | — | | | 730 | | | 5,019 | | | 27,734 | | | 24,675 | | | 115,263 | | | 1,104 | | | — | | | 174,525 | |
| Total | $ | 2,941 | | | $ | 170,665 | | | $ | 963,594 | | | $ | 883,431 | | | $ | 550,928 | | | $ | 2,226,419 | | | $ | 63,430 | | | $ | 35,136 | | | $ | 4,896,544 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 28 | | | $ | — | | | $ | 9 | | | $ | — | | | $ | — | | | $ | 37 | |
| | | | | | | | | | | | | | | | | |
| Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
| Multi-family | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | 45,501 | | | $ | 158,588 | | | $ | 67,642 | | | $ | 174,599 | | | $ | — | | | $ | — | | | $ | 446,330 | |
| 4-6 Pass | 18,571 | | | 88,432 | | | 2,226,235 | | | 1,196,320 | | | 578,112 | | | 1,339,150 | | | 11,478 | | | 47,980 | | | 5,506,278 | |
| 7 Special mention | — | | | — | | | — | | | 8,063 | | | 15,465 | | | 70,690 | | | — | | | — | | | 94,218 | |
| 8-9 Classified | — | | | — | | | — | | | 17,284 | | | 8,552 | | | 48,810 | | | — | | | — | | | 74,646 | |
| Total | $ | 18,571 | | | $ | 88,432 | | | $ | 2,271,736 | | | $ | 1,380,255 | | | $ | 669,771 | | | $ | 1,633,249 | | | $ | 11,478 | | | $ | 47,980 | | | $ | 6,121,472 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
| Other residential | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,693 | | | $ | — | | | $ | 6,693 | |
| 4-6 Pass | 1,795 | | | 184,141 | | | 1,764,313 | | | 2,757,120 | | | 64,163 | | | 19,743 | | | 53,324 | | | 82 | | | 4,844,681 | |
| 7 Special mention | — | | | — | | | 27,992 | | | 3,323 | | | — | | | 284 | | | — | | | — | | | 31,599 | |
| 8-9 Classified | — | | | 5,027 | | | 36,971 | | | 21,551 | | | 939 | | | 1,742 | | | 147 | | | 33 | | | 66,410 | |
| Total | $ | 1,795 | | | $ | 189,168 | | | $ | 1,829,276 | | | $ | 2,781,994 | | | $ | 65,102 | | | $ | 21,769 | | | $ | 60,164 | | | $ | 115 | | | $ | 4,949,383 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | 851 | | | $ | 1,028 | | | $ | 540 | | | $ | 21 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,440 | |
____________________(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
| March 31, 2024 | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
| Real Estate Construction | | | | | | | | | | | | | | | | | |
| and Land: Commercial | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 4-6 Pass | 5,783 | | | 26,160 | | | 417,605 | | | 221,095 | | | 71,133 | | | 11,351 | | | 21,894 | | | — | | | 775,021 | |
| 7 Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8-9 Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 5,783 | | | $ | 26,160 | | | $ | 417,605 | | | $ | 221,095 | | | $ | 71,133 | | | $ | 11,351 | | | $ | 21,894 | | | $ | — | | | $ | 775,021 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Real Estate Construction | | | | | | | | | | | | | | | | | |
| and Land: Residential | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 4-6 Pass | 10,774 | | | 87,735 | | | 1,315,850 | | | 645,125 | | | 255,161 | | | 26,908 | | | 125,775 | | | — | | | 2,467,328 | |
| 7 Special mention | — | | | — | | | — | | | 3,005 | | | — | | | — | | | — | | | — | | | 3,005 | |
| 8-9 Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 10,774 | | | $ | 87,735 | | | $ | 1,315,850 | | | $ | 648,130 | | | $ | 255,161 | | | $ | 26,908 | | | $ | 125,775 | | | $ | — | | | $ | 2,470,333 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Commercial: Asset-Based | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | 16,929 | | | $ | 38,274 | | | $ | 230,364 | | | $ | 213,767 | | | $ | 32,957 | | | $ | 316,425 | | | $ | 85,599 | | | $ | — | | | $ | 934,315 | |
| 4-6 Pass | (9) | | | 111,264 | | | 215,198 | | | 125,887 | | | 16,485 | | | 32,016 | | | 606,049 | | | — | | | 1,106,890 | |
| 7 Special mention | — | | | — | | | 75 | | | 3 | | | — | | | 1 | | | 11,237 | | | — | | | 11,316 | |
| 8-9 Classified | — | | | — | | | — | | | — | | | 701 | | | — | | | 7,794 | | | — | | | 8,495 | |
| Total | $ | 16,920 | | | $ | 149,538 | | | $ | 445,637 | | | $ | 339,657 | | | $ | 50,143 | | | $ | 348,442 | | | $ | 710,679 | | | $ | — | | | $ | 2,061,016 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Commercial: Venture | | | | | | | | | | | | | | | | | |
| Capital | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | (85) | | | $ | (98) | | | $ | (5) | | | $ | — | | | $ | 1,998 | | | $ | (2) | | | $ | 148,410 | | | $ | 1,407 | | | $ | 151,625 | |
| 4-6 Pass | 24,976 | | | 71,914 | | | 102,487 | | | 106,549 | | | 5,821 | | | 6,774 | | | 749,806 | | | 84,925 | | | 1,153,252 | |
| 7 Special mention | — | | | 61,994 | | | 28,850 | | | 31,934 | | | — | | | 19,987 | | | 50,551 | | | 4,995 | | | 198,311 | |
| 8-9 Classified | — | | | 2,967 | | | — | | | 7,486 | | | — | | | — | | | — | | | — | | | 10,453 | |
| Total | $ | 24,891 | | | $ | 136,777 | | | $ | 131,332 | | | $ | 145,969 | | | $ | 7,819 | | | $ | 26,759 | | | $ | 948,767 | | | $ | 91,327 | | | $ | 1,513,641 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 141 | | | $ | — | | | $ | 141 | |
____________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
| March 31, 2024 | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
| Commercial: Other | | | | | | | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | 505 | | | $ | 785 | | | $ | 4,273 | | | $ | 4,855 | | | $ | 105 | | | $ | 1,221 | | | $ | 61,631 | | | $ | — | | | $ | 73,375 | |
| 4-6 Pass | 44,466 | | | 81,764 | | | 175,174 | | | 278,317 | | | 49,333 | | | 180,267 | | | 1,314,086 | | | 2,826 | | | 2,126,233 | |
| 7 Special mention | — | | | — | | | — | | | 457 | | | — | | | 6,560 | | | 7,999 | | | 64 | | | 15,080 | |
| 8-9 Classified | — | | | — | | | 2,281 | | | 3,556 | | | 2,061 | | | 18,277 | | | 3,991 | | | 1,056 | | | 31,222 | |
| Total | $ | 44,971 | | | $ | 82,549 | | | $ | 181,728 | | | $ | 287,185 | | | $ | 51,499 | | | $ | 206,325 | | | $ | 1,387,707 | | | $ | 3,946 | | | $ | 2,245,910 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 211 | | | $ | — | | | $ | 121 | | | $ | 231 | | | $ | — | | | $ | 563 | |
| | | | | | | | | | | | | | | | | |
| Consumer | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | 25 | | | $ | 21 | | | $ | 3 | | | $ | — | | | $ | 1,918 | | | $ | — | | | $ | 1,967 | |
| 4-6 Pass | 8,903 | | | 25,411 | | | 68,254 | | | 199,872 | | | 22,426 | | | 99,514 | | | 5,535 | | | 312 | | | 430,227 | |
| 7 Special mention | — | | | — | | | 1,119 | | | 3,712 | | | 103 | | | 1,596 | | | — | | | — | | | 6,530 | |
| 8-9 Classified | — | | | — | | | 128 | | | 502 | | | 43 | | | 290 | | | — | | | 15 | | | 978 | |
| Total | $ | 8,903 | | | $ | 25,411 | | | $ | 69,526 | | | $ | 204,107 | | | $ | 22,575 | | | $ | 101,400 | | | $ | 7,453 | | | $ | 327 | | | $ | 439,702 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | 335 | | | $ | 643 | | | $ | 209 | | | $ | 646 | | | $ | — | | | $ | — | | | $ | 1,833 | |
| | | | | | | | | | | | | | | | | |
| Total Loans and Leases | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | 17,349 | | | $ | 38,961 | | | $ | 306,295 | | | $ | 392,382 | | | $ | 116,492 | | | $ | 580,936 | | | $ | 304,252 | | | $ | 1,407 | | | $ | 1,758,074 | |
| 4-6 Pass | 118,200 | | | 846,756 | | | 7,203,500 | | | 6,290,280 | | | 1,571,521 | | | 3,639,920 | | | 2,950,272 | | | 171,261 | | | 22,791,710 | |
| 7 Special mention | — | | | 61,994 | | | 72,090 | | | 131,048 | | | 19,147 | | | 197,384 | | | 69,787 | | | 5,059 | | | 556,509 | |
| 8-9 Classified | — | | | 8,724 | | | 44,399 | | | 78,113 | | | 36,971 | | | 184,382 | | | 13,036 | | | 1,104 | | | 366,729 | |
| Total | $ | 135,549 | | | $ | 956,435 | | | $ | 7,626,284 | | | $ | 6,891,823 | | | $ | 1,744,131 | | | $ | 4,602,622 | | | $ | 3,337,347 | | | $ | 178,831 | | | $ | 25,473,022 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | 851 | | | $ | 1,363 | | | $ | 1,422 | | | $ | 230 | | | $ | 776 | | | $ | 372 | | | $ | — | | | $ | 5,014 | |
______________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
| December 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
| Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | 16,976 | | | $ | 17,432 | | | $ | 16,832 | | | $ | 17,337 | | | $ | 69,205 | | | $ | 1 | | | $ | — | | | $ | 137,783 | |
| 4-6 Pass | 182,236 | | | 933,294 | | | 814,564 | | | 510,952 | | | 298,985 | | | 1,765,454 | | | 76,866 | | | 10,937 | | | 4,593,288 | |
| 7 Special mention | — | | | 14,021 | | | 32,235 | | | 25,485 | | | 17,147 | | | 129,549 | | | 1,250 | | | — | | | 219,687 | |
| 8-9 Classified | 749 | | | — | | | 26,172 | | | 439 | | | 17,063 | | | 29,566 | | | 1,750 | | | — | | | 75,739 | |
| Total | $ | 182,985 | | | $ | 964,291 | | | $ | 890,403 | | | $ | 553,708 | | | $ | 350,532 | | | $ | 1,993,774 | | | $ | 79,867 | | | $ | 10,937 | | | $ | 5,026,497 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 34 | | | $ | — | | | $ | — | | | $ | — | | | $ | 76 | | | $ | 14,185 | | | $ | — | | | $ | — | | | $ | 14,295 | |
| | | | | | | | | | | | | | | | | |
| Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
| Multi-family | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | 28,155 | | | $ | 140,424 | | | $ | 58,959 | | | $ | 57,988 | | | $ | 109,423 | | | $ | — | | | $ | — | | | $ | 394,949 | |
| 4-6 Pass | 66,143 | | | 2,221,235 | | | 1,193,052 | | | 539,660 | | | 564,420 | | | 794,599 | | | 67,811 | | | — | | | 5,446,920 | |
| 7 Special mention | — | | | 2,610 | | | 17,784 | | | 12,201 | | | 39,808 | | | 35,953 | | | — | | | — | | | 108,356 | |
| 8-9 Classified | — | | | — | | | 17,283 | | | 8,576 | | | 26,543 | | | 22,552 | | | — | | | — | | | 74,954 | |
| Total | $ | 66,143 | | | $ | 2,252,000 | | | $ | 1,368,543 | | | $ | 619,396 | | | $ | 688,759 | | | $ | 962,527 | | | $ | 67,811 | | | $ | — | | | $ | 6,025,179 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
| Other residential | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,769 | | | $ | — | | | $ | 6,769 | |
| 4-6 Pass | 188,561 | | | 1,824,253 | | | 2,812,293 | | | 65,230 | | | — | | | 19,518 | | | 51,246 | | | 87 | | | 4,961,188 | |
| 7 Special mention | — | | | 46,263 | | | 7,568 | | | — | | | — | | | — | | | 366 | | | — | | | 54,197 | |
| 8-9 Classified | 3,847 | | | 18,263 | | | 12,908 | | | 1,223 | | | — | | | 1,764 | | | 65 | | | 85 | | | 38,155 | |
| Total | $ | 192,408 | | | $ | 1,888,779 | | | $ | 2,832,769 | | | $ | 66,453 | | | $ | — | | | $ | 21,282 | | | $ | 58,446 | | | $ | 172 | | | $ | 5,060,309 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 3,402 | | | $ | 23,544 | | | $ | 5,385 | | | $ | 740 | | | $ | — | | | $ | 4 | | | $ | — | | | $ | — | | | $ | 33,075 | |
____________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
| December 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
| Real Estate Construction | | | | | | | | | | | | | | | | | |
| and Land: Commercial | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 4-6 Pass | 23,916 | | | 388,165 | | | 214,303 | | | 68,833 | | | 16,781 | | | 27,175 | | | 20,412 | | | — | | | 759,585 | |
| 7 Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8-9 Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 23,916 | | | $ | 388,165 | | | $ | 214,303 | | | $ | 68,833 | | | $ | 16,781 | | | $ | 27,175 | | | $ | 20,412 | | | $ | — | | | $ | 759,585 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Real Estate Construction | | | | | | | | | | | | | | | | | |
| and Land: Residential | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 4-6 Pass | 64,341 | | | 1,185,297 | | | 668,083 | | | 336,636 | | | — | | | 26,896 | | | 115,674 | | | — | | | 2,396,927 | |
| 7 Special mention | — | | | — | | | 2,757 | | | — | | | — | | | — | | | — | | | — | | | 2,757 | |
| 8-9 Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 64,341 | | | $ | 1,185,297 | | | $ | 670,840 | | | $ | 336,636 | | | $ | — | | | $ | 26,896 | | | $ | 115,674 | | | $ | — | | | $ | 2,399,684 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Commercial: Asset-Based | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | 32,485 | | | $ | 237,936 | | | $ | 223,088 | | | $ | 39,380 | | | $ | 119,364 | | | $ | 254,638 | | | $ | 89,667 | | | $ | — | | | $ | 996,558 | |
| 4-6 Pass | 122,064 | | | 238,206 | | | 132,449 | | | 17,823 | | | 7,447 | | | 25,945 | | | 630,073 | | | 1,453 | | | 1,175,460 | |
| 7 Special mention | — | | | 101 | | | — | | | — | | | — | | | 1 | | | 12,394 | | | 10 | | | 12,506 | |
| 8-9 Classified | — | | | — | | | — | | | 701 | | | — | | | 340 | | | 3,520 | | | — | | | 4,561 | |
| Total | $ | 154,549 | | | $ | 476,243 | | | $ | 355,537 | | | $ | 57,904 | | | $ | 126,811 | | | $ | 280,924 | | | $ | 735,654 | | | $ | 1,463 | | | $ | 2,189,085 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 60 | | | $ | — | | | $ | — | | | $ | — | | | $ | 150 | | | $ | 210 | |
| | | | | | | | | | | | | | | | | |
| Commercial: Venture | | | | | | | | | | | | | | | | | |
| Capital | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | (84) | | | $ | (7) | | | $ | — | | | $ | 1,998 | | | $ | — | | | $ | (3) | | | $ | 136,339 | | | $ | (140) | | | $ | 138,103 | |
| 4-6 Pass | 101,038 | | | 128,485 | | | 113,183 | | | 6,473 | | | 6,216 | | | 622 | | | 770,941 | | | 74,863 | | | 1,201,821 | |
| 7 Special mention | 17,481 | | | 10,984 | | | 31,928 | | | — | | | 19,986 | | | — | | | 13,260 | | | 4,994 | | | 98,633 | |
| 8-9 Classified | — | | | — | | | 7,808 | | | — | | | — | | | — | | | (3) | | | — | | | 7,805 | |
| Total | $ | 118,435 | | | $ | 139,462 | | | $ | 152,919 | | | $ | 8,471 | | | $ | 26,202 | | | $ | 619 | | | $ | 920,537 | | | $ | 79,717 | | | $ | 1,446,362 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | 2,245 | | | $ | 2,759 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9 | | | $ | — | | | $ | 5,013 | |
____________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
| December 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
| Commercial: Other | | | | | | | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | 815 | | | $ | 4,350 | | | $ | 5,216 | | | $ | 130 | | | $ | 29 | | | $ | 2,148 | | | $ | 66,827 | | | $ | — | | | $ | 79,515 | |
| 4-6 Pass | 98,643 | | | 201,215 | | | 285,249 | | | 50,582 | | | 39,951 | | | 158,810 | | | 1,176,946 | | | 2,921 | | | 2,014,317 | |
| 7 Special mention | 1,748 | | | 1,306 | | | 442 | | | 554 | | | 540 | | | 5,071 | | | 254 | | | 69 | | | 9,984 | |
| 8-9 Classified | — | | | 912 | | | 4,011 | | | 1,706 | | | 1,299 | | | 13,768 | | | 3,257 | | | 1,091 | | | 26,044 | |
| Total | $ | 101,206 | | | $ | 207,783 | | | $ | 294,918 | | | $ | 52,972 | | | $ | 41,819 | | | $ | 179,797 | | | $ | 1,247,284 | | | $ | 4,081 | | | $ | 2,129,860 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | 6,867 | | | $ | 24 | | | $ | — | | | $ | 28 | | | $ | 75 | | | $ | 1,013 | | | $ | 431 | | | $ | 8,438 | |
| | | | | | | | | | | | | | | | | |
| Consumer | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | — | | | $ | 27 | | | $ | 22 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | 1,304 | | | $ | — | | | $ | 1,357 | |
| 4-6 Pass | 26,468 | | | 71,523 | | | 207,751 | | | 23,390 | | | 42,338 | | | 63,919 | | | 7,684 | | | 345 | | | 443,418 | |
| 7 Special mention | — | | | 1,286 | | | 4,224 | | | 371 | | | 1,100 | | | 181 | | | 30 | | | — | | | 7,192 | |
| 8-9 Classified | — | | | 281 | | | 42 | | | 135 | | | 198 | | | 486 | | | 1 | | | 16 | | | 1,159 | |
| Total | $ | 26,468 | | | $ | 73,117 | | | $ | 212,039 | | | $ | 23,900 | | | $ | 43,636 | | | $ | 64,586 | | | $ | 9,019 | | | $ | 361 | | | $ | 453,126 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | 432 | | | $ | 540 | | | $ | 76 | | | $ | 255 | | | $ | 1,081 | | | $ | 1 | | | $ | 12 | | | $ | 2,397 | |
| | | | | | | | | | | | | | | | | |
| Total Loans and Leases | | | | | | | | | | | | | | | | | |
| Internal risk rating: | | | | | | | | | | | | | | | | | |
| 1-3 High pass | $ | 33,216 | | | $ | 287,437 | | | $ | 386,182 | | | $ | 117,303 | | | $ | 194,718 | | | $ | 435,411 | | | $ | 300,907 | | | $ | (140) | | | $ | 1,755,034 | |
| 4-6 Pass | 873,410 | | | 7,191,673 | | | 6,440,927 | | | 1,619,579 | | | 976,138 | | | 2,882,938 | | | 2,917,653 | | | 90,606 | | | 22,992,924 | |
| 7 Special mention | 19,229 | | | 76,571 | | | 96,938 | | | 38,611 | | | 78,581 | | | 170,755 | | | 27,554 | | | 5,073 | | | 513,312 | |
| 8-9 Classified | 4,596 | | | 19,456 | | | 68,224 | | | 12,780 | | | 45,103 | | | 68,476 | | | 8,590 | | | 1,192 | | | 228,417 | |
| Total | $ | 930,451 | | | $ | 7,575,137 | | | $ | 6,992,271 | | | $ | 1,788,273 | | | $ | 1,294,540 | | | $ | 3,557,580 | | | $ | 3,254,704 | | | $ | 96,731 | | | $ | 25,489,687 | |
| Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 3,436 | | | $ | 33,088 | | | $ | 8,708 | | | $ | 876 | | | $ | 359 | | | $ | 15,345 | | | $ | 1,023 | | | $ | 593 | | | $ | 63,428 | |
____________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
On January 1, 2023, the Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02"), which eliminated the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis.
The following table presents our loan modifications made to borrowers experiencing financial difficulty by type of modification for the period indicated with related amortized cost balances as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| Loan Modifications |
| Balances (Amortized Cost Basis) at |
| March 31, 2024 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Term Extension | | | | | | | | |
| | | % of | | | | | | | | | | | | | | | | |
| | | Loan | | | | | | | | | | | | | | | | |
| | | Portfolio | | | | | | | | | | | | | | | | |
| Balance | | Class | | | | | | | | | | | | | | | | |
| (Dollars in thousands) |
| Real estate mortgage: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | 1,250 | | | — | % | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other residential | 1,837 | | | — | % | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other commercial | 2,827 | | | 0.1 | % | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total | $ | 5,914 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Loan Modifications |
| Balances (Amortized Cost Basis) at |
| March 31, 2023 |
| | | | | | | | | Combination - Term | | | | | | |
| | | | | | | | | Extension and | | Combination - Term | | | | |
| | | | | | | | | Interest Rate | | Extension and | | Total Loan |
| Term Extension | | Payment Delay | | Reduction | | Payment Delay | | Modifications |
| | | % of | | | | % of | | | | % of | | | | % of | | | | % of |
| | | Loan | | | | Loan | | | | Loan | | | | Loan | | | | Loan |
| | | Portfolio | | | | Portfolio | | | | Portfolio | | | | Portfolio | | | | Portfolio |
| Balance | | Class | | Balance | | Class | | Balance | | Class | | Balance | | Class | | Balance | | Class |
| (Dollars in thousands) |
| Real estate mortgage: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other residential | $ | 12,716 | | | 0.2 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 12,716 | | | 0.2 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Venture | | | | | | | | | | | | | | | | | | | |
| capital | — | | | — | % | | — | | | — | % | | — | | | — | % | | 613 | | | — | % | | 613 | | | — | % |
| Other commercial | 2,057 | | | 0.2 | % | | 45 | | | — | % | | — | | | — | % | | — | | | — | % | | 2,102 | | | 0.2 | % |
| Consumer | — | | | — | % | | — | | | — | % | | 3 | | | — | % | | — | | | — | % | | 3 | | | — | % |
| Total | $ | 14,773 | | | | | $ | 45 | | | | | $ | 3 | | | | | $ | 613 | | | | | $ | 15,434 | | | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present the financial effect of our loan modifications made to borrowers experiencing financial difficulty by type of modification for the period indicated:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| Term Extension - Financial Effect |
| Real estate mortgage: | |
| Commercial | Extended maturity by a weighted average 5 months. |
| |
| Other residential | Extended maturity by a weighted average 12 months. |
| | | | | | |
| |
| |
| Commercial: | | | | | | |
| |
| |
| Other commercial | Extended maturity by a weighted average 3 months. |
| |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Term Extension - Financial Effect |
| Real estate mortgage: | |
| |
| |
| Other residential | Extended maturity by a weighted average seven months. |
| | | | | | |
| |
| |
| Commercial: | | | | | | |
| |
| |
| Other commercial | Extended maturity by a weighted average 12 months. |
| |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Payment Delay - Financial Effect |
| |
| |
| |
| |
| | | | | | |
| |
| |
| Commercial: | | | | | | |
| |
| |
| Other commercial | Provided six months of reduced payments to borrowers without extending the loan term. |
| |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Combination - Term Extension and Interest Rate Reduction - Financial Effect |
| |
| |
| |
| |
| | | | | | |
| |
| |
| | | | | | |
| |
| |
| |
| Consumer | Extended maturity by a weighted average 2 years and reduced weighted average contractual interest rate from 9.5% to 2.0%. |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Combination - Term Extension and Payment Delay - Financial Effect |
| |
| |
| |
| |
| | | | | | |
| |
| |
| Commercial: | | | | | | |
| |
| Venture capital | Extended maturity by a weighted average 11 months and provided 11 months of interest only payments to borrowers. |
| |
| |
The following table presents the payment status of our loan modifications made during the past 12 months with related amortized cost balances as of the date indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| Payment Status (Amortized Cost Basis) at |
| March 31, 2024 |
| | | 30-89 Days | | 90 or More Days | | |
| Current | | Past Due | | Past Due | | Total |
| (In thousands) |
| Real estate mortgage: | | | | | | | |
| Commercial | $ | 2,250 | | | $ | — | | | $ | — | | | $ | 2,250 | |
| | | | | | | |
| Other residential | 2,953 | | | 90 | | | 1,715 | | | 4,758 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Commercial: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Other commercial | 4,910 | | | — | | | — | | | 4,910 | |
| Consumer | 13 | | | — | | | — | | | 13 | |
| Total | $ | 10,126 | | | $ | 90 | | | $ | 1,715 | | | $ | 11,931 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the three months ended March 31, 2024, there were $2.2 million of other residential real estate loans modified in the form of a term extension during the preceding 12-month period that subsequently defaulted.
Leases Receivable
We provide equipment financing to our customers primarily with operating and direct financing leases. For direct financing leases, lease receivables are recorded on the balance sheet but the leased equipment is not, although we generally retain legal title to the leased equipment until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Direct financing leases are subject to our accounting for allowance for loan and lease losses. See Note 7. Leases for information regarding operating leases where we are the lessor.
The following table provides the components of leases receivable income for the periods indicated:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2024 | | 2023 | | | | |
| (In thousands) |
| Component of leases receivable income: | | | | | | | |
| Interest income on net investments in leases | $ | 4,735 | | | $ | 3,749 | | | | | |
The following table presents the components of leases receivable as of the dates indicated:
| | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| (In thousands) |
| Net Investment in Direct Financing Leases: | | | |
| Lease payments receivable | $ | 249,900 | | | $ | 249,223 | |
| Unguaranteed residual assets | 25,915 | | | 25,488 | |
| Deferred costs and other | 2,602 | | | 2,715 | |
| Aggregate net investment in leases | $ | 278,417 | | | $ | 277,426 | |
| | | |
The following table presents maturities of leases receivable as of the date indicated: | | | | | |
| March 31, 2024 |
| (In thousands) |
| Period ending December 31, | |
| 2024 | $ | 65,235 | |
| 2025 | 74,910 | |
| 2026 | 56,555 | |
| 2027 | 37,965 | |
| 2028 | 22,188 | |
| Thereafter | 24,315 | |
| Total undiscounted cash flows | 281,168 | |
| Less: Unearned income | (31,268) | |
| Present value of lease payments | $ | 249,900 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Allowance for Loan and Lease Losses
The following tables present a summary of the activity in the allowance for loan and lease losses on loans and leases held for investment by loan portfolio segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Three Months Ended March 31, 2024 |
| | | Real Estate | | | | | | |
| Real Estate | | Construction | | | | | | |
| Mortgage | | and Land | | Commercial | | Consumer | | Total |
| (In thousands) |
| Allowance for Loan and Lease Losses: | | | | | | | | | |
| Balance, beginning of period | $ | 186,827 | | | $ | 33,830 | | | $ | 45,156 | | | $ | 15,874 | | | $ | 281,687 | |
| | | | | | | | | |
| Charge-offs | (2,477) | | | — | | | (704) | | | (1,833) | | | (5,014) | |
| Recoveries | 891 | | | — | | | 2,869 | | | 70 | | | 3,830 | |
| Net (charge-offs) recoveries | (1,586) | | | — | | | 2,165 | | | (1,763) | | | (1,184) | |
| Provision | 13,033 | | | (3,819) | | | (267) | | | 2,053 | | | 11,000 | |
| Balance, end of period | $ | 198,274 | | | $ | 30,011 | | | $ | 47,054 | | | $ | 16,164 | | | $ | 291,503 | |
| | | | | | | | | |
| Ending Allowance by | | | | | | | | | |
| Evaluation Methodology: | | | | | | | | | |
| Individually evaluated | $ | 8,336 | | | $ | — | | | $ | 7 | | | $ | — | | | $ | 8,343 | |
| Collectively evaluated | $ | 189,938 | | | $ | 30,011 | | | $ | 47,047 | | | $ | 16,164 | | | $ | 283,160 | |
| | | | | | | | | |
| Ending Loans and Leases by | | | | | | | | | |
| Evaluation Methodology: | | | | | | | | | |
| Individually evaluated | $ | 129,116 | | | $ | — | | | $ | 14,919 | | | $ | 4 | | | $ | 144,039 | |
| Collectively evaluated | 15,838,283 | | | 3,245,354 | | | 5,805,648 | | | 439,698 | | | 25,328,983 | |
| Ending balance | $ | 15,967,399 | | | $ | 3,245,354 | | | $ | 5,820,567 | | | $ | 439,702 | | | $ | 25,473,022 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Three Months Ended March 31, 2023 |
| | | Real Estate | | | | | | |
| Real Estate | | Construction | | | | | | |
| Mortgage | | and Land | | Commercial | | Consumer | | Total |
| (In thousands) |
| Allowance for Loan and Lease Losses: | | | | | | | | | |
| Balance, beginning of period | $ | 87,309 | | | $ | 52,320 | | | $ | 52,849 | | | $ | 8,254 | | | $ | 200,732 | |
| Charge-offs | (9,835) | | | — | | | (137) | | | (425) | | | (10,397) | |
| Recoveries | 200 | | | — | | | 975 | | | 45 | | | 1,220 | |
| Net (charge-offs) recoveries | (9,635) | | | — | | | 838 | | | (380) | | | (9,177) | |
| Provision | 31,809 | | | 2,714 | | | (16,492) | | | 469 | | | 18,500 | |
| Balance, end of period | $ | 109,483 | | | $ | 55,034 | | | $ | 37,195 | | | $ | 8,343 | | | $ | 210,055 | |
| | | | | | | | | |
| Ending Allowance by | | | | | | | | | |
| Evaluation Methodology: | | | | | | | | | |
| Individually evaluated | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Collectively evaluated | $ | 109,483 | | | $ | 55,034 | | | $ | 37,195 | | | $ | 8,343 | | | $ | 210,055 | |
| | | | | | | | | |
| Ending Loans and Leases by | | | | | | | | | |
| Evaluation Methodology: | | | | | | | | | |
| Individually evaluated | $ | 82,835 | | | $ | — | | | $ | 2,616 | | | $ | — | | | $ | 85,451 | |
| Collectively evaluated | 15,324,776 | | | 4,608,440 | | | 5,226,491 | | | 427,223 | | | 25,586,930 | |
| Ending balance | $ | 15,407,611 | | | $ | 4,608,440 | | | $ | 5,229,107 | | | $ | 427,223 | | | $ | 25,672,381 | |
The allowance for loan and lease losses increased by $9.8 million in the first quarter of 2024 to $291.5 million due primarily to an $11.0 million provision, offset partially by net charge-offs of $1.2 million. For additional information regarding the calculation of the allowance for loan and lease losses using the CECL methodology, including discussion of forecasts used to estimate the allowance, please see Note 1(j). 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 Statements and Supplementary Data" of the Form 10-K.
A loan is considered collateral dependentcollateral-dependent, and is individually evaluated for reserve purposes, when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the operation or sale of the collateral. Collateral dependentThe following table summarizes collateral-dependent loans are evaluated individuallyheld for investment by collateral type as of the following dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| Real | | Business | | | | | | Real | | Business | | |
| Property | | Assets | | Consumer | | Total | | Property | | Assets | | Total |
| (In thousands) |
| Real estate mortgage | $ | 130,567 | | | $ | — | | | $ | — | | | $ | 130,567 | | | $ | 47,952 | | | $ | — | | | $ | 47,952 | |
| | | | | | | | | | | | | |
| Commercial | — | | | 3,153 | | | — | | | 3,153 | | | — | | | 3,616 | | | 3,616 | |
| Consumer | — | | | — | | | 4 | | | 4 | | | — | | | — | | | — | |
| Total | $ | 130,567 | | | $ | 3,153 | | | $ | 4 | | | $ | 133,724 | | | $ | 47,952 | | | $ | 3,616 | | | $ | 51,568 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses
The allowance for credit losses is the combination of the allowance for loan and lease losses and the ALLreserve for unfunded loan commitments. The reserve for unfunded loan commitments is determined basedincluded within "Accrued interest payable and other liabilities" on the amount by which amortized costs exceedcondensed consolidated balance sheets.
The following tables present a summary of the estimatedactivity in the allowance for loan and lease losses and reserve for unfunded loan commitments for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2024 | | |
| Allowance for | | Reserve for | | Total | | | | | | |
| Loan and | | Unfunded Loan | | Allowance for | | | | | | |
| Lease Losses | | Commitments | | Credit Losses | | | | | | |
| (In thousands) | | | | | | |
| Balance, beginning of period | $ | 281,687 | | | $ | 29,571 | | | $ | 311,258 | | | | | | | |
| Charge-offs | (5,014) | | | — | | | (5,014) | | | | | | | |
| Recoveries | 3,830 | | | — | | | 3,830 | | | | | | | |
| Net charge-offs | (1,184) | | | — | | | (1,184) | | | | | | | |
| Provision | 11,000 | | | (1,000) | | | 10,000 | | | | | | | |
| Balance, end of period | $ | 291,503 | | | $ | 28,571 | | | $ | 320,074 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | |
| Allowance for | | Reserve for | | Total | | | | | | |
| Loan and | | Unfunded Loan | | Allowance for | | | | | | |
| Lease Losses | | Commitments | | Credit Losses | | | | | | |
| (In thousands) | | | | | | |
| Balance, beginning of period | $ | 200,732 | | | $ | 91,071 | | | $ | 291,803 | | | | | | | |
| Charge-offs | (10,397) | | | — | | | (10,397) | | | | | | | |
| Recoveries | 1,220 | | | — | | | 1,220 | | | | | | | |
| Net charge-offs | (9,177) | | | — | | | (9,177) | | | | | | | |
| Provision | 18,500 | | | (15,500) | | | 3,000 | | | | | | | |
| Balance, end of period | $ | 210,055 | | | $ | 75,571 | | | $ | 285,626 | | | | | | | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually at the reporting unit level unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the collateral, adjusted for estimated selling costs.
Collateral dependent loans consistednet assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the following as ofgoodwill exceeds the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Real Estate | | | | | | |
| ($ in thousands) | | Commercial | | Residential | | Business Assets | | Automobile | | Total |
| Commercial: | | | | | | | | | | |
| Commercial and industrial | | $ | — | | | $ | — | | | $ | 15,538 | | | $ | 62 | | | $ | 15,600 | |
| Commercial real estate | | 2,600 | | | — | | | — | | | — | | | 2,600 | |
| | | | | | | | | | |
| SBA | | 18 | | | 2,948 | | | 6,645 | | | — | | | 9,611 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Consumer: | | | | | | | | | | |
| Single family residential mortgage | | — | | | 33,496 | | | — | | | — | | | 33,496 | |
| Other consumer | | — | | | 81 | | | — | | | 290 | | | 371 | |
| Total loans | | $ | 2,618 | | | $ | 36,525 | | | $ | 22,183 | | | $ | 352 | | | $ | 61,678 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Real Estate | | | | | | |
| ($ in thousands) | | Commercial | | Residential | | Business Assets | | Automobile | | Total |
| Commercial: | | | | | | | | | | |
| Commercial and industrial | | $ | — | | | $ | — | | | $ | 18,392 | | | $ | — | | | $ | 18,392 | |
| Commercial real estate | | 910 | | | — | | | — | | | — | | | 910 | |
| | | | | | | | | | |
| SBA | | 23 | | | 4,702 | | | 5,691 | | | — | | | 10,416 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Consumer: | | | | | | | | | | |
| Single family residential mortgage | | — | | | 21,262 | | | — | | | — | | | 21,262 | |
| Other consumer | | — | | | 81 | | | — | | | 113 | | | 194 | |
| Total loans | | $ | 933 | | | $ | 26,045 | | | $ | 24,083 | | | $ | 113 | | | $ | 51,174 | |
Loan Modifications to Borrowers Experiencing Financial Difficulty
Loans modified for borrowers experiencing financial difficulty consisted of the following as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | Commercial and industrial | | | | | | | | | | Single family residential mortgage | | | | Total |
| June 30, 2023 | | | | | | | | | | | | | | | |
| Interest rate reduction: | | | | | | | | | | | | | | | |
| Amortized cost basis | $ | — | | | | | | | | | | | $ | 1,071 | | | | | $ | 1,071 | |
| % of total class of loans | — | % | | | | | | | | | | 0.1 | % | | | | — | % |
| |
| Term extension: | | | | | | | | | | | | | | | |
| Amortized cost basis | $ | — | | | | | | | | | | | $ | 286 | | | | | $ | 286 | |
| % of total class of loans | — | % | | | | | | | | | | — | % | | | | — | % |
| |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| |
| Combination - principal reduction and payment delays: | | | | | | | | | | | | | | | |
| Amortized cost basis | $ | 3,910 | | | | | | | | | | | $ | — | | | | | $ | 3,910 | |
| % of total class of loans | 0.2 | % | | | | | | | | | | — | % | | | | 0.1 | % |
| |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | |
| Total amortized cost basis | $ | 3,910 | | | | | | | | | | | $ | 1,357 | | | | | $ | 5,267 | |
| Percentage of total class of loans | 0.2 | % | | | | | | | | | | 0.1 | % | | | | 0.1 | % |
The following table presents the aging of loans modified to borrowers experiencing financial difficulty at June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | 30-59 Days
Past Due | | 60-89 Days
Past Due | | Over 90 Days
Past Due | | Total
Past Due | | Current | | Total |
| June 30, 2023 | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | |
| Commercial and industrial | $ | — | | | $ | 3,910 | | | $ | — | | | $ | 3,910 | | | $ | — | | | $ | 3,910 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Consumer: | | | | | | | | | | | |
| Single family residential mortgage | — | | | — | | | — | | | — | | | 1,357 | | | 1,357 | |
| | | | | | | | | | | |
| $ | — | | | $ | 3,910 | | | $ | — | | | $ | 3,910 | | | $ | 1,357 | | | $ | 5,267 | |
There were no loan modifications made to borrowers experiencing financial difficulty during the quarter ended June 30, 2023 that subsequently defaulted.
Troubled Debt Restructurings (for modifications to borrowers experiencing financial difficulty prior to January 1, 2023)
At June 30, 2023 and December 31, 2022, we had 10 and 15 loans classified as TDRs, with an aggregate balance of $8.0 million and $16.1 million. During the six months ended June 30, 2023 a $3.9 million commercial and industrial (“C&I”) loan that was restructured during 2022 was modified and accounted for as a new loan. Additionally, $4.0 million relating to two commercial relationships were paid down during this same period.
Accruing TDRs were $2.5 million and nonaccrual TDRs were $5.5 million at June 30, 2023, compared to accruing TDRs of $2.7 million and nonaccrual TDRs of $13.4 million at December 31, 2022.
Purchases, Sales, and Transfers
From time to time, we purchase and sell loans in the secondary market. There were no loans purchased during the three months ended June 30, 2023. During the six months ended June 30, 2023, we purchased loans aggregating $61.4 million. During the three and six months ended June 30, 2022, we purchased loans aggregating $277.2 million and $641.5 million.
There were no loans transferred from held for investment to loans held-for-sale, and there were no sales of loans for the three and six months ended June 30, 2023 and 2022.
Non-Traditional Mortgage (“NTM”) Loans
We no longer originate SFR loans, however we have purchased and may continue to purchase pools of loans that include NTM loans such as interest only loans with maturities of up to 40 years and flexible initial repricing dates, ranging from 1 to 10 years, and periodic repricing dates through the life of the loan.
NTM loans are included in our SFR mortgage portfolio and are comprised primarily of interest only loans. As of June 30, 2023 and December 31, 2022, the NTM loans totaled $811.7 million, or 11.3% of total loans, and $862.3 million, or 12.1% of total loans. The total NTM portfolio decreased by $50.7 million, or 5.9% during the six months ended June 30, 2023. The decrease was due to principal paydowns and payoffs.
At June 30, 2023 and December 31, 2022, nonperforming NTM loans totaled $13.3 million and $3.0 million.
Non-Traditional Mortgage Performance Indicators
Our risk management policy and credit monitoring include reviewing delinquency, FICO scores, and LTV ratios on the NTM loan portfolio. We also continually monitor market conditions for our geographic lending areas. We have determined that the most significant performance indicators for NTM loans are LTV ratios. At June 30, 2023, our NTM portfolio had a weighted average LTV of approximately 61%.
NOTE 5 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair values. At June 30, 2023 and December 31, 2022, we had goodwill of $114.3 million.
The following table presents changes in the carrying amount of goodwill for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Goodwill, beginning of period | | $ | 114,312 | | | $ | 95,127 | | | $ | 114,312 | | | $ | 94,301 | |
| | | | | | | | |
| Goodwill adjustments for purchase accounting | | — | | | — | | | — | | | 826 | |
| | | | | | | | |
| | | | | | | | |
| Goodwill, end of period | | $ | 114,312 | | | $ | 95,127 | | | $ | 114,312 | | | $ | 95,127 | |
| | | | | | | | |
The acquisition of Deepstack in the third quarter of 2022 resulted in the recognition of $18.2 million in goodwill. We also adjusted goodwill in the first quarter of 2022 as a result of updates to the initial fair value of core deposit intangibles and finalization of income tax returns relatedthe reporting unit. An impairment loss would be recognized in an amount equal to the acquisition of PMB.
We evaluate goodwill for impairmentthat excess as of October 1 each year, and more frequently if events or circumstances indicate that there may be impairment. We completed our most recent annual goodwill impairment test as of October 1, 2022 and determined that no goodwill impairment existed. For the three and six months ended June 30, 2023, we analyzed indicators relateda charge to potential goodwill impairment due to volatility"Noninterest expense" in the financial marketscondensed consolidated statements of earnings.
Our other intangible assets with definite lives are CDI and recent events in the banking sector. Based on this analysis, we did not identify any impairment to goodwill.
Other Intangibles
Other intangibles are comprised of the following at June 30, 2023CRI. CDI and December 31, 2022:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31,
2022 |
| Core deposit intangibles | | $ | 3,363 | | | $ | 3,932 | |
| Developed technology | | 2,357 | | | 2,637 | |
| | | | |
| | | | |
| | | | |
| Other intangibles | | 883 | | | 957 | |
| Total other intangibles | | $ | 6,603 | | | $ | 7,526 | |
Other intangiblesCRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. As of June 30, 2023,The amortization expense represents the weighted average remaining amortization period for core deposit intangibles was approximately 6.3 years. Amortization periods for developed technology and other intangibles acquiredestimated decline in the acquisitionvalue of Deepstack have useful lives ranging from 3 to 10 years.the underlying deposits or customer relationships acquired.
The following table presents the changes in CDI and CRI and the carrying amount of other intangiblesrelated accumulated amortization for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Other intangibles: | | | | | | | | |
| Balance, beginning of period | | $ | 38,778 | | | $ | 34,978 | | | $ | 38,778 | | | $ | 35,958 | |
| | | | | | | | |
| Purchase accounting adjustments | | — | | | — | | | — | | | (980) | |
| Balance, end of period | | 38,778 | | | 34,978 | | | 38,778 | | | 34,978 | |
| Accumulated amortization: | | | | | | | | |
| Balance, beginning of period | | 31,713 | | | 29,988 | | | 31,252 | | | 29,547 | |
| Amortization of other intangibles | | 462 | | | 313 | | | 923 | | | 754 | |
| Balance, end of period | | 32,175 | | | 30,301 | | | 32,175 | | | 30,301 | |
| Other intangibles | | $ | 6,603 | | | $ | 4,677 | | | $ | 6,603 | | | $ | 4,677 | |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| March 31, | | |
| | 2024 | | 2023 | | | | |
| | (In thousands) |
| Gross Amount of CDI and CRI: | | | | | | | |
| Balance, beginning of period | $ | 236,264 | | | $ | 91,550 | | | | | |
| Fully amortized portion | — | | | (750) | | | | | |
| Balance, end of period | 236,264 | | | 90,800 | | | | | |
| Accumulated Amortization: | | | | | | | |
| Balance, beginning of period | (70,787) | | | (60,169) | | | | | |
| Amortization expense | (8,251) | | | (2,411) | | | | | |
| Fully amortized portion | — | | | 750 | | | | | |
| Balance, end of period | (79,038) | | | (61,830) | | | | | |
| Net CDI and CRI, end of period | $ | 157,226 | | | $ | 28,970 | | | | | |
Table of ContentsThe following table presents the estimated aggregate future amortization expense of other intangiblesfor our current CDI and CRI as of June 30, 2023:the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Remainder of 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and After | | Total |
| Estimated future amortization expense | | $ | 876 | | | $ | 1,425 | | | $ | 1,107 | | | $ | 1,013 | | | $ | 811 | | | $ | 1,371 | | | $ | 6,603 | |
| | | | | |
| March 31, 2024 |
| (In thousands) |
| Period ending December 31, | |
| 2024 | $ | 24,282 | |
| 2025 | 27,657 | |
| 2026 | 24,412 | |
| 2027 | 21,166 | |
| 2028 | 17,920 | |
| Thereafter | 41,789 | |
| Net CDI and CRI | $ | 157,226 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES, FEDERAL RESERVE BANK BORROWINGS AND6. OTHER BORROWINGS
Federal Home Loan Bank (FHLB) AdvancesASSETS
The following table presents advances from the FHLBdetail of our other assets as of the dates indicated:
| | | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | | December 31,
2022 |
| Fixed rate: | | | | | |
Outstanding balance (1) | | $ | 811,000 | | | | $ | 711,000 | |
| Interest rates ranging from | | 0.64 | % | | | 0.64 | % |
| Interest rates ranging to | | 3.70 | % | | | 3.70 | % |
| Weighted average interest rate | | 3.04 | % | | | 2.97 | % |
| Variable rate: | | | | | |
| Outstanding balance | | $ | — | | | | $ | 20,000 | |
| Weighted average interest rate | | — | % | | | 4.59 | % |
| | | | | | | | | | | |
| March 31, | | December 31, |
| Other Assets | 2024 | | 2023 |
| (In thousands) |
| LIHTC investments | $ | 335,584 | | | $ | 347,478 | |
| Interest receivable | 138,258 | | | 138,522 | |
Operating lease ROU assets, net (1) | 125,383 | | | 133,126 | |
| SBIC investments | 112,982 | | | 105,433 | |
| Equity investments without readily determinable fair values | 71,392 | | | 71,332 | |
| Prepaid expenses | 43,412 | | | 43,498 | |
| Taxes receivable | 26,090 | | | 34,268 | |
| HLBV investments | 18,112 | | | 18,442 | |
| Foreclosed assets, net | 12,488 | | | 7,394 | |
Equity warrants (2) | 3,708 | | | 3,689 | |
| Equity investments with readily determinable fair values | 1 | | | 1 | |
| Other receivables/assets | 206,973 | | | 228,066 | |
| Total other assets | $ | 1,094,383 | | | $ | 1,131,249 | |
____________________
(1) See Note 7.Excludes $3.0 million and $3.7 million Leases for further details regarding the operating lease ROU assets.
(2) See Note 9. Derivatives forinformation regarding equity warrants.
NOTE 7. LEASES
Operating Leases as a Lessee
Our lease expense is a component of unamortized debt issuance costs at June 30, 2023 and December 31, 2022. "Occupancy expense" on our condensed consolidated statements of earnings. The following table presents the components of lease expense for the periods indicated: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2024 | | 2023 | | | | |
| (In thousands) |
| Operating lease expense: | | | | | | | |
| Fixed costs | $ | 9,435 | | | $ | 7,748 | | | | | |
| Variable costs | 48 | | | 35 | | | | | |
| Short-term lease costs | 66 | | | 357 | | | | | |
| Sublease income | (1,196) | | | (712) | | | | | |
| Net lease expense | $ | 8,353 | | | $ | 7,428 | | | | | |
The following table presents supplemental cash flow information related to leases for the periods indicated: | | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2024 | | 2023 |
| (In thousands) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 7,746 | | | $ | 8,963 | |
| ROU assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 1,183 | | | $ | 2,196 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents supplemental balance sheet and other information related to operating leases as of June 30, 2023, FHLB advances consistedthe dates indicated: | | | | | | | | | | | |
| March 31, | | December 31, |
| 2024 | | 2023 |
| (Dollars in thousands) |
| Operating leases: | | | |
| Operating lease right-of-use assets, net | $ | 125,383 | | | $ | 133,126 | |
| Operating lease liabilities | $ | 153,298 | | | $ | 161,308 | |
| | | |
| Weighted average remaining lease term (in years) | 6.0 | | 6.1 |
| Weighted average discount rate | 3.41 | % | | 3.40 | % |
The following table presents the maturities of $611 million in term advances withoperating lease liabilities as of the date indicated: | | | | | |
| March 31, 2024 |
| (In thousands) |
| Period ending December 31, | |
| 2024 | $ | 30,606 | |
| 2025 | 34,841 | |
| 2026 | 28,152 | |
| 2027 | 20,386 | |
| 2028 | 16,248 | |
| Thereafter | 41,304 | |
| Total operating lease liabilities | 171,537 | |
| Less: Imputed interest | (18,239) | |
| Present value of operating lease liabilities | $ | 153,298 | |
Operating Leases as a weighted average lifeLessor
We provide equipment financing to our customers through operating leases where we facilitate the purchase of 3 yearsequipment leased to our customers. The equipment is shown on the condensed consolidated balance sheets as "Equipment leased to others under operating leases" and a weighted average interest rate of 2.91% and $200 million in putable advances with a weighted average life of 4.5 years and a weighted average interest rate of 3.44%. Term advances are payable at maturity date, and advances paid early are subjectis depreciated to a prepayment penalty. The putable advances can be called quarterly until maturityits estimated residual value at the optionend of the lease term, shown as "Leased equipment depreciation" in the condensed consolidated statements of earnings, according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest Income" in the condensed consolidated statements of earnings (loss). The equipment is tested periodically for impairment. No impairment was recorded on "Equipment leased to others under operating leases" during the three months ended March 31, 2024 and 2023.
The following table presents the rental payments to be received on operating leases as of the date indicated:
| | | | | |
| March 31, 2024 |
| (In thousands) |
| Year Ending December 31, | |
| 2024 | $ | 34,210 | |
| 2025 | 39,965 | |
| 2026 | 35,321 | |
| 2027 | 28,349 | |
| 2028 | 24,223 | |
| Thereafter | 64,371 | |
| Total undiscounted cash flows | $ | 226,439 | |
| |
| |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 8. BORROWINGS AND SUBORDINATED DEBT
Borrowings
The following table summarizes our borrowings as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| | | Weighted | | | | Weighted |
| | | Average | | | | Average |
| Balance | | Rate | | Balance | | Rate |
| (Dollars in thousands) |
| Bank Term Funding Program | $ | 1,545,000 | | | 5.40 | % | | $ | 2,618,300 | | | 4.37 | % |
| Senior notes | 174,000 | | | 5.25 | % | | 174,000 | | | 5.25 | % |
| Credit-linked notes | 123,824 | | | 16.03 | % | | 123,116 | | | 16.02 | % |
| FHLB secured advances | 300,000 | | | 4.45 | % | | — | | | — | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total borrowings | 2,142,824 | | | 5.87 | % | | 2,915,416 | | | 4.92 | % |
| Acquisition discount on senior notes | (3,326) | | | | | (4,094) | | | |
| Total borrowings, net | $ | 2,139,498 | | | | | $ | 2,911,322 | | | |
The Bank has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, beginning in December 2023.the FRBSF, and other financial institutions.
FHLB advances areSecured Line of Credit. The Bank had secured financing capacity with the FHLB as of March 31, 2024 of $6.3 billion, collateralized by a blanket lien on all real estate loans.$10.2 billion of qualifying loans and $20.1 million of securities. As of June 30, 2023, our secured borrowing capacity with the FHLB totaled $2.39 billion,March 31, 2024, there were $307.4 million in letters of credit pledged and $300.0 million outstanding, which the Bank was eligible to borrow an additional $1.16 billion based on qualifying loans with an aggregate unpaid principal balanceconsisted of $3.47 billion astwo $150.0 million advances that both mature in March 2026. As of that date.
The Bank’s investment in the capital stock of the FHLB of San Francisco totaled $25.7 million and $22.6 million at June 30, 2023 and December 31, 2022.2023, there were $243.8 million in letters of credit pledged but no balance outstanding.
Federal Reserve Bank (FRB) Borrowings
At June 30, 2023, the Bank had borrowing capacity with the Federal Reserve BankFRBSF Secured Line of San Francisco (the “Federal Reserve”) of $1.45 billion, including the secured borrowing capacity through the FRB Discount Window, Borrower-in-Custody (“BIC”), and Bank Term Funding (“BTFP”) programs. Borrowings under the BIC program are overnight advances with interest chargeable at the primary credit borrowing rate. Borrowings under the BTFP, which was established in March 2023, are for periods up to one year in length, with interest rates based on the one-year overnight index swap (“OIS”) rate plus a spread of 10 basis points. BTFP borrowings are collateralized by eligible investment securities valued at par and provide an additional source of liquidity leveraging high-quality securities.
At June 30, 2023, the Bank pledged certain qualifying loans with an unpaid principal balance of $1.40 billion and securities with a carrying value of $515.3 million as collateral for the FRB credit programs.
Borrowings from the Federal Reserve through the FRB Discount Window and BIC programs were $340.0 million and zero at June 30, 2023 and December 31, 2022. There were no borrowings under the BTFP at June 30, 2023.
The Bank’s investment in capital stock of the Federal Reserve totaled $34.6 million and $34.5 million at June 30, 2023 and December 31, 2022.
Other Borrowings
Credit.The Bank maintained available unsecured federal funds lines with six correspondent banks totaling $290.0 million, with no outstanding borrowings at June 30, 2023 and December 31, 2022. The Bank also has the ability to access unsecured overnight borrowings from various financial institutions through the American Financial Exchange platform ("AFX"). The availability of
such unsecured borrowings fluctuates regularly and are subject to the counterparties discretion and totaled $365.0 million and $445.0 million at June 30, 2023 and December 31, 2022. Borrowings from the correspondent banks and AFX totaled zero at June 30, 2023 and December 31, 2022.
In December 2022, the holding company renewed its $50.0 million revolvinga secured line of credit with another financial institution. The linethe FRBSF. As of credit matures on December 18, 2023March 31, 2024, the Bank had secured borrowing capacity of $6.9 billion collateralized by liens covering $7.7 billion of qualifying loans and is subject to certain operational and financial covenants. There were no borrowings under this line$1.0 billion of credit at June 30, 2023securities. As of March 31, 2024 and December 31, 2022,2023, there were no balances outstanding.
FRBSF Bank Term Funding Program. In March of 2023, the Bank participated in the FRBSF Bank Term Funding Program. As of March 31, 2024, the Bank had secured borrowing capacity of $1.5 billion collateralized by the par value of pledged securities totaling $1.6 billion. As of March 31, 2024, the balance outstanding was $1.5 billion consisting of one term advance maturing in March 2025. As of December 31, 2023, the balance outstanding was $2.6 billion consisting of two term advances maturing in March 2024.
Federal Funds Arrangements with Commercial Banks. As of March 31, 2024, the Bank had unsecured lines of credit of $290.0 million in the aggregate with several correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and we were in compliance with all covenants.
The Bank also maintained repurchase agreements and hadhave no outstanding securities sold under agreements to repurchase at June 30, 2023unused commitment fees. As of March 31, 2024 and December 31, 2022. Availabilities2023, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of March 31, 2024 and termsDecember 31, 2023 there was no balance outstanding.
Senior Notes. The Senior Notes are unsecured debt obligations and rank equally with our other present and future unsecured unsubordinated obligations. We make interest payments on repurchase agreements are subjectthe Senior Notes semi-annually in arrears. We have the option to redeem the Senior Notes either in whole or in part on or after January 15, 2025 (i.e., 90 days prior to the counterparties’ discretionmaturity date). Notification of no less than 30 nor more than 60 days is required for redemption. The Senior Notes will be redeemable at a price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to the pledgingdate of redemption.
Credit-Linked Notes. The notes were issued in five classes, each with an interest rate of SOFR plus a spread that ranges from 8.00% to 13.25%, with a weighted average spread of 10.70% at March 31, 2024. The notes are linked to the credit risk of an approximately $2.46 billion reference pool of previously purchased single-family residential mortgage loans at March 31, 2024. The notes are due June 27, 2052. Principal payments on the notes are based only on scheduled and unscheduled principal that is actually collected on these loans. The notes are reported at fair value of $123.8 million at March 31, 2024. See Note 11. Fair Value Option for additional investment securities.information.
NOTE 7 – LONG-TERM DEBT
41
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Subordinated Debt
The following table presents our long-termsummarizes the terms of each issuance of subordinated debt outstanding as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | | Interest
Rate | | Maturity
Date | | Par
Value | | Unamortized Debt Issuance Cost and Discount | | Par
Value | | Unamortized Debt Issuance Cost and Discount |
| Senior notes | | 5.25% | | 4/15/2025 | | $ | 174,000 | | | $ | (609) | | | $ | 175,000 | | | $ | (722) | |
Subordinated notes(1) | | 4.375% | | 10/30/2030 | | 85,000 | | | (1,797) | | | 85,000 | | | (1,899) | |
| PMB Statutory Trust III, junior subordinated debentures | | SOFR + 3.40% | | 9/26/2032 | | 7,217 | | | — | | | 7,217 | | | — | |
| PMB Capital Trust III, junior subordinated debentures | | SOFR + 2.00% | | 10/8/2034 | | 10,310 | | | — | | | 10,310 | | | — | |
| Total | | | | | | $ | 276,527 | | | $ | (2,406) | | | $ | 277,527 | | | $ | (2,621) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 | | Date | | Maturity | | Rate Index |
| Series | Balance | | Rate (1) | | Balance | | Rate (1) | | Issued | | Date | | (Quarterly Reset) |
| (Dollars in thousands) | | | | | | |
Subordinated notes, net (2) | $ | 380,783 | | | 3.25 | % | | $ | 380,651 | | | 3.25 | % | | 4/30/2021 | | 5/1/2031 | | Fixed rate (3) |
| Subordinated notes | 75,000 | | | 4.375 | % | | 75,000 | | | 4.375 | % | | 10/30/2020 | | 10/30/2030 | | Fixed rate (6) |
| Trust V | 10,310 | | | 8.69 | % | | 10,310 | | | 8.74 | % | | 8/15/2003 | | 9/17/2033 | | 3-month Term SOFR + 3.10 |
| Trust VI | 10,310 | | | 8.64 | % | | 10,310 | | | 8.70 | % | | 9/3/2003 | | 9/15/2033 | | 3-month Term SOFR + 3.05 |
| Trust CII | 5,155 | | | 8.54 | % | | 5,155 | | | 8.59 | % | | 9/17/2003 | | 9/17/2033 | | 3-month Term SOFR + 2.95 |
| Trust VII | 61,856 | | | 8.33 | % | | 61,856 | | | 8.40 | % | | 2/5/2004 | | 4/23/2034 | | 3-month Term SOFR + 2.75 |
| Trust CIII | 20,619 | | | 7.28 | % | | 20,619 | | | 7.34 | % | | 8/15/2005 | | 9/15/2035 | | 3-month Term SOFR + 1.69 |
| Trust FCCI | 16,495 | | | 7.19 | % | | 16,495 | | | 7.25 | % | | 1/25/2007 | | 3/15/2037 | | 3-month Term SOFR + 1.60 |
| Trust FCBI | 10,310 | | | 7.14 | % | | 10,310 | | | 7.20 | % | | 9/30/2005 | | 12/15/2035 | | 3-month Term SOFR + 1.55 |
| Trust CS 2005-1 | 82,475 | | | 7.54 | % | | 82,475 | | | 7.60 | % | | 11/21/2005 | | 12/15/2035 | | 3-month Term SOFR + 1.95 |
| Trust CS 2005-2 | 128,866 | | | 7.53 | % | | 128,866 | | | 7.60 | % | | 12/14/2005 | | 1/30/2036 | | 3-month Term SOFR + 1.95 |
| Trust CS 2006-1 | 51,545 | | | 10.45 | % | | 51,545 | | | 10.45 | % | | 2/22/2006 | | 4/30/2036 | | Prime + 1.95 |
| Trust CS 2006-2 | 51,550 | | | 7.53 | % | | 51,550 | | | 7.60 | % | | 9/27/2006 | | 10/30/2036 | | 3-month Term SOFR + 1.95 |
Trust CS 2006-3 (4) | 27,811 | | | 5.94 | % | | 28,453 | | | 6.00 | % | | 9/29/2006 | | 10/30/2036 | | 3-month EURIBOR + 2.05 |
| Trust CS 2006-4 | 16,470 | | | 10.55 | % | | 16,470 | | | 10.45 | % | | 12/5/2006 | | 1/30/2037 | | Prime + 1.95 |
| Trust CS 2006-5 | 6,650 | | | 7.53 | % | | 6,650 | | | 7.60 | % | | 12/19/2006 | | 1/30/2037 | | 3-month Term SOFR + 1.95 |
| Trust CS 2007-2 | 39,177 | | | 7.53 | % | | 39,177 | | | 7.60 | % | | 6/13/2007 | | 7/30/2037 | | 3-month Term SOFR + 1.95 |
| PMB Statutory Trust III | 7,217 | | | 8.97 | % | | 7,217 | | | 9.02 | % | | 9/16/2002 | | 9/26/2032 | | 3-month Term SOFR + 3.40 |
| PMB Capital Trust III | 10,310 | | | 7.60 | % | | 10,310 | | | 7.66 | % | | 10/4/2004 | | 10/8/2034 | | 3-month Term SOFR + 2.00 |
| Total subordinated debt | 1,012,909 | | | 5.90 | % | | 1,013,419 | | | 5.93 | % | | | | | | |
Acquisition discount (5) | (75,192) | | | | | (76,820) | | | | | | | | | |
| Net subordinated debt | $ | 937,717 | | | | | $ | 936,599 | | | | | | | | | |
(1) The Subordinated Notes bear interestRates do not include the effects of discounts and issuance costs.
(2) Net of unamortized issuance costs of $4.2 million.
(3) Interest rate is fixed until May 1, 2026, when it changes to a floating rate and resets quarterly at an initiala benchmark rate plus 252 basis points.
(4) Denomination is in Euros with a value of €25.8 million.
(5) Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.
(6) Interest rate is fixed rate of 4.375% per annum, payable semi-annually in arrears. From and includinguntil October 30, 2025, when it changes to but excluding, the maturity date or the date of earlier redemption, the Subordinated Notes bear interest at a floating rate per annum equal to a benchmark rate, which is expected to be 3-Month3-month Term SOFR, plus a spread of 419.5 basis points, payable quarterly in arrears.points.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9. DERIVATIVES
To a limited extent, the threeCompany utilizes interest rate swaps contracts with clients and six months ended June 30, 2023, we repurchased senior notescounterparty banks for the purpose of offsetting or hedging exposures arising out of lending and borrowing transactions. The Company offers borrowers interest rate swaps under a "back-to-back" loan hedging program and offsets these "pay floating/receive fixed" contracts with an outstandingborrowers with "receive floating/pay fixed" swaps with counterparty banks. The total notional balance of $1.0these offsetting hedging contracts was $167.0 million at March 31, 2024. The Company has also hedged the interest rate risk and foreign currency risk on €25.8 million of subordinated debt utilizing a discountcombined cross currency swap/interest rate swap, which has had the effect of hedging the foreign currency risk and recognized an $80 thousand gain.
At June 30, 2023, we were in compliance with all covenants under our long-term debt agreements.
NOTE 8 – INCOME TAXES
Forfixing the three and six months ended June 30, 2023, income tax expense was $6.7 million and $14.1 million, resulting in an effective taxEuribor-based floating rate instrument at a fixed rate of 27.4%2.76% through July 2025. The outputs from the Company's NII simulation analysis and 27.0%MVE modeling reflect the impact of these interest rate/currency swaps, however, the impact is not material. Our derivatives are carried at fair value and recorded in "Other assets" or "Accrued interest payable and other liabilities," as appropriate, in the consolidated balance sheets. For derivatives not designated as hedging instruments, the changes in fair value of our derivatives and the related fees are recognized in "Noninterest income - other" in the condensed consolidated statements of earnings (loss). For the three and six months ended June 30, 2022,March 31, 2024, changes in fair value and fees recorded to noninterest income tax expense was $10.2 million and $28.9 million, resulting in an effective tax rate of 27.6% and 27.8%. The effective tax rate for the three and six months ended June 30, 2023 and 2022, differs from the combined federal and state statutory rate for the consolidated company of 28.9% due primarily to various permanent tax differences, tax credits and other discrete tax items that impact our effective tax rate.
We account for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and the tax basis of our assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinioncondensed consolidated statements of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four possible 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. Based on this analysis, management determined, it was more likely than not, that all of the deferred tax assets would be realized; therefore, no valuation allowance was provided against the net deferred tax assets of $64.0 million and $50.5 million at June 30, 2023 and December 31, 2022.earnings (loss) were immaterial. See Note 6. Other Assets for additional information regarding equity warrant assets.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10-25 prescribes a threshold and a measurement process for recognizingIncluded in the financial statements a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We had unrecognized tax benefits of $0.8 million at both June 30, 2023 and December 31, 2022. We do not believe that the unrecognized tax benefits will change materiallyrate contracts in the next twelve months. As of June 30, 2023, the total unrecognized tax benefit that, if recognized, would impact the effective taxtable below are pay-fixed, receivable-variable interest rate was $0.6 million.
At June 30, 2023 and December 31, 2022, we had no accrued interest or penalties. In the event we are assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income tax expense.
We are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. We are no longer subject to examination by U.S. federal taxing authorities for years before 2019. The statute of limitations for the assessment of California franchise taxes has expired for tax years before 2018 (other state income and franchise tax statutes of limitations vary by state).
NOTE 9 – DERIVATIVE INSTRUMENTS
We use derivative instruments and other risk management techniques to reduce our exposure to adverse fluctuations in interest rates and foreign currency exchange rates in accordance with our risk management policies and for certain loan clients to allow them to hedge the risk of rising interest rates on their variable rate loans.
The Company recognizes all derivatives on the consolidated balance sheet at fair value in other assets and other liabilities. On the date we enter into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, or a hedge designation is not made as it is a customer-related transaction. When a derivative is designated as a fair value hedge or cash flow hedge, the Company performs an assessment at inception, and, at least quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the fair value or cash flows of the hedged items.
Cash flow hedge
In March 2023, the Company entered into pay-fixed, receive-variable interest-rate swap contracts classified as cash flow hedges with notional amounts aggregating $300.0 million, five year terms, and varying maturity dates throughthroughout 2028. These swap contracts were entered into with institutional counterparties to hedge against variability in cash flowsflow attributable to interest rate risk related to changes in the SOFR benchmark interest rate on a portion of the Company’sCompany's variable rate deposits and borrowings. The cash flow hedges were deemed highly effective at inception.
Theinception and thereafter. For derivatives designated as cash flow hedges, the portion of changes in fair value considered to be highly effective are reported as a component of "Accumulated other comprehensive loss, net" on the consolidated balance sheets until the related cash flows from the hedged items are recognized in earnings. As of March 31, 2024, the fair value of the cash flow hedges considered highly effective are recognized in other comprehensive income (loss) until therepresented an asset of $1.7 million, related cash flows from the hedged item are recognized in earnings.
At June 30, 2023, the fair value of the cash flow hedges represent a liability of $0.5 million, ofto which $0.4$0.3 million (net of tax) was included in accumulated"Accumulated other comprehensive loss, onnet."
The following table presents the U.S. dollar notional amounts and fair values of our derivative instruments included in the condensed consolidated statementsbalance sheets as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| Notional | | Fair | | Notional | | Fair |
| Amount | | Value | | Amount | | Value |
| (In thousands) |
| Derivative Assets: | | | | | | | |
| Interest rate contracts | $ | 466,990 | | | $ | 9,035 | | | $ | 168,850 | | | $ | 6,426 | |
| Foreign exchange contracts | 42,417 | | | 1,170 | | | 45,742 | | | 1,883 | |
| Interest rate and economic contracts | 509,407 | | | 10,205 | | | 214,592 | | | 8,309 | |
| Equity warrant assets | 16,944 | | | 3,708 | | | 17,008 | | | 3,869 | |
| Total | $ | 526,351 | | | $ | 13,913 | | | $ | 231,600 | | | $ | 12,178 | |
| | | | | | | |
| Derivative Liabilities: | | | | | | | |
| Interest rate contracts | $ | 166,990 | | | $ | 7,262 | | | $ | 468,850 | | | $ | 10,421 | |
| Foreign exchange contracts | 42,417 | | | 75 | | | 45,742 | | | 128 | |
| Total | $ | 209,407 | | | $ | 7,337 | | | $ | 514,592 | | | $ | 10,549 | |
| | | | | | | |
For further information regarding our derivatives, 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" of the Form 10-K.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 10. COMMITMENTS AND CONTINGENCIES
The following table presents a summary of commitments described below as of the dates indicated:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2024 | | 2023 |
| (In thousands) |
| Loan commitments to extend credit | $ | 5,482,672 | | | $ | 5,578,907 | |
| Standby letters of credit | 248,485 | | | 252,572 | |
| Total | $ | 5,731,157 | | | $ | 5,831,479 | |
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement that the Company has in particular classes of financial condition.instruments.
Other interest rate swapsCommitments to extend credit are contractual agreements to lend to our customers when customers are in compliance with their contractual credit agreements and foreign exchange contractswhen customers have contractual availability to borrow under such agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not designated for hedge accounting
During the three and six months ended June 30, 2023, changes in fair value of interest rate swaps on loans and foreign exchange contracts were gains of $10 thousand and losses of $14 thousand and werenecessarily represent future cash requirements. The estimated exposure to loss from these commitments is included in other incomethe reserve for unfunded loan commitments, which amounted to $28.6 million at March 31, 2024 and $29.6 million at December 31, 2023.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. Most guarantees expire within one year from the date of issuance. If a borrower defaults on its commitments subject to any letter of credit issued under these arrangements, we would be required to meet the consolidated statementsborrower's financial obligation but would seek repayment of operations. Duringthat financial obligation from the threeborrower. In some cases, borrowers have pledged cash and six months ended June 30, 2022, changesinvestment securities as collateral under these arrangements.
In addition, we invest in fair valueSBICs that call for capital contributions up to an amount specified in the partnership agreements, and in CRA-related loan pools. As of interest rate swaps on loansMarch 31, 2024 and foreign exchange contracts were gains of $82 thousandDecember 31, 2023, we had commitments to contribute capital to these entities totaling $72.9 million and $0.2$94.5 million.
The following table presents the notional amountyears in which commitments are expected to be paid for our commitments to contribute capital to SBICs and CRA-related loan pools as of the date indicated:
| | | | | |
| March 31, 2024 |
| (In thousands) |
| Period ending December 31, | |
| 2024 | $ | 36,445 | |
| 2025 | 36,444 | |
| |
| |
| |
| |
| Total | $ | 72,889 | |
Legal Matters
In the ordinary course of our business, the Company is party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon currently available information, 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. The range of any reasonably possible liabilities is also not significant.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 11. FAIR VALUE OPTION
The Company may elect to report financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. The election is made upon the initial recognition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not otherwise be revoked once an election is made. The changes in fair value are recorded in "Noninterest income" on the condensed consolidated statements of earnings (loss). However, movements in debt valuation adjustments are reported as a component of "Accumulated other comprehensive loss, net" on the condensed consolidated balance sheets. Debt valuation adjustments represent the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk.
Fair Value Option for Certain Debt Liabilities
The Company has elected the fair value option for the credit-linked notes issued in September 2022. The Company elected the fair value option because these exposures are considered to be structured notes, which are financial instruments that contain embedded derivatives. The notes are linked to the credit risk of an approximately $2.46 billion reference pool of previously purchased single-family residential mortgage loans. The principal balance of the credit-linked notes was $123.7 million at March 31, 2024. The carrying value of the credit-linked notes at March 31, 2024 was the estimated fair value of $123.8 million.
The following table presents the changes in fair value of the credit-linked notes for which the fair value option has been elected for the periods indicated:
| | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| March 31, | | |
| Credit-Linked Notes | 2024 | | 2023 | | | | |
| | (In thousands) |
| Changes in fair value - losses (gains) included in earnings | $ | 348 | | | $ | (1,998) | | | | | |
| Changes in fair value - other comprehensive loss | $ | 1,251 | | | $ | — | | | | | |
The following table provides information about the credit-linked notes carried at fair value as of the dates indicated:
| | | | | | | | | | | |
| March 31, | | December 31, |
| Credit-Linked Notes | 2024 | | 2023 |
| (In thousands) |
| | | |
| Carrying value reported on the consolidated balance sheets | $ | 123,824 | | | $ | 123,116 | |
| Aggregate unpaid principal balance (less than) in excess of fair value | $ | (120) | | | $ | 1,479 | |
| | | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 12. FAIR VALUE MEASUREMENTS
The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale, derivatives, and certain debt liabilities. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and leases and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.
For information regarding the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Operations and Summary of Significant Accounting Policies and Note 15. Fair ValueMeasurements to the Consolidated Financial Statements of the Company's Form 10-K.
The Company also holds SBIC investments measured at fair value using the NAV per share practical expedient that are not required to be classified in the fair value hierarchy. At March 31, 2024, the fair value of these investments was $113.0 million.
The following tables present information on the assets and liabilities measured and recorded at fair value on a recurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| March 31, 2024 |
| Measured on a Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
| Securities available-for-sale: | | | | | | | |
| Agency residential MBS | $ | 1,137,469 | | | $ | — | | | $ | 1,137,469 | | | $ | — | |
| | | | | | | |
| Agency commercial MBS | 243,387 | | | — | | | 243,387 | | | — | |
| Agency residential CMOs | 281,569 | | | — | | | 281,569 | | | — | |
| Municipal securities | 33,259 | | | — | | | 33,259 | | | — | |
| Corporate debt securities | 277,198 | | | — | | | 275,098 | | | 2,100 | |
| Private label residential CMOs | 153,412 | | | — | | | 153,412 | | | — | |
| Collateralized loan obligations | 109,078 | | | — | | | 109,078 | | | — | |
| Private label commercial MBS | 19,491 | | | — | | | 19,491 | | | — | |
| Asset-backed securities | 18,908 | | | — | | | 18,908 | | | — | |
| SBA securities | 12,911 | | | — | | | 12,911 | | | — | |
| Total securities available-for-sale | $ | 2,286,682 | | | $ | — | | | $ | 2,284,582 | | | $ | 2,100 | |
| Equity investments with readily determinable fair values | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | |
Derivatives (1): | | | | | | | |
| Equity warrants | 3,708 | | | — | | | — | | | 3,708 | |
| Interest rate and economic contracts | 10,205 | | | — | | | 10,205 | | | — | |
| Derivative liabilities | 7,337 | | | — | | | 7,337 | | | — | |
| Credit-linked notes | 123,824 | | | — | | | — | | | 123,824 | |
| | | | | | | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| December 31, 2023 |
| Measured on a Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
| Securities available-for-sale: | | | | | | | |
| Agency residential MBS | $ | 1,187,609 | | | $ | — | | | $ | 1,187,609 | | | $ | — | |
| U.S. Treasury securities | 4,968 | | | 4,968 | | | — | | | — | |
| Agency commercial MBS | 253,306 | | | — | | | 253,306 | | | — | |
| Agency residential CMOs | 284,334 | | | — | | | 284,334 | | | — | |
| Municipal securities | 28,083 | | | — | | | 28,083 | | | — | |
| Corporate debt securities | 267,232 | | | — | | | 226,983 | | | 40,249 | |
| Private label residential CMOs | 158,412 | | | — | | | 158,412 | | | — | |
| Collateralized loan obligations | 108,416 | | | — | | | 108,416 | | | — | |
| Private label commercial MBS | 20,813 | | | — | | | 20,813 | | | — | |
| Asset-backed securities | 19,952 | | | — | | | 19,952 | | | — | |
| SBA securities | 13,739 | | | — | | | 13,739 | | | — | |
| Total securities available-for-sale | $ | 2,346,864 | | | $ | 4,968 | | | $ | 2,301,647 | | | $ | 40,249 | |
| Equity investments with readily determinable fair values | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | |
Derivatives (1): | | | | | | | |
| Equity warrants | 3,689 | | | — | | | — | | | 3,689 | |
| Interest rate and economic contracts | 8,309 | | | — | | | 8,309 | | | — | |
| Derivative liabilities | 10,549 | | | — | | | 10,549 | | | — | |
| Credit-linked notes | 123,116 | | | — | | | — | | | 123,116 | |
| | | | | | | |
____________________
(1) For information regarding derivative instruments, see Note 9. Derivatives.
During the three months ended March 31, 2024, there was a $2,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values measured on a recurring basis. There was also a $38.1 million transfer of corporate debt securities from Level 3 to Level 2 during the three months ended March 31, 2024.
The following table presents information about quantitative inputs and assumptions used to determine the fair values provided by our third-party pricing service for our Level 3 corporate debt securities available-for-sale measured at fair value on a recurring basis as of the date indicated:
| | | | | | | | | | | |
| March 31, 2024 |
| Corporate Debt Securities |
| Input or | | Weighted |
| Range | | Average |
| Unobservable Inputs | of Inputs | | Input (1) |
| Spread to 10 Year Treasury | 6.3% - 8.8% | | 7.6% |
| Discount rates | 10.5% - 13.0% | | 11.8% |
____________________(1) Unobservable inputs for corporate debt securities were weighted by the relative fair values of the instruments.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of the date indicated: | | | | | | | | | | | |
| March 31, 2024 |
| Equity Warrants |
| | | Weighted |
| Range | | Average |
| Unobservable Inputs | of Inputs | | Input (1) |
| Volatility | 19.0% - 196.9% | | 26.7% |
| Risk-free interest rate | 4.2% - 5.5% | | 4.5% |
| Remaining life assumption (in years) | 0.08 - 4.97 | | 3.24 |
____________________
(1) Unobservable inputs for equity warrants were weighted by the relative fair values of the instruments.
The following table summarizes activity for our Level 3 private label commercial MBS available-for-sale, equity warrants, and credit-linked notes measured at fair value on a recurring basis for the period indicated:
| | | | | | | | | | | | | | | | | |
| Corporate | | Equity | | Credit-Linked |
| Debt Securities | | Warrants | | Notes |
| (In thousands) |
| Balance, December 31, 2023 | $ | 40,249 | | | $ | 3,689 | | | $ | 123,116 | |
| Total included in earnings | — | | | 178 | | | 348 | |
| Total included in other comprehensive income | — | | | — | | | 1,251 | |
| | | | | |
| Issuances | — | | | 115 | | | — | |
| Principal payments | — | | | — | | | (891) | |
| | | | | |
| | | | | |
| Transfer to Level 2 | (38,149) | | | — | | | — | |
| | | | | |
| Exercises and settlements | — | | | (272) | | | — | |
| Transfers to Level 1 (equity investments with readily | | | | | |
| determinable fair values) | — | | | (2) | | | — | |
| Balance, March 31, 2024 | $ | 2,100 | | | $ | 3,708 | | | $ | 123,824 | |
| | | | | |
| Unrealized net gains (losses) for the period included in other | | | | | |
| comprehensive income for securities held at quarter-end | $ | (900) | | | | | |
| | | | | |
The following tables present assets measured at fair value on a non-recurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement as of |
| March 31, 2024 |
| Measured on a Non-Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
| Individually evaluated loans and leases | $ | 5,639 | | | $ | — | | | $ | 2,602 | | | $ | 3,037 | |
| | | | | | | |
| OREO | 2,511 | | | — | | | 2,511 | | | — | |
| Total non-recurring | $ | 8,150 | | | $ | — | | | $ | 5,113 | | | $ | 3,037 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement as of |
| December 31, 2023 |
| Measured on a Non-Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
| Individually evaluated loans and leases | $ | 6,402 | | | $ | — | | | $ | 4,051 | | | $ | 2,351 | |
| OREO | 3,422 | | | — | | | 3,422 | | | — | |
| Total non-recurring | $ | 9,824 | | | $ | — | | | $ | 7,473 | | | $ | 2,351 | |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| Losses on Assets | March 31, | | |
| Measured on a Non-Recurring Basis | 2024 | | 2023 | | | | |
| (In thousands) |
| Individually evaluated loans and leases | $ | 832 | | | $ | 4,911 | | | | | |
| | | | | | | |
| OREO | 297 | | | — | | | | | |
| Total losses | $ | 1,129 | | | $ | 4,911 | | | | | |
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | | | Valuation | | Unobservable | | Input or | | Weighted |
| Asset | | Fair Value | | Technique | | Inputs | | Range | | Average |
| | (In thousands) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Individually evaluated | | | | | | | | | | |
| loans and leases | | 3,037 | | Third-party appraisals | | No discounts | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total non-recurring Level 3 | | $ | 3,037 | | | | | | | | |
The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated.indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| Carrying | | Estimated Fair Value |
| Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
| Financial Assets: | | | | | | | | | |
| Cash and due from banks | $ | 199,922 | | | $ | 199,922 | | | $ | 199,922 | | | $ | — | | | $ | — | |
| Interest-earning deposits in financial institutions | 2,885,306 | | | 2,885,306 | | | 2,885,306 | | | — | | | — | |
| Securities available-for-sale | 2,286,682 | | | 2,286,682 | | | — | | | 2,284,582 | | | 2,100 | |
| Securities held-to-maturity | 2,291,984 | | | 2,153,349 | | | 172,338 | | | 1,963,818 | | | 17,193 | |
| Investment in FRB and FHLB stock | 129,314 | | | 129,314 | | | — | | | 129,314 | | | — | |
| Loans held for sale | 80,752 | | | 82,383 | | | — | | | 82,383 | | | — | |
| Loans and leases held for investment, net | 25,181,519 | | | 23,553,410 | | | — | | | 2,602 | | | 23,550,808 | |
| Equity investments with readily determinable fair values | 1 | | | 1 | | | 1 | | | — | | | — | |
| Equity warrants | 3,708 | | | 3,708 | | | — | | | — | | | 3,708 | |
| Interest rate and economic contracts | 10,205 | | | 10,205 | | | — | | | 10,205 | | | — | |
| Servicing rights | 21,384 | | | 22,242 | | | — | | | — | | | 22,242 | |
| | | | | | | | | |
| Financial Liabilities: | | | | | | | | | |
| Demand, checking, money market, and savings deposits | 22,706,213 | | | 22,706,213 | | | — | | | 22,706,213 | | | — | |
| Time deposits | 6,186,194 | | | 6,260,651 | | | — | | | 6,260,651 | | | — | |
| Borrowings | 2,139,498 | | | 2,135,757 | | | — | | | 2,011,933 | | | 123,824 | |
| Subordinated debt | 937,717 | | | 850,984 | | | — | | | 850,984 | | | — | |
| Derivative liabilities | 7,337 | | | 7,337 | | | — | | | 7,337 | | | — | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | | Notional Amount | | Fair
Value | | Notional Amount | | Fair
Value |
| Derivative assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Interest rate swaps on loans | | $ | 32,677 | | | $ | 2,158 | | | $ | 33,694 | | | $ | 2,134 | |
| Foreign exchange contracts | | 4,892 | | | 41 | | | 5,885 | | | 158 | |
| Total | | $ | 37,569 | | | $ | 2,199 | | | $ | 39,579 | | | $ | 2,292 | |
| Derivative liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Cash flow hedges | | $ | 300,000 | | | $ | 454 | | | $ | — | | | $ | — | |
| Interest rate swaps on loans | | 32,677 | | | 2,138 | | | 33,694 | | | 2,107 | |
| | | | | | | | |
| Foreign exchange contracts | | 4,892 | | | 34 | | | 5,885 | | | 144 | |
| Total | | $ | 337,569 | | | $ | 2,626 | | | $ | 39,579 | | | $ | 2,251 | |
37
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Carrying | | Estimated Fair Value |
| Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
| Financial Assets: | | | | | | | | | |
| Cash and due from banks | $ | 202,427 | | | $ | 202,427 | | | $ | 202,427 | | | $ | — | | | $ | — | |
| Interest-earning deposits in financial institutions | 5,175,149 | | | 5,175,149 | | | 5,175,149 | | | — | | | — | |
| Securities available-for-sale | 2,346,864 | | | 2,346,864 | | | 4,968 | | | 2,301,647 | | | 40,249 | |
| Securities held-to-maturity | 2,287,291 | | | 2,168,316 | | | 175,579 | | | 1,976,015 | | | 16,722 | |
| Investment in FRB and FHLB stock | 126,346 | | | 126,346 | | | — | | | 126,346 | | | — | |
| Loans held for sale | 122,757 | | | 126,646 | | | — | | | 126,646 | | | — | |
| Loans and leases held for investment, net | 25,208,000 | | | 23,551,725 | | | — | | | 4,051 | | | 23,547,674 | |
| Equity investments with readily determinable fair values | 1 | | | 1 | | | 1 | | | — | | | — | |
| Equity warrants | 3,689 | | | 3,689 | | | — | | | — | | | 3,689 | |
| Interest rate and economic contracts | 8,309 | | | 8,309 | | | — | | | 8,309 | | | — | |
| Servicing rights | 22,174 | | | 22,174 | | | — | | | — | | | 22,174 | |
| | | | | | | | | |
| Financial Liabilities: | | | | | | | | | |
| Demand, checking, money market, and savings deposits | 23,768,896 | | | 23,768,896 | | | — | | | 23,768,896 | | | — | |
| Time deposits | 6,632,873 | | | 6,732,246 | | | — | | | 6,732,246 | | | — | |
| Borrowings | 2,911,322 | | | 2,908,527 | | | — | | | 2,785,411 | | | 123,116 | |
| Subordinated debt | 936,599 | | | 851,625 | | | — | | | 851,625 | | | — | |
| Derivative liabilities | 10,549 | | | 10,549 | | | — | | | 10,549 | | | — | |
Limitations
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of March 31, 2024, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 10 – EMPLOYEE STOCK COMPENSATION
On May 31, 2018, our stockholders approved the Company’s 2018 Omnibus Stock Incentive Plan (“2018 Omnibus Plan”). The 2018 Omnibus Plan provides that the maximum number of shares available for awards is 4,417,882. As of June 30, 2023, there were 1,901,039 shares available for future awards.
Stock-based Compensation Expense13. EARNINGS (LOSS) PER SHARE
The following table presents total stock-based compensation expensethe computations of basic and the related tax benefitsdiluted net earnings (loss) per share for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| Restricted stock awards and units | | $ | 1,726 | | | $ | 1,482 | | | $ | 3,181 | | | $ | 2,767 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Related tax benefits | | $ | 499 | | | $ | 428 | | | $ | 920 | | | $ | 799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2024 | | 2023 |
| (In thousands, except per share amounts) |
| | | | | Non-Voting | | | | |
| | | Class B | | Common | | | | |
| Voting | | Non-Voting | | Stock | | Total | | Total |
| Common | | Common | | Equivalents | | Common | | Common (2) |
| Basic Earnings (Loss) Per Share: | | | | | | | | | |
| Net earnings (loss) available to common | | | | | | | | | |
| and equivalent stockholders | $ | 19,521 | | | $ | 59 | | | $ | 1,325 | | | $ | 20,905 | | | $ | (1,205,371) | |
| | | | | | | | | |
| Less: Earnings allocated to unvested restricted stock (1) | (53) | | | — | | | — | | | (53) | | | (319) | |
| Net earnings (loss) allocated to common | | | | | | | | | |
| and equivalent shares | $ | 19,468 | | | $ | 59 | | | $ | 1,325 | | | $ | 20,852 | | | $ | (1,205,690) | |
| | | | | | | | | |
| Weighted average basic shares and unvested restricted | | | | | | | | | |
| stock outstanding | 157,838 | | | 477 | | | 10,658 | | | 168,973 | | | 78,985 | |
| Less: weighted average unvested restricted stock | | | | | | | | | |
| outstanding | (830) | | | — | | | — | | | (830) | | | (1,517) | |
| Weighted average basic shares outstanding | 157,008 | | | 477 | | | 10,658 | | | 168,143 | | | 77,468 | |
| | | | | | | | | |
| Basic earnings (loss) per share | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | | | $ | (15.56) | |
| | | | | | | | | |
| Diluted Earnings (Loss) Per Share: | | | | | | | | | |
| Net earnings (loss) allocated to common | | | | | | | | | |
| and equivalent shares | $ | 19,468 | | | $ | 59 | | | $ | 1,325 | | | $ | 20,852 | | | $ | (1,205,690) | |
| Weighted average diluted shares outstanding | 157,008 | | | 477 | | | 10,658 | | | 168,143 | | | 77,468 | |
| Diluted earnings (loss) per share | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | | | $ | (15.56) | |
Total stock-based compensation expense represents the cost(1) Represents cash dividends paid to holders of service-basedunvested restricted stock, units, performance-basednet of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, units and performance-based restricted stock units with market conditions. At June 30,if any.
(2) Share amounts for the three months ended March 31, 2023 unrecognized compensation expense totaled $12.8 million and will be recognized over a weighted average remaining period of 2.5 years.
Restricted Stock Awards and Restricted Stock Units
We have granted restricted stock awards and restricted stock units to certain employees, officers, and directors. The restricted stock awards and units are measured based on grant-date fair value, which generally reflect the closing price of our stock on the date of grant. For awards containing market conditions, we engage a third party to perform a valuation analysis using a Monte Carlo simulation model to determine grant-date fair value. The restricted stock awards and units fully vest after a specified period (generally ranging from one to five years) of continued service from the date of grant plus, in some cases, the satisfaction of performance and/or market conditions. Such targets include conditions relating to our profitability, our total shareholder return (TSR), stock price and regulatory standing. The actualbeen restated by multiplying historical amounts of stock released upon vesting will be determined by the Compensation, Nominating and Corporate Governance CommitteeMerger exchange ratio of our Board of Directors upon the Committee’s certification of the satisfaction of the target level of performance. We recognize an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock, generally upon vesting or, in the case of restricted stock units, when settled.0.6569.
The following table presents unvestedthe weighted average outstanding restricted stock awardsshares and restricted stock units activitywarrants that were not included in the computation of diluted earnings (loss) per share because their effect would be anti-dilutive for the three and six months ended June 30,March 31, 2024 and 2023:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | |
| 2024 | | 2023 | | | | |
| (In thousands) |
Restricted stock awards and units (1) | 830 | | | 1,517 | | | | | |
| Warrants | 18,902 | | | — | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, 2023 | | Six Months Ended
June 30, 2023 |
| | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted
Average Grant
Date Fair Value
Per Share |
| Outstanding at beginning of period | | 1,450,539 | | | $ | 14.85 | | | 1,403,245 | | | $ | 14.68 | |
Granted (1) | | 80,395 | | | $ | 10.20 | | | 374,200 | | | $ | 16.07 | |
Vested (2) | | (51,294) | | | $ | 17.94 | | | (283,077) | | | $ | 17.39 | |
Forfeited (3) | | (129,430) | | | $ | 20.32 | | | (144,158) | | | $ | 13.55 | |
| Outstanding at end of period | | 1,350,210 | | | $ | 14.61 | | | 1,350,210 | | | $ | 14.61 | |
(1)There were zero and 79,784 performance-based shares/units included in shares granted Share amounts for the three and six months ended June 30, 2023.March 31, 2023 have been restated by multiplying historical amounts by the Merger exchange ratio of 0.6569.
(2)There were zero and 66,699 performance-based shares/units included in vested shares for the three and six months ended June 30, 2023.
(3)The number of forfeited shares included aggregate performance-based shares/units of 113,650 and 124,882 for the three and six months ended June 30, 2023.
38
51
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stock OptionsNOTE 14. REVENUE FROM CONTRACTS WITH CUSTOMERS
We have issued stock optionsDisaggregation of Revenue
The following table presents interest income and noninterest income, the components of total revenue, as disclosed in the condensed consolidated statements of earnings (loss) and the related amounts which are from contracts with customers within the scope of ASC Topic 606, "Revenue from Contracts with Customers," for the periods indicated. As illustrated here, substantially all of our revenue is specifically excluded from the scope of ASC Topic 606.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| Total | | Revenue from | | Total | | Revenue from |
| Recorded | | Contracts with | | Recorded | | Contracts with |
| Revenue | | Customers | | Revenue | | Customers |
| (In thousands) |
| Total Interest Income | $ | 478,704 | | | $ | — | | | $ | 517,788 | | | $ | — | |
| Noninterest Income: | | | | | | | |
| Service charges on deposit accounts | 4,705 | | | 4,705 | | | 3,573 | | | 3,573 | |
| Other commissions and fees | 8,142 | | | 4,983 | | | 10,344 | | | 4,432 | |
| Leased equipment income | 11,716 | | | — | | | 13,857 | | | — | |
| (Loss) gain on sale of loans | (448) | | | — | | | 2,962 | | | — | |
| | | | | | | |
| Dividends and gains on equity investments | 3,068 | | | — | | | 1,098 | | | — | |
| Warrant income (loss) | 178 | | | — | | | (333) | | | — | |
| LOCOM HFS adjustment | 330 | | | — | | | — | | | — | |
| Other income | 6,125 | | | 93 | | | 4,890 | | | 269 | |
| Total noninterest income | 33,816 | | | 9,781 | | | 36,391 | | | 8,274 | |
| Total Revenue | $ | 512,520 | | | $ | 9,781 | | | $ | 554,179 | | | $ | 8,274 | |
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated: | | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2024 | | 2023 |
| (In thousands) |
| Products and services transferred at a point in time | $ | 4,878 | | | $ | 4,352 | |
| Products and services transferred over time | 4,903 | | | 3,922 | |
| Total revenue from contracts with customers | $ | 9,781 | | | $ | 8,274 | |
Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of the dates indicated: | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| (In thousands) |
| Receivables, which are included in "Other assets" | $ | 1,354 | | | $ | 1,615 | |
| | | |
| Contract liabilities, which are included in "Accrued interest payable and other liabilities" | $ | 401 | | | $ | 418 | |
Contract liabilities relate to certain employees, officers, and directors. Stock options are issuedadvance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the three months ended March 31, 2024 due to revenue recognized that was included in the contract liability balance at the closing market price immediately beforebeginning of the period was $17,000.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 15. STOCKHOLDERS' EQUITY
Stock-Based Compensation
At the special meeting of stockholders held on November 22, 2023, the Company's stockholders approved the Amended and Restated Banc of California, Inc. 2018 Stock Incentive Plan (the “Amended and Restated 2018 Plan”). The Company’s Amended and Restated 2018 Plan permits stock-based compensation awards to officers, directors, employees, and consultants and will remain in effect until November 30, 2033. The Amended and Restated 2018 Plan authorizes grants of stock-based compensation instruments to purchase or issue up to 8,789,197 shares. As of March 31, 2024, there were 6,983,382 shares available for grant under the Amended and Restated 2018 Plan. In addition to the Amended and Restated 2018 Plan, in connection with the Merger, the Company assumed the Amended and Restated PacWest Bancorp 2017 Stock Incentive Plan (the "PacWest 2017 Plan") with respect to PacWest's outstanding stock-based awards.
Restricted Stock
Restricted stock amortization totaled $4.4 million and $5.0 million for the three months ended March 31, 2024 and 2023. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings (loss). The amount of unrecognized compensation expense related to all unvested RSUs, TRSAs, and PRSUs as of March 31, 2024 totaled $46.1 million.
Time-Based Restricted Stock Awards
At March 31, 2024, there were 1,825,307 shares of unvested RSUs outstanding pursuant to the Amended and Restated 2018 Plan. At March 31, 2024, there were 781,815 shares of unvested TRSAs outstanding pursuant to the PacWest 2017 Plan. The RSUs and TRSAs generally vest over a service period of three or four years from the date of the grant or immediately upon death of an employee. Compensation expense related to RSUs and TRSAs is based on the fair value of the underlying stock on the award date and generally have a three to five yearis recognized over the vesting period and contractual terms of seven to ten years. We recognize an income tax deduction upon exercise of a stock option tousing the extent taxable income is recognizedstraight‑line method. TRSAs were assumed by the option holder.Company in connection with the Merger and continue to vest in accordance with the original vesting schedule of the awards.
Performance-Based Restricted Stock Units
At March 31, 2024, there were 296,614 units of unvested PRSUs that have been granted. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award date and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion of the previously recognized amortization is reversed and also suspended. Annual PRSU expense may vary during the performance period based upon changes in management's estimate of the number of shares that may ultimately vest. In the case of a non-qualified stock option,where the option holder recognizes taxable incomeperformance target for the PRSUs is based on a market condition (such as total shareholder return), the fair
market valueamortization is neither reversed nor suspended if it is subsequently determined that the attainment of the shares acquired atperformance target is less than probable or improbable and the timeemployee continues to meet the service requirement of exercise less the exercise price. There were no stock options grantedaward.
Classes of Stock and no unvested stock options as of June 30, 2023 and December 31, 2022. The following tables represents stock option activity for the three and six months ended June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2023 | | Six Months Ended June 30, 2023 | | | | |
| ($ in thousands, except per share data) | | Number
of Shares | | Weighted-Average Exercise Price Per Share | | Number
of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregate Intrinsic Value |
| Outstanding at beginning of period | | 14,904 | | | $ | 13.05 | | | 14,904 | | | $ | 13.05 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Exercised | | — | | | $ | — | | | — | | | $ | — | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Outstanding at end of period | | 14,904 | | | $ | 13.05 | | | 14,904 | | | $ | 13.05 | | | 1.8 years | | $ | 2 | |
| Exercisable at end of period | | 14,904 | | | $ | 13.05 | | | 14,904 | | | $ | 13.05 | | | 1.8 years | | $ | 2 | |
NOTE 11 – STOCKHOLDERS’ EQUITYEquity Instruments
Preferred Stock
WeDepositary shares each representing 1/40th of a share of 7.75% Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series F (“Series F Preferred Stock”) are authorized to issue 50,000,000 shares of preferred stock with par value of $0.01 per share.listed on the NYSE under the symbol “BANC/PF.” The Series F Preferred shares outstanding rankStock ranks senior to our common sharesstock and common stock equivalents both as to dividends and liquidation preference but generally have no voting rights. AllThere are 50,000,000 total preferred shares authorized, of our shares of preferredwhich 27,000,000 were authorized for the non-voting common stock had a $1,000 per share liquidation preferenceequivalents (“NVCE”) and 513,250 were authorized and outstanding for the Series F Preferred stock at March 31, 2024 and December 31, 2023.
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Common Stock
Our voting common stock is listed on the NYSE under the symbol “BANC” and there were no preferred446,863,844 shares authorized at March 31, 2024 and December 31, 2023 and 157,608,893 shares outstanding sinceat March 2022.31, 2024 and 156,790,349 shares outstanding at December 31, 2023.
The following table summarizes redemptionsOur Class B non-voting common stock is not listed or traded on any national securities exchange or automated quotation system, and repurchases of these depositary sharesthere currently is no established trading market for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Series E Preferred Stock: | | | | | | | | |
| Depositary shares repurchased | | — | | | — | | | — | | | 3,948,080 | |
| Preferred Stock retired (shares) | | — | | | — | | | — | | | 98,702 | |
| | | | | | | | |
| Consideration paid | | $ | — | | | $ | — | | | $ | — | | | $ | 98,703 | |
| Carrying value | | — | | | — | | | — | | | 94,956 | |
| Impact of preferred stock redemption | | $ | — | | | $ | — | | | $ | — | | | $ | 3,747 | |
During the first quarter of 2022, we redeemed all of our outstanding Series E Depositary Shares, resulting in an after-tax charge of $3.7 million in the accompanying consolidated statements of operations.
Common Share Repurchase Program
On February 13, 2023, we announced our Board of Directors authorized the repurchase of up to $35 million of our commonsuch stock. The repurchase authorization expires in February 2024. Purchases may be made in open-market transactions, in block transactions on or off an exchange, in privately negotiated transactions or by other meansClass B non-voting common stock ranks equally with, and has identical rights, preferences and privileges as determined by our managementthe voting common stock with respect to dividends and in accordanceliquidation preference but generally have no voting rights. There were 3,136,156 shares authorized at March 31, 2024 and December 31, 2023 and 477,321 shares outstanding at March 31, 2024 and 477,321 shares outstanding at December 31, 2023.
Non-Voting Common Stock Equivalents
In conjunction with the regulationsMerger, the Company issued a new class of NVCE from authorized preferred stock, which were issued under the Investment Agreements (as defined below). 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. The NVCE stock does not have voting rights and ranks equally with, and has identical rights, preferences and privileges as the voting common stock with respect to dividends or distributions (including regular quarterly dividends) declared by the Board and rights upon any liquidation, dissolution, winding up or similar proceeding of the SEC. The timingCompany. There were 27,000,000 shares authorized at March 31, 2024 and December 31, 2023 and 10,145,600 shares outstanding at March 31, 2024 and 10,829,990 shares outstanding at December 31, 2023.
Warrants
In conjunction with the Merger and per the terms of purchasesthe investment agreements, each dated July 25, 2023, entered into by Banc of California, Inc. with the Warburg Investors (such agreement, the "Warburg Investment Agreement") and the numberCenterbridge Investor (together with the Warburg Investment Agreement, the "Investment Agreements"), respectively, the Warburg Investors received warrants to purchase 15,853,659 shares of NVCE stock, and the Centerbridge Investor received warrants to purchase 3,048,780 shares repurchasedof voting common stock (the “Centerbridge Warrants”), each with an initial exercise price of $15.375 per share, subject to customary anti-dilution adjustments provided for under the program will depend onwarrant agreements. The warrants carry a varietyterm of factors includingseven years but are subject to mandatory exercise when the market price trading volume, corporate and regulatory requirements and market conditions.
Duringof the three and six months ended June 30, 2023,voting common stock repurchased under the program totaled 1,348,545 shares and 1,759,491 shares at a weighted averagereaches or exceeds $24.60 for 20 or more trading days during any 30-consecutive trading day period. These warrants are being accounted for as equity. The exercise price of $11.85 and $12.02. As of June 30, 2023, the Company had $13.9 million remaining underCenterbridge Warrants will be adjusted downward, per the current stock repurchase authorization.
Change in Accumulated Other Comprehensive (Loss) Income ("AOCI")
Our AOCI includes unrealized gain (loss) on AFS securities and cash flow hedges. Changes to AOCI are presented netterms of the tax effect as a component of stockholders’ equity. Reclassifications from AOCI occur when a security is sold, called or matures and are recorded on the consolidated statements of operations either as a gain or loss. During the first quarter of 2022, we transferred certain AFS securitiesagreement, for cash distributions to HTM. The unrealized loss on such securities at the time of transfer continues to be reported in AOCI and is amortized over the remaining lifestockholders of the security as a yield adjustment.
The effective portion of changes inCompany's voting common stock, including the fair value of derivatives designated and that qualify asCompany's quarterly cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. If a cash flow hedge is terminated or is no longer deemed highly effective, the hedge accounting is ceased and any gain or loss included in AOCI is reclassified into earnings.
The following table presents changes to AOCI for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Balance at beginning of period | | $ | (50,489) | | | $ | (19,172) | | | $ | (40,597) | | | $ | 7,743 | |
| Unrealized loss on securities available-for-sale: | | | | | | | | |
| Unrealized loss arising during the period | | (7,334) | | | (21,016) | | | (12,857) | | | (59,103) | |
| | | | | | | | |
| Reclassification adjustment from other comprehensive income | | — | | | — | | | — | | | (16) | |
| | | | | | | | |
| Total unrealized loss on securities available-for-sale | | (7,334) | | | (21,016) | | | (12,857) | | | (59,119) | |
| Amortization of unrealized loss of available-for-sale securities transferred to held-to-maturity | | 252 | | | 246 | | | 505 | | | 333 | |
| Unrealized gain (loss) on cash flow hedges: | | | | | | | | |
| Unrealized gain (loss) arising during the period | | 8,168 | | | — | | | (454) | | | — | |
| Tax effect of current period changes | | (355) | | | 5,883 | | | 3,645 | | | 16,984 | |
| Total changes, net of taxes | | 731 | | | (14,887) | | | (9,161) | | | (41,802) | |
| | | | | | | | |
| Balance at end of period | | $ | (49,758) | | | $ | (34,059) | | | $ | (49,758) | | | $ | (34,059) | |
NOTE 12 – VARIABLE INTEREST ENTITIES
We hold ownership interests in alternative energy partnerships, qualified affordable housing partnerships and other CRA investments and have a variable interest in a multifamily securitization trust. We evaluate our interests in these entities to determine whether they meet the definition of a variable interest entity ("VIE") and whether we are required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE. We have determined that our interests in these entities meet the definition of variable interests; however none of the VIE’s meet the criteria for consolidation.
Unconsolidated VIEs
Alternative Energy Partnerships
We invested in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits). These entities were formed to invest in newly established residential and commercial solar leases and power purchase agreements. As a result of our investments, we have the right to certain investment tax credits and tax depreciation benefits (recognized on the flow through income statement method in accordance with ASC 740), and to a lesser extent, cash flows generated from the installed solar systems leased to individual consumers for a fixed period of time. While our interest in the alternative energy partnerships meets the definition of a VIE in accordance with ASC 810, we have determined that we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact the economic performance of the entities including operational and credit risk management activities. As we are not the primary beneficiary, we did not consolidate the entities.
We use the HLBV method to account for our investments in alternative energy partnerships as an equity investment. Under the HLBV method, an equity method investor determines its share of an investee’s net earnings by comparing its claim on the investee’s book value at the beginning and end of the period, assuming the investee were to liquidate all assets at their U.S. GAAP amounts and distribute the resulting cash to creditors and investors under their respective priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses from the equity investment for the period. To account for the tax credits earned on investments in alternative energy partnerships, we use the flow-through income statement method. Under this method, the tax credits are recognized as a reduction to income tax expense and the initial book-tax differences in the basis of the investments are recognized as additional tax expense in the year they are earned. Investments in alternative energy partnerships totaled $19.1 million and $21.4 million at June 30, 2023 and December 31, 2022.
The following table presents information regarding activity in our alternative energy partnerships for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| Return of capital | | $ | 352 | | | $ | 582 | | | $ | 717 | | | $ | 1,156 | |
| | | | | | | | |
| Gain (loss) on investments in alternative energy partnerships | | 36 | | | (1,043) | | | (1,582) | | | (1,201) | |
| | | | | | | | |
| Tax expense (benefit) recognized from HLBV application | | 10 | | | (301) | | | (457) | | | (347) | |
There were no fundings of alternative energy partnerships or related income tax credits recognized for the three and six months ended June 30, 2023 and 2022.
The following table represents the carrying value of the associated unconsolidated assets and liabilities and the associated maximum loss exposure for alternative energy partnerships as of the dates indicated:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31,
2022 |
| Cash | | $ | 2,910 | | | $ | 4,110 | |
| Equipment, net of depreciation | | 233,152 | | | 237,641 | |
| Other assets | | 10,078 | | | 9,838 | |
| Total unconsolidated assets | | $ | 246,140 | | | $ | 251,589 | |
| Total unconsolidated liabilities | | $ | 11,426 | | | $ | 11,679 | |
| | | | |
| | | | |
| Maximum loss exposure | | $ | 19,111 | | | $ | 21,410 | |
The maximum loss exposure that would be absorbed by us in the event that all of the assets in alternative energy partnerships are deemed worthless is $19.1 million, which is our recorded investment amount at June 30, 2023.
We believe that the loss exposure on our investments is reduced considering our return on our investment is provided not only by the cash flows of the underlying client leases and power purchase agreements, but also through the tax benefits, including the federal tax credit carryover that resulted from the investments. In addition, our exposure is further limited as the arrangements include a transition manager to support any transition of the solar company sponsor, whose role includes that of the servicer and operation and maintenance provider, in the event the sponsor would be required to be removed from its responsibilities (e.g., bankruptcy, breach of contract, etc.).
Qualified Affordable Housing Partnerships - Low Income Housing Tax Credits
We invest in limited partnerships that operate qualified affordable housing projects that qualify for LIHTC. The returns on these investments are generated primarily through allocated federal tax credits and other tax benefits. In addition, LIHTC investments contribute to our compliance with the Community Reinvestment Act. These limited partnerships are considered to be VIEs, because either (i) they do not have sufficient equity investment at risk or (ii) the limited partners with equity at risk do not have substantive kick-out rights through voting rights or substantive participating rights over the general partner. As a limited partner, we are not the primary beneficiary because the general partner has the ability to direct the activities of the VIEs that most significantly impact their economic performance. As a result, we do not consolidate these partnerships.
The following table presents information regarding balances in LIHTC investments for the periods indicated:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31,
2022 |
Ending balance(1) | | $ | 42,818 | | | $ | 45,726 | |
| Aggregate funding commitment | | 72,997 | | | 72,967 | |
| Total amount funded | | 57,290 | | | 55,487 | |
| Unfunded commitment | | 15,707 | | | 17,480 | |
| Maximum loss exposure | | 42,818 | | | 45,726 | |
(1)Included in other assets in the accompanying Consolidated Statements of Financial Condition.
The following table presents information regarding activity in our LIHTC investments for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Fundings | | $ | 1,168 | | | $ | 919 | | | $ | 1,803 | | | $ | 2,024 | |
| Proportional amortization recognized | | 1,427 | | | 1,027 | | | 2,938 | | | 2,573 | |
| Income tax credits recognized | | 1,688 | | | 1,163 | | | 3,375 | | | 2,536 | |
Other CRA Investments
We invest in other CRA investments that are accounted for using the equity method of accounting or the measurement alternative to fair value for equity investments without a readily determinable fair value. Other CRA investments totaled $89.0 million and $85.0 million at June 30, 2023 and December 31, 2022.
CRA investments that are accounted for under the equity method consist primarily of investments in small business investment companies (“SBICs”) and limited partnerships which provide affordable housing where our ownership percentage exceeds 3%. Under the equity method of accounting, we record our proportionate share of the profits or losses of the investment entity as an adjustment to the carrying value of the investment and as a component of noninterest income. Equity investments that do not meet the criteria to be accounted for under the equity method and do not have a readily determinable fair value are accounted for at cost under the measurement alternative to fair value with adjustments for impairment and observable price changes as applicable. These investments consist primarily of investments in limited partnerships which provide affordable housing where our partnership percentage is less than 3% and other qualifying investments such as Community Development Financial Institutions (“CDFI”) stock.
Multifamily Securitization
During the third quarter of 2019, we transferred $573.5 million of multifamily loans, through a two-step process, to a third-party depositor which placed the multifamily loans into a third-party trust (a VIE) that issued structured pass-through certificates to investors. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860. We determined that we are not the primary beneficiary of this VIE as we do not have the power to direct the activities that will have the most significant economic impact on the entity, therefore we do not consolidate the securitization trust. Our continuing involvement in this securitization is limited to customary obligations associated with the securitization of loans, including the obligation to cure, repurchase, or substitute loans in the event of a material breach in representations. Additionally, we have the obligation to guarantee credit losses up to 12% of the aggregate unpaid principal balances at cut-off date of the securitization. This obligation is supported by a $68.8 million letter of credit between Freddie Mac and the FHLB.
The maximum loss exposure that would be absorbed by us in the event that all of the assets in the securitization trust are deemed worthless is $68.8 million, which represents the aforementioned obligation to guarantee credit losses up to 12%. We believe that the loss exposure on the multifamily securitization is reduced by both loan-to-value ratios of the underlying collateral balances and the overcollateralization that exists within the securitization trust. At June 30, 2023, the remaining unpaid principal balance on the securitization totaled $91.0 million, and we have a $1.2 million repurchase reserve related to this VIE.
Capital Trusts - Trust Preferred Securities
In connection with our acquisition of PMB, we acquired investments in two grantor trusts. These grantor trusts were originally formed to sell and issue trust preferred securities to institutional investors (Refer to Note 7 - Long-term Debt). We are not the primary beneficiary, and consequently, these grantor trusts are not consolidated in the consolidated financial statements. At
June 30, 2023 and December 31, 2022, our investment in these grantor trusts, which is included in other assets in the consolidated statements of financial condition, totaled $0.5 million.
NOTE 13 – EARNINGS PER COMMON SHARE
The following table presents computations of basic and diluted earnings per common share (“EPS”) for the three and six months ended June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Three Months Ended June 30, 2023 | | Six Months Ended
June 30, 2023 |
| ($ in thousands except per share data) | | Common Stock | | Class B
Common Stock | | | | Common Stock | | Class B Common Stock | | |
| Net income | | $ | 17,732 | | | $ | 147 | | | | | $ | 37,846 | | | $ | 311 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Weighted average common shares outstanding | | 57,503,213 | | | 477,321 | | | | | 58,017,185 | | | 477,321 | | | |
| Dilutive effects of restricted shares/units | | 45,268 | | | — | | | | | 104,941 | | | — | | | |
| | | | | | | | | | | | |
| Dilutive effects of stock options | | 205 | | | — | | | | | 866 | | | — | | | |
| | | | | | | | | | | | |
| Average shares and dilutive common shares | | 57,548,686 | | | 477,321 | | | | | 58,122,992 | | | 477,321 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.31 | | | $ | 0.31 | | | | | $ | 0.65 | | | $ | 0.65 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Diluted earnings per common share | | $ | 0.31 | | | $ | 0.31 | | | | | $ | 0.65 | | | $ | 0.65 | | | |
For the three and six months ended June 30, 2023, there were 609,324 and 457,960 anti-dilutive restricted shares/units and 11,232 and zero anti-dilutive stock options that were excluded from computing diluted earnings per common share.
The following table presents computations of basic and diluted EPS for the three and six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| ($ in thousands except per share data) | | Common Stock | | Class B Common Stock | | | | Common Stock | | Class B Common Stock | | |
| Net income | | $ | 26,504 | | | $ | 208 | | | | | $ | 74,645 | | | $ | 579 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Less: preferred stock dividends | | — | | | — | | | | | (1,409) | | | (11) | | | |
| Less: preferred stock redemption | | — | | | — | | | | | (3,718) | | | (29) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net income allocated to common stockholders | | $ | 26,504 | | | $ | 208 | | | | | $ | 69,518 | | | $ | 539 | | | |
| | | | | | | | | | | | |
| Weighted average common shares outstanding | | 60,873,481 | | | 477,321 | | | | | 61,497,261 | | | 477,321 | | | |
| Dilutive effects of stock units | | 245,571 | | | — | | | | | 269,093 | | | — | | | |
| | | | | | | | | | | | |
| Dilutive effects of stock options | | 4,242 | | | — | | | | | 4,701 | | | — | | | |
| | | | | | | | | | | | |
| Average shares and dilutive common shares | | 61,123,294 | | | 477,321 | | | | | 61,771,055 | | | 477,321 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.44 | | | $ | 0.44 | | | | | $ | 1.13 | | | $ | 1.13 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Diluted earnings per common share | | $ | 0.43 | | | $ | 0.44 | | | | | $ | 1.13 | | | $ | 1.13 | | | |
For the three and six months ended June 30, 2022, there were 354,484 and 806 anti-dilutive restricted shares/units and no anti-dilutive stock options that were excluded from computing diluted earnings per common share.
NOTE 14 – LOAN COMMITMENTS AND OTHER16. RELATED ACTIVITIES
Some financial instruments, such as unfunded loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met prior to their expiration dates. Commitments may expire without being used. Risk of credit loss exists up to the face amount of these instruments. The same credit policies are used to make such commitments as are used for originating loans, including obtaining collateral at exercise of the commitment.
The following table presents the contractual amount of financial instruments with off-balance-sheet risk as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | | Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
Commitments to extend credit | | $ | 39,729 | | | $ | 161,036 | | | $ | 50,193 | | | $ | 180,696 | |
| Unused lines of credit | | 47,334 | | | 1,330,913 | | | 8,392 | | | 1,505,122 | |
| Letters of credit | | 1,671 | | | 7,462 | | | 2,461 | | | 7,016 | |
Other Commitments
At June 30, 2023, we had unfunded commitments of $15.7 million, $7.5 million, and $20.0 million for LIHTC investments, SBIC investments, and other investments. At December 31, 2022, we had unfunded commitments of $17.5 million, $8.6 million, and $9.8 million for LIHTC investments, SBIC investments, and other investments.
NOTE 15 – OTHER ASSETS AND OTHER LIABILITIES
The following table presents the components of other assets as of the dates indicated:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31,
2022 |
| Accrued interest receivable | | $ | 35,821 | | | $ | 37,942 | |
| Prepaid expenses | | 9,816 | | | 8,068 | |
| | | | |
Derivative instruments(1) | | 2,199 | | | 2,292 | |
| | | | |
| Operating lease right-of-use assets | | 26,630 | | | 28,780 | |
| Servicing assets | | 21,051 | | | 22,484 | |
| Other real estate owned | | 882 | | | — | |
| Income taxes receivable | | — | | | 7,679 | |
| | | | |
| Investments: | | | | |
CRA and other equity investments(2) | | 94,703 | | | 90,295 | |
LIHTCs(2) | | 42,818 | | | 45,726 | |
Alternative energy partnerships(2) | | 19,111 | | | 21,410 | |
| | | | |
| | | | |
| Other assets | | 25,281 | | | 13,513 | |
| Total other assets | | $ | 278,312 | | | $ | 278,189 | |
(1)See Note 9 - Derivative Instruments for information regarding derivative instruments
(2)See Note 12 - Variable Interest Entities regarding alternative energy partnerships, LIHTC and other CRA investments
The following table presents the components of accrued expenses and other liabilities as of the dates indicated:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31,
2022 |
| Accrued interest payable | | $ | 14,791 | | | $ | 7,004 | |
| Accounts payable and accrued expenses | | 43,791 | | | 37,560 | |
| | | | |
| Income taxes payable | | 682 | | | — | |
Derivative liabilities(1) | | 2,626 | | | 2,251 | |
| Lease liability | | 30,505 | | | 33,122 | |
| | | | |
Commitments to fund LIHTC(2) | | 15,707 | | | 17,480 | |
| Reserve for unfunded noncancellable loan commitments | | 4,005 | | | 5,305 | |
| Reserve for loss on repurchased loans | | 1,977 | | | 2,989 | |
| Other liabilities | | 5,933 | | | 8,512 | |
| Total accrued expenses and other liabilities | | $ | 120,017 | | | $ | 114,223 | |
(1)See Note 9 - Derivative Instruments for information regarding derivative instruments
(2)See Note 14 - Loan Commitments and Other Related Activities regarding commitments to fund LIHTC
NOTE 16 – REVENUE RECOGNITION
The following table presents noninterest income, segregated by revenue streams, in-scope and out-of-scope of Topic 606 - Revenue From Contracts With Customers, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Noninterest income | | | | | | | | |
| In scope of Topic 606 | | | | | | | | |
| Deposit service fees | | $ | 1,377 | | | $ | 1,627 | | | $ | 2,640 | | | $ | 3,281 | |
| Debit card fees | | 424 | | | 542 | | | 801 | | | 995 | |
| | | | | | | | |
| Other | | 331 | | | 137 | | | 699 | | | 296 | |
| Noninterest income (in-scope of Topic 606) | | 2,132 | | | 2,306 | | | 4,140 | | | 4,572 | |
| Noninterest income (out-of-scope of Topic 606) | | 3,892 | | | 4,880 | | | 9,743 | | | 8,524 | |
| Total noninterest income | | $ | 6,024 | | | $ | 7,186 | | | $ | 13,883 | | | $ | 13,096 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
We do not typically enter into long-term revenue contracts with clients and as of June 30, 2023 and December 31, 2022, we did not have any significant contract balances within the scope of Topic 606 and we did not capitalize any revenue contract acquisition costs.
Sale-leaseback Transactions
In January 2022, we completed a sale-leaseback transaction for $2.4 million and recognized a gain of $0.8 million. Gains related to sale-leaseback are included in other income in the accompanying consolidated statements of operations.
NOTE 17 – RELATED-PARTYPARTY TRANSACTIONS
Certain of our executive officers and directors, and their related interests, are customers of, or have had transactions with, the Bank in the ordinary course of business, including deposits, loans and other financial services relatedservices-related transactions. From time to time, the Bank may make loans to executive officers and directors, and their related interests, in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those of comparable transactions with non-insiders prevailing at the time, in accordance with the Bank’sBank's underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features. As of June 30, 2023, March 31, 2024, no related party loans were categorized as nonaccrual, past due, restructured or potential problem loans.
Transactions with Related Parties
The Company and the Bank have engaged in transactionsthe transaction described below with the Company’sCompany's current or former directors, executive officers, and beneficial owners of more than five percent of the outstanding shares of the Company’sCompany's voting common stock and certain persons related to them.
As previously disclosed, the Company’s Board of Directors has authorized and directed the Company to provide indemnification, advancement and/or reimbursement for the costs of separate independent counsel retained by any then-current officer or director, in their individual capacity, with respect to matters related to (i) an investigation by the Special Committee of the Company’s Board of Directors in late 2016, (ii) a formal order of investigation issued by the SEC on January 4, 2017 (since resolved), and (iii) any civil or administrative proceedings against the Company as well as officers and directors currently or previously associated with the Company (collectively, the “Indemnified Matters”).
Indemnification costs were paid or reimbursed by the Company or its insurance carriers o
n behalf of certain current directors in connection with the Indemnified Matters, in an aggregate amount less than $120 thousand for each of the three and six months ended June 30, 2023 and 2022.
45
54
NOTE 18 – LITIGATION
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In accordance with applicable accounting guidance, we establish an accrued liability when those matters present loss contingencies that are both probable and estimable.
While the ultimate liability with respectBANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to legal actions cannot be determined at this time, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to the consolidated financial statements.Condensed Consolidated Financial Statements (Unaudited)
NOTE 19 – SUBSEQUENT EVENTS
We have evaluated events from the date of the consolidated financial statements on June 30, 2023 through the issuance of these consolidated financial statements included in this Quarterly Report on Form 10-Q.
On July 25, 2023, theThe Company and PacWest announced the execution of an Agreement and Plan of Merger, pursuantis a party to which (a) a newly formed merger subsidiary of the Company will mergeservices agreement with and into PacWest, with PacWest surviving (the “merger”), (b) immediately following the merger, PacWest will merge into the Company, with the Company surviving (the “second-step merger”), (c) promptly following the second-step merger, Pacific Western Bank, a California-chartered non-member bank and prior to the second-step merger, a wholly-owned subsidiary of PacWestIntraFi Network LLC (“PacWest Bank”), will become a member of the Federal Reserve System (the “FRS Membership”IntraFi”) and (d) promptly following the effectiveness of the FRS Membership,whereby IntraFi provides the Bank will merge into PacWest Bank, with PacWest Bank surviving as a wholly-owned subsidiary of the Company. Upon closing of the transaction, the combined holding company and bank will operate under the Banc of California name and brand. At the closing of the merger, PacWest stockholders will be entitledcertain insured cash sweep services from time to receive 0.6569 of a share of the Company’s common stock for each share held of PacWest common stock. Each outstanding share of PacWest’s 7.75% series A fixed-rate reset noncumulative perpetual preferred stock will be converted into the right to receive one share of a newly created series of substantially identical preferred stock of the Company with the same terms and conditions.
In connection with the proposed transaction, the Company also entered into separate investment agreements (the “Investment Agreements”) with affiliatestime. Affiliates of funds managed by Warburg Pincus LLC (the “Warburg Investors”) and certainhold a material investment vehicles sponsored, managed or advised by Centerbridge Partners, L.P. and its affiliates (the “Centerbridge Investors” and, together with theinterest in IntraFi. Additionally, one of Warburg Investors, the “Investors”), which together will investPincus LLC’s principals, Todd Schell, who currently serves as a total of $400 million for newly issued equity securitiesmember of the Company substantially concurrently with and subject to closingBoard, is a member of the transaction.
Subject to the terms and conditionsboard of the Investment Agreements, at the closingdirectors of the transactions contemplated thereby, the Company expects to issue to theIntraFi. Affiliates of funds managed by Warburg Investors and the Centerbridge Investors, in the aggregate,Pincus LLC beneficially owned approximately 21.8 million shares of common stock at a purchase price of $12.30 per share and 10.8 million shares of a new class of nonvoting, common-equivalent stock at a purchase price of $12.30 per share.
Additionally, the Warburg Investors will receive warrants to purchase approximately 15.9 million9.9% of the Company’s nonvoting, common-equivalent shares, and the Centerbridge Investors will receive warrants to purchase approximately 3.0 million shares of the Company’soutstanding voting common stock eachas of December 1, 2023, based on information reported on a Schedule 13D filed with an exercise price of $15.375 per share. The warrants are exercisablethe SEC on December 1, 2023. For the three months ended March 31, 2024 and 2023, the amounts paid to IntraFi for a period of seven years and subject to mandatory exercise when the market price of the Company’s common stock reaches or exceeds $24.60 for twenty or more trading days during any thirty-consecutive trading day period.
Simultaneously with entering into the definitive merger agreement, Banc of California, N.A. entered into an aggregate of $3.5 billion in interest rate swap options to hedge interest rate risk for a total cost of $15.7certain insured cash sweep services were $2.3 million and a contingent forward asset sale agreement on the SFR loan portfolio of $1.8 billion.$1.6 million.
Except as noted, there have been no other subsequent events that occurred during such period that would require disclosure in this report or would be required to be recognized in the consolidated financial statements as of June 30, 2023.
NOTE 17. RECENTLY ISSUED ACCOUNTING STANDARDS
| | | | | | | | | | | | | | | | | | | | |
| | | | Effective | | Effect on the Financial Statements |
| Standard | | Description | | Date | | or Other Significant Matters |
ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative | | This standard amends certain Subtopics of the ASC to incorporate certain disclosure requirements from SEC Release No. 33-10532, "Disclosure Update and Simplification" that was issued in 2018. The amendments in this standard should be applied prospectively. Early adoption is prohibited.
| | The effective date for each amendment will be the date on which the SEC's removal of the related disclosure from Regulation S-X or Regulation S-K becomes effective. | | The Company is evaluating the impact of this standard on its consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | |
| | | | Effective | | Effect on the Financial Statements |
| Standard | | Description | | Date | | or Other Significant Matters |
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | | The standard improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The enhanced segment disclosure requirements apply retrospectively to all prior periods presented in the financial statements. Additionally, early adoption is permitted. | | December 31, 2024 | | The Company is evaluating the impact of this standard on its consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | |
| | | | Effective | | Effect on the Financial Statements |
| Standard | | Description | | Date | | or Other Significant Matters |
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures | | The standard, among other changes, improves annual income tax disclosures by requiring disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The enhanced income tax disclosure requirements apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. Additionally, early adoption is permitted. | | January 1, 2025 | | The Company is evaluating the impact of this standard on its consolidated financial statements. |
BANC OF CALIFORNIA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | | | Effective | | Effect on the Financial Statements |
| Standard | | Description | | Date | | or Other Significant Matters |
ASU 2024-02, Codification Improvements: Amendments to Remove References to the Concepts Statements | | The ASU amends the Codification to remove references to various concepts and impacts a variety of topics in the Codification. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Concept Statements to provide guidance in certain topical areas. The amendment in this ASU should be applied using one of the following transition methods: (1) prospectively to all new transactions recognized on or after the date that the entity first applies the amendments; or (2) retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. Additionally, early adoption is permitted. | | January 1, 2025 | | The Company is evaluating the impact of this standard on its consolidated financial statements. |
ITEM 2 – MANAGEMENT’S2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’smanagement's discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2023.March 31, 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20222023 (the "Form 10-K") and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our operating expenses, profitability, allowance for credit losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions and related integrations, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. All statements contained in this Quarterly Report on Form 10-Q that are not clearly historical in nature are forward-looking, and the quarterlywords “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:
•changes in general economic conditions, either nationally or in our market areas, including the impact of supply chain disruptions, and the risk of recession or an economic downturn;
•changes in the interest rate environment, including the recent and potential future changes in the FRB benchmark rate, which could adversely affect our revenue and expenses, the value of assets and obligations, the realization of deferred tax assets, the availability and cost of capital and liquidity, and the impacts of continuing inflation;
•the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial condition of borrowers, and the operational risk of lending activities, including the effectiveness of our underwriting practices and the risk of fraud, any of which may lead to increased loan delinquencies, losses, and non-performing assets, and may result in our allowance for credit losses not being adequate;
•fluctuations in the demand for loans, and fluctuations in commercial and residential real estate values in our market area;
•the quality and composition of our securities portfolio;
•our ability to develop and maintain a strong core deposit base, including among our venture banking clients, or other low cost funding sources necessary to fund our activities particularly in a rising or high interest rate environment;
•the rapid withdrawal of a significant amount of demand deposits over a short period ended June 30, 2023.of time;
•the costs and effects of litigation;
•risks related to the Company's acquisitions, including disruption to current plans and operations; difficulties in customer and employee retention; fees, expenses and charges related to these transactions being significantly higher than anticipated; and our inability to achieve expected revenues, cost savings, synergies, and other benefits; and in the case of our recent merger with PacWest, reputational risk, regulatory risk and potential adverse reactions of the Company's or PacWest's customers, suppliers, vendors, employees or other business partners;
•results of examinations by regulatory authorities of the Company and the possibility that any such regulatory authority may, among other things, limit our business activities, restrict our ability to invest in certain assets, refrain from issuing an approval or non-objection to certain capital or other actions, increase our allowance for credit losses, result in write-downs of asset values, restrict our ability or that of our bank subsidiary to pay dividends, or impose fines, penalties or sanctions;
•legislative or regulatory changes that adversely affect our business, including changes in tax laws and policies, accounting policies and practices, privacy laws, and regulatory capital or other rules;
Executive Overview
We are focused on providing core banking products
57
•the risk that our enterprise risk management framework may not be effective in mitigating risk and services, including customized and innovative banking and lending solutions, designed to cater toreducing the unique needspotential for losses;
•errors in estimates of California’s diverse businesses, entrepreneurs and communities through our 27 full service branches in California, extending from San Diego to Santa Barbara. Through our dedicated professionals, we are committed to servicing and building enduring relationships by providing a higher standardfair values of banking. We offer a
varietycertain of financial products and services designed to serve the banking and financial needs of our target clients. We also acquired Deepstack Technologies in 2022 to be able to offer full stack payment processing solutions and further our ability to serve as the hub of our clients' financial services ecosystem.
Economy and Banking Industry Impact
Economic uncertainty and concerns regarding the stability of the U.S. banking system following recent bank failures earlier in the year contributed to a challenging operating environment for our Company in the first half of 2023. Additionally, the Federal Reserve continued to raise the short-term federal funds rate, which increased 100 basis points since the start of the year through July 2023, as inflation persists. Since the beginning of 2022 through July 2023, the Federal Reserve has increased the federal funds target rate 525 basis points. As our assets and liabilities, are primarily monetarywhich may result in nature, the effect ofsignificant changes in interest rates has a significantvaluation;
•failures or security breaches with respect to the network, applications, vendors, and computer systems on which we depend, including due to cybersecurity threats;
•our ability to attract and retain key members of our senior management team;
•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;
•the impact of bank failures or other adverse developments at other banks on general depositor and investor sentiment regarding the stability and liquidity of banks;
•the possibility that our recorded goodwill could become impaired, which may have an adverse impact on our performance.earnings and capital;
•our existing indebtedness, together with any future incurrence of additional indebtedness, could adversely affect our ability to raise additional capital and to meet our debt obligations;
•the risk that we may incur significant losses on future asset sales; and
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this Quarterly Report on Form 10-Q and from time to time in other documents that we file with or furnish to the SEC.
All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
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. 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. 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. 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. 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. 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.
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. 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.
The rising interest rate environment may leadBank is a relationship-based community bank focused on providing business banking and treasury management services to lower demandsmall, 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.
At March 31, 2024, the Company had total assets of $36.1 billion, including $25.6 billion of total loans and leases, net of deferred fees, $2.3 billion of securities available-for-sale, $2.3 billion of securities held-to-maturity, and $2.9 billion of interest-earning deposits in financial institutions compared to $38.5 billion of total assets at December 31, 2023, including $25.6 billion of total loans and leases, net of deferred fees, $2.3 billion of securities available-for-sale, $2.3 billion securities held-to-maturity, and $5.2 billion of interest-earning deposits in financial institutions. The $2.5 billion decrease in total assets since year-end was due primarily to a $2.3 billion decrease in interest-earning deposits in financial institutions.
At March 31, 2024, the Company had total liabilities of $32.7 billion, including total deposits of $28.9 billion and borrowings of $2.1 billion, compared to $35.1 billion of total liabilities at December 31, 2023, including $30.4 billion of total deposits and $2.9 billion borrowings. The $2.5 billion decrease in total liabilities since year-end was due mainly to a $1.5 billion decrease in deposits and a $771.8 million decrease in borrowings.
The Company had total stockholders' equity of $3.4 billion at March 31, 2024 and at December 31, 2023. Net earnings for loans, higher credit losses, and decreased values for our investment securities, among other negative effects. Additionally, it may create more intense competition for low-cost deposits, potential for deposit outflows as rate-sensitive depositors seek higher yielding products or investment alternatives, and increased deposit rates and borrowing costs. The recent industry events could further accelerate the deposit outflows experienced by some mid-sized banks.
During the first quarter of 2023, in response to volatility in the financial markets, we proactively performed liquidity-enhancing measures, including additional advances from the FHLB2024 were mostly offset by dividends declared and draws on available FRB facilities. We reduced our excess liquidity toward the end of the second quarter as volatility in the markets began to stabilize. We had primarypaid. Our consolidated common equity Tier 1 (CET1), Tier 1 capital and secondary liquidity availability of just over $3.9 billion, or 2.2 times our uninsuredTotal capital ratios were 10.09%, 12.38%, and uncollateralized deposits16.40% at quarter end. While these actions had a negative impact on our level of profitability and net interest margin in the second quarter and year-to-date period, we believe it was prudent from a risk management perspective.March 31, 2024.
Recently Announced
Recent Events
PacWest Bancorp Merger with PacWest
On July 25,November 30, 2023, Banc of California, Inc. completed the Company and PacWest announced the execution of a definitive merger agreementMerger, pursuant to which PacWest Bancorp merged with and into Banc of California, Inc., with Banc of California, Inc. continuing as the companies will combine in an all-stock merger transaction. Pursuant to the termssurviving legal corporation and, conditionsas of the agreement, PacWest will mergeDecember 1, 2023, Banc of California, N.A. merged into the Company, with the Company surviving, and the Bank will merge into PacWestPacific Western Bank with PacWestPacific Western Bank surviving as wholly-owned subsidiary of the Company. The combined holding company and bank will operatecontinuing under the Banc of California name and brand following closing ofas the transaction. At the closing of the merger, PacWest stockholders will be entitled to receive 0.6569 of a share of the Company’s common stock for each share held of PacWest common stock.
In connection with entering into the definitive merger agreement, the Company also entered into the Investment AgreementsBank. Concurrent with the Warburg Investors and the Centerbridge Investors. Subject to the terms and conditions of the Investment Agreements, at closing, the Investors will invest an aggregate of $400 million for newly issued equity securities substantially concurrently with, and subject to, closing of the merger. The proceeds from this capital raise are expected to be utilized in conjunction with other planned actions to reposition the combined company’s balance sheet. It is expected that, after closing the transaction, the combined company will repay approximately $13 billion in wholesale borrowings and high-cost deposits using proceeds from the sale of certain loan and investment securities assets. The Bank has also entered into an aggregate of $3.5 billion notional amount in interest rate swap options to hedge interest rate risk and a contingent forward asset sale agreement to lock in proceeds for certain asset sales contemplated in connection with the closing of the transaction.
Upon completion of the proposed transaction, (a) the shares issued to PacWest stockholders in the merger are expected to represent approximately 47% of the outstanding shares of the combined company, (b) the shares issued to the Investors in the equity capital raise transaction discussed above are expected to represent approximately 19% of the outstanding shares of the
combined company and (c) the shares ofMerger, Banc of California, commonInc. 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 that are outstanding immediately prior to completionissued by Banc of the merger are expected to represent approximately 34% of the outstanding shares of the combined company.
Financial Highlights
For the second quarter of 2023, net income was $17.9 million, or $0.31 per diluted common share. This compares to net income of $20.3 million, or $0.34 per diluted common share, for the first quarter of 2023 and net income of $26.7 million, or $0.43 per diluted common share, for the second quarter of 2022.
On an adjusted basis, net income was $18.4 million for the quarter, or $0.32 per diluted common share, for the second quarter of 2023.(1) This compares to adjusted net income of $21.7 million, or $0.37 per diluted common share, for the first quarter of 2023, and $27.8 million, or $0.45 per diluted common share for the second quarter of 2022.(1)
Second quarter of 2023 highlights:
•Interest income growth, up $9.2 million or 9% from the prior quarter due to higher interest rates and changesCalifornia, Inc. as consideration in the portfolio as new originations have higher yields than payoffs. Overall, net interest income was down $3.4 million or 5% from the prior quarter due to higher funding costs, changes in the balance sheet mix and the impact of the strategy to hold extra liquidity, which resulted in higher short-term borrowings from the FHLB and FRB.Merger totaled approximately $663 million.
•Stable overall deposits, down approximately 1% on average and period-end balances, with the period-end noninterest-bearing percentage stable at approximately 36% quarter over quarter.
•Noninterest-bearing deposit growth from new clients, which contributed inflows of $74.8 million in the quarter, consistent with the prior quarter’s growth and up 13% over the same period last year.
•Loan growth, up $101.8 million or 1% from the prior quarter and 6% annualized, highlighted by core commercial and industrial growth of $64 million or 6% and increased warehouse utilization.
•Lower noninterest expenses, which declined $2.1 million or 4% from the prior quarter due primarily to lower losses in alternative energy partnerships and compensation expenses.
•High liquidity levels, with immediately available on-balance sheet liquidity and unused borrowing capacity of $3.9 billion. Available liquidityThe Merger was 2.2 times the level of uninsured and uncollateralized deposits, which was consistent with the prior quarter.
•Low unrealized losses, with AFS unrealized losses of $54.1 million on securities of $922.1 million, representing 4.3% of CET1 capital. Total AFS and HTM unrealized losses of $115.5 million on total securities of $1.25 billion represented 9.1% of CET1 capital.
•Strong capital ratios well above the regulatory thresholds for “well capitalized” banks, including a 14.26% Total risk-based capital ratio, 11.88% Tier 1 capital ratio, 11.88% CET1 capital ratio and 9.39% Tier 1 leverage ratio.
•Other performance highlights as follows:
◦Book value per share of $16.67, up from $16.33
◦Tangible common equity per share of $14.56, up from $14.26(1)
◦Repurchased $16.0 million of common stock during the quarter and $21.1 million during the six months ended June 30, 2023
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 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. 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. 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. 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. Management has identified our most critical accounting policies and accounting estimates as: allowance for credit losses, business combinations, value of acquired loans, goodwill and deferred income taxes. See Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements (Unaudited) included in Item 1 for a description of these policies.
1Non-GAAP measures; refer to section “Non-GAAP Measures”
ACL - Loans.The ACL on loans 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. 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. The ALL 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. 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. 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 ALL and the RUC.
ACL - AFS Securities. For AFS securities which are in an unrealized loss position, we assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For AFS securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded as a valuation allowance for the estimated credit loss, reducing the carrying value of the securities on the balance sheet and limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL are recorded as a provision for credit loss. Losses are charged against the allowance when we believe the uncollectibility of an AFS security has been confirmed or if either of the criteria regarding intent or requirement to sell is met.
Business Combinations.Business combinations are accounted forreverse merger using the acquisition method of accounting, under ASC Topic 805 - Business Combinations. Undertherefore, PacWest Bancorp was deemed the acquisition method,accounting acquirer, even though Banc of California, Inc. was the Company measureslegal acquirer. We recorded the identifiable assetslegacy Banc of California, Inc. acquired including identifiable intangible assets and assumed liabilities, assumed in a business combinationboth tangible and intangible, at their estimated fair value on 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 assumedvalues as of the acquisition date. 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. We completed the Merger to, among other things, enhance our scale and presence in California and augment and diversify our sources of revenue.
Balance Sheet Repositioning
In connection with the Merger, we implemented our previously announced balance sheet repositioning strategy. 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. 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. The liabilities that were paid down included $4.7 billion of borrowings and $3.9 billion of brokered deposits from both legacy entities.
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. 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. 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. 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. Our current priorities are to increase customer deposits to replace brokered deposits, which will reduce our interest expense.
Loan and Lease Production
We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans and leases portfolio is diverse and generally includes various asset-secured loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial and venture-backed companies during the various phases of their early life cycles, and secured business loans.
Our loan origination process emphasizes credit quality. On occasion, to augment our internal loan production, we have purchased loans such as multi-family loans from other banks, private student loans from third-party lenders, and single-family residential mortgage loans. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic risk, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We allocateemphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the fair valuelevels of our classified loans and leases, nonaccrual loans and leases, and net charge-offs. We maintain an allowance for credit losses on loans and leases, which is the sum of the purchase considerationallowance for loan and lease losses and the reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off-balance sheet credit exposures. Loans and leases that are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the assets acquiredallowance for loan and liabilities assumedlease losses. The provision for credit losses on the loan and lease portfolio is based on their estimated fair values atour allowance methodology, which considers the acquisitionimpact of assumptions and is reflective of historical experience, economic forecasts viewed to be reasonable and supportable by management, the current loan and lease composition, and relative credit risks known as of the balance sheet date. The fair values of other intangibles are determined utilizing information available nearFor originated and acquired credit-deteriorated loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively.
We regularly review loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because our loans are concentrated in commercial real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation and occupancy expense. It also includes costs that tend to vary based on expectationsthe volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the ratio of noninterest expense to average total assets.
The following table presents the calculation of our ratio of noninterest expense to average total assets for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, | | December 31, | | March 31, | | |
| Noninterest Expense to Average Total Assets | 2024 | | 2023 | | 2023 | | | | |
| | (Dollars in thousands) |
| Noninterest expense | $ | 210,518 | | | $ | 363,638 | | | $ | 1,573,003 | | | | | |
| Average total assets | $ | 37,540,707 | | | $ | 37,640,387 | | | $ | 42,768,714 | | | | | |
Noninterest expense to average total assets (1) | 2.26 | % | | 3.83 | % | | 14.92 | % | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | |
(1) Annualized.
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements and the notes thereto, which have been prepared in accordance with U.S. GAAP. The preparation of the condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are deemed reasonable by management. Thereasonable; however, actual results may ultimately differ significantly from these estimates used to determineand assumptions, which could have a material adverse effect on the fair valuescarrying value of assets and liabilities acquired in a business combination can beat the balance sheet dates and on our results of operations for the reporting periods.
Our accounting policies and estimates are fundamental to understanding the following discussion and analysis of financial condition and results of operations. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and require judgment, as such we typically engage third-party valuation specialists for significant items.
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. 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. Non-compete agreements are estimated using a with and without scenario where cash flows are projected through the termbecause of the non-compete agreement assuming the agreement is in placelikelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and compared to cash flows assuming it is not in place. 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. 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.
Goodwill. Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired. 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. 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 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.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. 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. In additionrelate 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.
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. 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.
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.
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. These critical estimates are difficult to predict and may result in provisionsallowance for credit losses in future periods if actual losses materially differ fromon loans and leases held for investment, business combinations, the estimated assumptions utilized in our initial valuationcarrying value of acquired loans.
Deferred Taxes.Deferredgoodwill and other intangible assets, and the realization of deferred income tax assets and liabilitiesliabilities.
Our critical accounting policies and estimates are computed for differences between the financial statementdescribed in Item 7. Management’s Discussion and tax basisAnalysis of assetsFinancial Condition and liabilities that will result in taxable or deductible amountsResults of Operations included 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 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. 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. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four possible 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.
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.
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. 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. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. 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.
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 1 - Summary of Significant Accounting Policies.Form 10-K.
Non-GAAP Financial Measures
Under Item 10(e) of SEC Regulation S-K, public companies disclosingWe use certain non-GAAP financial measures in filings with the SEC that are not calculated in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additionalto provide meaningful supplemental information including a presentation of the most directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure, as well as a statement of the reasons why the company’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the company’s financial condition and results of operationsCompany’s operational performance and to the extent material, a statement of the additional purposes, if any, for which the company’s management uses the non-GAAP financial measure.
Tangible assets, tangible equity, tangible common equity, tangible common equity to tangible assets, tangible common equity per share, return on average tangible common equity, adjusted noninterest income, adjusted noninterest expense, adjusted noninterest income to adjusted total revenue, adjusted noninterest expense to average total assets, pre-tax pre-provision (PTPP) income, adjusted PTPP income, PTPP income ROAA, adjusted PTPP income ROAA, efficiency ratio, adjusted efficiency ratio, adjusted net income, adjusted net income available to common stockholders, adjusted diluted earnings per share (EPS), adjusted return on average assets (ROAA) and adjusted common equity tier 1 (CET 1) constitute supplemental financial information determined by methods other than in accordance with GAAP. These non-GAAP measures are used by management in its analysis of the Company's performance.
Tangible assets and tangible equity are calculated by subtracting goodwill and other intangible assets from total assets and total equity. Tangible common equity is calculated by subtracting preferred stock, as applicable, from tangible equity. Return on average tangible common equity is calculated by dividing net income available to common stockholders, after adjustment for amortization of intangible assets, by average tangible common equity. Banking regulators also exclude goodwill and other intangible assets from stockholders’ equity when assessing the capital adequacy of a financial institution.
PTPP income is calculated by adding net interest income and noninterest income (total revenue) and subtracting noninterest expense. Adjusted PTPP income is calculated by adding net interest income and adjusted noninterest income (adjusted total revenue) and subtracting adjusted noninterest expense. PTPP income ROAA is calculated by dividing annualized PTPP income by average assets. Adjusted PTPP income ROAA is calculated by dividing annualized adjusted PTPP income by average assets. Efficiency ratio is calculated by dividing noninterest expense by total revenue. Adjusted efficiency ratio is calculated by dividing adjusted noninterest expense by adjusted total revenue.
Adjusted net income is calculated by adjusting net income for tax-effected noninterest income and noninterest expense adjustments and the tax impact from the exercise of stock appreciation rights for the periods indicated. Adjusted ROAA is calculated by dividing annualized adjusted net income by average assets. Adjusted net income available to common stockholders is calculated by removing the impact of preferred stock redemptions from adjusted net income. Adjusted diluted earnings per share is calculated by dividing adjusted net income available to common stockholders by the weighted average diluted common shares outstanding.
Common equity tier 1 and the common equity tier 1 ratio are defined by regulatory capital rules. Adjusted CET 1 is calculated by subtracting net unrealized losses, net of tax, on securities from CET 1 capital and provided to reflect management’s assessment of capital impacts from net unrealized losses on securities.
Management believes the presentation of these financial measures adjusting the impact of these items provides useful supplemental information that is essential to a properenhance investors’ overall understanding of thesuch financial results and operating performance of the Company.performance. This disclosure should not be viewed as a substitute for results determined in accordance with GAAP. The methodology for determining these non-GAAP measures may differ among companies and may not be comparable. We used the following non-GAAP measures in this Quarterly Report on Form 10-Q:
•Return on average tangible common equity, tangible common equity ratio, and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP nor is it necessarily comparablemeasures of return on average equity, equity to assets ratio, and book value per common share, respectively. The reconciliations of these non-GAAP performance measures that may beto the GAAP measures are presented by other companies.
Thein the following tables provide reconciliationsfor and as of the non-GAAP measures with financial measures definedperiods presented.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, | | December 31, | | March 31, | | |
| Return on Average Tangible Common Equity | 2024 | | 2023 | | 2023 | | | | |
| | (Dollars in thousands) |
| Net earnings (loss) | $ | 30,852 | | | $ | (482,955) | | | $ | (1,195,424) | | | | | |
| | | | | | | | | | |
| Earnings (loss) before income taxes | $ | 42,400 | | | $ | (659,989) | | | $ | (1,260,340) | | | | | |
| Add: | Intangible asset amortization | 8,404 | | | 4,230 | | | 2,411 | | | | | |
| Add: | Goodwill impairment | — | | | — | | | 1,376,736 | | | | | |
| Adjusted earnings (loss) before income taxes | 50,804 | | | (655,759) | | | 118,807 | | | | | |
Adjusted income tax expense (benefit) (1) | 13,819 | | | (175,743) | | | 33,741 | | | | | |
| Adjusted net earnings (loss) | 36,985 | | | (480,016) | | | 85,066 | | | | | |
| Less: | Preferred stock dividends | 9,947 | | | 9,947 | | | 9,947 | | | | | |
| Adjusted net earnings (loss) available to | | | | | | | | | |
| common and equivalent stockholders | $ | 27,038 | | | $ | (489,963) | | | $ | 75,119 | | | | | |
| | | | | | | | | | |
| Average stockholders' equity | $ | 3,390,532 | | | $ | 2,797,784 | | | $ | 3,998,687 | | | | | |
| Less: | Average intangible assets | 360,680 | | | 89,041 | | | 1,391,857 | | | | | |
| Less: | Average preferred stock | 498,516 | | | 498,516 | | | 498,516 | | | | | |
| Average tangible common equity | $ | 2,531,336 | | | $ | 2,210,227 | | | $ | 2,108,314 | | | | | |
| | | | | | | | | | |
Return on average equity (2) | 3.66 | % | | (68.49) | % | | (121.24) | % | | | | |
Return on average tangible common equity (3) | 4.30 | % | | (87.95) | % | | 14.45 | % | | | | |
(1) Effective tax rates of 27.2% and 26.8% used for the effect of the three months ended March 31, 2024 and December 31, 2023; adjusted effective tax rate of 28.4% used for the three months ended March 31, 2023 to normalize goodwill impairment.
(2) Annualized net earnings (loss) divided by GAAP.average stockholders' equity.
| | | | | | | | | | | | | | | | | |
($ in thousands, except per share data)
(Unaudited) | June 30,
2023 | | December 31,
2022 | | | | | | |
| Tangible common equity, and tangible common equity to tangible assets ratio | | | | | | | | | |
| Total assets | $ | 9,370,265 | | | $ | 9,197,016 | | | | | | | |
| Less goodwill | (114,312) | | | (114,312) | | | | | | | |
| Less other intangible assets | (6,603) | | | (7,526) | | | | | | | |
Tangible assets(1) | $ | 9,249,350 | | | $ | 9,075,178 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total stockholders' equity | $ | 957,054 | | | $ | 959,618 | | | | | | | |
| Less goodwill | (114,312) | | | (114,312) | | | | | | | |
| Less other intangible assets | (6,603) | | | (7,526) | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Tangible common equity(1) | $ | 836,139 | | | $ | 837,780 | | | | | | | |
| | | | | | | | | |
| Total stockholders' equity to total assets | 10.21 | % | | 10.43 | % | | | | | | |
| | | | | | | | | |
Tangible common equity to tangible assets(1) | 9.04 | % | | 9.23 | % | | | | | | |
| | | | | | | | | |
| Common shares outstanding | 56,944,706 | | | 58,544,534 | | | | | | | |
| Class B non-voting non-convertible common shares outstanding | 477,321 | | | 477,321 | | | | | | | |
| Total common shares outstanding | 57,422,027 | | | 59,021,855 | | | | | | | |
| | | | | | | | | |
| Book value per common share | $ | 16.67 | | | $ | 16.26 | | | | | | | |
Tangible common equity per common share(1) | $ | 14.56 | | | $ | 14.19 | | | | | | | |
(1)Non-GAAP measure.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended June 30, |
($ in thousands)
(Unaudited) | June 30,
2023 | | March 31,
2023 | | | | | | June 30,
2022 | | 2023 | | 2022 |
| Return on tangible common equity | | | | | | | | | | | | | |
| Average total stockholders' equity | $ | 997,049 | | | $ | 1,004,794 | | | | | | | $ | 969,885 | | | $ | 1,000,900 | | | $ | 1,009,677 | |
| Less average preferred stock | — | | | — | | | | | | | — | | | — | | | (37,773) | |
| Average total common stockholders' equity | 997,049 | | | 1,004,794 | | | | | | | 969,885 | | | 1,000,900 | | | 971,904 | |
| Less average goodwill | (114,312) | | | (114,312) | | | | | | | (95,127) | | | (114,312) | | | (94,719) | |
| Less average other intangibles | (6,885) | | | (7,355) | | | | | | | (4,869) | | | (7,119) | | | (5,543) | |
Average tangible common equity(1) | $ | 875,852 | | | $ | 883,127 | | | | | | | $ | 869,889 | | | $ | 879,469 | | | $ | 871,642 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income available to common stockholders | $ | 17,879 | | | $ | 20,278 | | | | | | | $ | 26,712 | | | $ | 38,157 | | | $ | 70,057 | |
| Add amortization of other intangibles | 462 | | | 461 | | | | | | | 313 | | | 923 | | | 754 | |
| | | | | | | | | | | | | |
Less tax effect on amortization of other intangibles(2) | (137) | | | (136) | | | | | | | (93) | | | (273) | | | (223) | |
Net income available to common stockholders(1) | $ | 18,204 | | | $ | 20,603 | | | | | | | $ | 26,932 | | | $ | 38,807 | | | $ | 70,588 | |
| | | | | | | | | | | | | |
| Return on average equity | 7.19 | % | | 8.18 | % | | | | | | 11.05 | % | | 7.69 | % | | 15.02 | % |
Return on average tangible common equity(1) | 8.34 | % | | 9.46 | % | | | | | | 12.42 | % | | 8.90 | % | | 16.33 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1)Non-GAAP measure.
(2)Adjustments shown net of a statutory Federal tax rate of 29.6%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended June 30, |
($ in thousands)
(Unaudited) | June 30,
2023 | | March 31,
2023 | | | | | | June 30,
2022 | | 2023 | | 2022 |
| Adjusted noninterest income | | | | | | | | | | | | | |
| Total noninterest income | $ | 6,024 | | | $ | 7,859 | | | | | | | $ | 7,186 | | | $ | 13,883 | | | $ | 13,096 | |
| Noninterest income adjustments: | | | | | | | | | | | | | |
| Net loss (gain) on securities available-for-sale | — | | | — | | | | | | | — | | | — | | | (16) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total noninterest income adjustments | — | | | — | | | | | | | — | | | — | | | (16) | |
Adjusted noninterest income(1) | $ | 6,024 | | | $ | 7,859 | | | | | | | $ | 7,186 | | | $ | 13,883 | | | $ | 13,080 | |
| | | | | | | | | | | | | |
| Adjusted noninterest expense | | | | | | | | | | | | | |
| Total noninterest expense | $ | 49,132 | | | $ | 51,239 | | | | | | | $ | 48,612 | | | $ | 100,371 | | | $ | 95,208 | |
| Noninterest expense adjustments: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Indemnified legal (fees) recoveries | (752) | | | (380) | | | | | | | (455) | | | (1,132) | | | (349) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Noninterest expense adjustments before (loss) gain in alternative energy partnership investments | (752) | | | (380) | | | | | | | (455) | | | (1,132) | | | (349) | |
| (Loss) gain in alternative energy partnership investments | 36 | | | (1,618) | | | | | | | (1,043) | | | (1,582) | | | (1,201) | |
| Total noninterest expense adjustments | (716) | | | (1,998) | | | | | | | (1,498) | | | (2,714) | | | (1,550) | |
Adjusted noninterest expense(1) | $ | 48,416 | | | $ | 49,241 | | | | | | | $ | 47,114 | | | $ | 97,657 | | | $ | 93,658 | |
| | | | | | | | | | | | | |
| Average assets | $ | 9,611,239 | | | $ | 9,317,209 | | | | | | | $ | 9,342,696 | | | $ | 9,465,035 | | | $ | 9,367,364 | |
| Noninterest income to total revenue | 7.96 | % | | 9.71 | % | | | | | | 8.41 | % | | 8.87 | % | | 7.80 | % |
Adjusted noninterest income to adjusted total revenue(1) | 7.96 | % | | 9.71 | % | | | | | | 8.41 | % | | 8.87 | % | | 7.79 | % |
Noninterest expense to average total assets(2) | 2.05 | % | | 2.23 | % | | | | | | 2.09 | % | | 2.14 | % | | 2.05 | % |
Adjusted noninterest expense to average total assets(1)(2) | 2.02 | % | | 2.14 | % | | | | | | 2.02 | % | | 2.08 | % | | 2.02 | % |
(1)Non-GAAP measure.
(2)Ratio presented on an annualized basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended June 30, |
($ in thousands)
(Unaudited) | June 30,
2023 | | March 31,
2023 | | | | | | June 30,
2022 | | 2023 | | 2022 |
| Adjusted pre-tax pre-provision income | | | | | | | | | | | | | |
| Net interest income | $ | 69,632 | | | $ | 73,053 | | | | | | | $ | 78,299 | | | $ | 142,685 | | | $ | 154,740 | |
| Noninterest income | 6,024 | | | 7,859 | | | | | | | 7,186 | | | 13,883 | | | 13,096 | |
| Total revenue | 75,656 | | | 80,912 | | | | | | | 85,485 | | | 156,568 | | | 167,836 | |
| Noninterest expense | 49,132 | | | 51,239 | | | | | | | 48,612 | | | 100,371 | | | 95,208 | |
Pre-tax pre-provision income(1) | $ | 26,524 | | | $ | 29,673 | | | | | | | $ | 36,873 | | | $ | 56,197 | | | $ | 72,628 | |
| | | | | | | | | | | | | |
| Total revenue | $ | 75,656 | | | $ | 80,912 | | | | | | | $ | 85,485 | | | $ | 156,568 | | | $ | 167,836 | |
| Total noninterest income adjustments | — | | | — | | | | | | | — | | | — | | | (16) | |
Adjusted total revenue(1) | 75,656 | | | 80,912 | | | | | | | 85,485 | | | 156,568 | | | 167,820 | |
| | | | | | | | | | | | | |
| Noninterest expense | 49,132 | | | 51,239 | | | | | | | 48,612 | | | 100,371 | | | 95,208 | |
| Total noninterest expense adjustments | (716) | | | (1,998) | | | | | | | (1,498) | | | (2,714) | | | (1,550) | |
Adjusted noninterest expense(1) | 48,416 | | | 49,241 | | | | | | | 47,114 | | | 97,657 | | | 93,658 | |
Adjusted pre-tax pre-provision income(1) | $ | 27,240 | | | $ | 31,671 | | | | | | | $ | 38,371 | | | $ | 58,911 | | | $ | 74,162 | |
| | | | | | | | | | | | | |
| Average assets | $ | 9,611,239 | | | $ | 9,317,209 | | | | | | | $ | 9,342,696 | | | $ | 9,465,035 | | | $ | 9,367,364 | |
Pre-tax pre-provision income ROAA(1)(2) | 1.11 | % | | 1.29 | % | | | | | | 1.58 | % | | 1.20 | % | | 1.56 | % |
Adjusted pre-tax pre-provision income ROAA(1)(2) | 1.14 | % | | 1.38 | % | | | | | | 1.65 | % | | 1.26 | % | | 1.60 | % |
Efficiency ratio(1)(2) | 64.94 | % | | 63.33 | % | | | | | | 56.87 | % | | 64.11 | % | | 56.73 | % |
Adjusted efficiency ratio(1)(2) | 63.99 | % | | 60.86 | % | | | | | | 55.11 | % | | 62.37 | % | | 55.81 | % |
(1)Non-GAAP measure.
(2)Ratio presented on an annualized basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended June 30, |
($ in thousands)
(Unaudited) | June 30,
2023 | | March 31,
2023 | | | | | | June 30,
2022 | | 2023 | | 2022 |
| Adjusted net income | | | | | | | | | | | | | |
Net income(1) | $ | 17,879 | | | $ | 20,278 | | | | | | | $ | 26,712 | | | $ | 38,157 | | | $ | 75,224 | |
| Adjustments: | | | | | | | | | | | | | |
| Noninterest income | — | | | — | | | | | | | — | | | — | | | (16) | |
| Noninterest expense adjustments | 716 | | | 1,998 | | | | | | | 1,498 | | | 2,714 | | | 1,550 | |
| | | | | | | | | | | | | |
Tax impact of adjustments above(2) | (212) | | | (591) | | | | | | | (443) | | | (802) | | | (454) | |
| | | | | | | | | | | | | |
| Adjustments to net income | 504 | | | 1,407 | | | | | | | 1,055 | | | 1,912 | | | 1,080 | |
Adjusted net income(1)(3) | $ | 18,383 | | | $ | 21,685 | | | | | | | $ | 27,767 | | | $ | 40,069 | | | $ | 76,304 | |
| | | | | | | | | | | | | |
| Average assets | $ | 9,611,239 | | | $ | 9,317,209 | | | | | | | $ | 9,342,696 | | | $ | 9,465,035 | | | $ | 9,367,364 | |
ROAA(4) | 0.75 | % | | 0.88 | % | | | | | | 1.15 | % | | 0.81 | % | | 1.62 | % |
Adjusted ROAA(3)(4) | 0.77 | % | | 0.94 | % | | | | | | 1.19 | % | | 0.85 | % | | 1.64 | % |
| | | | | | | | | | | | | |
| Adjusted net income available to common stockholders | | | | | | | | | | | | | |
| Net income available to common stockholders | $ | 17,879 | | | $ | 20,278 | | | | | | | $ | 26,712 | | | $ | 38,157 | | | $ | 70,057 | |
| Adjustments to net income | 504 | | | 1,407 | | | | | | | 1,055 | | | 1,912 | | | 1,080 | |
| Adjustments for impact of preferred stock redemption | — | | | — | | | | | | | — | | | — | | | 3,747 | |
Adjusted net income available to common stockholders(3) | $ | 18,383 | | | $ | 21,685 | | | | | | | $ | 27,767 | | | $ | 40,069 | | | $ | 74,884 | |
| | | | | | | | | | | | | |
| Average diluted common shares | 58,026,007 | | | 59,206,619 | | | | | | | 61,600,615 | | | 58,600,313 | | | 62,248,376 | |
| Diluted EPS | $ | 0.31 | | | $ | 0.34 | | | | | | | $ | 0.43 | | | $ | 0.65 | | | $ | 1.13 | |
Adjusted diluted EPS(3)(5) | $ | 0.32 | | | $ | 0.37 | | | | | | | $ | 0.45 | | | $ | 0.68 | | | $ | 1.20 | |
| | | | | | | | | | | |
| Tangible Common Equity to Tangible Assets and | March 31, | | December 31, |
| Tangible Book Value Per Common Share | 2024 | | 2023 |
| (Dollars in thousands, except per share data) |
| Stockholders’ equity | $ | 3,394,150 | | | $ | 3,390,765 | |
| Less: Preferred stock | 498,516 | | | 498,516 | |
| Total common equity | 2,895,634 | | | 2,892,249 | |
| Less: Intangible assets | 355,853 | | | 364,104 | |
| Tangible common equity | $ | 2,539,781 | | | $ | 2,528,145 | |
| | | |
| Total assets | $ | 36,073,516 | | | $ | 38,534,064 | |
| Less: Intangible assets | 355,853 | | | 364,104 | |
| Tangible assets | $ | 35,717,663 | | | $ | 38,169,960 | |
| | | |
| Total stockholders' equity to total assets ratio | 9.41 | % | | 8.80 | % |
| Tangible common equity to tangible assets ratio | 7.11 | % | | 6.62 | % |
Book value per common share (1) | $ | 17.13 | | | $ | 17.12 | |
Tangible book value per common share (2) | $ | 15.03 | | | $ | 14.96 | |
Common and equivalent shares outstanding (3) | 169,013,629 | | | 168,959,063 | |
(1)_______________________________________Net income and adjusted net income for the six months ended June 30, 2022 includes a $31.3 million pre-tax reversal of credit losses due to the recovery from the settlement of a previously charged-off loan; there is no similar recovery in any of the other periods presented. The Bank previously recognized a $35.1 million charge-off for this loan during the third quarter of 2019.
(2)Tax impact of adjustments shown at an effective tax rate of 29.6%.
(3)Non-GAAP measure.
(4)Ratio presented on an annualized basis.
(5)Represents adjusted net income available to(1) Total common stockholdersequity divided by average diluted common shares.and equivalent shares outstanding.
(2) Tangible common equity divided by common and equivalent shares outstanding.
(3) Common and equivalent shares outstanding include non-voting common stock equivalents that are participating securities.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| Noninterest Income to Total Revenue and | March 31, | | December 31, | | March 31, | | |
| Adjusted Noninterest Expense to Average Assets | 2024 | | 2023 | | 2023 | | | | |
| | (Dollars in thousands) |
| Net interest income | $ | 229,102 | | | $ | 151,051 | | | $ | 279,272 | | | | | |
| Noninterest income (loss) | 33,816 | | | (400,402) | | | 36,391 | | | | | |
| Total revenue | $ | 262,918 | | | $ | (249,351) | | | $ | 315,663 | | | | | |
| | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | |
| Noninterest expense | $ | 210,518 | | | $ | 363,638 | | | $ | 1,573,003 | | | | | |
| Less: | FDIC special assessment | (4,814) | | | (32,746) | | | — | | | | | |
| Less: | Acquisition, integration, and | | | | | | | | | |
| reorganization costs | — | | | (111,800) | | | (8,514) | | | | | |
| Less: | Goodwill impairment | — | | | — | | | (1,376,736) | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Adjusted noninterest expense | $ | 205,704 | | | $ | 219,092 | | | $ | 187,753 | | | | | |
| | | | | | | | | | |
| Average total assets | $ | 37,540,707 | | | $ | 37,640,387 | | | $ | 42,768,714 | | | | | |
| | | | | | | | | | |
| Noninterest income (loss) to total revenue | 12.86 | % | | 160.58 | % | | 11.53 | % | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Noninterest expense to average total assets | 2.26 | % | | 3.83 | % | | 14.92 | % | | | | |
| | | | | | | | | | |
| Adjusted noninterest expense to average total assets | 2.20 | % | | 2.31 | % | | 1.78 | % | | | | |
| | | | | | | | | | |
| | | | | | | |
($ in thousands)
(Unaudited) | June 30,
2023 | | |
Adjusted Common Equity Tier 1 (CET 1) capital(1)
| | | |
CET 1 capital | $ | 892,009 | | | |
Less unrealized loss on AFS securities, net of tax | (38,103) | | | |
Less unrealized loss on HTM securities, net of tax | (43,197) | | | |
Adjusted CET 1 capital(2)
| $ | 810,709 | | | |
| | | |
Unrealized loss on AFS securities, net of tax, to CET 1 capital | 4.27 | % | | |
| | | |
Total unrealized loss on AFS and HTM securities, net of tax, to CET 1 capital | 9.11 | % | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
(1)June 30, 2023 presented to reflect management’s assessment of capital impact from net unrealized losses on securities. Tax rate of 29.6% used for calculation purposes.
(2)Non-GAAP measure.
63
| | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Adjusted Net Earnings, Net Earnings Available to | March 31, | | December 31, | | March 31, |
| Common and Equivalent Stockholders, and Diluted EPS | 2024 | | 2023 | | 2023 |
| (In thousands, except per share amounts) |
| Earning (loss) before income taxes | $ | 42,400 | | | $ | (659,989) | | | $ | (1,260,340) | |
| Add: FDIC assessment | 4,814 | | | 32,746 | | | — | |
| Add: Loss on sale of securities | — | | | 442,413 | | | — | |
| Add: Acquisition, integration, and reorganization | | | | | |
| costs | — | | | 111,800 | | | 8,514 | |
| Add: Goodwill impairment | — | | | — | | | 1,376,736 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Adjusted earnings (loss) before income taxes | 47,214 | | | (73,030) | | | 124,910 | |
Adjusted income tax expense (1) | 12,842 | | | (19,572) | | | 35,474 | |
| Adjusted net earnings (loss) | 34,372 | | | (53,458) | | | 89,436 | |
| Less: Preferred stock dividends | (9,947) | | | (9,947) | | | (9,947) | |
| Adjusted net earnings (loss) available to common | | | | | |
| and equivalent stockholders | $ | 24,425 | | | $ | (63,405) | | | $ | 79,489 | |
| | | | | |
| Weighted average common shares outstanding | 168,143 | | | 108,290 | | | 77,468 | |
| Diluted earnings (loss) per common share | $ | 0.12 | | | $ | (4.55) | | | $ | (15.56) | |
Adjusted diluted earnings (loss) per common share (2) | $ | 0.15 | | | $ | (0.59) | | | $ | 1.03 | |
(1) Effective tax rates of 27.2% and 26.8% used for the effect of the three months ended March 31, 2024 and December 31, 2023; adjusted effective tax rate of 28.4% used for the three months ended March 31, 2023 to normalize goodwill impairment.
(2) Adjusted net earnings (loss) available to common and equivalent stockholders divided by weighted average common shares outstanding.
RESULTS OF OPERATIONSResults of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | March 31, | | |
| 2024 | | 2023 | | 2023 | | | | |
| (Dollars in thousands, except per share data) |
| Earnings Summary: | | | | | | | | | |
| Interest income | $ | 478,704 | | | $ | 467,240 | | | $ | 517,788 | | | | | |
| Interest expense | (249,602) | | | (316,189) | | | (238,516) | | | | | |
| Net interest income | 229,102 | | | 151,051 | | | 279,272 | | | | | |
| Provision for credit losses | (10,000) | | | (47,000) | | | (3,000) | | | | | |
| Noninterest income (loss) | 33,816 | | | (400,402) | | | 36,391 | | | | | |
| Operating expense | (210,518) | | | (251,838) | | | (187,753) | | | | | |
| Acquisition, integration and reorganization costs | — | | | (111,800) | | | (8,514) | | | | | |
| Goodwill impairment | — | | | — | | | (1,376,736) | | | | | |
| | | | | | | | | |
| Earnings (loss) before income taxes | 42,400 | | | (659,989) | | | (1,260,340) | | | | | |
| Income tax (expense) benefit | (11,548) | | | 177,034 | | | 64,916 | | | | | |
| Net earnings (loss) | 30,852 | | | (482,955) | | | (1,195,424) | | | | | |
| Preferred stock dividends | (9,947) | | | (9,947) | | | (9,947) | | | | | |
| Net earnings (loss) available to | | | | | | | | | |
| common and equivalent stockholders | $ | 20,905 | | | $ | (492,902) | | | $ | (1,205,371) | | | | | |
| | | | | | | | | |
| Per Common Share Data: | | | | | | | | | |
Diluted earnings (loss) per share(1) | $ | 0.12 | | | $ | (4.55) | | | $ | (15.56) | | | | | |
Book value per share(1) | $ | 17.13 | | | $ | 17.12 | | | $ | 28.78 | | | | | |
Tangible book value per share (1)(2) | $ | 15.03 | | | $ | 14.96 | | | $ | 28.41 | | | | | |
| | | | | | | | | |
| Performance Ratios: | | | | | | | | | |
| Return on average assets | 0.33 | % | | (5.09) | % | | (11.34) | % | | | | |
Return on average tangible common equity (1) | 4.30 | % | | (87.95) | % | | 14.45 | % | | | | |
| Net interest margin (tax equivalent) | 2.66 | % | | 1.69 | % | | 2.89 | % | | | | |
| Yield on average loans and leases (tax equivalent) | 6.08 | % | | 5.82 | % | | 6.14 | % | | | | |
| Cost of average total deposits | 2.66 | % | | 2.94 | % | | 1.98 | % | | | | |
| Noninterest expense to average total assets | 2.26 | % | | 3.83 | % | | 14.92 | % | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Capital Ratios (consolidated): | | | | | | | | | |
| Common equity tier 1 capital ratio | 10.09 | % | | 10.14 | % | | 9.21 | % | | | | |
| Tier 1 capital ratio | 12.38 | % | | 12.44 | % | | 11.15 | % | | | | |
| Total capital ratio | 16.40 | % | | 16.43 | % | | 14.21 | % | | | | |
| Tier 1 leverage capital ratio | 9.12 | % | | 9.00 | % | | 8.33 | % | | | | |
| Risk-weighted assets | $ | 27,513,193 | | | $ | 27,338,852 | | | $ | 32,507,454 | | | | | |
_____________________________
(1) Shares include non-voting common stock equivalents that are participating securities.
(2) See "- Non-GAAP Financial Measurements."
First Quarter of 2024 Compared to Fourth Quarter of 2023
Net earnings available to common and equivalent stockholders for the first quarter of 2024 was $20.9 million, or $0.12 per diluted share, compared to a net loss available to common and equivalent stockholders for the fourth quarter of 2023 of $492.9 million, or a loss of $4.55 per diluted share. The $513.8 million increase in net earnings available to common and equivalent stockholders from the fourth quarter of 2023 was due to the fourth quarter of 2023 including pre-tax amounts of $442.4 million of losses on security sales relating to our balance sheet repositioning strategy, merger costs of $111.8 million, and an FDIC special assessment of $32.7 million.
First Quarter of 2024 Compared to First Quarter of 2023
Net earnings available to common and equivalent stockholders for the first quarter of 2024 was $20.9 million, or $0.12 per diluted share, compared to a net loss available to common and equivalent stockholders for the first quarter of 2023 of $1.2 billion, or a loss of $15.56 per diluted share. The $1.2 billion increase in net earnings available to common and equivalent stockholders from the first quarter of 2023 was due mainly to a $1.36 billion decrease in noninterest expense, offset partially by a $50.2 million decrease in net interest income and a $76.5 million increase in income tax expense. The decrease in noninterest expense was due, in part, to a $1.38 billion goodwill impairment charge in the first quarter of 2023. The decrease in net interest income was due primarily to our interest-bearing liabilities repricing faster than our interest-bearing assets when interest rates rapidly increased over the last year. Also, the mix of our interest-bearing liabilities changed significantly to higher-cost borrowings and brokered deposits from lower-cost customer deposits, as the closure of three banks in the first half of 2023 caused an outflow of such lower-cost customer deposits. The increase in income tax expense is due to the income tax expense recorded on earnings before taxes in the first quarter of 2024, compared to an income tax benefit recorded on a net loss before income taxes in the first quarter of 2023.
Net Interest Income
The following table presentstables summarize the distribution of average assets, liabilities, and stockholders’ equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and ratespresented on a tax equivalent basis, for the three months ended June 30, 2023, March 31, 2023 and June 30, 2022:periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2023 | | March 31, 2023 | | June 30, 2022 |
| ($ in thousands) | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/
Cost | | Average Balance | | Interest and Dividends | | Yield/Cost |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Total loans(1)(2) | | $ | 7,061,016 | | | $ | 92,889 | | | 5.28 | % | | $ | 6,994,958 | | | $ | 87,418 | | | 5.07 | % | | $ | 7,269,655 | | | $ | 78,895 | | | 4.35 | % |
| Securities | | 1,311,362 | | | 15,804 | | | 4.83 | % | | 1,297,640 | | | 14,909 | | | 4.66 | % | | 1,216,612 | | | 8,124 | | | 2.68 | % |
Other interest-earning assets (3) | | 595,234 | | | 7,458 | | | 5.03 | % | | 389,051 | | | 4,592 | | | 4.79 | % | | 295,715 | | | 1,399 | | | 1.90 | % |
| Total interest-earning assets | | 8,967,612 | | | 116,151 | | | 5.20 | % | | 8,681,649 | | | 106,919 | | | 4.99 | % | | 8,781,982 | | | 88,418 | | | 4.04 | % |
| Allowance for loan losses | | (82,282) | | | | | | | (84,267) | | | | | | | (94,217) | | | | | |
BOLI and noninterest-earning assets (4) | | 725,909 | | | | | | | 719,827 | | | | | | | 654,931 | | | | | |
| Total assets | | $ | 9,611,239 | | | | | | | $ | 9,317,209 | | | | | | | $ | 9,342,696 | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
| Interest-bearing checking | | $ | 1,761,341 | | | 9,751 | | | 2.22 | % | | $ | 1,951,618 | | | 8,514 | | | 1.77 | % | | $ | 2,363,233 | | | 1,457 | | | 0.25 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Savings and money market | | 1,015,181 | | | 2,609 | | | 1.03 | % | | 1,070,911 | | | 2,001 | | | 0.76 | % | | 1,598,663 | | | 860 | | | 0.22 | % |
| Certificates of deposit | | 1,566,636 | | | 15,758 | | | 4.03 | % | | 1,189,658 | | | 10,012 | | | 3.41 | % | | 631,415 | | | 863 | | | 0.55 | % |
| Total interest-bearing deposits | | 4,343,158 | | | 28,118 | | | 2.60 | % | | 4,212,187 | | | 20,527 | | | 1.98 | % | | 4,593,311 | | | 3,180 | | | 0.28 | % |
| FHLB advances and FRB borrowings | | 1,441,244 | | | 14,703 | | | 4.09 | % | | 1,067,125 | | | 9,648 | | | 3.67 | % | | 485,629 | | | 3,114 | | | 2.57 | % |
| | | | | | | | | | | | | | | | | | |
| Other borrowings | | 358 | | | 3 | | | 3.36 | % | | 4,773 | | | 57 | | | 4.84 | % | | 117,688 | | | 325 | | | 1.11 | % |
| Long-term debt | | 275,012 | | | 3,695 | | | 5.39 | % | | 274,939 | | | 3,634 | | | 5.36 | % | | 274,515 | | | 3,500 | | | 5.11 | % |
| Total interest-bearing liabilities | | 6,059,772 | | | 46,519 | | | 3.08 | % | | 5,559,024 | | | 33,866 | | | 2.47 | % | | 5,471,143 | | | 10,119 | | | 0.74 | % |
| Noninterest-bearing deposits | | 2,425,719 | | | | | | | 2,617,973 | | | | | | | 2,804,877 | | | | | |
| Noninterest-bearing liabilities | | 128,699 | | | | | | | 135,418 | | | | | | | 96,791 | | | | | |
| Total liabilities | | 8,614,190 | | | | | | | 8,312,415 | | | | | | | 8,372,811 | | | | | |
| Total stockholders’ equity | | 997,049 | | | | | | | 1,004,794 | | | | | | | 969,885 | | | | | |
| Total liabilities and stockholders’ equity | | $ | 9,611,239 | | | | | | | $ | 9,317,209 | | | | | | | $ | 9,342,696 | | | | | |
| Net interest income/spread | | | | $ | 69,632 | | | 2.12 | % | | | | $ | 73,053 | | | 2.52 | % | | | | $ | 78,299 | | | 3.30 | % |
Net interest margin (5) | | | | | | 3.11 | % | | | | | | 3.41 | % | | | | | | 3.58 | % |
| | | | | | | | | | | | | | | | | | |
| Ratio of interest-earning assets to interest-bearing liabilities | | 148 | % | | | | | | 156 | % | | | | | | 161 | % | | | | |
Total deposits(6) | | 6,768,877 | | | 28,118 | | | 1.67 | % | | 6,830,160 | | | 20,527 | | | 1.22 | % | | 7,398,188 | | | 3,180 | | | 0.17 | % |
Total funding (7) | | 8,485,491 | | | 46,519 | | | 2.20 | % | | 8,176,997 | | | 33,866 | | | 1.68 | % | | 8,276,020 | | | 10,119 | | | 0.49 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, 2024 | | December 31, 2023 | | March 31, 2023 | | | | |
| | Interest | Yields | | | Interest | Yields | | | Interest | Yields | | | | |
| Average | Income/ | and | | Average | Income/ | and | | Average | Income/ | and | | | | |
| Balance | Expense | Rates | | Balance | Expense | Rates | | Balance | Expense | Rates | | | | |
| (Dollars in thousands) | | | | |
| ASSETS: | | | | | | | | | | | | | | | |
Loans and leases (1)(2)(3) | $ | 25,518,590 | | $ | 385,465 | | 6.08 | % | | $ | 23,608,246 | | $ | 346,308 | | 5.82 | % | | $ | 28,583,265 | | $ | 433,029 | | 6.14 | % | | | | |
| Investment securities | 4,721,556 | | 34,303 | | 2.92 | % | | 6,024,737 | | 41,280 | | 2.72 | % | | 7,191,362 | | 44,237 | | 2.49 | % | | | | |
| Deposits in financial institutions | 4,374,968 | | 58,936 | | 5.42 | % | | 5,791,739 | | 79,652 | | 5.46 | % | | 3,682,228 | | 42,866 | | 4.72 | % | | | | |
Total interest‑earning assets (1) | 34,615,114 | | 478,704 | | 5.56 | % | | 35,424,722 | | 467,240 | | 5.23 | % | | 39,456,855 | | 520,132 | | 5.35 | % | | | | |
| Other assets | 2,925,593 | | | | | 2,215,665 | | | | | 3,311,859 | | | | | | | |
| Total assets | $ | 37,540,707 | | | | | $ | 37,640,387 | | | | | $ | 42,768,714 | | | | | | | |
| | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | | | | | | | | | | | | |
| Interest checking | $ | 7,883,177 | | 61,549 | | 3.14 | % | | $ | 7,296,234 | | 60,743 | | 3.30 | % | | $ | 7,089,102 | | 55,957 | | 3.20 | % | | | | |
| Money market | 5,737,837 | | 41,351 | | 2.90 | % | | 5,758,074 | | 44,279 | | 3.05 | % | | 8,932,059 | | 56,224 | | 2.55 | % | | | | |
| Savings | 2,036,129 | | 18,030 | | 3.56 | % | | 1,696,222 | | 16,446 | | 3.85 | % | | 597,287 | | 599 | | 0.41 | % | | | | |
| Time | 6,108,321 | | 73,877 | | 4.86 | % | | 6,915,504 | | 86,292 | | 4.95 | % | | 5,123,955 | | 43,112 | | 3.41 | % | | | | |
| Total interest‑bearing deposits | 21,765,464 | | 194,807 | | 3.60 | % | | 21,666,034 | | 207,760 | | 3.80 | % | | 21,742,403 | | 155,892 | | 2.91 | % | | | | |
| Borrowings | 2,892,406 | | 38,124 | | 5.30 | % | | 5,229,425 | | 92,474 | | 7.02 | % | | 5,289,429 | | 69,122 | | 5.30 | % | | | | |
| Subordinated debt | 937,005 | | 16,671 | | 7.16 | % | | 894,219 | | 15,955 | | 7.08 | % | | 867,637 | | 13,502 | | 6.31 | % | | | | |
| Total interest‑bearing liabilities | 25,594,875 | | 249,602 | | 3.92 | % | | 27,789,678 | | 316,189 | | 4.51 | % | | 27,899,469 | | 238,516 | | 3.47 | % | | | | |
| Noninterest‑bearing demand deposits | 7,685,027 | | | | | 6,326,511 | | | | | 10,233,434 | | | | | | | |
| Other liabilities | 870,273 | | | | | 726,414 | | | | | 637,124 | | | | | | | |
| Total liabilities | 34,150,175 | | | | | 34,842,603 | | | | | 38,770,027 | | | | | | | |
| Stockholders’ equity | 3,390,532 | | | | | 2,797,784 | | | | | 3,998,687 | | | | | | | |
| Total liabilities and stockholders' equity | $ | 37,540,707 | | | | | $ | 37,640,387 | | | | | $ | 42,768,714 | | | | | | | |
Net interest income (1) | | $ | 229,102 | | | | | $ | 151,051 | | | | | $ | 281,616 | | | | | | |
| Net interest rate | | | | | | | | | | | | | | | |
spread (1) | | | 1.64 | % | | | | 0.72 | % | | | | 1.88 | % | | | | |
Net interest margin (1) | | | 2.66 | % | | | | 1.69 | % | | | | 2.89 | % | | | | |
| | | | | | | | | | | | | | | |
Total deposits (4) | $ | 29,450,491 | | $ | 194,807 | | 2.66 | % | | $ | 27,992,545 | | $ | 207,760 | | 2.94 | % | | $ | 31,975,837 | | $ | 155,892 | | 1.98 | % | | | | |
Total funds (5) | $ | 33,279,902 | | $ | 249,602 | | 3.02 | % | | $ | 34,116,189 | | $ | 316,189 | | 3.68 | % | | $ | 38,132,903 | | $ | 238,516 | | 2.54 | % | | | | |
_____________________
(1) Tax equivalent.
(1)(2) IncludesIncludes average loans held for sale net loan discount accretion of $4.4 million, $4.3$22.4 million and $3.6$15.7 million for the three months ended June 30, 2023, March 31, 2024 and December 31, 2023 and June 30, 2022,which are included in other assets in the accompanying consolidated statementsnet loan premium amortization of financial condition.
(2)Total loans are net of deferred fees, related direct costs, premiums and discounts, but exclude the ACL. Nonaccrual loans are included in the average balance. Interest income includes net (amortization) accretion of deferred loan (costs) fees and purchased (premiums) discounts of $(1.0) million, $0.3 million and $(0.2) millionfor the three months ended June 30, 2023, March 31, 2023 and June 30, 2022.
(3)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions.
(4)Includes average balance of bank-owned life insurance of $128.4 million, $127.4 million and $124.8$2.8 million for the three months ended June 30,March 31, 2023.
(3) Includes tax-equivalent adjustments of $0.0 million, $0.0 million, and $2.3 million for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023 and June 30, 2022.related to tax-exempt income on loans. The federal statutory rate utilized was 21%.
(5)Annualized net interest income divided by average interest-earning assets.
(6)(4) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized total interest expense on total deposits divided by average total deposits.
(7)(5) Total fundingfunds is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of total fundingfunds is calculated as annualized total interest expense divided by average total funding.funds.
Three Months Ended June 30, 2023
67
First Quarter of 2024 Compared to Three Months Ended March 31,Fourth Quarter of 2023
Net interest income increased by $78.1 million to $229.1 million for the first quarter of 2024 compared to $151.1 million for the fourth quarter of 2023 due to lower borrowing balances and costs, higher asset yields that were driven by changes in the interest-earning asset mix, and lower deposit costs.
The NIM was 2.66% for the first quarter of 2024 compared to 1.69% for the fourth quarter of 2023. The increase in the NIM was due to the average yield on interest-earning assets increasing by 33 basis points, while the average total cost of funds decreased by 66 basis points, which was positively impacted by an increase in average noninterest-bearing deposits. The average yield on interest-earning assets increased by 33 basis points to 5.56% for the first quarter from 5.23% in the fourth quarter due mainly to the change in the interest-earning asset mix due to an increase in the average balance of loans and leases as a percentage of average interest-earning assets while the average balance of investment securities and deposits in financial institutions as a percentage of average assets decreased.
The average yield on loans and leases increased by 26 basis points to 6.08% for the first quarter of 2024 from 5.82% for the fourth quarter of 2023 as a result of higher discount accretion income and changes in portfolio mix and a full quarter benefit from the acquired loans and leases. Net loan discount accretion was $22.4 million for the first quarter compared to $15.7 million for the fourth quarter.
The average total cost of funds decreased by 66 basis points to 3.02% for the first quarter from 3.68% in the fourth quarter due mainly to decreases in higher-cost borrowings and interest-bearing deposits combined with an increase in average noninterest-bearing deposits. The average cost of interest-bearing liabilities decreased by 59 basis points to 3.92% for the first quarter from 4.51% for the fourth quarter. The average total cost of deposits decreased by 28 basis points to 2.66% for the first quarter compared to 2.94% in the fourth quarter. Average noninterest-bearing deposits increased by $1.4 billion for the first quarter compared to the fourth quarter and average total deposits increased by $1.5 billion due mainly to the acquired deposits.
First Quarter of 2024 Compared to First Quarter of 2023
Net interest income decreased $3.4by $50.2 million or 4.7%, to $69.6$229.1 million for the secondfirst quarter primarilyof 2024 compared to $279.3 million for the first quarter of 2023 due mainly to lower income on loans and leases and higher interest expense on deposits and borrowings, offset partially by higher interest income on deposits in financial institutions. The increase in interest expense was due to the impacta higher cost and balance of higher marketaverage interest-bearing liabilities. The decrease in interest rates, changes in theincome on loans and leases was attributable to a lower average balance sheet mix, and the cost of excess short-term borrowings from the FHLB and FRB related to maintaining higher levels of liquidity during the quarter, which was partially offset by higher average balances and yields on interest-earning assets.
The net interest margin decreased 30 basis points to 3.11% for the second quarter as the average cost of funds increased 52 basis points while the average interest-earning assets yield increased 21 basis points.
Thea lower yield on average interest-earning assets increased 21 basis points to 5.20%loans and leases. The tax equivalent yield on average loans and leases was 6.08% for the second quarter from 4.99% in the first quarter of 2024 compared to 6.14% for the same quarter of 2023. The increase in interest income on deposits in financial institutions was due mainly due to a higher yieldsrate paid on loans, securitiesdeposits at the Federal Reserve and other interest-earning assets. a higher average balance.
The overall loan yield increased 21 basis pointstax equivalent NIM was 2.66% for the first quarter of 2024 compared to 5.28% during2.89% for the secondcomparable quarter as a result oflast year. The decrease in the impact of higher market interest rates and changes in portfolio mix from originations and payoffs. The yield on securities increased 17 basis points to 4.83%tax equivalent NIM was due mostly to rate resetsa shift in our funding mix beginning in the CLO portfolio.
Thesecond half of March 2023 as we responded to the banking crisis to enhance liquidity and protect franchise value. Average borrowings as a percentage of average cost of funds increased 52 basis points to 2.20%interest-bearing liabilities was 11% for the second quarter from 1.68% in the first quarter drivenof 2024 compared to 19% for the first quarter of 2023. The tax-equivalent NIM was further impacted by a higher market interest ratescost of total deposits and changesborrowings and a lower yield on loans and leases, offset partially by a higher yield on deposits in the balance sheet mix. financial institutions.
The cost of average interest-bearing liabilities increased 61 basis points to 3.08%total deposits was 2.66% for the second quarter from 2.47% in the first quarter. This increase was due partially to the cost of excess short-term borrowings from the FHLB and FRB related to maintaining excess liquidity at the end of the first quarter and into the second quarter dueof 2024 compared to the operating environment. Average noninterest-bearing deposits were $192.3 million lower and average total deposits were $61.3 million lower1.98% for the second quarter.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Net interest income for the secondfirst quarter of 2023 decreased $8.7 million, or 11.1%, to $69.6 million compared to $78.3 million for the same 2022 period. Net interest income for the second quarter of 2023 was impacted by higher market interest rates, changes in the balance sheet mix, and the cost of excess short-term borrowings from the FHLB and FRB related to maintaining higher levels of liquidity during the second quarter of 2023, which was partially offset by higher average yields on interest-earning assets.
The net interest margin decreased 47 basis points to 3.11% for the second quarter of 2023 as average cost of total funding increased 171 basis points while the average interest-earning assets yield increased 116 basis points.
The yield on average interest-earning assets increased 116 basis points to 5.20% for the second quarter of 2023 from 4.04% for the same 2022 perioddue mainly due to higher market interest rates and changesa change in the mix of interest-earning assets. The yield on average loans increased 93 basis points to 5.28% compared to the same 2022 period asdeposits, resulting from a decrease in lower cost non-maturity deposits and an increase in higher cost time deposits.
result of the impact of higher market interest rates and changes in portfolio mix. The yield on securities increased 215 basis points to 4.83% for the second quarter of 2023, compared to 2.68% for the same 2022 period. Average loans represented 79% of average earnings assets for the three months ended June 30, 2023 compared to 83% for the three months ended June 30, 2022. Average loans decreased by $208.6 million due mostly to lower average warehouse balances, partially offset by loan growth within other loans categories.
The average cost of funds increased 171 basis points to 2.20% for the second quarter of 2023, from 0.49% for the same 2022 period, due mostly to higher market interest rates as the average effective Federal Funds rate increased 422 basis points to 4.99% for the second quarter of 2023 from 0.77% in the same 2022 period, changes in the balance sheet mix and the cost of excess short-term borrowings from the FHLB and FRB related to maintaining excess liquidity in 2023 due to the operating environment. The average cost of total deposits increased 150 basis points to 1.67% for the second quarter of 2023 compared to the same 2022 period. The cost of average interest-bearing liabilities increased 234 basis points to 3.08% for the second quarter of 2023 from 0.74% for the same 2022 period and included a 232 basis point increase in the cost of average interest-bearing deposits to 2.60%. Average noninterest-bearing deposits decreased $379.2 million for the second quarter of 2023 compared to the same 2022 period and average deposits decreased $629.3 million. Average noninterest-bearing deposits represented 36% of total average deposits for the second quarter of 2023 and 38% for the second quarter of 2022.
58
68
The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 |
| ($ in thousands) | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/Cost |
| Interest-earning assets: | | | | | | | | | | | | |
Total loans (1)(2) | | $ | 7,028,169 | | | $ | 180,307 | | | 5.17 | % | | $ | 7,266,234 | | | $ | 155,129 | | | 4.31 | % |
| Securities | | 1,304,539 | | | 30,713 | | | 4.75 | % | | 1,254,137 | | | 15,433 | | | 2.48 | % |
Other interest-earning assets (3) | | 492,712 | | | 12,050 | | | 4.93 | % | | 280,611 | | | 2,125 | | | 1.53 | % |
| Total interest-earning assets | | 8,825,420 | | | 223,070 | | | 5.10 | % | | 8,800,982 | | | 172,687 | | | 3.96 | % |
| Allowance for loan losses | | (83,269) | | | | | | | (93,422) | | | | | |
BOLI and noninterest-earning assets (4) | | 722,884 | | | | | | | 659,804 | | | | | |
| Total assets | | $ | 9,465,035 | | | | | | | $ | 9,367,364 | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | |
| Interest-bearing checking | | $ | 1,855,954 | | | 18,265 | | | 1.98 | % | | $ | 2,386,120 | | | 2,097 | | | 0.18 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Savings and money market | | 1,042,892 | | | 4,610 | | | 0.89 | % | | 1,635,747 | | | 1,371 | | | 0.17 | % |
| Certificates of deposit | | 1,379,188 | | | 25,770 | | | 3.77 | % | | 570,170 | | | 1,100 | | | 0.39 | % |
| Total interest-bearing deposits | | 4,278,034 | | | 48,645 | | | 2.29 | % | | 4,592,037 | | | 4,568 | | | 0.20 | % |
| FHLB advances | | 1,255,218 | | | 24,351 | | | 3.91 | % | | 472,760 | | | 6,067 | | | 2.59 | % |
| | | | | | | | | | | | |
| Other borrowings | | 2,554 | | | 59 | | | 4.66 | % | | 117,095 | | | 379 | | | 0.65 | % |
| Long-term debt | | 274,975 | | | 7,330 | | | 5.38 | % | | 274,466 | | | 6,933 | | | 5.09 | % |
| Total interest-bearing liabilities | | 5,810,781 | | | 80,385 | | | 2.79 | % | | 5,456,358 | | | 17,947 | | | 0.66 | % |
| Noninterest-bearing deposits | | 2,521,314 | | | | | | | 2,800,281 | | | | | |
| Noninterest-bearing liabilities | | 132,040 | | | | | | | 101,048 | | | | | |
| Total liabilities | | 8,464,135 | | | | | | | 8,357,687 | | | | | |
| Total stockholders’ equity | | 1,000,900 | | | | | | | 1,009,677 | | | | | |
| Total liabilities and stockholders’ equity | | $ | 9,465,035 | | | | | | | $ | 9,367,364 | | | | | |
| Net interest income/spread | | | | $ | 142,685 | | | 2.31 | % | | | | $ | 154,740 | | | 3.30 | % |
Net interest margin (5) | | | | | | 3.26 | % | | | | | | 3.55 | % |
| | | | | | | | | | | | |
| Ratio of interest-earning assets to interest-bearing liabilities | | 152 | % | | | | | | 161 | % | | | | |
Total deposits(6) | | 6,799,348 | | | 48,645 | | | 1.44 | % | | 7,392,318 | | | 4,568 | | | 0.12 | % |
Total funding (7) | | 8,332,095 | | | 80,385 | | | 1.95 | % | | 8,256,639 | | | 17,947 | | | 0.44 | % |
(1)Includes average loans held for sale of $4.4 million and $3.5 million for the six months ended June 30, 2023 and 2022, which are included in other assets in the accompanying consolidated statements of financial condition.
(2)Total loans are net of deferred fees, related direct costs, premiums and discounts, but exclude the ACL. Nonaccrual loans are included in the average balance. Interest income includes net (amortization) accretion of deferred loan (costs) fees and purchased (premiums) discounts of $(0.7) million and $(0.6) million for the six months ended June 30, 2023 and 2022 are included in interest income.
(3)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions.
(4)Includes average balance of bank-owned life insurance of $127.9 million and $124.4 million for the six months ended June 30, 2023 and 2022.
(5)Annualized net interest income divided by average interest-earning assets.
(6)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of total deposits is calculated as annualized total interest expense on 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 annualized total interest expense divided by average total funding.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Net interest income decreased $12.1 million, or 7.8%, to $142.7 million for the six months ended June 30, 2023 due primarily to higher funding costs from higher market interest rates, changes in the balance sheet mix and the conservative strategy to hold extra liquidity at the end of the first quarter and into the second quarter due to the operating environment.
The net interest margin decreased 29 basis points to 3.26% as the average cost of funds increased 151 basis points while the average interest-earning assets yield increased 114 basis points between periods.
The yield on average interest-earning assets increased 114 basis points to 5.10% for the six months ended June 30, 2023, from 3.96% for the same period in 2022 due mostly to higher market interest rates and changes in the mix of interest-earning assets. The yield on average loans increased 86 basis points to 5.17% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The yield on average investment securities increased 227 basis points for the same period. Average loans represented 80% of average earnings assets for the six months ended June 30, 2023 compared to 83% for the six months ended June 30, 2022. Average loans decreased by $238.1 million due mostly to lower average warehouse balances, partially offset by organic loan growth in other loan categories.
The average cost of funds increased 151 basis points to 1.95% for the six months ended June 30, 2023 from 0.44% for the six months ended June 30, 2022 due mostly to higher market interest rates and changes in the balance sheet mix. The average cost of total deposits increased 132 basis points to 1.44% for the six months ended June 30, 2023 compared to the same period in 2022. The cost of average interest-bearing liabilities increased 213 basis points to 2.79% for the six months ended June 30, 2023 compared to 0.66% for the same period in 2022 and included a 209 basis point increase in the cost of average interest-bearing deposits to 2.29%. The increase in the cost of these funding sources was mainly due to the impact of higher market interest rates as the average effective Federal Funds rate increased 430 basis points to 4.75% for the six months ended June 30, 2023 from 0.45% in the same period in 2022. Average noninterest-bearing deposits decreased $279.0 million for the six months ended June 30, 2023 compared to the same period in 2022 and average total deposits decreased $593.0 million. Average noninterest-bearing deposits represented 37% of total average deposits for the six months ended June 30, 2023 compared to 38% for the same period in 2022.
Rate/Volume Analysis
The following table presents the changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities. The information provided presents the changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, 2023 vs. June 30, 2022 | | Six Months Ended June 30, 2023 vs. 2022 |
| | | | | | Increase (Decrease) Due to | | Net
Increase (Decrease) | | Increase (Decrease) Due to | | Net
Increase (Decrease) |
| ($ In thousands) | | | | | | | Volume | | Rate | | | Volume | | Rate | |
| Interest and dividend income: | | | | | | | | | | | | | | | | | | |
| Total loans | | | | | | | | $ | (2,327) | | | $ | 16,321 | | | $ | 13,994 | | | $ | (5,226) | | | $ | 30,404 | | | $ | 25,178 | |
| Securities | | | | | | | | 678 | | | 7,002 | | | 7,680 | | | 645 | | | 14,635 | | | 15,280 | |
| Other interest-earning assets | | | | | | | | 2,310 | | | 3,749 | | | 6,059 | | | 2,513 | | | 7,412 | | | 9,925 | |
| Total interest and dividend income | | | | | | | | $ | 661 | | | $ | 27,072 | | | $ | 27,733 | | | $ | (2,068) | | | $ | 52,451 | | | $ | 50,383 | |
| Interest expense: | | | | | | | | | | | | | | | | | | |
| Interest-bearing checking | | | | | | | | $ | (467) | | | $ | 8,761 | | | $ | 8,294 | | | $ | (567) | | | $ | 16,735 | | | $ | 16,168 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Savings and money market | | | | | | | | (373) | | | 2,122 | | | 1,749 | | | (603) | | | 3,842 | | | 3,239 | |
| Certificates of deposit | | | | | | | | 2,822 | | | 12,073 | | | 14,895 | | | 3,465 | | | 21,205 | | | 24,670 | |
| FHLB advances and FRB borrowings | | | | | | | | 8,908 | | | 2,681 | | | 11,589 | | | 13,967 | | | 4,317 | | | 18,284 | |
| | | | | | | | | | | | | | | | | | |
| Other borrowings | | | | | | | | (542) | | | 220 | | | (322) | | | (684) | | | 364 | | | (320) | |
| Long-term debt | | | | | | | | 6 | | | 189 | | | 195 | | | 13 | | | 384 | | | 397 | |
| Total interest expense | | | | | | | | 10,354 | | | 26,046 | | | 36,400 | | | 15,591 | | | 46,847 | | | 62,438 | |
| Net interest income | | | | | | | | $ | (9,693) | | | $ | 1,026 | | | $ | (8,667) | | | $ | (17,659) | | | $ | 5,604 | | | $ | (12,055) | |
Provision for Credit Losses
The following table sets forth the details of the provision for credit losses is charged to operationson loans and is adjusted in each period to a level required to cover current expectedleases held for investment and held-to-maturity securities and information regarding credit losses in our loan portfolio and unfunded commitments.quality metrics for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | March 31, | | |
| 2024 | | 2023 | | 2023 | | | | |
| (Dollars in thousands) |
| Provision For Credit Losses: | | | | | | | | | |
| | | | | | | | | |
Addition to allowance for loan and lease losses (1) | $ | 11,000 | | | $ | 47,000 | | | $ | 18,500 | | | | | |
| | | | | | | | | |
| Reduction in reserve for unfunded loan commitments | (1,000) | | | — | | | (15,500) | | | | | |
| Total loan-related provision | $ | 10,000 | | | $ | 47,000 | | | $ | 3,000 | | | | | |
| Addition to allowances for held-to-maturity | | | | | | | | | |
| and available-for-sale securities | — | | | — | | | — | | | | | |
Total provision for credit losses (1) | $ | 10,000 | | | $ | 47,000 | | | $ | 3,000 | | | | | |
| | | | | | | | | |
| Credit Quality Metrics: | | | | | | | | | |
| | | | | | | | | |
Net charge-offs on loans and leases held for investment (2) | $ | 1,184 | | | $ | 13,233 | | | $ | 9,177 | | | | | |
| | | | | | | | | |
| Annualized net charge-offs to average loans and leases | 0.02 | % | | 0.22 | % | | 0.13 | % | | | | |
| At quarter-end: | | | | | | | | | |
| Allowance for credit losses | $ | 320,074 | | | $ | 311,258 | | | $ | 285,626 | | | | | |
| | | | | | | | | |
| Allowance for credit losses to loans and leases held for investment | 1.26 | % | | 1.22 | % | | 1.11 | % | | | | |
| | | | | | | | | |
| Allowance for credit losses to nonaccrual loans and leases held | | | | | | | | | |
| for investment | 219.6 | % | | 497.8 | % | | 327.8 | % | | | | |
| Nonaccrual loans and leases held for investment | $ | 145,785 | | | $ | 62,527 | | | $ | 87,124 | | | | | |
| | | | | | | | | |
| Nonaccrual loans and leases held for investment to loans and leases | | | | | | | | | |
| held for investment | 0.57 | % | | 0.25 | % | | 0.34 | % | | | | |
Classified loans and leases held for investment | $ | 366,729 | | | $ | 228,417 | | | $ | 132,423 | | | | | |
| Special mention loans and leases held for investment | $ | 556,509 | | | $ | 513,312 | | | $ | 580,153 | | | | | |
______________________
(1) The following table presents the components of our provision for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended June 30, |
| ($ in thousands) | | June 30,
2023 | | March 31,
2023 | | June 30,
2022 | | 2023 | | 2022 |
| Provision for (reversal of) credit losses - loans | | $ | 1,664 | | | $ | 2,500 | | | $ | (500) | | | $ | 4,164 | | | $ | (31,842) | |
| (Reversal of) provision for credit losses - unfunded noncancellable loan commitments | | (800) | | | (500) | | | 500 | | | (1,300) | | | 300 | |
| Provision for credit losses - securities | | 1,036 | | | — | | | — | | | 1,036 | | | — | |
| Total provision for (reversal of) credit losses | | $ | 1,900 | | | $ | 2,000 | | | $ | — | | | $ | 3,900 | | | $ | (31,542) | |
Three Months Ended June 30, 2023Provisions for credit losses are charged to earnings for the allowance for loan and lease losses, the reserve for unfunded loan commitments, and the allowance for credit losses on held-to-maturity securities. The provision for credit losses on our loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate allowance for credit losses. For further details on our loan-related allowance for credit losses methodology, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.
First Quarter of 2024 Compared to Three Months Ended March 31,Fourth Quarter of 2023
The provision for credit losses was $1.9decreased $37.0 million compared to the fourth quarter of 2023 to $10.0 million for the secondfirst quarter and included a $1.7 millionof 2024. The first quarter provision for loan losses and a $1.0 million provision for credit loss for AFS securities, partially offsetwas driven by an $0.8 million reversal of theincrease in qualitative reserves related to loans secured by office properties and an increase in quantitative reserves due to an increase in nonaccrual and classified loans and leases. The provision for credit losses relatedwas $47.0 million for the fourth quarter and included an initial provision of $22.2 million for acquired legacy Banc of California non-PCD loans. Outside this initial provision, the fourth quarter's expense was driven by $13.2 million of net charge-offs and a need for increased quantitative reserves resulting from revising the economic forecast to lower unfunded commitments. There wasreflect 60% probability weighting on recessionary scenarios and updating expected prepayment speeds based on a $2.0 millionhigh interest rate environment.
First Quarter of 2024 Compared to First Quarter of 2023
The provision for credit losses increased by $7.0 million to $10.0 million for the first quarter of 2024 compared to $3.0 million for the first quarter of 2023. The provision for credit losses in the secondfirst quarter of 2024 was mainlyprimarily due to net charge-offsan increase in qualitative reserves for loans secured by office properties and an increase in specificquantitative reserves partially offset by the changedue to an increase in portfolio mixnonaccrual and lower unfunded commitments.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
classified loans and leases. The $3.0 million provision for credit losses was $1.9 million for the secondfirst quarter of 2023 and includedwas primarily attributable to reserves needed due to a $1.7 million provision for loan losses and a $1.0 million provision for credit loss for AFS securities, partially offset by an $0.8 million reversal of the provision for credit losses related to lower unfunded commitments. There was no provision for credit losses for the same 2022 period.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
During the six months ended June 30, 2023, the provision for credit losses was $3.9 million, and included a $4.2 million provision for loan losses and a $1.0 million provision for credit loss for AFS securities,less favorable economic forecast, partially offset by a $1.3 million reversal of the provisiondecrease in COVID-related qualitative reserves.
Certain circumstances may lead to increased provisions for credit losses related to loweron loans and leases in the future. Examples of such circumstances include deterioration in economic conditions and forecasts, an increased amount of classified and/or criticized loans and leases, and net loan and lease and unfunded commitments. The provision for credit losses was a reversalcommitment growth. Deterioration in economic conditions and forecasts include the rate of $31.5 million duringeconomic growth, the six months ended June 30, 2022,unemployment rate, the rate of inflation, changes in the general level of interest rates, changes in real estate values, and included a $31.3 million recovery from the settlement of a loan previously charged-offadverse conditions in 2019.
borrowers’ businesses. See further discussion in “- Balance Sheet Analysis "- Allowance for Credit Losses."Losses on Loans and Leases Held for Investment
Noninterest Income
The following table presents the components ofsummarizes noninterest income by category for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended June 30, |
| ($ in thousands) | | June 30,
2023 | | March 31,
2023 | | June 30,
2022 | | 2023 | | 2022 |
| Customer service fees | | $ | 2,022 | | | $ | 1,979 | | | $ | 2,578 | | | $ | 4,001 | | | $ | 5,012 | |
| Loan servicing income | | 574 | | | 547 | | | 109 | | | 1,121 | | | 321 | |
| Income from bank owned life insurance | | 951 | | | 900 | | | 810 | | | 1,851 | | | 1,606 | |
| | | | | | | | | | |
| Net gain on sale of securities available-for-sale | | — | | | — | | | — | | | — | | | 16 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other income | | 2,477 | | | 4,433 | | | 3,689 | | | 6,910 | | | 6,141 | |
| Total noninterest income | | $ | 6,024 | | | $ | 7,859 | | | $ | 7,186 | | | $ | 13,883 | | | $ | 13,096 | |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | March 31, | | |
| Noninterest Income | 2024 | | 2023 | | 2023 | | | | |
| (In thousands) |
| Leased equipment income | $ | 11,716 | | | $ | 12,369 | | | $ | 13,857 | | | | | |
| Other commissions and fees | 8,142 | | | 8,860 | | | 10,344 | | | | | |
| Service charges on deposit accounts | 4,705 | | | 4,562 | | | 3,573 | | | | | |
| (Loss) gain on sale of loans and leases | (448) | | | (3,526) | | | 2,962 | | | | | |
| Loss on sale of securities | — | | | (442,413) | | | — | | | | | |
| Dividends and gains on equity investments | 3,068 | | | 8,138 | | | 1,098 | | | | | |
| Warrant income (loss) | 178 | | | (173) | | | (333) | | | | | |
| LOCOM HFS adjustment | 330 | | | 3,175 | | | — | | | | | |
| Other | 6,125 | | | 8,606 | | | 4,890 | | | | | |
| Total noninterest income (loss) | $ | 33,816 | | | $ | (400,402) | | | $ | 36,391 | | | | | |
First Quarter of 2024 Compared to Fourth Quarter of 2023
Noninterest income increased by $434.2 million to $33.8 million for the first quarter of 2024 due almost entirely to a decrease in the loss on sale of securities of $442.4 million. As part of our balance sheet repositioning strategy, we sold $2.7 billion of legacy PacWest available-for-sale securities in the fourth quarter resulting in losses of $442.4 million. There were no securities sales in the first quarter of 2024.
Three Months Ended June 30, 20232024 Compared to Three Months Ended March 31,First Quarter of 2023
Noninterest income decreased $1.8by $2.6 million to $6.0$33.8 million for the secondfirst quarter of 2024 compared to $36.4 million for the first quarter of 2023 due mainly due to the timinga decrease of revenue received from$3.4 million in gains on sale of loans and leases and a $2.2 million decrease in other commissions and fees, offset partially by an increase in dividends and gains on equity investments of $1.2$2.0 million. The decrease in gains on sale of loans and leases resulted from sales of $274 million and the prior quarter included $1.1at a net loss of $0.4 million in recoveries of certain charged-off loans acquired in a business combination.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Noninterest income for the secondfirst quarter of 2023 decreased $1.2 million to $6.0 million2024 compared to sales of $287 million at a net gain of $3.0 million in the samefirst quarter of 2023. The decrease in 2022 mainlyother commission and fees was due primarily to a decrease in loan-related fees. The increase in dividends and gains on equity investments was primarily due to lower revenue receivedhigher income distributions from equity investments and other income of $1.2 million and lower customer service fees of $0.6 million, partially offset bya higher loan servicing income of $0.5 million from higher purchased mortgage servicing asset balances.fair value mark-to-market adjustment on equity investments still held.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Noninterest income for the six months ended June 30, 2023 increased $0.8 million to $13.9 million compared to the same period in 2022. The increase was mainly due to higher loan servicing income from higher purchased mortgage servicing asset balances, lower valuation losses on loan held for sale, and higher rental income due to an increase in subleased facilities, partially offset by lower customer services fees.
Noninterest Expense
The following table presents the breakdown of noninterest expense for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended June 30, |
| ($ in thousands) | | June 30,
2023 | | March 31,
2023 | | June 30,
2022 | | 2023 | | 2022 |
| Salaries and employee benefits | | $ | 28,282 | | | $ | 29,656 | | | $ | 28,264 | | | $ | 57,938 | | | $ | 57,251 | |
| | | | | | | | | | |
| Occupancy and equipment | | 5,603 | | | 5,526 | | | 5,741 | | | 11,129 | | | 11,378 | |
| Professional fees | | 4,001 | | | 4,072 | | | 4,001 | | | 8,073 | | | 6,840 | |
| | | | | | | | | | |
| Data processing | | 1,686 | | | 1,563 | | | 1,782 | | | 3,249 | | | 3,610 | |
| | | | | | | | | | |
| Regulatory assessments | | 1,301 | | | 1,202 | | | 1,021 | | | 2,503 | | | 1,796 | |
| Software and technology | | 3,579 | | | 3,274 | | | 2,747 | | | 6,853 | | | 5,447 | |
| Reversal of loan repurchase reserves | | (808) | | | (11) | | | (490) | | | (819) | | | (961) | |
| Amortization of other intangibles | | 462 | | | 461 | | | 313 | | | 923 | | | 754 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other expense | | 5,062 | | | 3,878 | | | 4,190 | | | 8,940 | | | 7,892 | |
| Noninterest expense before (gain) loss on investments in alternative energy partnerships | | 49,168 | | | 49,621 | | | 47,569 | | | 98,789 | | | 94,007 | |
| (Gain) loss on investments in alternative energy partnerships | | (36) | | | 1,618 | | | 1,043 | | | 1,582 | | | 1,201 | |
| Total noninterest expense | | $ | 49,132 | | | $ | 51,239 | | | $ | 48,612 | | | $ | 100,371 | | | $ | 95,208 | |
Three Months Ended June 30, 2023 Compared to Three Months Ended March 31, 2023
Noninterest expense decreased $2.1 million to $49.1 million for the second quarter compared to the first quarter. The decrease was due primarily to (i) lower net losses in alternative energy partnership investments of $1.7 million, (ii) lower salaries and employee benefits of $1.4 million as the first quarter included $1.0 million of severance costs and higher payroll taxes, (iii) the reversal of a provision for loan repurchases of $0.8 million, partially offset by (iv) higher marketing, recruiting and other expense of $1.2 million and (v) higher software and technology expense of $0.3 million as we continue to invest in our technology infrastructure.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Noninterest expense increased $0.5 million to $49.1 million for the second quarter of 2023 from $48.6 million for the comparable 2022 period due mostly to higher marketing, recruiting and other expense of $0.9 million and software and technology costs of $0.8 million related to investments in our technology infrastructure, partially offset by lower loss on investments in alternative energy partnerships of $1.1 million.
62
70
Six Months Ended June 30, 2023Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31 | | March 31, | | |
| Noninterest Expense | 2024 | | 2023 | | 2023 | | | | |
| (In thousands) |
| Compensation | $ | 92,236 | | | $ | 89,354 | | | $ | 88,476 | | | | | |
| Customer related expense | 30,919 | | | 45,826 | | | 24,005 | | | | | |
| Insurance and assessments | 20,461 | | | 60,016 | | | 11,717 | | | | | |
| Occupancy | 17,968 | | | 15,925 | | | 15,067 | | | | | |
| Information technology and data processing | 15,418 | | | 13,099 | | | 12,979 | | | | | |
| Intangible asset amortization | 8,404 | | | 4,230 | | | 2,411 | | | | | |
| Leased equipment depreciation | 7,520 | | | 7,447 | | | 9,375 | | | | | |
| Other professional services | 5,075 | | | 2,980 | | | 6,073 | | | | | |
| Loan expense | 4,491 | | | 4,446 | | | 6,524 | | | | | |
| Other | 8,026 | | | 8,515 | | | 11,126 | | | | | |
| Total operating expense | 210,518 | | | 251,838 | | | 187,753 | | | | | |
| Acquisition, integration and reorganization costs | — | | | 111,800 | | | 8,514 | | | | | |
| Goodwill impairment | — | | | — | | | 1,376,736 | | | | | |
| Total noninterest expense | $ | 210,518 | | | $ | 363,638 | | | $ | 1,573,003 | | | | | |
First Quarter of 2024 Compared to Six Months Ended June 30, 2022Fourth Quarter of 2023
Noninterest expense decreased by $153.1 million to $210.5 million for the six months ended June 30, 2023 increased $5.2 million to $100.4 millionfirst quarter of 2024 compared to the same periodfourth quarter of 2023 due mainly to fourth quarter acquisition, integration and reorganization costs of $111.8 million related to our merger with PacWest and a decrease in 2022.insurance and assessments expense of $39.6 million, which includes $32.7 million for the FDIC special assessment for the fourth quarter.
First Quarter of 2024 Compared to First Quarter of 2023
Noninterest expense decreased by $1.4 billion to $210.5 million for the first quarter of 2024 compared to $1.6 billion for the first quarter of 2023 due primarily to a $1.4 billion decrease in goodwill impairment, a $8.5 million decrease in acquisition, integration and reorganization costs and a $3.1 million decrease in other expense, offset partially by a $8.7 million increase in insurance and assessments expense and a $6.9 million increase in customer related expense. The decrease in acquisition, integration and reorganization costs was due, in part, to costs related to the reorganization of our Civic lending subsidiary incurred in the first quarter of 2023. The decrease in other expense was due to lower communications and business development expenses and a $1.0 million debt extinguishment charge incurred in the first quarter of 2023. The increase in insurance and assessments expense was due to higher (i) softwareFDIC assessment expense primarily the result of a higher assessment rate as a result of lower earnings and technology expensehigher levels of $1.4 million related to investments in our technology infrastructure, (ii) professional fees of $1.2 million, including a $0.8 millionbrokered deposits. The increase in indemnified legal fees (net of insurance recoveries), (iii) marketing, recruiting and other expenses of $1.0 million, (iv) regulatory assessments of $0.7 million ascustomer related expense was due to higher third-party payments for deposit customers for which the FDIC increased assessmentCompany provides earnings credits due to an increase in the earnings credit rates in 2023 and (v) salaries and employee benefits of $0.7 million due mostly to the aforementioned severance costs.offered.
Income Tax ExpenseTaxes
ForThe effective tax rate for the first quarter of 2024 was 27.2% compared to 26.8% for the fourth quarter of 2023 and 5.2% for the first quarter of 2023. Excluding goodwill impairment of $1.4 billion, the adjusted effective income tax rate for the three months ended June 30, 2023, March 31, 2023 and June 30, 2022, income taxwas 28.4%. The decrease from the adjusted rate in the first quarter of 2023 was due primarily to lower disallowed officer compensation expense was $6.7 million, $7.4 million, and $10.2 million resulting in an effectivethe first quarter of 2024. The Company's blended statutory tax rate of 27.4%, 26.7%for federal and 27.6%.
Income tax expense totaled $14.1 millionstate was 28.4% for the six months ended June 30, 2023, representing an effective tax ratefirst quarter of 27.0%, compared to $28.9 million and an effective tax rate of 27.8% for the six months ended June 30, 2022.2024.
For additional information, see Note 8 to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
FINANCIAL CONDITION
Investment Securities
The primary goal of our investment securities portfolio is to provide a relatively stable source of interest income while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk, and interest rate risk. Certain investment securities can be pledged as collateral to obtain public deposits or to provide a secondary source of liquidity in the form of secured borrowings from the FHLB, the FRB, or other financial institutions for repurchase agreements.
Investment
71
Balance Sheet Analysis
Securities Available-for-Sale
The following table presents the amortized costcomposition and fair valuedurations of the AFSour securities portfolio and the corresponding amounts of unrealized gains and losses recognized in AOCIavailable-for-sale as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 (1) |
| ($ in thousands) | | Amortized Cost | | Unrealized Gain (Loss) | | Allowance for Credit Losses | | Fair Value | | Amortized Cost | | Unrealized Gain (Loss) | | Fair Value |
| Securities available-for-sale: | | | | | | | | | | | | | | |
| SBA loan pool securities | | $ | 9,251 | | | $ | (36) | | | $ | — | | | $ | 9,215 | | | $ | 11,241 | | | $ | (54) | | | $ | 11,187 | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 82,913 | | | (1,205) | | | — | | | 81,708 | | | 40,431 | | | (225) | | | 40,206 | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 95,760 | | | (6,500) | | | — | | | 89,260 | | | 99,075 | | | (5,884) | | | 93,191 | |
| | | | | | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | 122,995 | | | (11,487) | | | — | | | 111,508 | | | 90,832 | | | (10,340) | | | 80,492 | |
| | | | | | | | | | | | | | |
| Collateralized loan obligations | | 490,534 | | | (7,703) | | | — | | | 482,831 | | | 492,203 | | | (15,600) | | | 476,603 | |
| Corporate debt securities | | 175,796 | | | (27,191) | | | (1,036) | | | 147,569 | | | 175,781 | | | (9,163) | | | 166,618 | |
| Total securities available-for-sale | | $ | 977,249 | | | $ | (54,122) | | | $ | (1,036) | | | $ | 922,091 | | | $ | 909,563 | | | $ | (41,266) | | | $ | 868,297 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| Fair | | % of | | Duration | | Fair | | % of | | Duration |
| Security Type | Value | | Total | | (in years) | | Value | | Total | | (in years) |
| | (Dollars in thousands) |
| Agency residential MBS | $ | 1,137,469 | | | 50 | % | | 8.5 | | | $ | 1,187,609 | | | 51 | % | | 8.2 | |
| Agency residential CMOs | 281,569 | | | 12 | % | | 4.3 | | | 284,334 | | | 12 | % | | 4.4 | |
| Corporate debt securities | 277,198 | | | 12 | % | | 1.8 | | | 267,232 | | | 11 | % | | 1.9 | |
| Agency commercial MBS | 243,387 | | | 11 | % | | 3.3 | | | 253,306 | | | 11 | % | | 3.4 | |
| Private label residential CMOs | 153,412 | | | 7 | % | | 7.4 | | | 158,412 | | | 7 | % | | 7.7 | |
| Collateralized loan obligations | 109,078 | | | 5 | % | | 0.1 | | | 108,416 | | | 5 | % | | 0.1 | |
| Municipal securities | 33,259 | | | 1 | % | | 4.3 | | | 28,083 | | | 1 | % | | 4.5 | |
| Private label commercial MBS | 19,491 | | | 1 | % | | 2.1 | | | 20,813 | | | 1 | % | | 2.1 | |
| Asset-backed securities | 18,908 | | | 1 | % | | — | | | 19,952 | | | 1 | % | | — | |
| SBA securities | 12,911 | | | — | % | | 3.1 | | | 13,739 | | | — | % | | 3.2 | |
| U.S. Treasury securities | — | | | — | % | | — | | | 4,968 | | | — | % | | 0.1 | |
| Total securities available-for-sale | $ | 2,286,682 | | | 100 | % | | 5.9 | | | $ | 2,346,864 | | | 100 | % | | 5.9 | |
(1)There was no ACL related to AFS securities at December 31, 2022.
AFS securities were $922.1 million at June 30, 2023, an increase of $53.8 million, or 6.2%, from $868.3 million at December 31, 2022. The increase was mainly due to purchases of $101.7 million, partly offset by calls of $20.0 million, principal payments of $14.1 million, a $1.0 million provision for credit losses for corporate debt securities of other financial institutions due to downgrades in their ratings, and an increase in net unrealized losses of $12.9 million.
Net unrealized losses on AFS securities were $54.1 million at June 30, 2023, compared to $41.3 million at December 31, 2022. The net unrealized gain or loss on AFS securities, net of tax, is reflected in accumulated other comprehensive income (loss). The increases in unrealized net losses during the six months ended June 30, 2023 were due to wider credit spreads within
corporate debt securities and the impact of higher market interest rates on agency CMOs and non-agency residential MBS, which was partly offset by improvement in the valuation of CLOs.
CLOs totaled $482.8 million and $476.6 million and were all AAA and AA-rated at June 30, 2023 and December 31, 2022. We perform due diligence and ongoing credit quality review of our CLO holdings, which includes monitoring performance factors such as external credit ratings, collateralization levels, collateral concentration levels, and other performance factors.
During the three and six months ended June 30, 2023, we recorded a $1.0 million provision for credit losses on three corporate debt securities of other financial institutions that were downgraded to below investment grade by external credit agencies. We did not record credit impairment for any investment securities for the three and six months ended June 30, 2022.
We monitor our securities portfolio to ensure it has adequate credit support and consider the lowest credit rating for identification of potential credit impairment. Except for the corporate debt securities noted above, we believe there was no other credit impairment, and the decline in fair value of our securities since acquisition was attributable to a combination of changes in interest rates and general volatility in market conditions. As of June 30, 2023, we did not have the intent to sell securities in an unrealized loss position and further believe it is more likely than not that we will not be required to sell these securities before their anticipated recovery. Except for the corporate debt securities noted above, as of June 30, 2023, all of our investment securities in an unrealized loss position received an investment grade credit rating.
Investment Securities Held-to-Maturity
The following table presents the amortized costcomposition and fair valuedurations of HTMour securities held-to-maturity as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | | Amortized Cost | | Unrealized Gain (Loss) | | Fair Value | | Amortized Cost | | Unrealized Gain (Loss) | | Fair Value |
| Securities held-to-maturity: | | | | | | | | | | | | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 152,843 | | | $ | (27,987) | | | $ | 124,856 | | | $ | 153,033 | | | $ | (29,807) | | | $ | 123,226 | |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 61,359 | | | (11,937) | | | 49,422 | | | 61,404 | | | (11,946) | | | 49,458 | |
| Municipal securities | | 114,203 | | | (21,436) | | | 92,767 | | | 114,204 | | | (24,428) | | | 89,776 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total securities held-to-maturity | | $ | 328,405 | | | $ | (61,360) | | | $ | 267,045 | | | $ | 328,641 | | | $ | (66,181) | | | $ | 262,460 | |
HTM securities totaled $328.4 million at June 30, 2023, compared to $328.6 million at December 31, 2022. At June 30, 2023, HTM securities included $214.2 million in agency securities and $114.2 million in municipal securities.
During the first quarter of 2022, certain longer-duration fixed-rate MBS and municipal securities with an amortized cost basis of $346.0 million were transferred from the AFS portfolio to the HTM portfolio. At the time of the transfer, the securities had an unrealized gross loss of $16.6 million, which became part of the securities’ amortized cost basis. This amount, along with the unrealized loss included in AOCI, is subsequently amortized over the remaining life of the security as an adjustment to its yield using the interest method. As a result, there is no impact on the consolidated statements of operations.
As of June 30, 2023 and December 31, 2022, HTM securities had aggregate unrealized net losses of $61.4 million and $66.2 million, of which $15.3 million and $15.8 million related to unrealized losses from the transfer of certain fixed-rate MBS and municipal securities from the AFS portfolio to the HTM portfolio in the prior year. These unrealized losses related primarily to changes in overall interest rates. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 | | |
| Amortized | | % of | | Duration | | Amortized | | % of | | Duration | | | | | | |
| Security Type | Cost | | Total | | (in years) | | Cost | | Total | | (in years) | | | | | | |
| | (Dollars in thousands) | | | | | | |
| | | | | | | | | | | | | | | | | |
| Municipal securities | $ | 1,248,355 | | | 55 | % | | 8.0 | | $ | 1,247,310 | | | 55 | % | | 8.1 | | | | | | |
| Agency commercial MBS | 435,467 | | | 19 | % | | 6.6 | | 433,827 | | | 19 | % | | 6.8 | | | | | | |
| Private label commercial MBS | 351,688 | | | 15 | % | | 6.1 | | 350,493 | | | 15 | % | | 6.3 | | | | | | |
| U.S. Treasury securities | 187,759 | | | 8 | % | | 6.4 | | 187,033 | | | 8 | % | | 6.7 | | | | | | |
| Corporate debt securities | 70,215 | | | 3 | % | | 4.3 | | 70,128 | | | 3 | % | | 4.4 | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total securities held-to-maturity | $ | 2,293,484 | | | 100 | % | | 7.2 | | $ | 2,288,791 | | | 100 | % | | 7.4 | | | | | | |
The following table presentsshows the fair values and weighted average yields using amortized costgeographic composition of the AFSmajority of our held-to-maturity municipal securities portfolio as of June 30, 2023, based on the earlier of contractual maturity dates or next repricing dates:date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One Year or Less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total |
| ($ in thousands) | | Fair
Value | | Weighted Average Yield | | Fair
Value | | Weighted Average Yield | | Fair
Value | | Weighted Average Yield | | Fair
Value | | Weighted Average Yield | | Fair
Value | | Weighted Average Yield |
| Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | |
| SBA loan pools securities | | $ | 9,215 | | | 3.87 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 9,215 | | | 3.87 | % |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 81,708 | | | 5.54 | % | | 81,708 | | | 5.54 | % |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 5,233 | | | 5.70 | % | | 7,795 | | | 3.61 | % | | 24,442 | | | 3.14 | % | | 51,790 | | | 5.19 | % | | 89,260 | | | 4.45 | % |
| | | | | | | | | | | | | | | | | | | | |
| Non-agency residential mortgage-backed securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 111,508 | | | 3.92 | % | | 111,508 | | | 3.92 | % |
| | | | | | | | | | | | | | | | | | | | |
| Collateralized loan obligations | | 482,831 | | | 6.88 | % | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 482,831 | | | 6.88 | % |
| Corporate debt securities | | — | | | — | % | | 137,097 | | | 4.82 | % | | 10,472 | | | 5.73 | % | | — | | | — | % | | 147,569 | | | 4.89 | % |
| Total securities available-for-sale | | $ | 497,279 | | | 6.81 | % | | $ | 144,892 | | | 4.76 | % | | $ | 34,914 | | | 3.95 | % | | $ | 245,006 | | | 4.70 | % | | $ | 922,091 | | | 5.77 | % |
| | | | | | | | | | | |
| March 31, 2024 |
| Amortized | | % of |
| Municipal Securities by State | Cost | | Total |
| (Dollars in thousands) |
| California | $ | 311,308 | | | 25 | % |
| Texas | 276,617 | | | 22 | % |
| Washington | 189,254 | | | 15 | % |
| Oregon | 79,196 | | | 6 | % |
| Maryland | 64,585 | | | 5 | % |
| Georgia | 55,352 | | | 4 | % |
| Colorado | 48,873 | | | 4 | % |
| Minnesota | 34,957 | | | 3 | % |
| Tennessee | 30,965 | | | 3 | % |
| Florida | 21,964 | | | 2 | % |
| Total of ten largest states | 1,113,071 | | | 89 | % |
| All other states | 135,284 | | | 11 | % |
| Total municipal securities held-to-maturity | $ | 1,248,355 | | | 100 | % |
The following table presents the amortized cost and weighted average yields using amortized cost of the HTM securities portfolio as of June 30, 2023, based on the earlier of contractual maturity dates or next repricing dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One Year or Less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total |
| ($ in thousands) | | Amortized
Cost | | Weighted Average Yield | | Amortized
Cost | | Weighted Average Yield | | Amortized
Cost | | Weighted Average Yield | | Amortized
Cost | | Weighted Average Yield | | Amortized
Cost | | Weighted Average Yield |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 9,344 | | | 2.52 | % | | $ | 143,499 | | | 2.70 | % | | $ | 152,843 | | | 2.69 | % |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 61,359 | | | 2.64 | % | | 61,359 | | | 2.64 | % |
| Municipal securities | | — | | | — | % | | — | | | — | % | | 27,995 | | | 2.32 | % | | 86,208 | | | 2.72 | % | | 114,203 | | | 2.62 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Total securities held-to-maturity | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 37,339 | | | 2.37 | % | | $ | 291,066 | | | 2.69 | % | | $ | 328,405 | | | 2.66 | % |
65
73
Loans Receivable, Netand Leases Held for Investment
The following table presents the composition of our loans and leases held for investment, net of deferred fees, by loan portfolio segment, class, and lease portfoliosubclass as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31, 2022 | | Amount Change | | Percentage Change |
| Commercial: | | | | | | | | |
Commercial and industrial(1) | | $ | 2,000,408 | | | $ | 1,845,960 | | | $ | 154,448 | | | 8.4 | % |
| Commercial real estate | | 1,266,438 | | | 1,259,651 | | | 6,787 | | | 0.5 | % |
| Multifamily | | 1,654,152 | | | 1,689,943 | | | (35,791) | | | (2.1) | % |
| SBA | | 62,898 | | | 68,137 | | | (5,239) | | | (7.7) | % |
| Construction | | 264,684 | | | 243,553 | | | 21,131 | | | 8.7 | % |
| | | | | | | | |
| Total commercial loans | | 5,248,580 | | | 5,107,244 | | | 141,336 | | | 2.8 | % |
| Consumer: | | | | | | | | |
| Single family residential mortgage | | 1,820,721 | | | 1,920,806 | | | (100,085) | | | (5.2) | % |
| | | | | | | | |
| | | | | | | | |
| Other consumer | | 86,905 | | | 86,988 | | | (83) | | | (0.1) | % |
| Total consumer loans | | 1,907,626 | | | 2,007,794 | | | (100,168) | | | (5.0) | % |
Total loans(2) | | 7,156,206 | | | 7,115,038 | | | 41,168 | | | 0.6 | % |
| Allowance for loan losses | | (80,883) | | | (85,960) | | | 5,077 | | | (5.9) | % |
| Total loans receivable, net | | $ | 7,075,323 | | | $ | 7,029,078 | | | $ | 46,245 | | | 0.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| | | % of | | | | % of |
Loan and Lease Portfolio | Balance | | Total | | Balance | | Total |
| (Dollars in thousands) |
| Real Estate Mortgage: | | | | | | | |
| Commercial real estate | $ | 3,819,423 | | | 15 | % | | $ | 3,874,804 | | | 15 | % |
| SBA program | 622,848 | | | 2 | % | | 632,110 | | | 3 | % |
| Hotel | 454,273 | | | 2 | % | | 519,583 | | | 2 | % |
| Total commercial real estate mortgage | 4,896,544 | | | 19 | % | | 5,026,497 | | | 20 | % |
| Multi-family | 6,121,472 | | | 24 | % | | 6,025,179 | | | 23 | % |
| Residential mortgage | 2,725,329 | | | 11 | % | | 2,754,176 | | | 11 | % |
| Investor-owned residential | 2,162,961 | | | 8 | % | | 2,234,531 | | | 9 | % |
| Residential renovation | 61,093 | | | — | % | | 71,602 | | | — | % |
| Total other residential real estate | 4,949,383 | | | 19 | % | | 5,060,309 | | | 20 | % |
| Total real estate mortgage | 15,967,399 | | | 62 | % | | 16,111,985 | | | 63 | % |
| Real Estate Construction and Land: | | | | | | | |
| Commercial | 775,021 | | | 3 | % | | 759,585 | | | 3 | % |
| Residential | 2,470,333 | | | 10 | % | | 2,399,684 | | | 9 | % |
Total real estate construction and land (1) | 3,245,354 | | | 13 | % | | 3,159,269 | | | 12 | % |
| Total real estate | 19,212,753 | | | 75 | % | | 19,271,254 | | | 75 | % |
| Commercial: | | | | | | | |
| Lender finance | 476,984 | | | 2 | % | | 486,966 | | | 2 | % |
| Equipment finance | 712,240 | | | 3 | % | | 736,275 | | | 3 | % |
| Premium finance | 655,203 | | | 2 | % | | 732,162 | | | 3 | % |
| Other asset-based | 216,589 | | | 1 | % | | 233,682 | | | 1 | % |
| Total asset-based | 2,061,016 | | | 8 | % | | 2,189,085 | | | 9 | % |
| Equity fund loans | 729,717 | | | 3 | % | | 662,732 | | | 3 | % |
| Venture lending | 783,924 | | | 3 | % | | 783,630 | | | 3 | % |
| Total venture capital | 1,513,641 | | | 6 | % | | 1,446,362 | | | 6 | % |
| Secured business loans | 615,783 | | | 2 | % | | 614,120 | | | 2 | % |
| Warehouse lending | 636,388 | | | 3 | % | | 554,940 | | | 2 | % |
| Other lending | 993,739 | | | 4 | % | | 960,800 | | | 4 | % |
| Total other commercial | 2,245,910 | | | 9 | % | | 2,129,860 | | | 8 | % |
| Total commercial | 5,820,567 | | | 23 | % | | 5,765,307 | | | 23 | % |
| Consumer | 439,702 | | | 2 | % | | 453,126 | | | 2 | % |
| Total loans and leases held for investment, | | | | | | | |
| net of deferred fees | $ | 25,473,022 | | | 100 | % | | $ | 25,489,687 | | | 100 | % |
| | | | | | | |
| Total unfunded loan commitments | $ | 5,482,672 | | | | | $ | 5,578,907 | | | |
(1)________________________________
(1) Includes warehouse lending balancesland and acquisition and development loans of $786.1 million and $602.5$235.7 million at June 30, 2023March 31, 2024 and $228.9 million at December 31, 2022.2023.
(2)Total loans include net deferred loan origination costs (fees), purchased premiums (discounts), and fair value allocations of premiums (discounts) totaling $7.3 million and $7.1 million at June 30, 2023 and December 31, 2022.
Total loans ended the second quarter of 2023 at $7.16 billion, up $41.2 million from $7.12 billion at December 31, 2022, comprised primarily of a $141.3 million increase in our commercial portfolio, offset by a $100.2 million decrease in our consumer portfolio.
During the six months ended June 30, 2023, the increase in our commercial portfolio included (i) a $154.4 million net increase in C&I loans, including a $183.6 million increase in warehouse lending balances, partly offset by a decrease in other C&I loans of $29.1 million, (ii) a $21.1 million increase in construction loans, (iii) a $6.8 million increase in CRE loans, partially offset by a (iv) $35.8 million decrease in multifamily loans driven by payoff activity. The decrease in our consumer portfolio was due primarily to a $100.1 million decrease in single-family residential (SFR) loans.
Loan fundings of $840.1 million during the six months ended June 30, 2023 included net warehouse advances of $183.6 million, offset by other loan paydowns and payoffs of $794.1 million.
Loan concentrations were well-diversified between products and industries. Notably, the CRE portfolio of $1.27 billion had balances related to office loans of $351.9 million, which was 4.9% of total loans. The office portfolio was comprised of general office of $265.1 million with a weighted average LTV of 53% and debt service coverage ratio of 1.6x and medical office of $86.8 million with a weighted average LTV of 55% and debt service coverage ratio of 2.3x.
Credit Quality Indicators
We categorize loans into risk categories based on relevant information about the ability of borrowers to repay their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze the associated risks in the current loan portfolio and individually grade each loan for credit risk. This analysis includes all loans delinquent over 60 days and non-homogeneous loans such as commercial and CRE loans.
The following table presents the risk categoriesgeographic composition of our real estate loans held for total loansinvestment, net of deferred fees, by classthe top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| | | % of | | | | % of |
| Real Estate Loans by State | Balance | | Total | | Balance | | Total |
| (Dollars in thousands) |
| California | $ | 12,149,645 | | | 63 | % | | $ | 12,262,311 | | | 64 | % |
| Colorado | 1,257,286 | | | 7 | % | | 1,167,659 | | | 6 | % |
| Texas | 854,953 | | | 5 | % | | 878,538 | | | 5 | % |
| Florida | 829,052 | | | 4 | % | | 837,467 | | | 4 | % |
| Arizona | 738,286 | | | 4 | % | | 719,299 | | | 4 | % |
| Washington | 533,645 | | | 3 | % | | 533,931 | | | 3 | % |
| Nevada | 425,443 | | | 2 | % | | 411,020 | | | 2 | % |
| Oregon | 344,736 | | | 2 | % | | 348,166 | | | 2 | % |
| Georgia | 252,090 | | | 1 | % | | 257,763 | | | 1 | % |
| Tennessee | 224,956 | | | 1 | % | | 225,166 | | | 1 | % |
| Total of 10 largest states | 17,610,092 | | | 92 | % | | 17,641,320 | | | 92 | % |
| All other states | 1,602,661 | | | 8 | % | | 1,629,934 | | | 8 | % |
| Total real estate loans held for investment, net of deferred fees | $ | 19,212,753 | | | 100 | % | | $ | 19,271,254 | | | 100 | % |
The following table presents a roll forward of loans asand leases held for investment, net of June 30, 2023 and December 31, 2022:deferred fees, for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | | | Total |
| June 30, 2023 | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | $ | 1,923,203 | | | $ | 30,998 | | | $ | 36,848 | | | $ | 9,359 | | | | | $ | 2,000,408 | |
| Commercial real estate | | 1,250,928 | | | 12,251 | | | 3,259 | | | — | | | | | 1,266,438 | |
| Multifamily | | 1,636,243 | | | 2,995 | | | 14,914 | | | — | | | | | 1,654,152 | |
| SBA | | 50,864 | | | 1,256 | | | 10,476 | | | 302 | | | | | 62,898 | |
| Construction | | 264,684 | | | — | | | — | | | — | | | | | 264,684 | |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | 1,783,553 | | | 3,001 | | | 34,167 | | | — | | | | | 1,820,721 | |
| Other consumer | | 86,132 | | | 402 | | | 371 | | | — | | | | | 86,905 | |
| Total | | $ | 6,995,607 | | | $ | 50,903 | | | $ | 100,035 | | | $ | 9,661 | | | | | $ | 7,156,206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | | | Total |
| December 31, 2022 | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | $ | 1,749,284 | | | $ | 49,399 | | | $ | 43,273 | | | $ | 4,004 | | | | | $ | 1,845,960 | |
| Commercial real estate | | 1,248,196 | | | 1,745 | | | 9,710 | | | — | | | | | 1,259,651 | |
| Multifamily | | 1,658,521 | | | 2,997 | | | 28,425 | | | — | | | | | 1,689,943 | |
| SBA | | 55,789 | | | 800 | | | 11,548 | | | — | | | | | 68,137 | |
| Construction | | 243,553 | | | — | | | — | | | — | | | | | 243,553 | |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | 1,889,911 | | | 9,101 | | | 21,794 | | | — | | | | | 1,920,806 | |
| Other consumer | | 86,599 | | | 138 | | | 251 | | | — | | | | | 86,988 | |
| Total | | $ | 6,931,853 | | | $ | 64,180 | | | $ | 115,001 | | | $ | 4,004 | | | | | $ | 7,115,038 | |
During the six months ended June 30, 2023, total criticized and classified assets decreased $22.6 million to $160.6 million at June 30, 2023 from decreases in special mention and substandard loans, offset by an increase in doubtful loans.
Total classified assets, consisting of loans risk rated substandard, doubtful and loss, decreased $9.3 million to $109.7 million at June 30, 2023. The decrease was due mostly to payoffs and paydowns of $59.2 million and upgrades of $3.7 million, partially offset by downgrades of $53.6 million. At June 30, 2023 loans risk rated doubtful related to five C&I relationships, compared to one C&I relationship at December 31, 2022.
Total criticized assets, consisting of loans risk rated special mention, decreased $13.3 million to $50.9 million at June 30, 2023 compared to $64.2 million at December 31, 2022 due mostly to upgrades of $34.1 million and payoffs, paydowns and other reductions of $16.0 million, partially offset by downgrades of $36.8 million.
| | | | | |
| Three Months Ended |
| Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees | March 31, 2024 |
| (In thousands) |
| Balance, beginning of period | $ | 25,489,687 | |
| Additions: | |
| Production | 141,670 | |
| Disbursements | 1,404,549 | |
| Total production and disbursements | 1,546,219 | |
| Reductions: | |
| Payoffs | (872,582) | |
| Paydowns | (661,272) | |
| Total payoffs and paydowns | (1,533,854) | |
| Sales | (6,765) | |
| Transfers to foreclosed assets | (10,964) | |
| Charge-offs | (5,014) | |
| Transfers to loans held for sale | (7,466) | |
| Total reductions | (1,564,063) | |
| Transfers from loans held for sale | 1,179 | |
| |
| Net decrease | (16,665) | |
| Balance, end of period | $ | 25,473,022 | |
| |
Allowance for Credit Losses on Loans and Leases Held for Investment
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. The amortized cost basis of loans and leases does not include accrued interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statement of earnings (loss) is a combination of the provision for loan and lease losses, the provision for unfunded loan commitments, and the provision for held-to-maturity debt securities.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates.
For further information regarding the calculation of the allowance for credit losses on loans and leases held for investment using the CECL methodology, 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" of our Form 10-K.
In calculating our allowance for credit losses, we continued to consider higher inflation rates, the Federal Reserve's monetary policy, the risk of a recession, technical or otherwise, and the impact of various geopolitical risks on the economy in our process for estimating expected credit losses given the changes in economic forecasts and assumptions along with the uncertainty related to the severity and duration of the economic consequences resulting from such events. Our methodology and framework along with the 4-quarter reasonable and supportable forecast period and 2-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2020. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.
For the first quarter of 2024, we used the Moody’s March 31, 2024 Baseline, S2 Downside 75th Percentile, and S7 Next-Cycle Recession forecast scenarios for the calculation of our quantitative component. The weightings of the scenarios were based on management’s current expectations for the economic forecast, acknowledging the risk of a near-term recession and inherent uncertainty. Compared to the fourth quarter of 2023, the economic forecasts were relatively consistent, resulting in an immaterial impact to the allowance for credit losses.
As part of our allowance for credit losses methodology, we consistently incorporate the use of qualitative factors in determining the overall allowance for credit losses to capture risks that may not be adequately reflected in our quantitative models. During the first quarter of 2021, we added qualitative components that were based on management’s assessment of various qualitative factors such as economic conditions not captured in the quantitative reserve including collateral dependency. These qualitative components were primarily related to certain loan portfolios including hotels, retail, and office properties that were more directly affected by the COVID-19 pandemic and may react more slowly to the improvements in the general economic conditions. Business operations and collateral valuations in these industries have stabilized with the exception of office properties for which there is continued uncertainty regarding the longer-term impact of remote working and flexible/hybrid work environments.
During the first quarter of 2024, the increase in qualitative adjustments for loans secured by office properties was offset partially by net charge-offs improving loss given default rates and lower reserves needed for lower loan and unfunded commitment balances. Additionally, specific reserves on individually evaluated loans increased during the first quarter of 2024 due to two commercial real estate loans secured by office properties.
The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses. As part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the estimated allowance for credit losses. At times, these analyses can provide information to further assist management in making decisions on certain assumptions. We calculated alternative values for our March 31, 2024 ACL using various alternative forecast scenarios weightings and the calculated amounts for the quantitative component differed from the probability-weighted multiple scenario forecast ranging from lower reserves by 2.47% to higher reserves by 3.00%. However, changing one assumption and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate, hence all assumptions and information must be considered. From a sensitivity analysis perspective, changing key assumptions such as the macro-economic variable inputs from the economic forecasts, the reasonable and supportable forecast period, prepayment rates, loan segmentation, historical loss factors and/or periods, among others, would all change the outcome of the quantitative components of the allowance for credit losses. Those results would then need to be assessed from a qualitative perspective potentially requiring further adjustments to the qualitative component to arrive at a reasonable and appropriate allowance for credit losses.
The determination of the allowance for credit losses is complex and highly dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses on loans and leases held for investment as quantified in the allowance for credit losses considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan and lease composition, and relative credit risks known as of the balance sheet date.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded loan commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.
The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated: | | | | | | | | | | | |
| March 31, | | December 31, |
Allowance for Credit Losses Data | 2024 | | 2023 |
| (Dollars in thousands) |
| Allowance for loan and lease losses | $ | 291,503 | | | $ | 281,687 | |
| Reserve for unfunded loan commitments | 28,571 | | | 29,571 | |
| Total allowance for credit losses | $ | 320,074 | | | $ | 311,258 | |
| | | |
| Allowance for loan and lease losses to loans and leases held for investment | 1.14 | % | | 1.11 | % |
| | | |
| | | |
| Allowance for credit losses to loans and leases held for investment | 1.26 | % | | 1.22 | % |
| | | |
| | | |
| | | |
The following table presents the changes in our allowance for credit losses on loans and leases held for investment for the periods indicated: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
Allowance for Credit Losses Roll Forward | 2024 | | 2023 | | | | |
| (Dollars in thousands) |
| Balance, beginning of period | $ | 311,258 | | | $ | 291,803 | | | | | |
| | | | | | | |
| Provision for credit losses: | | | | | | | |
| | | | | | | |
| Addition to allowance for loan and lease losses | 11,000 | | | 18,500 | | | | | |
| | | | | | | |
| Reduction in reserve for unfunded loan commitments | (1,000) | | | (15,500) | | | | | |
| Total provision for credit losses | 10,000 | | | 3,000 | | | | | |
| Loans and leases charged off: | | | | | | | |
| Real estate mortgage | (2,477) | | | (9,835) | | | | | |
| Real estate construction and land | — | | | — | | | | | |
| Commercial | (704) | | | (137) | | | | | |
| Consumer | (1,833) | | | (425) | | | | | |
| Total loans and leases charged off | (5,014) | | | (10,397) | | | | | |
| Recoveries on loans charged off: | | | | | | | |
| Real estate mortgage | 891 | | | 200 | | | | | |
| Real estate construction and land | — | | | — | | | | | |
| Commercial | 2,869 | | | 975 | | | | | |
| Consumer | 70 | | | 45 | | | | | |
| Total recoveries on loans charged off | 3,830 | | | 1,220 | | | | | |
| Net charge-offs | (1,184) | | | (9,177) | | | | | |
| Balance, end of period | $ | 320,074 | | | $ | 285,626 | | | | | |
| | | | | | | |
| Annualized net charge-offs to | | | | | | | |
| average loans and leases | 0.02 | % | | 0.13 | % | | | | |
The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
Allowance for Credit Losses Charge-offs | 2024 | | 2023 | | | | |
| (In thousands) |
| Real Estate Mortgage: | | | | | | | |
| Commercial real estate | $ | — | | | $ | 6,926 | | | | | |
| SBA program | 37 | | | — | | | | | |
| Hotel | — | | | — | | | | | |
| Total commercial real estate mortgage | 37 | | | 6,926 | | | | | |
| Multi-family | — | | | — | | | | | |
| Residential mortgage | — | | | — | | | | | |
| Investor-owned residential | 1,520 | | | 1,811 | | | | | |
| Residential renovation | 920 | | | 1,098 | | | | | |
| Total other residential real estate | 2,440 | | | 2,909 | | | | | |
| Total real estate mortgage | 2,477 | | | 9,835 | | | | | |
| Real Estate Construction and Land: | | | | | | | |
| Commercial | — | | | — | | | | | |
| Residential | — | | | — | | | | | |
| Total real estate construction and land | — | | | — | | | | | |
| Total real estate | 2,477 | | | 9,835 | | | | | |
| Commercial: | | | | | | | |
| Lender finance | — | | | — | | | | | |
| Equipment finance | — | | | — | | | | | |
| Premium finance | — | | | — | | | | | |
| Other asset-based | — | | | — | | | | | |
| Total asset-based | — | | | — | | | | | |
| Equity fund loans | — | | | — | | | | | |
| Venture lending | 141 | | | — | | | | | |
| Total venture capital | 141 | | | — | | | | | |
| Secured business loans | 211 | | | 82 | | | | | |
| Warehouse lending | — | | | — | | | | | |
| Other lending | 352 | | | 55 | | | | | |
| Total other commercial | 563 | | | 137 | | | | | |
| Total commercial | 704 | | | 137 | | | | | |
| Consumer | 1,833 | | | 425 | | | | | |
| Total charge-offs | $ | 5,014 | | | $ | 10,397 | | | | | |
The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| Allowance for Credit Losses Recoveries | 2024 | | 2023 | | | | |
| (In thousands) |
| Real Estate Mortgage: | | | | | | | |
| Commercial real estate | $ | 243 | | | $ | — | | | | | |
| SBA program | 101 | | | 187 | | | | | |
| Hotel | — | | | — | | | | | |
| Total commercial real estate mortgage | 344 | | | 187 | | | | | |
| Multi-family | — | | | — | | | | | |
| Residential mortgage | 1 | | | 1 | | | | | |
| Investor-owned residential | 301 | | | 10 | | | | | |
| Residential renovation | 245 | | | 2 | | | | | |
| Total other residential real estate | 547 | | | 13 | | | | | |
| Total real estate mortgage | 891 | | | 200 | | | | | |
| Real Estate Construction and Land: | | | | | | | |
| Commercial | — | | | — | | | | | |
| Residential | — | | | — | | | | | |
| Total real estate construction and land | — | | | — | | | | | |
| Total real estate | 891 | | | 200 | | | | | |
| Commercial: | | | | | | | |
| Lender finance | — | | | — | | | | | |
| Equipment finance | — | | | — | | | | | |
| Premium finance | — | | | — | | | | | |
| Other asset-based | — | | | 231 | | | | | |
| Total asset-based | — | | | 231 | | | | | |
| Equity fund loans | — | | | — | | | | | |
| Venture lending | 357 | | | 363 | | | | | |
| Total venture capital | 357 | | | 363 | | | | | |
| Secured business loans | 263 | | | 20 | | | | | |
| Warehouse lending | — | | | — | | | | | |
| Other lending | 2,249 | | | 361 | | | | | |
| Total other commercial | 2,512 | | | 381 | | | | | |
| Total commercial | 2,869 | | | 975 | | | | | |
| Consumer | 70 | | | 45 | | | | | |
| Total recoveries | $ | 3,830 | | | $ | 1,220 | | | | | |
Deposits
The following table presents the composition of our deposit portfolio by account type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 | | |
| | | % of | | | | % of | | Increase |
| Deposit Composition | Balance | | Total | | Balance | | Total | | (Decrease) |
| (Dollars in thousands) |
| Noninterest-bearing checking | $ | 7,833,608 | | | 27 | % | | $ | 7,774,254 | | | 26 | % | | $ | 59,354 | |
| Interest-bearing: | | | | | | | | | |
| Checking | 7,836,097 | | | 27 | % | | 7,808,764 | | | 26 | % | | 27,333 | |
| Money market | 5,020,110 | | | 17 | % | | 6,187,889 | | | 20 | % | | (1,167,779) | |
| Savings | 2,016,398 | | | 7 | % | | 1,997,989 | | | 6 | % | | 18,409 | |
| Time: | | | | | | | | | |
| Non-brokered | 2,761,836 | | | 10 | % | | 3,139,270 | | | 10 | % | | (377,434) | |
| Brokered | 3,424,358 | | | 12 | % | | 3,493,603 | | | 12 | % | | (69,245) | |
| Total time deposits | 6,186,194 | | | 22 | % | | 6,632,873 | | | 22 | % | | (446,679) | |
| Total interest-bearing | 21,058,799 | | | 73 | % | | 22,627,515 | | | 74 | % | | (1,568,716) | |
| Total deposits | $ | 28,892,407 | | | 100 | % | | $ | 30,401,769 | | | 100 | % | | $ | (1,509,362) | |
The following table presents time deposits based on the $250,000 FDIC insured limit as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| | | % of | | | | % of |
| | | Total | | | | Total |
| Time Deposits | Balance | | Deposits | | Balance | | Deposits |
| (Dollars in thousands) |
| Time deposits $250,000 and under | $ | 5,149,152 | | | 18 | % | | $ | 5,526,396 | | | 18 | % |
| Time deposits over $250,000 | 1,037,042 | | | 4 | % | | 1,106,477 | | | 4 | % |
| Total time deposits | $ | 6,186,194 | | | 22 | % | | $ | 6,632,873 | | | 22 | % |
During the three months ended March 31, 2024, total deposits decreased by $1.5 billion, or 5.0%, to $28.9 billion at March 31, 2024 due primarily to a decrease of $1.2 billion in money market accounts and a decrease of $0.4 billion in non-brokered time deposits. At March 31, 2024, noninterest-bearing deposits totaled $7.8 billion, or 27%, of total deposits and interest-bearing deposits totaled $21.1 billion, or 73%, of total deposits.
As of March 31, 2024, FDIC-insured deposits represented approximately 74% of total deposits, including accounts eligible for pass-through insurance, down from 76% as of December 31, 2023. Available liquidity (on-balance sheet liquidity plus unused borrowing capacity and unpledged AFS securities) was $16.8 billion at March 31, 2024, which exceeded uninsured and uncollateralized deposits of $7.1 billion, with a coverage ratio of 238% as compared to a coverage ratio of 247% at December 31, 2023. Available liquidity also represented 58% of total deposits at March 31, 2024.
The Bank is a participant in the IntraFi Network, a network that offers deposit placement services such as ICS and CDARS, and other reciprocal deposit networks which offer products that qualify large deposits for FDIC insurance. At March 31, 2024, the Bank had $8.1 billion of reciprocal deposits compared to $8.9 billion at December 31, 2023.
The following table summarizes the maturities of time deposits as of the date indicated:
| | | | | | | | | | | | | | | | | |
| Time Deposits |
| $250,000 | | Over | | |
| March 31, 2024 | and Under | | $250,000 | | Total |
| (In thousands) |
| Maturities: | | | | | |
| Due in three months or less | $ | 1,730,351 | | | $ | 375,366 | | | $ | 2,105,717 | |
| Due in over three months through six months | 1,545,562 | | | 339,815 | | | 1,885,377 | |
| Due in over six months through 12 months | 1,707,097 | | | 235,761 | | | 1,942,858 | |
| Total due within 12 months | 4,983,010 | | | 950,942 | | | 5,933,952 | |
| Due in over 12 months through 24 months | 158,378 | | | 80,710 | | | 239,088 | |
| Due in over 24 months | 7,764 | | | 5,390 | | | 13,154 | |
| Total due over twelve months | 166,142 | | | 86,100 | | | 252,242 | |
| Total | $ | 5,149,152 | | | $ | 1,037,042 | | | $ | 6,186,194 | |
Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through BAM, our registered investment adviser subsidiary, and third-party money market sweep products. BAM provides customized investment advisory and asset management solutions. At March 31, 2024, total off-balance sheet client investment funds were $1.2 billion, of which $0.6 billion was managed by BAM. At December 31, 2023, total off-balance sheet client investment funds were $0.6 billion, of which $0.2 billion was managed by BAM.
Credit Quality
Nonperforming Assets, Classified Loans and Leases, and Special Mention Loans and Leases
The following table presents information on our nonperforming assets, classified loans and leases, and special mention loans and leases as of the dates indicated:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2024 | | 2023 |
| (Dollars in thousands) |
| Nonaccrual loans and leases held for investment | $ | 145,785 | | | $ | 62,527 | |
| Accruing loans contractually past due 90 days or more | — | | | 11,750 | |
| Total nonperforming loans and leases | 145,785 | | | 74,277 | |
| Foreclosed assets, net | 12,488 | | | 7,394 | |
| Total nonperforming assets | $ | 158,273 | | | $ | 81,671 | |
| | | |
| Classified loans and leases held for investment | $ | 366,729 | | | $ | 228,417 | |
| Special mention loans and leases held for investment | $ | 556,509 | | | $ | 513,312 | |
| Nonaccrual loans and leases held for investment to loans and leases held for investment | 0.57 | % | | 0.25 | % |
| Nonperforming assets to loans and leases held for investment and foreclosed assets, net | 0.62 | % | | 0.32 | % |
| Allowance for credit losses to nonaccrual loans and leases held for investment | 219.6 | % | | 497.8 | % |
| Classified loans and leases held for investment to loans and leases held for investment | 1.44 | % | | 0.90 | % |
| Special mention loans and leases held for investment to loans and leases held for investment | 2.18 | % | | 2.01 | % |
Nonaccrual Loans and Leases Held for Investment
The following table presents our nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 | | Increase (Decrease) |
| | | Accruing | | | | Accruing | | | | Accruing |
| | | and 30-89 | | | | and 30-89 | | | | and 30-89 |
| | | Days Past | | | | Days Past | | | | Days Past |
| Nonaccrual | | Due | | Nonaccrual | | Due | | Nonaccrual | | Due |
| (In thousands) |
| Real estate mortgage: | | | | | | | | | | | |
| Commercial | $ | 66,527 | | | $ | 22,252 | | | $ | 15,669 | | | $ | 10,577 | | | $ | 50,858 | | | $ | 11,675 | |
| Multi-family | 953 | | | 9,046 | | | 1,020 | | | 2,302 | | | (67) | | | 6,744 | |
| Other residential | 61,754 | | | 62,897 | | | 31,041 | | | 83,747 | | | 30,713 | | | (20,850) | |
| Total real estate mortgage | 129,234 | | | 94,195 | | | 47,730 | | | 96,626 | | | 81,504 | | | (2,431) | |
| Real estate construction and land: | | | | | | | | | | | |
| Commercial | — | | | — | | | — | | | — | | | — | | | — | |
| Residential | — | | | 4,606 | | | — | | | — | | | — | | | 4,606 | |
| Total real estate construction and land | — | | | 4,606 | | | — | | | — | | | — | | | 4,606 | |
| Commercial: | | | | | | | | | | | |
| Asset-based | 2,325 | | | 11,701 | | | 2,689 | | | 608 | | | (364) | | | 11,093 | |
| Venture capital | — | | | — | | | 325 | | | — | | | (325) | | | — | |
| Other commercial | 13,390 | | | 5,581 | | | 10,972 | | | 1,187 | | | 2,418 | | | 4,394 | |
| Total commercial | 15,715 | | | 17,282 | | | 13,986 | | | 1,795 | | | 1,729 | | | 15,487 | |
| Consumer | 836 | | | 2,696 | | | 811 | | | 3,461 | | | 25 | | | (765) | |
| Total held for investment | $ | 145,785 | | | $ | 118,779 | | | $ | 62,527 | | | $ | 101,882 | | | $ | 83,258 | | | $ | 16,897 | |
| | | | | | | | | | | |
During the three months ended March 31, 2024, nonperforming loan and leases held for investment increased by $71.5 million to $145.8 million at March 31, 2024 due mainly to additions of $90.7 million, offset partially by transfers to accrual status of $12.8 million, principal and other reductions including sales of $5.0 million, and charge-offs of $1.4 million. Included in additions are four commercial real estate mortgage loans (three office properties and one retail) totaling $51.6 million and Civic loans of $25.0 million. As of March 31, 2024, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $46.3 million and represented 32% of total nonaccrual loans and leases.
Loans and leases accruing 30-89 days past due generally fluctuate from period to period. The $16.9 million increase to $118.8 million as of March 31, 2024 was due mainly to an increase in commercial real estate and asset-based delinquent loans.
Foreclosed Assets
The following table presents a summaryforeclosed assets (primarily OREO), net of total nonperforming assets, excluding loans held-for-sale,the valuation allowance, by property type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31, 2022 | | Amount Change | | Percentage Change |
| Loans past due 90 days or more still on accrual | | $ | — | | | $ | — | | | $ | — | | | — | % |
| Nonaccrual loans | | 67,306 | | | 55,251 | | | 12,055 | | | 21.8 | % |
| Total nonperforming loans | | 67,306 | | | 55,251 | | | 12,055 | | | 21.8 | % |
| Other real estate owned | | 882 | | | — | | | 882 | | | — | % |
| Total nonperforming assets | | $ | 68,188 | | | $ | 55,251 | | | $ | 12,937 | | | 23.4 | % |
| | | | | | | | |
| Nonaccrual loans to total loans | | 0.94 | % | | 0.78 | % | | | | |
| Nonperforming loans to total loans | | 0.94 | % | | 0.78 | % | | | | |
| Total nonperforming assets to total assets | | 0.73 | % | | 0.60 | % | | | | |
| ALL to nonperforming loans | | 120.17 | % | | 155.58 | % | | | | |
| ACL to nonperforming loans | | 126.12 | % | | 165.18 | % | | | | |
| | | | | | | | | | | |
| March 31, | | December 31, |
| Property Type | 2024 | | 2023 |
| (In thousands) |
| | | |
| Single-family residential | $ | 12,488 | | | $ | 7,394 | |
| | | |
| | | |
| Total OREO, net | 12,488 | | | 7,394 | |
| Other foreclosed assets | — | | | — | |
| Total foreclosed assets, net | $ | 12,488 | | | $ | 7,394 | |
Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where we believe the borrower will eventually overcome those circumstances and repay the loan in full.
Additional interest income of approximately $1.0 million and $1.9 million would have been recorded during the three and six months ended June 30, 2023, had these loans been paid in accordance with their original terms throughout the periods indicated.
At June 30, 2023, non-performing loans were $67.3 million, and included $33.5 million of SFR mortgage loans, $21.2 million of C&I loans and $9.6 million of SBA loans. During the six months ended June 30, 2023, non-performing loans increased $12.1 million due to total additions of $32.9 million, offset by $19.8 million in charge-offs, amortization and other removals and $1.1 million in loans returning to accrual status. Excluding SFR mortgages, which are well-secured with low loan-to-value ratios, non-performing loans decreased $0.3 million from year-end. At June 30, 2023, there were $2.7 million of non-performing loans, primarily consisting of SFR mortgages that were in a current payment status, however are considered nonaccrual based on other criteria.
At June 30, 2023, non-performing assets included $0.9 million of real estate owned, consisting of one single-family residence we acquired in the second quarter.
Modifications to Borrowers Experiencing Financial Difficulty (effective January 1, 2023 upon adoption of ASU 2022-02)
During the three and six months ended June 30, 2023, we had 1 and 3 loan modifications madeMarch 31, 2024, foreclosed assets increased by $5.1 million to borrowers experiencing financial difficulty, with an aggregate balance of $5.3$12.5 million at June 30, 2023, of which one C&I loan of $3.9 million was previously classified as a TDR. At June 30, 2023, $3.9 million of the $5.3 million in modified loans made to borrowers experiencing financial difficulty were past due.
Troubled Debt Restructurings (for modifications to borrowers experiencing financial difficulty prior to January 1, 2023)
At June 30, 2023 and DecemberMarch 31, 2022, we had 10 and 15 loans classified as TDRs, with an aggregate balance of $8.0 million and $16.1 million. The decrease in TDRs during the six months ended June 30, 2023 was due mostly to the aforementioned $3.9 million C&I loan that was restructured during 2022 being modified and accounted for as a new loan in the first quarter of 2023, and $4.0 million in paydowns of two C&I loans.
Accruing TDRs were $2.5 million and nonaccrual TDRs were $5.5 million at June 30, 2023, compared to accruing TDRs of $2.7 million and nonaccrual TDRs of $13.4 million at December 31, 2022.
Allowance for Credit Losses (ACL) - Loans
The ACL, which includes the reserve for unfunded loan commitments, totaled $84.9 million, or 1.19% of total loans, at June 30, 2023, compared to $91.3 million, or 1.28% of total loans, at December 31, 2022. The $6.4 million decrease in the ACL was due to: (i) net charge-offs of $9.2 million and (ii) $1.3 million lower RUC from lower unfunded commitments, partially offset by (iii) higher specific reserves of $3.3 million, and (iv) a $0.9 million increase in general reserves2024 due mainly to theadditions of $11.0 million, offset partially by sales of $5.6 million.
impact of the deterioration in the macroeconomic outlook. The ACL coverage of non-performing loans was 126% at June 30, 2023 compared to 165% at December 31, 2022.Classified and Special Mention Loans and Leases Held for Investment
The following table provides a summarypresents the credit risk ratings of componentsour loans and leases held for investment, net of deferred fees, as of the ACLdates indicated:
| | | | | | | | | | | |
| March 31, | | December 31, |
Loan and Lease Credit Risk Ratings | 2024 | | 2023 |
| (In thousands) |
| Pass | $ | 24,549,784 | | | $ | 24,747,958 | |
| Special mention | 556,509 | | | 513,312 | |
| Classified | 366,729 | | | 228,417 | |
| Total loans and leases held for investment, net of deferred fees | $ | 25,473,022 | | | $ | 25,489,687 | |
| | | |
| | | |
| | | |
Classified and special mention loans and leases fluctuate from period to period as a result of loan repayments and downgrades or upgrades from our ongoing active portfolio management.
The following table presents the classified and special mention credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class and the related net changes as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | December 31, 2023 | | Increase (Decrease) |
| | | Special | | | | Special | | | | Special |
| Classified | | Mention | | Classified | | Mention | | Classified | | Mention |
| (In thousands) |
| Real estate mortgage: | | | | | | | | | | | |
| Commercial | $ | 174,525 | | | $ | 196,450 | | | $ | 75,739 | | | $ | 219,687 | | | $ | 98,786 | | | $ | (23,237) | |
| Multi-family | 74,646 | | | 94,218 | | | 74,954 | | | 108,356 | | | (308) | | | (14,138) | |
| Other residential | 66,410 | | | 31,599 | | | 38,155 | | | 54,197 | | | 28,255 | | | (22,598) | |
| Total real estate mortgage | 315,581 | | | 322,267 | | | 188,848 | | | 382,240 | | | 126,733 | | | (59,973) | |
| Real estate construction and land: | | | | | | | | | | | |
| Commercial | — | | | — | | | — | | | — | | | — | | | — | |
| Residential | — | | | 3,005 | | | — | | | 2,757 | | | — | | | 248 | |
| Total real estate construction and land | — | | | 3,005 | | | — | | | 2,757 | | | — | | | 248 | |
| Commercial: | | | | | | | | | | | |
| Asset-based | 8,495 | | | 11,316 | | | 4,561 | | | 12,506 | | | 3,934 | | | (1,190) | |
| Venture capital | 10,453 | | | 198,311 | | | 7,805 | | | 98,633 | | | 2,648 | | | 99,678 | |
| Other commercial | 31,222 | | | 15,080 | | | 26,044 | | | 9,984 | | | 5,178 | | | 5,096 | |
| Total commercial | 50,170 | | | 224,707 | | | 38,410 | | | 121,123 | | | 11,760 | | | 103,584 | |
| Consumer | 978 | | | 6,530 | | | 1,159 | | | 7,192 | | | (181) | | | (662) | |
| Total | $ | 366,729 | | | $ | 556,509 | | | $ | 228,417 | | | $ | 513,312 | | | $ | 138,312 | | | $ | 43,197 | |
During the three months ended March 31, 2024, classified loans and leases increased by $138.3 million to $366.7 million at March 31, 2024 due mainly to increases of $98.8 million in commercial real estate mortgage classified loans, the majority of which relates to four large CRE relationships, and $28.3 million in other residential real estate mortgage classified loans (Civic loans).
During the three months ended March 31, 2024, special mention loans and leases increased by $43.2 million to $556.5 million at March 31, 2024 due primarily to an increase of $99.7 million in venture capital commercial special mention loans, offset partially by decreases of $23.2 million in commercial real estate mortgage special mention loans and $22.6 million in other residential real estate mortgage special mention loans.
Regulatory Matters
Capital
Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At March 31, 2024, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum Total risk-based capital ratio of 10.00%.
Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are disallowed from regulatory capital. At March 31, 2024, such disallowed amounts was $243.3 million for the Company. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future or that the Company will not have increased deferred tax assets that are disallowed.
Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the common equity Tier 1, Tier 1, and Total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At March 31, 2024, the Company and the Bank were in compliance with the capital conservation buffer requirements.
The Company and the Bank elected the CECL 5-year regulatory transition guidance for calculating regulatory capital ratios and the March 31, 2024 ratios include this election. This regulatory guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2021. This cumulative amount is now being phased out of regulatory capital evenly over the three years from 2022 to 2024. The add-back as of March 31, 2024 ranged from 0 basis points to 2 basis points for the capital ratios below.
The following tables present a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2023 | | December 31, 2022 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Allowance for credit losses: | | | | |
| Allowance for loan losses (ALL) | | $ | 80,883 | | | $ | 85,960 | |
| Reserve for unfunded loan commitments | | 4,005 | | | 5,305 | |
| Total allowance for credit losses (ACL) | | $ | 84,888 | | | $ | 91,265 | |
| | | | |
| ALL to total loans | | 1.13 | % | | 1.21�� | % |
| ACL to total loans | | 1.19 | % | | 1.28 | % |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Minimum Required |
| | | For Capital | | For Capital | | For Well |
| | | Adequacy | | Conservation | | Capitalized |
| March 31, 2024 | Actual | | Purposes | | Buffer | | Classification |
| Banc of California, Inc.: | | | | | | | |
| Tier 1 leverage capital ratio | 9.12% | | 4.00% | | N/A | | N/A |
| CET1 capital ratio | 10.09% | | 4.50% | | 7.00% | | N/A |
| Tier 1 capital ratio | 12.38% | | 6.00% | | 8.50% | | N/A |
| Total capital ratio | 16.40% | | 8.00% | | 10.50% | | N/A |
| | | | | | | |
| Banc of California: | | | | | | | |
| Tier 1 leverage capital ratio | 9.84% | | 4.00% | | N/A | | 5.00% |
| CET1 capital ratio | 13.35% | | 4.50% | | 7.00% | | 6.50% |
| Tier 1 capital ratio | 13.35% | | 6.00% | | 8.50% | | 8.00% |
| Total capital ratio | 15.88% | | 8.00% | | 10.50% | | 10.00% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Minimum Required |
| | | For Capital | | For Capital | | For Well |
| | | Adequacy | | Conservation | | Capitalized |
| December 31, 2023 | Actual | | Purposes | | Buffer | | Classification |
| Banc of California, Inc.: | | | | | | | |
| Tier 1 leverage capital ratio | 9.00% | | 4.00% | | N/A | | N/A |
| CET1 capital ratio | 10.14% | | 4.50% | | 7.00% | | N/A |
| Tier 1 capital ratio | 12.44% | | 6.00% | | 8.50% | | N/A |
| Total capital ratio | 16.43% | | 8.00% | | 10.50% | | N/A |
| | | | | | | |
| Banc of California: | | | | | | | |
| Tier 1 leverage capital ratio | 9.62% | | 4.00% | | N/A | | 5.00% |
| CET1 capital ratio | 13.27% | | 4.50% | | 7.00% | | 6.50% |
| Tier 1 capital ratio | 13.27% | | 6.00% | | 8.50% | | 8.00% |
| Total capital ratio | 15.75% | | 8.00% | | 10.50% | | 10.00% |
The Company's consolidated common equity Tier 1 (CET1), Tier 1 and Total capital ratios decreased during the three months ended March 31, 2024 due mainly to an increase in risk-weighted assets, partially offset by positive earnings. The consolidated Tier 1 leverage ratio increased during the three months ended March 31, 2024 due mainly to a decrease in average assets attributable primarily to decreased cash and cash equivalents.
The following tables provide summaries of activity in the allowance for credit losses for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| ($ in thousands) | | 2023 | | 2022 | | | | |
| | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | | | |
| Balance at beginning of period | | $ | 84,560 | | | $ | 4,805 | | | $ | 89,365 | | | $ | 93,226 | | | $ | 5,405 | | | $ | 98,631 | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Loans charged off | | (5,667) | | | — | | | (5,667) | | | (494) | | | — | | | (494) | | | | | |
| Recoveries of loans previously charged off | | 326 | | | — | | | 326 | | | 1,561 | | | — | | | 1,561 | | | | | |
| Net (charge-offs) recoveries | | (5,341) | | | — | | | (5,341) | | | 1,067 | | | — | | | 1,067 | | | | | |
| | | | | | | | | | | | | | | | |
| (Reversal of) provision for credit losses | | 1,664 | | | (800) | | | 864 | | | (500) | | | 500 | | | — | | | | | |
| Balance at end of period | | $ | 80,883 | | | $ | 4,005 | | | $ | 84,888 | | | $ | 93,793 | | | $ | 5,905 | | | $ | 99,698 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| ($ in thousands) | | 2023 | | 2022 | | | | |
| | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | Allowance
for
Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance
for
Credit Losses | | | | |
| Balance at beginning of period | | $ | 85,960 | | | $ | 5,305 | | | $ | 91,265 | | | $ | 92,584 | | | $ | 5,605 | | | $ | 98,189 | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Loans charged off | | (9,616) | | | — | | | (9,616) | | | (725) | | | — | | | (725) | | | | | |
| Recoveries of loans previously charged off | | 375 | | | — | | | 375 | | | 33,776 | | | — | | | 33,776 | | | | | |
| Net recoveries (charge-offs) | | (9,241) | | | — | | | (9,241) | | | 33,051 | | | — | | | 33,051 | | | | | |
| | | | | | | | | | | | | | | | |
| (Reversal of) provision for credit losses | | 4,164 | | | (1,300) | | | 2,864 | | | (31,842) | | | 300 | | | (31,542) | | | | | |
| Balance at end of period | | $ | 80,883 | | | $ | 4,005 | | | $ | 84,888 | | | $ | 93,793 | | | $ | 5,905 | | | $ | 99,698 | | | | | |
The following table presents a summary of net (charge-offs) recoveries and the annualized ratio of net (charge-offs) recoveries to average loans by loan class for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| ($ in thousands) | | 2023 | | 2022 |
| | Net
(Charge-offs) Recoveries | | Average Loans | | Annualized (Charge-off) Recovery Ratio | | Net
(Charge-offs) Recoveries | | Average Loans | | Annualized (Charge-off) Recovery Ratio |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | $ | (4,428) | | | $ | 1,853,235 | | | (0.96) | % | | $ | 1,262 | | | $ | 2,457,281 | | | 0.21 | % |
| Commercial real estate | | — | | | 1,311,584 | | | — | % | | — | | | 1,213,438 | | | — | % |
| Multifamily | | — | | | 1,660,788 | | | — | % | | — | | | 1,457,185 | | | — | % |
| SBA | | (795) | | | 29,437 | | | (10.80) | % | | (136) | | | 70,225 | | | (0.77) | % |
| Construction | | — | | | 267,908 | | | — | % | | — | | | 219,029 | | | — | % |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | 1 | | | 1,848,748 | | | — | % | | 154 | | | 1,755,719 | | | 0.04 | % |
| Other consumer | | (119) | | | 84,916 | | | (0.56) | % | | (213) | | | 93,160 | | | (0.91) | % |
| Total loans | | $ | (5,341) | | | $ | 7,056,616 | | | (0.30) | % | | $ | 1,067 | | | $ | 7,266,037 | | | 0.06 | % |
Net charge-offs were $5.3 million during the second quarter of 2023, compared to net recoveries of $1.1 million during the comparable 2022 period. Net increase in net charge-offs in the second quarter of 2023 were mainly due to charge-offs within the C&I and SBA portfolio.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| ($ in thousands) | | 2023 | | 2022 |
| | Net
(Charge-offs) Recoveries | | Average Loans | | Annualized (Charge-off) Recovery Ratio | | Net
(Charge-offs) Recoveries | | Average Loans | | Annualized (Charge-off) Recovery Ratio |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | $ | (7,672) | | | $ | 1,793,476 | | | (0.86) | % | | $ | 32,497 | | | $ | 2,544,351 | | | 2.55 | % |
| Commercial real estate | | (300) | | | 1,304,580 | | | (0.05) | % | | — | | | 1,267,891 | | | — | % |
| Multifamily | | — | | | 1,675,283 | | | — | % | | — | | | 1,398,452 | | | — | % |
| SBA | | (771) | | | 30,833 | | | (5.00) | % | | 609 | | | 93,062 | | | 1.31 | % |
| Construction | | — | | | 261,661 | | | — | % | | — | | | 203,996 | | | — | % |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | (370) | | | 1,873,120 | | | (0.04) | % | | 182 | | | 1,659,633 | | | 0.02 | % |
| Other consumer | | (128) | | | 84,851 | | | (0.30) | % | | (237) | | | 95,326 | | | (0.50) | % |
| Total loans | | $ | (9,241) | | | $ | 7,023,804 | | | (0.26) | % | | $ | 33,051 | | | $ | 7,262,711 | | | 0.91 | % |
Net charge-offs were $9.2 million during the six months ended June 30, 2023, compared to net recoveries of $33.1 million during the comparable 2022 period. The increase in net charge-offs between periods were due to charge-offs in the C&I
portfolio in 2023, and the comparable 2022 period including a $31.3 million recovery from the settlement of a loan previously charged-off in 2019.
The following table presents a summary of the allocation of the ALL by loan category as well as loans receivable for each category as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | | Allowance for Loan Losses | | Loans Receivable | | % of
Loans in Category to Total Loans | | Allowance for Loan Losses | | Loans Receivable | | % of
Loans in Category to
Total Loans |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | $ | 32,823 | | | $ | 2,000,408 | | | 28.0 | % | | $ | 34,156 | | | $ | 1,845,960 | | | 25.9 | % |
| Commercial real estate | | 15,767 | | | 1,266,438 | | | 17.7 | % | | 15,977 | | | 1,259,651 | | | 17.7 | % |
| Multifamily | | 14,697 | | | 1,654,152 | | | 23.1 | % | | 14,696 | | | 1,689,943 | | | 23.8 | % |
| SBA | | 1,387 | | | 62,898 | | | 0.9 | % | | 2,648 | | | 68,137 | | | 1.0 | % |
| Construction | | 6,053 | | | 264,684 | | | 3.7 | % | | 5,850 | | | 243,553 | | | 3.4 | % |
| | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | |
| Single family residential mortgage | | 9,518 | | | 1,820,721 | | | 25.4 | % | | 12,050 | | | 1,920,806 | | | 27.0 | % |
| Other consumer | | 638 | | | 86,905 | | | 1.2 | % | | 583 | | | 86,988 | | | 1.2 | % |
| | | | | | | | | | | | |
| Total | | $ | 80,883 | | | $ | 7,156,206 | | | 100.0 | % | | $ | 85,960 | | | $ | 7,115,038 | | | 100.0 | % |
Servicing Rights
We have retained servicing rights from certain sales of SFR mortgage loans and SBA loans and purchased mortgage servicing rights from unrelated third parties. Purchased mortgage servicing rights are recorded at the purchase price at the time of acquisition, which approximates the fair value. Subsequent to acquisition, we account for these servicing rights using the amortization method. We utilize a subservicer to service all of the loans underlying the purchased mortgage servicing rights. Loans underlying retained and purchased servicing rights are not included in our consolidated statements of financial condition.
Mortgage servicing rights totaled $21.1 million and $22.5 million at June 30, 2023 and December86
Subordinated Debt
We issued or assumed through mergers subordinated debt to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. As of March 31, 2022, which are included in other assets in the accompanying consolidated balance sheets. We purchased $22.7 million of SFR mortgage servicing rights, with underlying mortgage balances of $1.73 billion, during the second quarter of 2022. At June 30, 2023,2024, the carrying value of these purchased servicing rights was $20.2subordinated debt totaled $937.7 million. At March 31, 2024, $131.0 million and the unpaid principal balance of the loans underlying these purchased servicing rights was $1.62 billion.
Duringtrust preferred securities were included in the threeCompany's Tier I capital and six months ended June 30, 2023, we recognized loan servicing income of $0.6$791.9 million and $1.1 million. During the three and six months ended June 30, 2022, we recognized loan servicing income of $0.1 million and $0.3 million.were included in Tier II capital.
Alternative Energy PartnershipsDividends on Common Stock and Interest on Subordinated Debt
As a bank holding company, Banc of California, Inc. is required to notify and receive approval from the FRB prior to declaring and paying a dividend to common stockholders during any period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Interest payments made on subordinated debt are considered dividend payments under FRB regulations. We invest in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects that are designed to generatemay not pay a return primarily throughdividend if the realization of federal tax credits (energy tax credits) and other tax benefits. These investments help promote the development of renewable energy sources and lower the cost of housing for residents by lowering homeowners’ monthly utility costs.
The following table presents the activity related to our investment in alternative energy partnerships for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Balance at beginning of period | | $ | 19,427 | | | $ | 25,156 | | | $ | 21,410 | | | $ | 25,888 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Return of capital | | (352) | | | (582) | | | (717) | | | (1,156) | |
| Gain (loss) on investments using HLBV method | | 36 | | | (1,043) | | | (1,582) | | | (1,201) | |
| Balance at end of period | | $ | 19,111 | | | $ | 23,531 | | | $ | 19,111 | | | $ | 23,531 | |
| Unfunded equity commitments at end of period | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
During the three months ended June 30, 2023 and 2022, we received a return of capital of $0.4 million and $0.6 million. During the six months ended June 30, 2023 and 2022, we received a return of capital of $0.7 million and $1.2 million. We did not make any capital contributions during the periods indicated.
During the three months ended June 30, 2023 and 2022, we recognized a net gain on investment of $36 thousand and a net loss on investment of $1.0 million. During the six months ended June 30, 2023 and 2022, we recognized net losses on investment of $1.6 million and $1.2 million. From an income tax benefits perspective, we recognized no investment tax credits during these periods; however, we recorded income tax expense of $10 thousand and income tax benefits of $0.3 million related to these investments for the three months ended June 30, 2023 and 2022 and income tax benefits of $0.5 million and $0.3 million during the six months ended June 30, 2023 and 2022.
For additional information, see Note 12 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.
Deposits
The following table shows the composition of deposits by type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 | | | | |
| ($ in thousands) | | Amount | | % of Total Deposits | | Amount | | % of Total Deposits | | Amount Change | | |
| Noninterest-bearing deposits | | $ | 2,446,693 | | | 35.6 | % | | $ | 2,809,328 | | | 39.5 | % | | $ | (362,635) | | | |
| Interest-bearing demand deposits | | 1,713,465 | | | 24.9 | % | | 1,947,247 | | | 27.3 | % | | (233,782) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Savings and money market accounts | | 1,057,326 | | | 15.4 | % | | 1,174,925 | | | 16.5 | % | | (117,599) | | | |
| Certificates of deposit of $250,000 or less | | 1,245,279 | | | 18.2 | % | | 793,040 | | | 11.1 | % | | 452,239 | | | |
| | | | | | | | | | | | |
| Certificates of deposit of more than $250,000 | | 408,313 | | | 5.9 | % | | 396,381 | | | 5.6 | % | | 11,932 | | | |
| Total deposits | | $ | 6,871,076 | | | 100.0 | % | | $ | 7,120,921 | | | 100.0 | % | | $ | (249,845) | | | |
Total deposits were $6.87 billion at June 30, 2023, a decrease of $249.8 million,FRB objects or 3.5%, from $7.12 billion at December 31, 2022 due to lower noninterest-bearing checking balances of $362.6 million, lower interest-bearing demand deposits of $233.8 million, and lower savings and money market balances of $117.6 million, partially offset by higher certificates of deposits of $464.2 million.
We continue to focus on growing granular relationship-based deposits and strategically replacing short-term wholesale fundinguntil such time as we actively manage our funding costs. Noninterest-bearing deposits totaled $2.45 billion and represented 36% of total deposits at June 30, 2023 compared to $2.81 billion and 39% at December 31, 2022.
Brokered deposits were $1.08 billion and $614.9 million at June 30, 2023 and December 31, 2022. During the six months ended June 30, 2023, we added short-term brokered deposits to increase our liquidity due to the operating environment during this period.
As of June 30, 2023, insured deposits of $4.80 billion and collateralized deposits of $314.8 million represented 74% of total deposits, compared to insured deposits of $3.93 billion and collateralized deposits of $341.6 million, or 60% of total deposits at December 31, 2022.
The following table presents the scheduled maturities of certificates of deposit as of June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Three Months or Less | | Over Three Months Through Six Months | | Over Six Months Through Twelve Months | | Over One Year | | Total |
| Certificates of deposit of $250,000 or less | | $ | 499,334 | | | $ | 354,316 | | | $ | 268,673 | | | $ | 122,956 | | | $ | 1,245,279 | |
| Certificates of deposit of more than $250,000 | | 185,869 | | | 141,654 | | | 61,390 | | | 19,400 | | | 408,313 | |
| Total certificates of deposit | | $ | 685,203 | | | $ | 495,970 | | | $ | 330,063 | | | $ | 142,356 | | | $ | 1,653,592 | |
Borrowings
We have various available lines of credit. These include the ability to borrow fundsreceive approval from time to time on a long-term, short-term, or overnight basis from the FHLB, the FRB or other financial institutions.we no longer need to provide notice under applicable regulations. The following table presents our borrowings asCompany currently is required to receive FRB approval to declare or pay a dividend to stockholders. Further, if the Company defaults or elects to defer the interest payments on its subordinated debt, it is restricted from paying dividends on its Series F preferred and common stock.
Dividends on Preferred Stock
The Company's ability to pay dividends on the Series F preferred stock depends on the ability of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | June 30, 2023 | | December 31,
2022 |
| ($ in thousands) | | Weighted Average Interest
Rate | | Weighted Average Maturity (years) | | Outstanding Balance | | Outstanding Balance |
| FHLB advances: | | | | | | | | |
| Overnight advances | | —% | | — | | $ | — | | | $ | 20,000 | |
| Term advances | | 2.91% | | 3.00 | | 611,000 | | | 611,000 | |
| Term advances (putable) | | 3.44% | | 4.50 | | 200,000 | | | 100,000 | |
| Unamortized costs | | | | | | (3,003) | | | (3,652) | |
| Total FHLB advances | | 3.04% | | 3.37 | | $ | 807,997 | | | $ | 727,348 | |
| FRB borrowings: | | | | | | | | |
| Short-term advances | | 5.25% | | 0.02 | | $ | 340,000 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
In lightBank to pay dividends to the holding company. The ability of market volatilitythe Company and the Bank to pay dividends in the first half of 2023, we proactively performed liquidity-enhancing measures, including additional advances from the FHLB and draws on available FRB facilities. We reduced our excess liquidity toward the end of the second quarter as market volatility began to stabilize.
FHLB Advances.FHLB advances are collateralized by a blanket lien on all real estate loans. At June 30, 2023, our secured borrowing capacity with the FHLB totaled $2.39 billion, of which the Bank was eligible to borrow an additional $1.16 billion based on qualifying loans with an aggregate unpaid principal balance of $3.47 billion as of that date.
As of June 30, 2023, FHLB advances increased $80.0 million, or 10.9%, to $808.0 million mainly due to an increase in term putable advances of $100.0 million, partially offset by decrease in overnight advances of $20.0 million.
FRB Borrowings.At June 30, 2023, the Bank had borrowing capacity with the Federal Reserve of $1.45 billion, including the secured borrowing capacity through the FRB Discount Window, BIC and BTFP programs. The FRB credit programs are collateralized by certain qualifying loans with an unpaid principal balance of $1.40 billion and securities with a carrying value of $515.3 million.
We utilized available capacity in the FRB Discount Window and BIC programs through $340.0 million in overnight borrowings, but did not utilize the BTFP and there was no outstanding borrowing under this program at June 30, 2023.
Other Borrowings.The Bank maintains available unsecured federal funds lines with six correspondent banks totaling $290.0 million, with no outstanding borrowings at June 30, 2023.
The Bank also has the ability to perform unsecured overnight borrowing from various financial institutions through AFX. The availability of such unsecured borrowings fluctuates regularly,future is subject to bank regulatory requirements, including capital regulations and policies established by the counterparties discretionFRB, and totaled $365.0 millionthe DFPI, as applicable. Dividends on the Series F preferred stock will not be declared, paid, or set aside for payment to the extent such act would cause us to fail to comply with applicable laws and $445.0 million at June 30, 2023regulations, including applicable FRB capital adequacy regulations and December 31, 2022. There werepolicies.
Dividends on the Series F preferred stock are not cumulative or mandatory. If the Company's Board of Directors does not declare a dividend on the Series F preferred stock in respect of a dividend period, then no borrowings underdividend shall be deemed to be payable for such dividend period or be cumulative, and the AFX at June 30, 2023 and December 31, 2022.
In addition,Company will have no obligation to pay any dividend for that dividend period, whether or not the holding company maintainsBoard of Directors declares a $50.0 million revolving linedividend on the Series F preferred stock or any other class or series of credit, with no borrowings under this lineits capital stock for any future dividend period. However, if dividends on the Series F preferred stock have not been declared or paid for the equivalent of credit at June 30, 2023 and December 31, 2022.
For additional information, see Note 6 - Federal Home Loan Bank Advances, Federal Reserve Bank Borrowings and Other Borrowings six dividend payments, whether or not for consecutive dividend periods, holders of the Notes to Consolidated Financial Statements (unaudited) included in Part Ioutstanding shares of this Quarterly Report on Form 10-Q.
Long-term Debt
The following table presents our long-term debt asany other series of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | | Interest
Rate | | Maturity
Date | | Par
Value | | Unamortized Debt Issuance Cost and Discount | | Par
Value | | Unamortized Debt Issuance Cost and Discount |
| Senior notes | | 5.25% | | 4/15/2025 | | $ | 174,000 | | | $ | (609) | | | $ | 175,000 | | | $ | (722) | |
Subordinated notes (1) | | 4.375% | | 10/30/2030 | | 85,000 | | | (1,797) | | | 85,000 | | | (1,899) | |
| PMB Statutory Trust III, junior subordinated debentures | | SOFR + 3.40% | | 9/26/2032 | | 7,217 | | | — | | | 7,217 | | | — | |
| PMB Capital Trust III, junior subordinated debentures | | SOFR + 2.00% | | 10/8/2034 | | 10,310 | | | — | | | 10,310 | | | — | |
| Total | | | | | | $ | 276,527 | | | $ | (2,406) | | | $ | 277,527 | | | $ | (2,621) | |
(1) The Subordinated Notes bear interest at an initial fixed rateCompany's preferred stock ranking equal with the Series F preferred stock with similar voting rights, will generally be entitled to vote for the election of 4.375% per annum, payable semi-annuallytwo additional directors. Additionally, so long as any share of Series F preferred stock remains outstanding, unless dividends on all outstanding shares of Series F preferred stock for the most recently completed dividend period have been paid in arrears. Fromfull or declared and including October 30, 2025 to, but excluding,a sum sufficient for the maturity datepayment thereof has been set aside for payment, no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on the date of earlier redemption, the Subordinated Notes bear interest at a floating rate per annum equal to a benchmark rate, which is expected to be 3-Month Term SOFR, plus a spread of 419.5 basis points, payable quarterly in arrears.
During the three and six months ended June 30, 2023, we repurchased senior notes with an outstanding balance of $1.0 million at a discount and recognized an $80 thousand gain.
At June 30, 2023, we were in compliance with all covenants under our long-term debt agreements.Company's common stock.
Liquidity
Liquidity Management
We are requiredLiquidity is the ongoing ability to maintainaccommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequatecapacity to meet the requirements of normal operations, including both expectedneeds and unexpected cash flow needs such as funding loan commitments, potential deposit outflowsaccommodate fluctuations in asset and dividend payments. Cash flow projections are regularly reviewed and updatedliability levels due to ensure that adequate liquidity is maintained. We also monitor our liquidity requirements in light of rising interest rate trends, changes in the economyCompany’s business operations or unanticipated events.
We have a Management Finance Committee ("MFC") that is comprised of members of senior management and scheduled maturityis responsible for managing commitments to meet the needs of customers while achieving our financial objectives. MFC meets regularly to review funding capacities, current and interest rate sensitivityforecasted loan demand, and investment opportunities.
We manage our liquidity by maintaining pools of our investment and loan portfolio and deposits.
Bancliquid assets on-balance sheet, consisting of California, N.A.
Primary Sources of Liquidity:The Bank’s liquidity, represented by cash and cash equivalentsreceivables due from banks, interest-earning deposits in other financial institutions, and AFSunpledged securities, iswhich we refer to as our primary liquidity. We also maintain available borrowing capacity under secured credit lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.
As a productmember of its operating, investing,the FHLB, the Bank had secured borrowing capacity with the FHLB of $6.3 billion at March 31, 2024, and financing activities.$307.4 million was pledged for letters of credit and the balance outstanding was $300.0 million as of that date. The Bank’s primary sourcesFHLB secured credit line was collateralized by a blanket lien on $10.2 billion of funds are deposits, payments and maturities of outstandingcertain qualifying loans and investment securities; sales$20.1 million of loans, investment securities, and other short-term investments; and funds provided from operations. While scheduled payments and maturities of loans, investment securities and other short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
At June 30, 2023, we had primary liquidity of $1.00 billion, including total cash and cash equivalents of $283.7 million and unpledged AFS securities of $716.4 million. Our cash increased $54.8 million from December 31, 2022 but decreased $727.2 million from March 31, 2023 as we reduced the excess liquidity that we deployed in the first quarter of 2023 as part of a conservative strategy to hold extra liquidity due to the operating environment during this period.
Secondary Sources of Liquidity:securities. The Bank also generates cash throughhad secured borrowing capacity with the FRBSF under the Discount Window program totaling $6.9 billion at March 31, 2024, all of which was available, and unsecured secondary sources$1.5 billion under the Bank Term Funding Program, which was fully borrowed as of funds.that date. The FRBSF Discount Window secured credit line was collateralized by liens on $7.7 billion of qualifying loans and $1.0 billion of pledged securities, and the Bank Term Funding Program credit line was collateralized by pledged securities with a market value of $1.3 billion and a par value of $1.6 billion. The Bank maintains pre-establishedTerm Funding Program provides borrowing capacity on qualifying government and government agency guaranteed securities based on the collateral par value.
In addition to its secured lines of credit with the FHLB and FRBSF, the FRB as secondary sourcesBank also maintains unsecured lines of liquiditycredit for the purpose of borrowing overnight funds, subject to provideavailability, of $290.0 million in the aggregate with several correspondent banks. As of March 31, 2024, there was no balance outstanding related to these unsecured lines of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds for lending and investment activities and to enhance interest rate risk and liquidity risk management. At June 30, 2023, we had available unused secured borrowing capacitieson an overnight or short-term basis with a group of $1.16 billion from the FHLB and $1.11 billionpre-approved commercial banks. The availability of funds changes daily. As of March 31, 2024, there was no outstanding balance through the FRB Discount Window, BIC and BTFP programs.AFX.
The Bank has additional sourcesfollowing tables provide a summary of secondary liquidity through pre-established unsecured federal funds lines with correspondent banks and pre-approved unsecured overnight borrowing lines with various financial institutions through the AFX platform totaling $655.0 million at June 30, 2023. These facilities are subject to counterparty discretion.
As of June 30, 2023, the Company had high levels of liquidity available with total cash and cash equivalents of $283.7 million, unpledged AFS securities of $716.4 million, and unused borrowing capacity of $2.93 billion, resulting in totalBank’s primary and secondary liquidity levels at the dates indicated:
| | | | | | | | | | | |
| March 31, | | December 31, |
| Primary Liquidity - On-Balance Sheet | 2024 | | 2023 |
| (Dollars in thousands) |
| Cash and due from banks | $ | 199,922 | | | $ | 202,427 | |
| Interest-earning deposits in financial institutions | 2,885,306 | | | 5,175,149 | |
| Securities available-for-sale, at fair value | 2,286,682 | | | 2,346,864 | |
| Securities held-to-maturity, at fair value | 2,153,349 | | | 2,168,316 | |
| Less: pledged securities, available-for-sale, at fair value | (771,107) | | | (2,063,754) | |
| Less: pledged securities, held-to-maturity, at fair value | (2,100,308) | | | (2,117,110) | |
| Total primary liquidity | $ | 4,653,844 | | | $ | 5,711,892 | |
| | | |
| Ratio of primary liquidity to total deposits | 16.1 | % | | 18.8 | % |
| | | | | | | | | | | |
| Secondary Liquidity - Off-Balance Sheet | March 31, | | December 31, |
| Available Secured Borrowing Capacity | 2024 | | 2023 |
| (In thousands) |
| Total secured borrowing capacity with the FHLB | $ | 6,298,473 | | | $ | 5,302,210 | |
| Less: letters of credit | (307,441) | | | (243,801) | |
| Less: secured advances outstanding | (300,000) | | | — | |
| Available secured borrowing capacity with the FHLB | 5,691,032 | | | 5,058,409 | |
| Available secured borrowing capacity with the FRBSF | 6,860,233 | | | 6,916,235 | |
| Total secondary liquidity | $ | 12,551,265 | | | $ | 11,974,644 | |
During the three months ended March 31, 2024, the Company's primary liquidity decreased by $1.1 billion to $4.7 billion at March 31, 2024 due mainly to a $2.3 billion decrease in interest-earning deposits in financial institutions, offset partially by a decrease of $1.3 billion in pledged AFS securities. During the three months ended March 31, 2024, the Company's secondary liquidity increased by $576.6 million to $12.6 billion at March 31, 2024 due mainly to an increase in available secured borrowing capacity with the FHLB of $3.93 billion. This was 2.2 times total uninsured and uncollateralized deposits of $1.76 billion.$632.6 million.
Obtaining new customer deposits, or having existing customers increase their deposit balances with us, are the primary sources of funding for our operations and is one the highest priorities of the Company. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our deposits. Additionally, we fund our operations with cash flows from our loan and securities portfolios.
Our deposit balances may decrease if customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk from fluctuating deposit balances, the Bank maintains adequate levels of available liquidity on and off the balance sheet.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At March 31, 2024, brokered deposits totaled $4.1 billion, consisting of $662.8 million of non-maturity brokered accounts and $3.4 billion of brokered time deposits. At December 31, 2023, brokered deposits totaled $4.6 billion, consisting of $1.1 billion of non-maturity brokered accounts and $3.5 billion of brokered time deposits.
Our liquidity policy includes guidelines, which are governed by the Company's Risk Appetite Statement, which include the following metrics: Balance Sheet Liquidity Ratio (unencumbered liquid assets divided by the sum of deposits and borrowings), Brokered Deposits to Total Funding Ratio (wholesale deposits to total deposits plus borrowings), Total Borrowings to Total Funding Ratio (borrowings to total deposits and borrowings), Short-Term Non-Core Funding Ratio (retail time deposits of $250,000 or more that mature within one year, brokered deposits that mature within one year, listing service deposits that mature within one year, official checks, escrow and title company deposits, 1031 exchange accommodator deposits, Federal Funds purchased, and borrowings that mature within one year as a percentage of total assets) and the Wholesale Funding Ratio (wholesale deposits to total deposits and borrowings). At March 31, 2024, the Bank was in compliance with all of its funding concentration liquidity guidelines.
Holding Company Liquidity
Banc of California, Inc.
Primary Sources acts as a source of Liquidity:financial strength for the Bank which can also include being a source of liquidity. The primary sources of fundsliquidity for Banc of California, Inc., on a stand-alonethe holding company basis, areinclude dividends andfrom the Bank, intercompany tax payments from the Bank, outside borrowing, and itsBanc of California, Inc.'s ability to raise capital, issue subordinated debt, and issue debt securities. Dividends fromsecure outside borrowings. Banc of California, Inc.'s ability to obtain funds for the Bank arepayment of dividends to our stockholders, the repurchase of shares of common stock, and other cash requirements is largely dependent upon the Bank’s earnings and areearnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company. OCC regulations impose various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptionscompany through intercompany loans, advances, or repurchases, and certain other items. Generally, a well-capitalized bank may make capital distributions during any calendar year equal to up to 100 percent of year-to-date net income plus retained net income for the two preceding years without prior OCC approval. However, any dividend paid by the Bank would be limited by the need to maintain its well-capitalized status plus the capital buffer in order to avoid additional dividend restrictions (Refer to Capital - Dividend Restrictions below for additional information). Currently, the Bank does not have sufficient dividend-paying capacity to declare and pay such dividends to the holding company without obtaining prior approval from the OCC under the applicable regulations. During the three and six months ended June 30, 2023, the Bank paid $50.0 million and $70.0 million of dividends tocash dividends. Banc of California, Inc.'s ability to pay dividends is also subject to the restrictions set forth by the FRB, and by certain covenants contained in our subordinated debt. See "-Regulatory Matters - Dividend on Preferred Stock" for information regarding the payment of dividends on the Series F preferred stock.
At June 30, 2023,March 31, 2024, Banc of California, Inc. had $52.2$233.9 million in cash alland cash equivalents, of which a substantial amount was on deposit at the Bank.
Secondary Sources We believe this amount of Liquidity:In addition,cash, along with anticipated future dividends from the Bank, will be sufficient to fund the holding company hascompany’s cash flow needs over the next 12 months.
Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a $50.0 million revolving lineportion is expected to be funded, and standby letters of credit. There were no borrowings under this lineAt March 31, 2024, our loan commitments and standby letters of credit at June 30, 2023were $5.5 billion and at December 31, 2022,$248.5 million. The loan commitments, a portion of which will eventually result in funded loans, increase our profitability through net interest income when drawn and we were in compliance with all covenants.
On February 13, 2023, we announcedunused commitment fees prior to being drawn. We manage our Board of Directors authorized the repurchase of up to $35 millionoverall liquidity taking into consideration funded and unfunded commitments as a percentage of our common stock. The repurchase authorization expiresliquidity sources. Our liquidity sources, as described in February 2024. Purchases may"- Liquidity - Liquidity Management," have been and are expected to be made in open-market transactions, in block transactionssufficient to meet the cash requirements of our lending activities. For further information on or off an exchange, in privately negotiated transactions or by other means as determined by our management and in accordance with the regulations of the SEC. The timing of purchases and the number of shares repurchased under the program will depend on a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions.
During the three and six months ended June 30, 2023, common stock repurchased under the program totaled 1,348,545 shares and 1,759,491 shares at a weighted average price of $11.85 and $12.02. As of June 30, 2023, the Company had $13.9 million remaining under the current stock repurchase authorization.
loan commitments, see Note 10. Commitments and Contractual ObligationsContingencies, of our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
The following table presents our commitments and contractual obligations as of June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commitments and Contractual Obligations |
| ($ in thousands) | | Total Amount Committed | | Within
One Year | | More Than One Year Through Three Years | | More Than Three Years Through Five Years | | Over Five Years |
| Commitments to extend credit | | $ | 200,765 | | | $ | 24,005 | | | $ | 115,965 | | | $ | 35,195 | | | $ | 25,600 | |
| Unused lines of credit | | 1,378,247 | | | 946,093 | | | 291,952 | | | 114,201 | | | 26,001 | |
| Standby letters of credit | | 9,133 | | | 8,237 | | | 896 | | | — | | | — | |
| Total commitments | | $ | 1,588,145 | | | $ | 978,335 | | | $ | 408,813 | | | $ | 149,396 | | | $ | 51,601 | |
| FHLB advances and FRB borrowings | | $ | 1,151,000 | | | $ | 340,000 | | | $ | 311,000 | | | $ | 500,000 | | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| Long-term debt | | 276,527 | | | — | | | 174,000 | | | — | | | 102,527 | |
| Operating and capital lease obligations | | 31,514 | | | 8,459 | | | 13,947 | | | 6,471 | | | 2,637 | |
| Certificates of deposit | | 1,653,592 | | | 1,511,236 | | | 141,322 | | | 1,034 | | | — | |
| Total contractual obligations | | $ | 3,112,633 | | | $ | 1,859,695 | | | $ | 640,269 | | | $ | 507,505 | | | $ | 105,164 | |
At June 30, 2023, we had unfunded commitments of $15.7 million, $7.5 million, and $20.0 million for LIHTC investments, SBIC investments, and other investments.
Capital
In order to maintain adequate levels of capital, we continuously assess projected sources and uses of capital to support projected asset growth, operating needs and credit risk. We consider, among other things, earnings generated from operations and access to capital from financial markets. In addition, we perform capital stress tests on an annual basis to assess the impact of adverse changes in the economy on our capital base. Increases in market interest rates resulted in higher net unrealized losses in our securities portfolio and stockholders’ equity. As market interest rates increase, bond prices tend to fall and, consequently, the fair value of our securities may also decrease. To this end, we may have further net unrealized losses on our securities classified as available–for-sale, which would negatively affect our total and tangible stockholders’ equity.
7589
Regulatory Capital
The Company and the Bank are subject to the regulatory capital adequacy guidelines that are established by the Federal banking regulators. Under the relevant rules and including the required conservation buffer, common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%.
The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | Banc of California, Inc. | | Banc of California, NA | | | | Minimum Capital Requirements | | Well-Capitalized Requirements (Bank) | | Capital Conservation Buffer Requirements |
| June 30, 2023 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total risk-based capital | | | | 14.26 | % | | 15.64 | % | | | | 8.00 | % | | | | 10.00 | % | | 10.50 | % |
| Tier 1 risk-based capital | | | | 11.88 | % | | 14.60 | % | | | | 6.00 | % | | | | 8.00 | % | | 8.50 | % |
| Common equity tier 1 capital | | | | 11.88 | % | | 14.60 | % | | | | 4.50 | % | | | | 6.50 | % | | 7.00 | % |
| Tier 1 leverage | | | | 9.39 | % | | 11.56 | % | | | | 4.00 | % | | | | 5.00 | % | | N/A |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total risk-based capital | | | | 14.19 | % | | 16.00 | % | | | | 8.00 | % | | | | 10.00 | % | | 10.50 | % |
| Tier 1 risk-based capital | | | | 11.78 | % | | 14.92 | % | | | | 6.00 | % | | | | 8.00 | % | | 8.50 | % |
| Common equity tier 1 capital | | | | 11.78 | % | | 14.92 | % | | | | 4.50 | % | | | | 6.50 | % | | 7.00 | % |
| Tier 1 leverage | | | | 9.70 | % | | 12.25 | % | | | | 4.00 | % | | | | 5.00 | % | | N/A |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dividend Restrictions
Payment of dividends by the Company are subject to guidance provided by the Federal Reserve. That guidance provides that bank holding companies that plan to pay dividends that exceed net earnings for a given period should first consult with the Federal Reserve. To the extent future quarterly dividends exceed quarterly net earnings, payment of dividends in respect of the Company’s common stock will be subject to prior consultation and non-objection from the Federal Reserve.
Our principal source of funds for dividend payments is dividends received from the Bank. Federal banking laws and regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, in the case of the Bank, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Accordingly, any dividend granted by the Bank would be limited by the need to maintain its well capitalized status plus the capital buffer in order to avoid additional dividend restrictions. As described above, any near term dividend by the Bank will require OCC approval. During the three and six months ended June 30, 2023, the Bank paid $50.0 million and $70.0 million in dividends to Banc of California, Inc.
During the three and six months ended June 30, 2023, we declared and paid dividends on our common stock of $0.10 and $0.20 per share totaling $5.9 million and $11.5 million.
ITEM 3 —3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.
Market Risk - Foreign Currency Exposure
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 contracts to hedge exposures to loans and debt instruments denominated in foreign currencies. 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 March 31, 2024, the U.S. Dollar notional amounts of loans receivable and subordinated debt payable denominated in foreign currencies were $8.6 million and $27.8 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $8.7 million and $28.5 million. We recognized a foreign currency translation net loss of $190,000 for the three months ended March 31, 2024 and a foreign currency translation net loss of $165,000 for the three months ended March 31, 2023.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk - Company Governance. 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. The Management Finance Committee ("MFC") and the Finance Committee of the Company's Board of Directors review the results of these analyses at least quarterly. 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.
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 MFC and the Finance Committee of the Board of Directors annually. 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. 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. 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 MFC and the Finance Committee of the Company's Board of Directors at each monthly or quarterly meeting, as applicable.
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. 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.
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. 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.
We maintain both a management asset/liability committee (“
The Management ALCO”Finance Committee ("MFC"), is comprised of select members of senior management, andmanagement. The Company also has a joint asset/liability committeeFinance Committee of the Boards of Directors of the Company and the Bank (“Board ALCO”, together(together with Management ALCO,MFC, the “ALCOs”). In order to manage the risk of potential adverse effects of material and prolonged or volatile changes in interest rates on our results of operations, we have adopted asset/liability management policies to align maturities and repricing terms of interest-earning assets to interest-bearing liabilities. The asset/liability management policies establish guidelines for the volume and mix of assets and funding sources taking into account relative costs and
spreads, interest rate sensitivity and liquidity needs, while management monitors adherence to those guidelines with oversight by the ALCOs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals. The ALCOs meet no less than quarterly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to our economic value of equity analysis.
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.
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. 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. Interest rate risk is caused by the following factors:
•Repricing risk - timing differences in the repricing and maturity of interest-earning assets and interest-bearing liabilities;
•Option risk - changes in the expected maturities of assets and liabilities, such as borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity;
•Yield curve risk - changes in the yield curve where interest rates increase or decrease in a nonparallel fashion; and
•Basis risk - changes in spread relationships between different yield curves, such as U.S. Treasuries, U.S. Prime Rate, SOFR, and London Interbank Offered Rate.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. Management of our interest rate risk is overseen by the Board ALCO,Finance Committee of the Boards of Directors of the Company and Bank, which delegates the day to day management of interest rate risk to the Management ALCO. Management ALCOMFC. MFC ensures that the Bank is following the appropriate and current regulatory guidance in the formulation and implementation of our interest rate risk program. Board ALCOThe Finance Committee of the Boards of Directors of the Company and the Bank 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.
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.
Our interest rate risk exposure is measured and monitored through various risk management tools, including a simulation model that performs interest rate sensitivity analysis under multiple scenarios. The simulation model is based on the actual maturities and re-pricing characteristics of the Bank’s interest-rate sensitive assets and liabilities. The simulated interest rate scenarios include an instantaneous parallel shift in the yield curve (“Rate Shock”). We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”), and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled utilizing various assumptions for assets, liabilities, and derivatives.
We used a NII simulation model to measure the estimated changes in NII that would result over the next twelve months from immediate and sustained changes in interest rates as of March 31, 2024. We have assumed no growth or changes in the product mix of either our total interest-sensitive assets or liabilities over the next twelve months, therefore the results reflect an interest rate shock to a static balance sheet. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income.
EVE measures the period end present value of assets minus the present value of liabilities. Asset liability management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios. In some ways, the economic value approach provides a broader scope than net income volatility approach since it captures all anticipated cash flows.
The balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net interest margin,income, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities. Conversely, the balance sheet is considered “liability sensitive” when an increase in short-term interest rates
is expected to compress our net interest margin,income, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets.
At June 30, 2023,March 31, 2024, our interest rate risk profile remains “neutral”, in line withis slightly “liability sensitive,” but less liability sensitive as compared to our “liability sensitive” interest rate risk profile position as of March 31, 2023 and December 31, 2022.2023. This shift is primarily due to the change in the mix of funding sources during the first quarter of 2024 resulting from the paydown of the Bank Term Funding Program balance. 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.
The following table presents the projected change in the Company’s economic value of equity at June 30, 2023March 31, 2024 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) | | | Change in Interest Rates in Basis Points (bps) (1) |
| Economic Value of Equity | | | Economic Value of Equity | | Net Interest Income |
| | | Amount | | | | | Amount | | Percentage | | | | Amount | | Percentage |
| March 31, 2024 | | March 31, 2024 | Amount | | Change | | Amount | | Change |
| (Dollars in millions) | | | (Dollars in millions) |
| | | 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 |
| June 30, 2023 | | | | | | | | | | | | |
| +200 bps | |
| | +200 bps | |
| | +200 bps | +200 bps | | $ | 1,498,619 | | | $ | (8,929) | | | (0.6) | % | | $ | 319,495 | | | $ | 7,443 | | | 2.4 | % | $ | 5,837 | | | $ | | $ | (358) | | | (5.8) | | (5.8) | % | | $ | 1,076 | | | $ | | $ | (4) | | | (0.4) | | (0.4) | % |
| +100 bps | +100 bps | | 1,509,568 | | | 2,020 | | | 0.1 | % | | 315,895 | | | 3,843 | | | 1.2 | % | +100 bps | $ | 6,023 | | | $ | | $ | (172) | | | (2.8) | | (2.8) | % | | $ | 1,071 | | | $ | | $ | (9) | | | (0.8) | | (0.8) | % |
| 0 bps | 0 bps | | 1,507,548 | | | 312,052 | | |
| -100 bps | -100 bps | | 1,483,218 | | | (24,330) | | | (1.6) | % | | 305,290 | | | (6,762) | | | (2.2) | % |
| -100 bps | |
| -100 bps | | $ | 6,349 | | | $ | 154 | | | 2.5 | % | | $ | 1,093 | | | $ | 13 | | | 1.2 | % |
| -200 bps | -200 bps | | 1,431,619 | | | (75,929) | | | (5.0) | % | | 295,539 | | | (16,513) | | | (5.3) | % | -200 bps | $ | 6,472 | | | $ | | $ | 277 | | | 4.5 | | 4.5 | % | | $ | 1,105 | | | $ | | $ | 25 | | | 2.4 | | 2.4 | % |
|
(1)Assumes an instantaneous uniform change in interest rates at all maturities and no rate shock has a rate lower than zero percent.
Due to the transformation of the franchise to our relationship-based banking model since 2019, with higher relative percentages of noninterest-bearing deposits and variable rate commercial loans, we believe we are positioned for the current interest rate environment with a neutral balance sheet. 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, was 15% at June 30, 2023.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. 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. 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. 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.
92
ITEM 4 -4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controlsdisclosure controls and Procedures
An evaluation of the Company’sprocedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as definedas of March 31, 2024 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in Rule 13a-15(e)the reports that we file or submit under the Securities Exchange Act of 1934, (the Act) as of June 30, 2023 was carried out under the supervision and with the participation of the Company’s Principal Executive Officer, Principal Financial Officer and other members of the Company’s senior management. The Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of June 30, 2023, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Principal Executive Officer and Principal Financial Officer) to allow timely decisions regarding required disclosure; and (ii)amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in the Company’sour internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the six months ended June 30, 2023first quarter of 2024 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control. The design of any
control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
PART II —II. OTHER INFORMATION
ITEM 1 -1. LEGAL PROCEEDINGS
From time to timeThe information set forth in Note 10. Commitments and Contingencies of our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.
In addition, in the ordinary course of our business, we are involved as plaintiff or defendant inparty to various legal actions, arising inwhich we believe are incidental to the normal courseoperation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. 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 1A -1A. RISK FACTORS
There have been no material changes toFor information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors that appeared under Part I, Item 1A. “Risk Factors”disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2022 other than as set forth below.
Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect2023. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this Quarterly Report on the combined company following the merger with PacWest.
Before the merger with PacWest and the subsequent merger of the Bank and PacWest Bank (the “bank merger”) may be completed, the requisite approvals, consents and non-objections must be obtained from the Federal Reserve and the California Department of Financial Protection and Innovation (“CDFPI”). Under the Investment Agreements, before the $400 million (aggregate) equity investment (the “equity investment”) by the Investors may be completed, the Warburg Investors and the Centerbridge Investors each must have received reasonably satisfactory oral confirmation from staff of the legal division of the Federal Reserve that the consummation of the applicable equity investment will not result in such Investor being deemed to have, or to have acquired, “control” of the Company for purposes of the Bank Holding Company Act of 1956 (the “BHC Act”) or the Change in Bank Control Act of 1978 (the “CIBC Act”). Other approvals, waivers or consents from regulators may also be required, both for the merger and the equity investment.
In determining whether to grant these approvals and confirmations, such regulatory authorities consider a variety of factors. These approvals or confirmations could be delayed or not obtained at all, including due to (i) a party’s regulatory standing (or adverse development in respect thereof), (ii) the relationship between the Company, on the one hand, and the Investors, on the other hand or (iii) any other factors considered by regulators when granting such approvals or confirmations, including governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment generally.
The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the merger agreement or the Investment Agreements. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying or jeopardizing the completion of any of the transactions contemplated by the merger agreement or the Investment Agreements, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reducing the anticipated benefits of the merger (including the equity investment and its inclusion as additional CET1 regulatory capital, assuming the merger and the equity investment are consummated successfully and within the expected timeframe). In addition, there can be no assurance that any such conditions, limitations, obligations or restrictions will not result in abandonment of the merger and the equity investment. Additionally, the completion of the merger and the equity investments is conditioned on the absence of certain orders, injunctions or decrees by any governmental entity of competent jurisdiction that would prevent, prohibit or make illegal the completion of any of the transactions contemplated by the merger agreement or the equity investment, as applicable.
The Company and PacWest have agreed in the merger agreement to use reasonable best efforts to consummate the transactions contemplated by the merger agreement on the terms and conditions set forth herein, including using reasonable best efforts to satisfy all conditions and covenants under their control in the merger agreement. However, under the terms of the merger agreement, neither the Company nor PacWest, nor any of their respective subsidiaries, is required or permitted (without the written consent of the other party), to take any action, or commit to take or refrain from taking any action, or agree to any condition or restriction, in connection with obtaining the required permits, authorizations, consents, orders or approvals of governmental entities that would (i) reasonably be expected to require the combined company or any other person to issue equity securities or otherwise raise capital in excess of the amount contemplated by the equity investment under the merger agreement; or (ii) (A) not apply to a similarly sized financial holding company and state member bank that are well-capitalized and well-managed and (B) be materially more burdensome, individually or in the aggregate, on the operations, business or profitability of the combined company and its subsidiaries than those imposed on the Company or the Bank as of the date of the merger agreement (a “materially burdensome regulatory condition”).
The Company and the Investors have agreed in the Investment Agreements to use reasonable best efforts to promptly prepare and file for all permits, consents, approvals, confirmations and authorizations of all third parties and governmental entities that are necessary or advisable to consummate the equity investment as promptly as reasonably practicable, and to respond to any request for information from any government authority related to the foregoing, so as to enable the parties to consummate the transaction contemplated by the Investment Agreements. However, under the terms of the Investment Agreements, neither the Company nor any of its subsidiaries is permitted (without the written consent of the other party), and none of the Investors or any of their affiliates is required, to take any action, or commit to take or refrain from taking any action, or accept or agree to any condition or restriction, that would reasonably be expected to cause any Investor, any of their respective affiliates or any of their partners or principals to (A) “control” the Company or be required to become a bank holding company, in each case, pursuant to the BHC Act; (B) “control” the Company or be required to provide prior notice pursuant to the CIBC Act; (C) serve as a source of financial strength to the Company pursuant to the BHC Act; or (D) enter into any capital or liquidity maintenance agreement or any similar agreement with any governmental entity, provide capital support to the Company, PacWest or any of their respective subsidiaries or otherwise commit to or contribute any additional capital to, provide other funds to, or make any other investment in, the Company, PacWest or any of their respective subsidiaries.
Consummation of the merger and each Investor’s equity investment is conditioned upon the substantially concurrent closing of an aggregate $400 million equity investment.
As a condition to the consummation of the merger with PacWest, the Company must substantially concurrently therewith receive a $400 million (in the aggregate) or greater equity investment in the Company’s equity securities qualifying as CET1 capital (“qualifying equity securities”). As a condition to the consummation of each Investor’s equity investment, the Company must have substantially concurrently received an investment of $400 million or greater in the Company’s qualifying equity securities. Although the Company has legally binding agreements with each of the Warburg Investors and the Centerbridge Investors pursuant to which the Investors (in the aggregate) have agreed to invest $400 million in the Company’s qualifying equity securities substantially concurrently with the consummation of the merger, the obligation of each Investor to make such investment is subject to various conditions. If any Investor fails to consummate its portion of the equity investment, the Company may be required to seek a new investment in the Company’s qualifying equity securities from other third parties, which may or may not be available (and may or may not be available on the same terms as the Investment Agreements). Failure to consummate (or a delay in consummating) the equity investment may cause the failure or delay in the ability of the parties to consummate the merger.
Failure to consummate the merger and equity investment could negatively impact the Company.
The consummation of the merger is subject to the receipt of requisite regulatory and stockholder approvals and the satisfaction of other closing conditions, including the substantially concurrent consummation of the equity investment, as noted above. If the merger is not completed for any reason, including as a result of the Company stockholders or PacWest stockholders failing to grant the applicable requisite stockholder approval at the applicable company’s special stockholders meeting or the imposition of a materially burdensome regulatory condition resulting in either the Company or PacWest refusing to consummate the merger, there may be various adverse consequences and the Company may experience negative reactions from the financial markets and from its customers and employees. For example, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of consummating the merger. Additionally, if the merger agreement is terminated, the market price of the Company’s common stock could decline to the extent that current market prices reflect a market assumption that the merger and/or the equity investment will be beneficial and will be consummated. The Company also could be subject to litigation related to any failure to complete the merger or the equity investment or to proceedings commenced against the Company to perform its obligations under the merger agreement or the Investment Agreements. If the merger agreement is terminated under certain circumstances, the Company may be required to pay a termination fee of $39.5 million to PacWest and remit a portion of the termination fee obtained by the Company from PacWest to the Investors.
Additionally, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement and the Investment Agreements (including the equity investment and the balance sheet repositioning (as defined below)), as well as the costs and expenses of preparing, filing, printing and mailing of a joint proxy statement/prospectus in connection with the merger, and all filing and other fees paid in connection with the merger. If the merger and/or the equity investment is not completed, the Company would have to pay these expenses without realizing the expected benefits of the merger and/or the equity investment. Although the Company may be entitled to receive a termination fee of $39.5 million from PacWest and/or expense reimbursement with respect to certain costs and expenses associated with the balance sheet repositioning if the merger agreement is terminated under certain circumstances, (i) such payments may not be sufficient to fully compensate the Company for the losses it may incur in connection with a failure of the merger to be consummated and (ii) the Company may be required to remit a portion of the termination fee to the Investors.
Combining the Company and PacWest may be more difficult, costly or time-consuming than expected, and the Company may fail to realize the anticipated benefits of the merger.
The success of the merger will depend, in part, on the ability of the Company and PacWest to dispose certain assets in the planned balance sheet repositioning (the “balance sheet repositioning”) along with anticipated cost savings from combining the businesses of the Company and PacWest. To realize the anticipated benefits and cost savings from the merger, the Company and PacWest must successfully dispose of assets at closing, which is inherently subject to market conditions and the risk that such conditions will be less favorable than what the parties expected when entering into the merger agreement, and successfully integrate and combine their businesses in a manner that permits those benefits and cost savings to be realized without adversely affecting current revenues and future growth. If the Company and PacWest are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings of the merger could be less than anticipated, and integration may result in additional and unforeseen expenses.
An inability to realize the full extent of the anticipated benefits of, the merger and the other transactions contemplated by the merger agreement (including the balance sheet repositioning), as well as any delays encountered in the integration process, could have an adverse effect upon the capital position, revenues, levels of expenses and operating results of the combined company following the completion of the merger, which may adversely affect the value of the common stock of the combined company following the completion of the merger.
The Company and PacWest have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with its stakeholders or to achieve the anticipated benefits and cost savings of the merger. Integration efforts between the companies may also divert management attention and resources. These integration matters could have an adverse effect on the Company during this pre-closing period and for an undetermined period after consummation of the merger on the combined company.
Furthermore, the board of directors and executive leadership of the combined company and bank will consist of former directors and executive officers from each of the Company and PacWest, as well as a director designated by the Warburg Investors. Combining the boards of directors and management teams of each company into a single board of directors and a single management team could require the reconciliation of differing priorities and philosophies.
The combined company may be unable to retain the Company and/or PacWest personnel successfully after the merger is completed.
The success of the merger will depend, in part, on the combined company’s ability to retain the talent and dedication of key employees currently employed by the Company and PacWest. It is possible that these employees may decide not to remain with the Company or PacWest, as applicable, while the merger is pending or with the combined company after the merger is consummated. If the Company and PacWest are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, the Company and PacWest could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, following the merger, if key employees terminate their employment, the combined company’s business activities may be adversely affected, and management’s attention may be diverted from successfully hiring suitable replacements, all of which may cause the combined company’s business to suffer. The Company and PacWest also may not be able to locate or retain suitable replacements for any key employees who leave either company.
The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. In addition, subject to certain exceptions, the Company has agreed to operate its business in the ordinary course in all material respects and to refrain from taking certain actions that may adversely affect its ability to consummate (i) the transactions contemplated by the merger agreement on a timely basis without the consent of PacWest and (ii) the equity investment on a timely basis without the consent of the Investors. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.
The Company has incurred and is expected to incur substantial costs related to the merger and integration.
The Company has incurred and expects to incur a number of non-recurring costs associated with the merger and the equity investment. These costs include legal, financial, accounting, consulting and other advisory fees, retention, severance and employee benefit-related costs, public company filing fees and other regulatory fees, financial printing and other printing costs,
closing, integration and other related costs. Some of these costs are payable by the Company regardless of whether the merger is completed.
Stockholder litigation related to the merger and/or the equity investment could prevent or delay the completion of the merger and/or the equity investment, result in the payment of damages or otherwise negatively impact the business and operations of the Company.
Stockholders may bring claims in connection with the proposed merger and/or the proposed equity investment and, among other remedies, may seek damages or an injunction preventing the merger and/or the equity investment from closing. If any plaintiff were successful in obtaining an injunction prohibiting the Company or PacWest from completing the merger or any other transactions contemplated by the merger agreement or the Company and the Investors from consummating the equity investment (or any portion thereof), then such injunction may delay or prevent the effectiveness of the merger and the equity investment and could result in costs to the Company, including costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger and/or the equity investment. Further, such lawsuits and the defense or settlement of any such lawsuits may have an adverse effect on the financial condition and results of operations of the Company.
The merger agreement may be terminated in accordance with its terms, and the merger may not be consummated.
The obligation of the merger agreement parties to consummate the merger is subject to a number of conditions that must be satisfied or waived in order to consummate the merger. Those conditions include, among other things: (i) receiving the requisite approval by each of the Company stockholders and the PacWest stockholders of certain matters relating to the merger at each company’s respective special stockholders meeting; (ii) the receipt of required regulatory approvals from the Federal Reserve and the CDFPI; (iii) the absence of any order, injunction, decree or other legal restraint preventing the consummation of the merger, the bank merger or any of the other transactions contemplated by the merger agreement or making the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement illegal; and (iv) the Form S-4 for the merger being declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended; and (v) the consummation of a total of $400 million or greater investment in the Company’s qualifying equity securities substantially concurrently with the closing of the merger. Each party’s obligation to consummate the merger is also subject to certain additional conditions, including (a) subject to applicable materiality standards, the accuracy of the representations and warranties of the other party (including the absence of any material adverse effect, as defined in the merger agreement), (b) the performance in all material respects by the other party of its obligations under the merger agreement and (c) the receipt by each party of an opinion from its counsel to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
These conditions to the consummation of the merger may not be satisfied or waived in a timely manner or at all, and, accordingly, the merger may not be consummated. In addition, the parties can mutually decide to terminate the merger agreement at any time, before or after the requisite stockholder approvals, or PacWest or the Company may elect to terminate the merger agreement in certain other circumstances, including by the Company upon the occurrence of a material adverse effect under certain circumstances with respect to PacWest or by PacWest upon the occurrence of a material adverse effect under certain circumstances with respect to the Company.
The Investment Agreements may be terminated in accordance with their respective terms and the equity investment may not be consummated.
The obligation of the parties to each Investment Agreement to consummate the equity investment is subject to a number of conditions which must be satisfied or waived in order to consummate the equity investment. Those conditions include, among other things: (i) the substantially concurrent consummation of the merger and the satisfaction of the conditions to the merger under the merger agreement; (ii) the Warburg Investors and the Centerbridge Investors each must have received reasonably satisfactory oral confirmation from staff of the legal division of the Federal Reserve that the consummation of the applicable equity investment will not result in such Investor being deemed to have, or to have acquired, “control” of the Company for purposes of the BHC Act or CIBC Act; (iii) the absence of any order, injunction, decree or other legal restraint preventing the completion of the equity investment or making the completion of the equity investment or any of the other transactions contemplated by the Investment Agreements illegal; and (iv) the consummation of a total of $400 million or greater investment in the Company’s qualifying equity securities. Each party’s obligation to consummate the equity investment is also subject to certain additional customary conditions, including (a) subject to applicable materiality standards, the accuracy of the representations and warranties of the other party, and (b) the performance in all material respects by the other party of its obligations under the applicable Investment Agreement.
These conditions to the consummation of the equity investment may not be satisfied or waived in a timely manner or at all, and, accordingly, the equity investment may not be consummated. In addition, the parties to each Investment Agreement can mutually decide to terminate the applicable Investment Agreement at any time, before or after the requisite stockholder approvals, or the parties may elect to terminate the applicable Investment Agreement in certain other circumstances.
Failure to complete the balance sheet repositioning could delay or hinder regulatory approvals.
Although neither the Company’s nor PacWest’s balance sheet repositioning is a condition to consummate the merger under the merger agreement, the regulators may not approve the merger until the balance sheet repositioning can be completed to minimize capital and liquidity risk of the combined company. Therefore, if either the Company or PacWest is unable to complete its balance sheet repositioning, regulatory approval may be delayed or denied.
The Company may suffer significant losses from the balance sheet repositioning.
Under the merger agreement, the Company and PacWest commit to use reasonable best efforts to enter into agreements to complete the balance sheet repositioning at the best commercially reasonably available price. Therefore, depending on the existence of various potential buyers and competitive prices, the Company may sell its assets at a significant loss.
Our ability to use net operating loss carryforwards and other tax attributes may be limited in connection with the Mergers or other ownership changes.
Both the Company and PacWest are expected to incur taxable losses in connection with the balance sheet repositioning. To the extent these taxable losses exceed our or PacWest’s taxable income, as applicable, unused losses will carry forward to offset a portion of future taxable income, if any, until such unused losses expire, if at all.
Under Sections 382 and 383 of the Internal Revenue Code (the “Code”), these federal net operating loss carryforwards, certain losses incurred following the mergers, and other tax attributes may become subject to an annual limitation in the event of certain cumulative changes in our or PacWest’s ownership. An “ownership change” pursuant to Section 382 of the Code generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Our ability to utilize net operating loss carryforwards, certain losses incurred following the mergers, and other tax attributes to offset future taxable income or tax liabilities may be limited as a result of ownership changes, including potential changes in connection with the mergers or other transactions. Similar rules may apply under state tax laws. We have not yet determined the amount of the cumulative change in our and PacWest’s ownership resulting from the mergers or other transactions, or any resulting limitations on our ability to utilize our net operating loss carryforwards, certain losses incurred following the mergers, and other tax attributes. Such limitations could result in increased future income tax liability to us and our future cash flows could be adversely affected. The effect of such limitations could also adversely affect our regulatory capital ratios. In certain circumstances, to preserve our ability to utilize our tax attributes without limitation, we may take actions to attempt to prevent an “ownership change” from occurring, including by adopting provisions that would limit or discourage stockholders from acquiring 5% or more of the Company, or in the case of stockholders that already own 5% or more of the Company, from increasing their ownership. There can be no assurances that such actions will be available, or if such actions are available, whether we will decide to undertake any such actions and if such actions are undertaken, whether such actions would be effective in preventing an “ownership change” pursuant to Section 382 of the Code.
ITEM 2 -2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer PurchasesThe following table presents stock purchases made during the first quarter of Equity Securities2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Purchase of Equity Securities by the Issuer | | |
| | Total Number of Shares | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan |
| Common Stock: | | | | | | | | |
| From April 1, 2023 to April 30, 2023 | | 392,220 | | | $ | 12.30 | | | 390,672 | | | $ | 25,024,059 | |
| From May 1, 2023 to May 31, 2023 | | 463,403 | | | $ | 10.78 | | | 462,411 | | | $ | 20,037,941 | |
| From June 1, 2023 to June 30, 2023 | | 496,133 | | | $ | 12.48 | | | 495,462 | | | $ | 13,852,812 | |
| Total | | 1,351,756 | | | $ | 11.85 | | | 1,348,545 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | | Program |
| (Dollars in thousands, except per share amounts) |
| January 1 - January 31, 2024 | 600 | | | $ | 13.74 | | | — | | | $ | — | |
| February 1 - February 29, 2024 | 44,782 | | | $ | 14.73 | | | — | | | $ | — | |
| March 1 - March 31, 2024 | 38,722 | | | $ | 14.77 | | | — | | | $ | — | |
| Total | 84,104 | | | $ | 14.74 | | | — | | | |
During the three and six months ended June 30, 2023, purchases of shares of common stock related__________________________
(1) Shares repurchased pursuant to shares purchased under our stock repurchase program and shares surrenderednet settlement by employees in order to pay employeesatisfaction of income tax liabilities associated with vested awards under our employeewithholding obligations incurred through the vesting of Company stock benefit plans.awards.
On February 13, 2023, we announced a repurchase program of up to $35 million of our common stock. The repurchase authorization expires in February 2024. Purchases may be made in open-market transactions, in block transactions on or off an
exchange, in privately negotiated transactions, or by other means as determined by our management and in accordance with the regulations of the SEC. The timing of purchases and the number of shares repurchased under the program will depend on a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions.
ITEM 3 -3. DEFAULTS UPON SENIOR SECURITIES
NoneNone.
ITEM 44. MINE SAFETY DISCLOSURES
Not applicableapplicable.
ITEM 5 -5. OTHER INFORMATION
NoneUpdate to Previously Reported Results
On April 23, 2024, the Company issued a press release announcing its financial results for the first quarter ended March 31, 2024 (the “Earnings Press Release”). In the Earnings Press Release, the Company reported $32.5 million of net loan discount accretion for the three months ended March 31, 2024 related primarily to the accretion of fair value discounts on loans acquired in the recent transformational merger between the Company and PacWest Bancorp. While completing its review procedures for the preparation of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024, the Company identified an error in its previously reported amount of net loan discount accretion and, accordingly, adjusted its net loan discount accretion for the three months ended March 31, 2024 to $22.4 million. As a result, the Company also adjusted net earnings from $38.1 million to $30.9 million, diluted earnings per share from $0.17 to $0.12, and adjusted diluted earnings per share from $0.19 to $0.15 (see "Non-GAAP Financial Measures").
The information in this Form 10-Q amends and supersedes the disclosures in the Earnings Press Release.
Trading Arrangements
During the quarter ended March 31, 2024, none of our directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (in each case, as defined in Item 408 of Regulation S-K) for the purchase or sale of the Company’s securities.
ITEM 6 -6. EXHIBITS
| | | | | |
| Exhibit Number | |
| |
| Description |
| 2.1 | |
| 3.1 | |
| 3.2 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
10.1 | |
10.2 | |
10.3 | |
| 31.1 | |
| 31.2 | |
32.032.1 | |
101.032.2 | The following financial statements |
1
| | | | | |
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets as of March 31, 2024 and footnotes from December 31, 2023, (ii) the Registrant’sCondensed Consolidated Statements of Earnings (Loss) for the three months ended March 31, 2024, December 31, 2023 and March 31, 2023, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2024, December 31, 2023 and March 31, 2023, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2024 and 2023, (v) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023, and (vi) the Notes to Condensed Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.) (Filed herewith). |
| 104 | Cover page of Banc of California, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
104 | Cover Page Interactive Data File (embedded within theas Inline XBRL document)and contained in Exhibit 101. |
SIGNATURESSignatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | BANC OF CALIFORNIA, INC. |
| | | |
| Date: | August 7, 2023May 10, 2024 | | /s/ Jared M. Wolff |
| | | Jared M. Wolff |
| | | | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | | | | | | | |
| | |
| | |
| Date: | August 7, 2023May 10, 2024 | | /s/ Joseph Kauder |
| | | Joseph Kauder |
| | | | Executive Vice President and Chief Financial Officer |
| | (Principal Financial Officer) |
| | | | | | | | |
| | |
| | |
| Date: | August 7, 2023May 10, 2024 | | /s/ Raymond RindoneMonica L. Sparks |
| | | | Raymond RindoneMonica L. Sparks |
| | | | Executive Vice President and Chief Accounting Officer and Deputy Chief Financial Officer
|
| | (Principal Accounting Officer) |
| | | |
| | | |
| | | |
| | | |