2 0 2 2 A N N U A L R E P O R T
WE ARE
CALIFORNIA’S
BUSINESS
BANK.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35522
BANC OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
04-3639825
(I.R.S. Employer Identification No.)
3 MacArthur Place, Santa Ana, California
92707
Registrant’s telephone number, including area code -855 361-2262
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Trading symbol(s)
BANC
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 (§ 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
Non-accelerated filer
☒
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correct of an error to previously issued financial statement. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing
price of the registrant's voting common stock on the New York Stock Exchange as of June 30, 2022, was $991.2 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of
the registrant). As of February 23, 2023, the registrant had outstanding 58,549,607 shares of voting common stock and 477,321 shares of Class B
non-voting common stock.
PART III of Form 10-K—Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 2023.
DOCUMENTS INCORPORATED BY REFERENCE
BANC OF CALIFORNIA, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 2022
Table of Contents
Forward-Looking Statements
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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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.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
changes in general economic conditions, either nationally or in our market areas, including the impact of supply chain
disruptions, or changes in financial markets, and the risk of recession or an economic downturn;
changes in the interest rate environment and levels of general interest rates, including the recent and anticipated
increases by the FRB in its benchmark rate, the impacts of inflation, the relative differences between short- and long-
term interest rates, deposit interest rates, and their impact on our net interest margin, tangible book value, and the cost
of funding sources;
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 but not limited to, the effectiveness of
our underwriting practices and the risk of fraud, any of which may lead to increased loan delinquencies, losses, and
nonperforming assets in our loan portfolio, and may result in our allowance for credit losses not being adequate and
require us to materially increase our credit loss reserves;
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 or other low cost funding sources necessary to fund our
activities;
the continuing effects of the COVID-19 pandemic and steps taken by governmental and other authorities to contain,
mitigate and combat the pandemic on our business, operations, financial performance and prospects;
the costs and effects of litigation, including legal fees and other expenses, settlements and judgments;
the risk that we will not be successful in the implementation of our capital utilization strategy, new lines of business,
new products and services, or other strategic project initiatives;
risks that the Company’s merger and acquisition transactions may disrupt current plans and operations and lead to
difficulties in customer and employee retention; risks that the costs, fees, expenses and charges related to these
transactions could be significantly higher than anticipated and risks that the expected revenues, cost savings, synergies,
and other benefits of these transactions might not be realized to the extent anticipated, within the anticipated
timetables, or at all, 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;
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, require us to change our business mix, restrict our ability to
invest in certain assets, increase our allowance for credit losses, result in write-downs of asset values, increase our
capital levels, affect our ability to borrow funds or maintain or increase deposits, or impose fines, penalties or
sanctions, any of which could adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business, including, without limitation, changes in tax laws
and policies, changes in privacy laws, and changes in regulatory capital or other rules, and the availability of resources
to address or respond to such changes;
our ability to control operating costs and expenses;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work
force and potential associated charges;
the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the
potential for losses;
3
xvi.
xvii.
xviii.
xix.
xx.
xxi.
xxii.
xxiii.
xxiv.
xxv.
xxvi.
xxvii.
xxviii.
errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in
valuation;
uncertainty regarding the expected discontinuation of the London Interbank Offered Rate (“LIBOR”) and the use of
alternative reference rates;
failures or security breaches with respect to the network, applications, vendors and computer systems on which we
depend, including but not limited to, due to cybersecurity threats;
our ability to attract and retain key members of our senior management team;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and saving habits;
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 ability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the
Financial Accounting Standards Board or their application to our business, including additional guidance and
interpretation on accounting issues and details of the implementation of new accounting standards;
continuing impact of the Financial Accounting Standards Board’s credit loss accounting standard, referred to as
Current Expected Credit Loss, which requires financial institutions to determine periodic estimates of lifetime
expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses;
share price volatility and reputational risks, related to, among other things, speculative trading and certain traders
shorting our common stock and attempting to generate negative publicity about us;
our ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of
dividends by us or our bank subsidiary, or repurchases of our common stock; and
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” of
this Annual Report on Form 10-K.
4
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-K, including “Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and
Supplementary Data.”
Allowance for credit losses
Freddie Mac
the Federal Home Loan Mortgage Corporation
American Financial Exchange platform
Asset/Liability Committee
Allowance for loan losses
Accumulated Other Comprehensive Income
Adjustable Rate Mortgage
Accounting Standards Codification
Accounting Standards Update
Automated Valuation Models
Banc of California, National Association
Bank Holding Company Act of 1956, as amended
Borrower-in-Custody
Board of Directors
Bank Owned Life Insurance
Commercial and Industrial
California Consumer Privacy Act
Certified Development Company
Community Development Financial Institutions
Current Expected Credit Losses
Chief Executive Officer
Common Equity Tier 1
Chief Financial Officer
Consumer Financial Protection Bureau
Collateralized Loan Obligation
Committee of Sponsoring Organizations
GAAP
GLBA
GSE
HELOC
HLBV
LAFC
LIBOR
LIHTC
LTV
MSRs
NACHA
NII at Risk
NOL
NTM
NYSE
OCC
OREO
PCAOB
PCD
PPP
PTPP
Prime Rate
ROAA
ROU
S&P
SAR
SBA
Generally Accepted Accounting Principles
Gramm-Leach-Bliley Act
Government Sponsored Entity
Home Equity Lines of Credit
Hypothetical Liquidation at Book Value
The Los Angeles Football Club
London Inter-Bank Offered Rate
Low Income Housing Tax Credits
Loan-to-Value
Mortgage Servicing Rights
National Automated Clearinghouse Association
Net Interest Income at Risk
Net Operating Loss
Non-Traditional Mortgage
New York Stock Exchange
Office of the Comptroller of the Currency
Other Real Estate Owned
Public Company Accounting Oversight Board
Purchased Credit Deteriorated
Payment Protection Program
Pre-tax Pre-Provision
Wall Street Journal’s prime rate
Return on Average Assets
Right of Use
Standard and Poor’s
Stock Appreciation Right
Small Business Administration
COVID-19
Coronavirus Disease 2019
CRA
DIF
Community Reinvestment Act of 1977, as amended
Federal Deposit Insurance Fund
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act SBIC
Small Business Investment Company
DTA
EPS
EVE
EY
Deferred Tax Asset
Earnings Per Share
Economic Value of Equity
Ernst & Young LLP
Fannie Mae
the Federal National Mortgage Association
Financial Accounting Standards Board
SEC
SFR
SOFR
TCE
TDRs
TSR
Securities and Exchange Commission
Single Family Residential
Secured Overnight Financing Rate
Tangible Common Equity
Troubled Debt Restructurings
Total Shareholder Return
ACL
AFX
ALCO
ALL
AOCI
ARM
ASC
ASU
AVMs
Bank
BHCA
BIC
Board
BOLI
C&I
CCPA
CDC
CDFI
CECL
CEO
CET1
CFO
CFPB
CLO
COSO
FASB
FDIC
FRBSF
FHLB
FICO
FRB
Federal Deposit Insurance Corporation
2013 Plan
2013 Omnibus Stock Incentive Plan
Federal Reserve Bank of San Francisco
2018 Omnibus Plan
2018 Omnibus Stock Incentive Plan
Federal Home Loan Bank
Fair Isaac Corporation
the Company
VIE
Banc of California, Inc.
Variable Interest Entity
Board of Governors of the Federal Reserve System
5
PART I
Item 1. Business
General
Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the holding company for its
wholly owned subsidiary, Banc of California, National Association (the “Bank”), a California-based bank. 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 as a bank holding company by the Board of Governors of the
Federal Reserve System (the “FRB”) and the Bank is regulated by the Office of the Comptroller of the Currency (the “OCC”).
Our principal executive office is currently located at 3 MacArthur Place, Santa Ana, California, and our telephone number is
(855) 361-2262. Our common stock trades on the New York Stock Exchange under the trading symbol “BANC”.
Business Overview
The Bank is a relationship-focused business bank. We deliver comprehensive products and solutions for businesses, business
owners, and individuals within California through our 28 full service branches extending from San Diego to Santa Barbara. We
have served California markets since 1941 through the Bank and its predecessors. The Bank offers a variety of financial
products and services designed around our clients in order to serve their banking and financial needs.
Strategy
Our strategic objective is to be the premier relationship-focused business bank in California by delivering outstanding service to
our banking clients through our team's ability to collaborate, execute and perform superior to our competition. This involves
listening to our clients to understand their needs so that we can actively develop and deliver customized solutions to meet their
business objectives. It also involves executing promptly and holding ourselves accountable to the promises we make our clients.
We are focused on fostering relationships with businesses in our markets and verticals to establish this understanding and
provide an exceptional level of service. We offer a wide variety of deposit, loan and other financial services to both large and
small businesses, non-profit organizations, business owners, entrepreneurs, professionals and high-net worth individuals. Our
deposit products include checking, savings, money market, certificates of deposit, retirement accounts and safe deposit boxes.
Additional products and services leverage other technology and include automated bill payment, cash and treasury
management, master demand accounts, foreign exchange, interest rate swaps, card payment services, remote and mobile deposit
capture, automated clearing house origination, wire transfer and direct deposit. Our lending activities are focused on providing
thoughtful financing solutions to our clients. We consistently invest in automated solutions and our technology infrastructure to
gain operating efficiencies and to improve the client experience as we deliver our high standard of service.
Recent Acquisitions
Pacific Mercantile Bancorp Acquisition. On October 18, 2021, we completed our merger with Pacific Mercantile Bancorp
(“PMB”), pursuant to which PMB merged (the “PMB Acquisition”) with and into the Company, with the Company as the
surviving corporation. Promptly thereafter, Pacific Mercantile Bank, a California-chartered bank and wholly owned subsidiary
of PMB, merged with and into the Bank, with the Bank as the surviving bank. Pacific Mercantile Bank operated seven banking
offices, including three full-service branches, located throughout Southern California. PMB’s size, business focus, and deposit
profile aligned with our operations, which accelerated our growth and operating scale in key markets.
Deepstack Acquisition. On September 15, 2022, we completed the acquisition of the assets of Global Payroll Gateway, Inc. and
its wholly owned subsidiary, Deepstack Technologies, LLC (collectively, "Deepstack" and such acquisition, the "Deepstack
Acquisition"). Deepstack is a differentiated software-led and e-commerce payments platform that provides clients with payment
solutions, including merchant processing, payments acceptance and disbursements, tokenization, virtual accounts, fraud
protection tools, chargeback management, and reconciliation and reporting services. We acquired Deepstack Technologies to be
able to offer full stack payment processing solutions and become the hub of the financial services ecosystem for our clients.
For additional information, see “Business Combinations” under “Executive Overview” in Item 7 of this Annual Report on Form
10-K.
Products Offered
We offer a full array of competitively priced and client-tailored commercial loan and deposit products and services.
Loan Products
We offer a number of loan products including commercial and industrial loans; commercial real estate loans and multifamily
loans; SBA loans; and construction loans. In addition, we have a SFR mortgage loan portfolio that we service, however we no
6
longer originate this type of loan product, although we may purchase SFR loans from time to time. We also originate, on a
limited basis, certain types of consumer loans.
At December 31, 2022, our total loans held-for-investment were $7.12 billion, or 77.4% of total assets, compared to $7.25
billion or 77.2% of total assets at December 31, 2021, respectively. For additional information concerning changes in our loan
portfolio, see "Loans Receivable, Net" included in Item 7 of this Annual Report on Form 10-K.
Commercial and Industrial Loans
Commercial and industrial loans are made to finance operations, provide working capital, finance the purchase of fixed assets,
equipment or real property, business acquisitions, warehouse lending, and other business lines of credit. A borrower’s cash flow
from operations is generally the primary source of repayment. Accordingly, our policies provide specific guidelines regarding
debt coverage and other financial ratios. Commercial and industrial loans include lines of credit, commercial term loans and
owner occupied commercial real estate loans. Commercial lines of credit are extended to businesses generally to finance
operations and working capital needs. Commercial term loans are typically made to finance the acquisition of fixed assets,
refinance short-term debt originally used to purchase fixed assets or make business acquisitions. Owner occupied commercial
real estate loans are extended to purchase or refinance real property that is usually 50.0% or more occupied by the underlying
business and the business's cash flow is the primary source of repayment. Warehouse lending is a line of credit given to
a loan originator, the funds from which are used to originate or purchase mortgage loans and hold until sale in the secondary
market, either directly or through securitization.
Commercial and industrial loans are extended based on the financial strength and integrity of the borrower and guarantor(s) and
are generally collateralized by the borrower's assets such as accounts receivable, loans, inventory, equipment or real estate and
typically have a term of 1-5 years.
Commercial and industrial loans may be unsecured for well-capitalized and highly profitable borrowers. The interest rates on
these loans generally are adjustable and will vary based on market conditions and be commensurate to the perceived credit risk.
Loans are generally written with a floor rate of interest typically set at the initial rate on the loan. Some of the owner-occupied
commercial real estate loans may be fixed for periods of up to 10 years and many have prepayment penalties. Commercial and
industrial loans generally are made to businesses that have had profitable operations and have a conservative debt-to-net worth
ratio, good payment histories as evidenced by credit reports, acceptable working capital, and operating cash flow sufficient to
demonstrate the ability to pay obligations as they become due.
Our commercial credit banking standard includes credit file documentation and analysis of the borrower’s background, capacity
to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of macro- and microeconomic
conditions affecting the borrower and the industry in which they participate. Detailed analysis of the borrower’s past, present
and future cash flow is also an important aspect of the credit analysis, as it is the primary source of repayment. In addition,
commercial and industrial loans are typically monitored periodically to provide an early warning for deteriorating cash flow.
All commercial and industrial loans must have well-defined primary and secondary or, at times, tertiary sources of repayment.
In order to mitigate the risk of borrower default, we generally require collateral to support the credit and, in the case of loans
made to businesses, we typically obtain personal guarantees from their owners. We attempt to control the risk by generally
requiring LTV ratios as of the origination date to be lower than 80.0%, or in the case of SBA loans that are secured by owner
occupied commercial real estate loans, to be lower than 75.0%, and by regularly monitoring the amount and value of the
collateral in order to maintain that ratio. However, the collateral securing the loans may depreciate over time, may be difficult to
appraise or may fluctuate in value based on the success of a business. Because of the potential value reduction, the availability
of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business
itself, which, in turn, is often dependent, in part, upon general economic conditions. See “Asset Quality” under "Loans
Receivable, Net" included in Item 7 of this Annual Report on Form 10-K.
Commercial and industrial loan growth also assists in the growth of our deposits because many commercial and industrial loan
borrowers establish deposit accounts and utilize treasury management services. Those deposit accounts help us to reduce the
overall cost of funds and those banking service relationships provide a source of noninterest fee income.
Commercial Real Estate and Multifamily Loans
Commercial real estate and multifamily loans are secured primarily by multifamily dwellings, industrial/warehouse buildings,
anchored and non-anchored retail centers, office buildings and, on a limited basis, hospitality properties primarily located in our
market area.
Loans secured by commercial real estate and multifamily properties are originated with either a fixed or an adjustable interest
rate. The interest rate on adjustable rate loans is based on a variety of indices, generally determined through negotiation with the
borrower. LTV ratios on these loans typically do not exceed 75.0% of the appraised value of the property securing the loan.
7
These loans typically require monthly payments, may contain balloon payments and generally have maturities of 15 years with
maximum maturities of 30 years for multifamily loans and 10 years for commercial real estate loans.
Loans secured by commercial real estate and multifamily properties are underwritten based on the income producing potential
of the property and the financial strength of the borrower and/or guarantor. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the
outstanding debt. We generally require an assignment of rents or leases in order to be assured that the cash flow from the
project will be used to repay the debt. Appraisals on properties securing commercial real estate and multifamily loans are
performed by independent state licensed appraisers approved by management. In order to monitor the adequacy of cash flows
on income-producing properties, the borrower is generally required to provide periodic financial information. Because
payments on loans secured by commercial real estate and multifamily properties are often dependent on the successful
operation or management of the properties, adverse conditions in the real estate market or the economy may affect repayment of
these loans. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay
the loan may be impaired. See “Asset Quality” under "Loans Receivable, Net" included in Item 7 of this Annual Report on
Form 10-K.
Small Business Administration Loans
We provide SBA loan products through the Bank and have earned the Preferred Lender Program designation which delegates
loan approval, as well as closing and most servicing and liquidation authority to the Bank. We currently provide the following
SBA products:
•
•
•
7(a)—These loans generally provide the Bank with a guarantee from the SBA for up to 85.0% of the loan amount for
loans up to $150,000 and 75.0% of the loan amount for loans of more than $150,000, with a maximum loan amount of
$5 million. The CARES Act temporarily increased the guarantee to 90.0% for SBA 7(a) loans funded through
September 30, 2021. These are term loans that can be used for a variety of purposes including commercial real estate,
business acquisition, working capital, expansion, renovation, new construction, and equipment purchases. Depending
on collateral, these loans can have terms ranging from 7 to 25 years. The guaranteed portion of these loans is often sold
into the secondary market.
PPP— These SBA loans were originated as part of the program established by the CARES Act and have additional
credit enhancement provided by the U.S. Small Business Administration for up to 100.0% of the loan amount. PPP
loans may be forgiven in full depending on use of funds and eligibility. PPP loans have a term of two to five years.
504 Loans—These are real estate loans in which the lender can advance up to 90.0% of the purchase price; retain
50.0% as a first trust deed; and have a CDC retain the second trust deed for 40.0% of the total cost. CDCs are licensed
by the SBA. Required equity of the borrower is at least 10.0%. Terms of the first trust deed are typically similar to
market rates for conventional real estate loans, while the CDC establishes rates and terms for the second trust deed
loan.
SBA loans are subject to federal legislation that can affect the availability and funding of the program. This dependence on
legislative funding might cause future limitations and uncertainties with regard to the continued funding of such programs,
which could potentially have an adverse financial impact on our business. Our portfolio of SBA loans is subject to certain risks,
including, but not limited to: (i) the effects of economic downturns on the economy; (ii) interest rate increases; (iii)
deterioration of the value of the underlying collateral; and (iv) deterioration of a borrower's or guarantor's financial capabilities.
We attempt to mitigate these risks through: (i) reviewing each loan request and renewal individually; (ii) adhering to written
loan policies; (iii) adhering to SBA policies and regulations; (iv) obtaining independent third party appraisals; and (v) obtaining
external independent credit reviews. SBA loans normally require monthly installment payments of principal and interest and
therefore are continually monitored for past due conditions. In general, we review financial statements and other documents of
borrowers on an ongoing basis during the term of the relationship and respond to any identified deterioration. We may, in the
future, originate small business loans and small business lines of credit utilizing a digital lending platform.
Construction Loans
We provide short-term construction loans primarily relating to single family or multifamily residential properties. Construction
loans are typically secured by first deeds of trust and guarantees of the borrower. The economic viability of the project,
borrower’s creditworthiness, and borrower’s and contractor’s experience are primary considerations in the loan underwriting
decision. We utilize independent state licensed appraisers approved by management and monitor projects during construction
through inspections and a disbursement program tied to the percentage of completion of each project. We may, in the future,
originate or purchase loans or participations in construction, renovation and rehabilitation loans on residential, multifamily and/
or commercial real estate properties.
8
Single Family Residential Mortgage Loans
We previously originated SFR mortgage loans but discontinued offering this loan product during 2019. Our SFR portfolio
generally consists of mortgage loans that are secured by a first deed of trust on single family residences mainly throughout
California. The SFR portfolio includes non-conforming SFR mortgage loans where the loan amount exceeded Fannie Mae or
Freddie Mac limits, or the loans otherwise did not conform to Fannie Mae or Freddie Mac guidelines. The SFR portfolio
generally includes mortgage loans that earn interest on either a fixed or an adjustable rate basis. The SFR portfolio generally
includes mortgage loans underwritten based on the applicant’s income and credit history and the appraised value of the subject
property. Properties secured by SFR mortgage loans were appraised by independent fee appraisers approved by management at
origination. We required borrowers to obtain title insurance, hazard insurance, and flood insurance, if necessary. A majority of
SFR mortgage loans originated by us were made to finance the purchase or the refinance of existing loans on owner occupied
homes, with a smaller percentage used to finance non-owner occupied homes.
SFR mortgage loans in the portfolio include Adjustable Rate Mortgage (“ARM”) loans tied to a variety of indices which were
offered with flexible initial repricing dates, ranging from 1 to 10 years, and periodic repricing dates through the life of the loan.
During the year ended December 31, 2022, we purchased $814.3 million of held-for-investment SFR loans with terms up to 40
years, weighted average LTVs at origination below 70.0% and primarily secured by collateral in California. At December 31,
2022, $524.0 million, or 27.3% of the SFR mortgage portfolio, were adjustable rate compared to $703.8 million, or 49.6% of
the SFR mortgage portfolio, at December 31, 2021.
The SFR portfolio also includes interest only loans, which have payment features that allow interest only payments during the
first five or seven years during which time the interest rate is fixed before converting to fully amortizing payments. Following
the expiration of the fixed interest rate period, the interest rate and payment begin to adjust on an annual basis, with fully
amortized payments that include principal and interest calculated over the remaining term of the loan. The loan could be
secured by owner or non-owner occupied properties that include single family units and second homes. For additional
information, see “Non-Traditional Mortgage Portfolio” and “Non-Traditional Mortgage Loan Credit Risk Management” under
“Loans Receivable, Net” included in Item 7 of this Annual Report on Form 10-K.
Other Consumer Loans
Consumer loans primarily include consumer lines of credit and term loans. These loans generally have shorter terms to maturity
or variable interest rates, which reduces our exposure to changes in interest rates, and carry higher rates of interest than SFR
mortgage loans. Consumer loans acquired in the PMB Acquisition were primarily fixed rate automobile loans with longer terms
to maturity. As a result of the PMB Acquisition, we acquire automobile loans on a limited basis. We do not offer automobile
loans on a retail basis to our customers.
At December 31, 2022, other consumer loans included automobile loans totaling $69.8 million or 80.3% of this portfolio,
compared to $75.1 million or 73.0% at December 31, 2021.
Lending Limits
Our lending is subject to legal lending limits. Legal lending limits are calculated in conformance with OCC regulations, which
prohibit a national bank from lending to any one individual or entity or its related interests any amount that exceeds 15% of a
bank’s capital and surplus, plus an additional 10.0% of a bank’s capital and surplus, if the amount that exceeds a bank’s 15%
general limit is fully secured by readily marketable collateral. At December 31, 2022, the Bank’s statutory legal lending limits
for loans to one borrower were $180 million for unsecured loans and an additional $120 million for specific secured loans.
However, we maintain internal lending limits below these statutory legal lending limits consistent with our risk governance
framework.
Deposit Products and Sources of Funds
General
Our primary sources of funds are deposits, certificates of deposit, payments (including interest and principal) on outstanding
loans and investment securities, other short-term investments and funds provided from operations and sales of loans and
investment securities. While scheduled payments from loans and investment securities and maturing investment securities and
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. In addition, we invest excess funds in short-term interest-earning
assets, which provide liquidity to meet known and unknown lending commitments and deposit flows of our clients. We also
generate cash through borrowings mainly by utilizing FHLB advances to leverage our capital base, to provide funds for our
lending activities, as a source of liquidity, and to enhance our interest rate risk management.
9
Deposits
We offer a variety of deposit products to our clients with a wide range of interest rates and terms. Deposits consist of interest-
bearing and noninterest-bearing demand accounts, savings accounts, money market deposit accounts, and certificates of deposit.
We solicit deposits primarily in our market area, excluding brokered deposits. We primarily rely on our relationships from our
lending activities, competitive pricing policies, marketing and exceptional client service to attract and retain deposits. Deposit
levels are influenced significantly by general economic conditions, prevailing interest rates and competition. The variety of
deposit products we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in
demand from actual and prospective clients.
We manage the pricing of deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject
to market competitive factors. Based on our experience, we believe that our deposits are a relatively stable source of funds.
Despite this stability, our ability to attract and maintain these deposits and the rates paid on them have been and will continue to
be significantly affected by market conditions.
Core deposits, which we define as interest-bearing and noninterest-bearing demand deposits, savings and money market deposit
accounts, and certificates of deposit, excluding brokered deposits, decreased $923.5 million during the year ended
December 31, 2022 and totaled $6.51 billion at December 31, 2022 representing 91.4% of total deposits on that date. We held
brokered deposits of $614.9 million, or 8.6% of total deposits at December 31, 2022, compared to $10.0 million, or 0.1% at
December 31, 2021.
FHLB Advances, Other Secured and Unsecured Borrowing Arrangements, and Long Term Debt
Although deposits are our primary source of funds, we may utilize borrowings when they are a less costly source of funds and
can be invested at a positive interest rate spread, when we desire additional capacity to fund loan demand or when they meet our
asset/liability management goals to diversify funding sources and enhance interest rate risk management.
We utilize FHLB advances and securities sold under repurchase agreements to leverage our capital base, to provide funds for
our lending activities, to provide a source of liquidity, and to enhance our interest rate risk management activities. We may
obtain advances from the FHLB by collateralizing the advances with certain of our loans and investment securities. These
advances may be made pursuant to several different credit programs each of which has its own interest rate, range of maturities
and call features. At December 31, 2022, we had $731.0 million in FHLB advances outstanding and the ability to borrow an
additional $913.0 million.
In addition, we also have the ability to borrow from the Federal Reserve Bank and other correspondent banks and counterparties
through pre-established secured and unsecured lines of credit and securities sold under repurchase agreements. The availability
and terms on securities sold under repurchase agreements are subject to the counterparties' discretion and our pledging of
investment securities. At December 31, 2022, we had no securities sold under repurchase agreements. We also had the ability to
borrow $949.1 million from the Federal Reserve Bank and $210.0 million from unsecured federal funds lines with
correspondent banks at December 31, 2022.
We have access to unsecured overnight borrowings from various financial institutions through the AFX platform. The
availability of such unsecured borrowings, which fluctuates regularly and is subject to the counterparties' discretion, totaled
$445.0 million at December 31, 2022. There were no borrowings under the AFX at December 31, 2022.
Our holding company also has a $50.0 million revolving line of credit which matures on December 18, 2023. We have the
option to select paying interest using either (i) Prime Rate or (ii) SOFR + 1.85%. The line of credit is also subject to an unused
commitment fee of 0.40% per annum. There were no borrowings under this line of credit at December 31, 2022.
Further, we have outstanding unsecured long term senior notes with an April 15, 2025 maturity date at a stated rate of 5.25%
totaling $174.3 million as of December 31, 2022. We also have outstanding unsecured long term fixed-to floating rate
subordinated notes with an October 30, 2030 maturity date at a stated rate of 4.375% totaling $83.1 million as of December 31,
2022.
As a result of liabilities assumed in the PMB Acquisition, we have $7.2 million of junior subordinated floating rate debentures
with a September 26, 2032 maturity date at a stated rate of LIBOR plus 3.4%. We also assumed in the PMB Acquisition $10.3
million of junior subordinated floating rate debentures with an October 8, 2034 maturity date at a stated rate of LIBOR plus
2.0%.
For additional information, see Note 11 — Federal Home Loan Bank and Other Borrowings and Note 12 — Long Term Debt
of the Notes to Consolidated Financial Statements included in Item 8.
Investment Activities
The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining
earnings when loan demand is low and to provide a relatively stable source of interest income while satisfactorily managing
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risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. For additional information, see Item 7A —
Quantitative and Qualitative Disclosures about Market Risk of this Annual Report on Form 10-K.
Currently, we primarily invest in agency securities, municipal bonds, agency residential mortgage-backed securities, corporate
debt securities, and CLOs. For additional discussion of the risks associated with our CLO portfolio, please refer to Part I, Item
1A. - Risk Factors in this Annual Report.
Payment Processing
We acquired Deepstack to advance our goal to be the hub of the financial services ecosystem for clients while creating another
driver of profitable long-term growth and franchise value. Deepstack provides us a proprietary payments solution that allow us
to offer payment processing services to our current business customers as well as integrated software vendors, e-commerce
marketplaces, fintechs and other merchants. As of January 2023, we completed the integration of Deepstack's technology into
our internal platform and have begun processing payments for select, small clients. We continue to build out the infrastructure
and ramp up our business development efforts with a goal to begin scaling our payment processing business after the second
quarter in 2023.
Competition and Market Area
We face strong competition in originating all of our loan products and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings institutions and credit unions. With respect to commercial
and industrial lending we also encounter vigorous competition from finance companies. We attract deposits through our
relationships from our lending activities, community banking branch network, and our treasury management services.
Consequently, we have the ability to service client needs with a variety of deposit accounts and products at competitive rates.
Competition for deposits comes principally from other commercial banks, savings institutions, and credit unions, as well as
mutual funds, broker dealers, registered investment advisors, investment banks, financial institutions, financial service
companies, and other alternative investments.
Based on the most recent branch deposit data as of June 30, 2022, provided by FDIC, the Bank's share of deposits in Los
Angeles, Orange, San Diego, and Santa Barbara counties was as follows:
Orange County
Los Angeles County
Santa Barbara County
San Diego County
Human Capital Resources
June 30,
2022
2.17 %
0.51 %
0.28 %
0.19 %
We believe that our employees are vital to our success in the banking industry. As a relationship-focused business, the long-
term success of our company is tied to our people. Our goal is to ensure that we have the right talent, in the right place, working
together to serve our clients and communities. We do that through our focus on attracting, developing and retaining our
employees.
We strive to attract and develop individuals who are people-focused and share our values for building relationships among our
employees and across our clients and communities. In our recruiting efforts, we strive to have a diverse group of candidates to
consider for our roles that reflect the diversity of the Southern California communities we serve. To that end, we post our open
positions to dozens of minority-specific recruiting websites. In 2020, we formed an employee-led Inclusion, Diversity,
Engagement, and Awareness (“IDEA”) Committee to bring together voices and ideas to help fuel and foster a culture of
openness and inclusion in all that we do.
We seek to retain our employees by, among other things, soliciting their feedback with respect to employee-based initiatives
that support their needs. In that regard, we prioritize training, communications, recruitment, mentorship and wellness programs.
We conduct annual bank-wide employee engagement surveys and host periodic town halls to solicit feedback from our
employees in understanding what we are doing well and what we can do better. We also have a formal annual goal setting and
performance review process for our employees.
Furthermore, we believe that our compensation structure, including an array of benefit plans and programs, is attractive to our
current and prospective employees. We also offer our employees the opportunity to participate in a variety of professional and
leadership development programs. In addition, we have offered numerous health and wellness programs to help ensure the
physical and mental health of our employees.
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As of December 31, 2022, we had 685 full-time employees, almost exclusively in California.
Available Information
We file with the SEC Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, an
annual proxy statement and other reports and information. We invite you to visit our website at www.bancofcal.com via the
"Investor Relations" link, to access free of charge these filings and amendments to these filings, all of which are made available
as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. We also make available
on that website our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, and the charters for all
committees of our Board of Directors. Any changes to our Code of Business Conduct and Ethics or waiver of our Code of
Business Conduct and Ethics for senior financial officers, executive officers or directors will be posted on that website. The
content of our website is not incorporated into and is not part of this Annual Report on Form 10-K. In addition, you can write to
us to obtain a free copy of any of these reports or other documents at Banc of California, 3 MacArthur Place, Santa Ana, CA
92707, Attn: Investor Relations. The SEC maintains an internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC, located at www.sec.gov.
Risk Governance
We conduct our business activities under a system of risk governance controls. Key elements of our risk governance structure
include the risk appetite framework and risk appetite statement. The risk appetite framework we adopted is managed in
conjunction with our strategic and capital plans. The strategic and capital plans articulate the Board of Director's (“Board's”)
approved statement of financial condition, loan concentration targets and the appropriate level of capital to manage our business
risks properly.
The risk appetite framework includes a risk appetite statement, risk limits, and an outline of roles and responsibilities for risk
management activities. The risk appetite statement is an expression of the maximum level of residual risk that we are prepared
to accept in order to achieve our business objectives. Defining, communicating, and monitoring our risk is fundamental to a safe
and sound control environment and a risk-focused culture.
The Board establishes our strategic objectives and approves our risk appetite statement, which is developed in collaboration
with our executive leadership. The executive team translates the Board-approved strategic objectives and the risk appetite
statement into targets and constraints for lines of business.
Our risk appetite framework includes policies, procedures, controls, and management information systems; through which the
risk appetite is established, communicated, managed, and monitored. We utilize a risk assessment process to identify inherent
risks across the Company, gauge the effectiveness of internal controls, and establish tolerances for residual risk in each of the
following risk categories: strategic, reputational, earnings, capital, liquidity, asset quality (credit), market, operational,
compliance, and diversification/concentration.
Each risk category is assigned a qualitative statement as well as specific, measurable, risk metrics. The risk metrics have
variance thresholds established which indicate whether the metric is within tolerance or at variance to our risk appetite.
Variance(s) to the defined risk appetite are reported and monitored regularly by both executive management and the Board.
Where appropriate, remediation measures and/or risk acceptance, is defined and reviewed by executive management and the
Board.
We integrate risk appetite and enterprise risk management under a common framework. Key elements of this framework that
support our risk management activities include:
•
•
•
•
•
Executive management governance committees that govern the management of risks within the organization and
within the established risk appetite. These committees review and drive risk and control decisions, address escalated
issues and actively oversee our risk mitigation activities with an escalation path to the Board.
Policies and programs that articulate the culture and risk limits of our business and provides clarity around encouraged
and discouraged activities. Additional policies cover key risk disciplines (for example, our Commercial Real Estate
Policy) and other important aspects that support the Bank's activities (for example, policies relating to appraisals, risk
ratings, fair lending, etc.).
Processes, personnel and control systems are in place to promote the identification, measurement, assessment, and
control of both current and emerging risk.
Three lines of defense that are integrated, include specific roles and responsibilities for risk management activities, and
provide credible challenge and appropriate identification and escalation of critical information and issues.
Credit Approval Authorities—All of our material credit exposures are approved by a credit risk management group
that is independent of the business units. Above this threshold, credit approvals are made by the chief credit officer or
an executive management credit committee of the Bank. The joint enterprise risk committee of the Company's Board
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of Directors and the Bank's Board of Directors review and approve material acquisitions, divestitures, and any other
transactions as appropriate.
Asset Quality
•
•
•
•
Concentration Risk Management Policy—To mitigate and manage the risk within our loan portfolio, the Board
adopted a concentration risk management policy, pursuant to which it generally reviews and revises concentration risk
to tolerance thresholds at least annually and otherwise from time to time as appropriate. These concentration risk to
tolerance thresholds may change at any time when the Board of Directors is considering material strategic initiatives
such as acquisitions, new product launches and terminations of products or other factors as the Board of Directors
believes appropriate. We developed procedures relating to the appropriate actions to be taken should management seek
to increase the concentration guidelines or exceed the guideline maximum based on various factors. Concentration risk
to tolerance thresholds are intended to aid management and the Board to ensure that the loan concentrations are
consistent with the Board’s risk appetite.
Stress Testing—We have developed a Stress Testing Policy and stress testing methodology as a tool to evaluate our
loan portfolio, capital levels and strategic plan with the objective of ensuring that our loan portfolio and balance sheet
concentrations are consistent with the Board-approved risk appetite and strategic and capital plans.
Loan Portfolio Management—Our management credit committee formally reviews the loan portfolio on a regular
basis. Risk rating trends, loan portfolio performance, including delinquency status, and the resolution of problem
assets are reviewed and closely managed.
Regular discussions occur between the areas of Executive Management, Treasury, Treasury Management, Credit and
Risk Management and the business units with regard to the pricing of our loan products. These groups meet to ensure
that pricing of our products is appropriate and consistent with our strategic and capital plans.
Regulation and Supervision
General
We are extensively regulated under federal laws. As a financial holding company, Banc of California, Inc. is subject to the
BHCA, and its primary regulator is the FRB. As a national bank, the Bank is overseen by the OCC, which has responsibility to
ensure safety and soundness of the national banking system; ensure fair and equal access to financial services; enforce anti-
money and anti-terrorism finance laws; and for banks under $10 billion in assets to enforce consumer protection regulations. In
addition, as an insured depository institution the Bank is also subject to regulation by the FDIC.
Federal and state laws and regulations generally applicable to financial institutions regulate the Company’s and the Bank’s
scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans, the
establishment of branches, mergers, acquisitions, dividends, and other matters. This regulation and supervision by the federal
banking agencies is intended primarily for the protection of clients and depositors, the stability of the U.S. financial system, and
the Deposit Insurance Fund administered by the FDIC and not for the benefit of stockholders or debt holders. Set forth below is
a brief description of material information regarding certain laws and regulations that are applicable to the Company and the
Bank. This description, as well as other descriptions of laws and regulations in this Form 10-K, is not complete and is qualified
in its entirety by reference to applicable laws and regulations.
Banc of California, Inc.
Permissible Activities. In general, the BHCA limits the activities permissible for bank holding companies to the
business of banking, managing or controlling banks and such other activities as the FRB has determined to be so closely related
to banking as to be properly incidental thereto.
As a bank holding company that has elected to be a financial holding company pursuant to the BHCA, Banc of California, Inc.
may affiliate with securities firms and insurance companies and engage, directly or indirectly, in other activities that are (i)
financial in nature or incidental or (ii) complementary to activities that are financial in nature and that do not pose a substantial
risk to the safety and soundness of depository institutions or the financial system generally. “Financial in nature” activities
include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; and merchant banking.
Acquisitions. The BHCA requires every bank holding company to obtain the prior approval of the FRB before: (i) it
may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after
such acquisition, the bank holding company will directly or indirectly own or control 5.0% or more of the voting shares of the
institution; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or
savings and loan association; or (iii) it may merge or consolidate with any other bank holding company. In reviewing
applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other
13
things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks
to the stability of the U.S. banking or financial system, the applicant's managerial and financial resources, the applicant's
performance record under the Community Reinvestment Act of 1977, as amended (“CRA”), fair housing laws and other
consumer compliance laws, and the effectiveness of the banks in combating money laundering activities.
Capital Requirements. As a bank holding company, Banc of California, Inc. is subject to the regulations of the FRB
imposing capital requirements for a bank holding company, which establish a capital framework as described in “Capital
Requirements” below. As of December 31, 2022, Banc of California, Inc. had capital ratios in excess of the minimums required
to be considered "well capitalized".
Repurchases/Redemptions; Dividends. Banc of California, Inc. must give the FRB prior notice of any purchase or
redemption of its equity securities if the consideration for the purchase or redemption, when combined with the consideration
for all such purchases or redemptions in the preceding 12 months, is equal to 10.0% or more of its consolidated net worth.
Notice to the FRB would include, but may not be limited to, background information on a redemption, pro-forma financial
statements that reflect the planned transaction including impact to the Company and stress testing that incorporates the
transaction. The FRB may disapprove such a purchase or redemption if it determines that the proposal would be an unsafe or
unsound practice or would violate any law, regulation, FRB order, or condition imposed in writing by the FRB. This
notification requirement does not apply to a bank holding company that qualifies as well-capitalized, received a composite
rating and a rating for management of “1” or “2” in its last examination and is not subject to any unresolved supervisory issue.
In addition, federal bank regulators are authorized to determine under certain circumstances relating to the financial condition
of a bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment
thereof. Under the FRB’s policy statement on the payment of cash dividends, a bank holding company should pay cash
dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with its capital needs, asset quality, and overall financial condition. FRB policy also
provides that a bank holding company should inform the FRB reasonably in advance of declaring or paying a dividend that
exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank
holding company’s capital structure. Regarding dividends, see “Capital Requirements” below.
Source of Strength. Under FRB regulations and federal law, a bank holding company, such as the Company, must act
as a source of financial and managerial strength for its insured depository institution subsidiaries, such as the Bank, particularly
when such subsidiaries are in financial distress.
The Bank
Liquidity. The Bank is subject to a variety of requirements under federal law. The Bank is required to maintain
sufficient liquidity to ensure safe and sound operations. For additional information, see Liquidity included in Item 7 of this
Annual Report on Form 10-K.
Safety and Soundness. The OCC has adopted guidelines establishing safety and soundness standards on such matters
as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk
exposure, and compensation and other employee benefits. Any institution which fails to comply with these standards must
submit a compliance plan.
Acquisitions. The OCC must approve an acquisition of the Bank and the Bank’s acquisition of other financial
institutions and certain other acquisitions. For a discussion of the factors considered by the OCC in connection with such
acquisitions, see “--Banc of California, Inc.-Acquisitions” above. Generally, the Bank may branch de novo nationwide, but
branching by acquisition may be restricted by applicable state law.
Lending Limits. The Bank’s general limit on loans to one borrower is 15.0% of its capital and surplus, plus an
additional 10.0% of its capital and surplus if the amount of loans greater than 15.0% of capital and surplus is fully secured by
readily marketable collateral. Capital and surplus means Tier 1 and Tier 2 capital plus the amount of allowance for loan losses
not included in Tier 2 capital. The Bank has no loans in excess of its loans-to-one borrower limit.
Dividends. The Company’s primary source of liquidity is dividend payments from the Bank. OCC regulations impose
various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptions or
repurchases, and certain other items. Generally, a bank may make capital distributions during any calendar year equal to up to
100% of net income for the year-to-date plus retained net income for the two preceding years without prior OCC approval.
However, the OCC may restrict dividends by an institution deemed to be in need of more than normal supervision. Dividends
can also be restricted if the capital conservation buffer requirement is not met. Regarding dividends, see “Capital
Requirements” below.
14
FDIC Insurance
FDIC-insured banks are required to pay deposit insurance assessments to the FDIC. The amount of the deposit insurance
assessment for institutions with less than $10.0 billion in assets, such as the Bank, is based on its risk category, with certain
adjustments for any unsecured debt or brokered deposits held by the insured bank. Institutions assigned to higher risk categories
(that is, institutions that pose a higher risk of loss to the FDIC’s Deposit Insurance Fund) pay assessments at higher rates than
institutions that pose a lower risk. An institution’s risk classification is assigned based on a combination of its financial ratios
and supervisory ratings, reflecting, among other things, its capital levels and the level of supervisory concern that the institution
poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. The assessment base is based
upon average consolidated total assets less average tangible equity.
In October 2022, the FDIC finalized a rule to increase the initial base deposit insurance assessment rate schedules for all insured
depository institutions by 2.0 basis points, beginning with the first quarterly assessment period of 2023. The increased
assessment rate is intended to improve the likelihood that the Deposit Insurance Fund reserve ratio will reach the required
minimum of 1.35% by the statutory deadline of September 30, 2028.
Capital Requirements
The Company and the Bank are subject to capital regulations adopted by the FRB and the OCC. The current regulations
establish required minimum ratios for common equity Tier 1 (CET1) capital, Tier 1 capital and total capital and a leverage ratio;
set risk-weighting for assets and certain other items for purposes of the risk-based capital ratios; require an additional capital
conservation buffer over the minimum required capital ratios; and define what qualifies as capital for purposes of meeting the
capital requirements. Under these capital regulations, the Company and the Bank must maintain minimum capital ratios of: (i) a
CET1 capital ratio of 4.5% of total risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of total risk-weighted assets; (iii) a
total capital ratio of 8.0% of total risk-weighted assets; and (iv) a leverage ratio (the ratio of Tier 1 capital to average total
consolidated assets) of 4.0%.
CET1 capital generally consists of common stock, retained earnings, AOCI, except where an institution elects to exclude AOCI
from regulatory capital, and certain minority interests, subject to applicable regulatory adjustments and deductions, including
deduction of certain amounts of mortgage servicing assets and certain deferred tax assets that exceed specified thresholds. We
elected to permanently opt out of including AOCI in regulatory capital. Tier 1 capital generally consists of CET1 capital plus
noncumulative perpetual preferred stock and certain additional items less applicable regulatory adjustments and deductions.
Tier 2 capital generally consists of subordinated debt, certain other preferred stock, and allowance for loan losses up to 1.25%
of risk-weighted assets, less applicable regulatory adjustments and deductions. Total capital is the sum of Tier 1 capital and Tier
2 capital.
Assets and certain off-balance sheet items are assigned risk-weights ranging from 0% to 1,250%, reflecting credit risk and other
risk exposure, to determine total risk-weighted assets for the risk-based capital ratios.
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Company and the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses.
To be considered “well-capitalized”, the Company must maintain on a consolidated basis a total risk-based capital ratio of
10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more and not be subject to any written agreement, capital directive
or prompt corrective action directive issued by the FRB to meet and maintain a specific capital level for any capital measure.
For the well-capitalized standard applicable to the Bank, see Prompt Corrective Action below.
In addition, the Company and the Bank are subject to the final rule adopted by the FRB, OCC and FDIC in July 2019 relating to
simplifications of the capital rules applicable to non-advanced approaches banking organizations. These rules were effective for
the Company on April 1, 2020, and provided simplified capital requirements relating to the threshold deductions for mortgage
servicing assets, deferred tax assets arising from temporary differences that a banking organization could not realize through net
operating loss carry backs, and investments in the capital of unconsolidated financial institutions, as well as the inclusion of
minority interests in regulatory capital.
In 2020, the U.S. federal bank regulatory agencies approved a final rule that allowed banking organizations to elect to delay
temporarily the estimated effects of adopting CECL on regulatory capital until January 2022 and subsequently to phase in the
effects through January 2025. We adopted this phase in option during 2020 and elected to phase in the full effect of CECL on
regulatory capital over the five-year transition period.
Prompt Corrective Action
The Bank is required to maintain specified levels of regulatory capital under the capital and prompt corrective action
regulations of the OCC. To be adequately capitalized, the Bank must have the minimum capital ratios discussed in “Capital
15
Requirements” above. To be well-capitalized, the Bank must have a CET1 risk-based capital ratio of at least 6.5%, Tier 1 risk-
based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0% and a leverage ratio of at least 5.0%, and not
be subject to any written agreement, capital directive or prompt corrective action directive issued by its primary federal banking
regulator to meet and maintain a specific capital level for any capital measure. Institutions that are not well-capitalized are
subject to certain restrictions on brokered deposits and interest rates on deposits.
The OCC is authorized and, under certain circumstances, required to take certain actions against an institution that is less than
adequately capitalized. Such an institution must submit a capital restoration plan, including a specified guarantee by its holding
company, and until the plan is approved by the OCC, the institution may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make capital distributions.
For institutions that are not at least adequately capitalized, progressively more severe restrictions generally apply as capital
ratios decrease or if the OCC reclassifies an institution into a lower capital category due to unsafe or unsound practices or
unsafe or unsound condition. Such restrictions may cover all aspects of operations and may include a forced merger or
acquisition. An institution that becomes “critically undercapitalized” because it has a tangible equity ratio of 2.0% or less is
generally subject to the appointment of the FDIC as receiver or conservator for the institution within 90 days after it becomes
critically undercapitalized. The imposition by the OCC of any of these measures on the Bank may have a substantial adverse
effect on its operations and profitability.
Anti-Money Laundering and Suspicious Activity
Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act and the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) require all
financial institutions, including banks, to implement policies and procedures relating to anti-money laundering and anti-
terrorism compliance, suspicious activity and currency transaction reporting and conduct due diligence on clients. The Patriot
Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering when
determining whether to approve a proposed bank acquisition.
The Bank is also subject to regulation under the International Emergency Economic Powers Act and the Trading with the
Enemy Act, as administered by the United States Treasury Department's Office of Foreign Assets Control (such regulations,
"Sanctions Laws"). The Sanctions Laws are intended to restrict transactions with persons, companies or foreign governments
sanctioned by U.S. authorities. An institution that fails to meet these standards may be subject to regulatory sanctions. The
Bank has established compliance programs designed to comply with the Bank Secrecy Act, the Patriot Act and applicable
Sanctions Laws.
Community Reinvestment Act
The Bank is subject to the provisions of the CRA. Under the terms of the CRA, the Bank has a continuing and affirmative
obligation, consistent with safe and sound operation, to help meet the credit needs of its community, including providing credit
to individuals residing in low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions, and does not limit an institution’s discretion to develop the types of products and services
that it believes are best suited to its particular community in a manner consistent with the CRA.
The OCC regularly assesses the Bank on its record in meeting the credit needs of the communities it serves, including low-
income and moderate-income neighborhoods. In the uniform four-tier- rating system used by federal banking agencies in
assessing CRA performance, an "Outstanding" rating is the top tier rating. This CRA rating deals strictly with how well an
institution is meeting its responsibilities under the CRA and the OCC takes into account performance under the CRA when
considering a bank’s application to establish or relocate a branch or main office or to merge with, acquire assets of, or assume
liabilities of another insured depository institution. The bank’s record may be the basis for denying the application.
Performance under the CRA also is considered when the FRB or the OCC reviews applications to acquire, merge or consolidate
with another banking institution or, in the case of the FRB, its holding company. In the case of a bank holding company
applying for approval to acquire a bank, the FRB will assess the records of each subsidiary depository institution of the
applicant bank holding company, and that record may be the basis for denying the application.
On May 5, 2022, the FRB, FDIC and the OCC issued a notice of proposed rulemaking proposing revisions to the agencies'
CRA regulations, including with respect to the delineation of assessment areas, the overall evaluation framework and
performance standards and metrics, the definition of community development activities, and data collection and reporting. The
proposed rule would adjust CRA evaluations based on bank size and type, with many of the proposed changes applying only to
banks with over $2.0 billion in assets, such as the Company, and several applying only to banks with over $10.0 billion in
assets.
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Financial Privacy Under the Requirements of the Gramm-Leach-Bliley Act
The Company and its subsidiaries are required periodically to disclose to their retail clients the Company’s policies and
practices with respect to the sharing of nonpublic client information with its affiliates and others, and the confidentiality and
security of that information. Under the GLBA, retail clients also must be given the opportunity to “opt out” of information-
sharing arrangements with non-affiliates, subject to certain exceptions set forth in the GLBA.
Limitations on Transactions with Affiliates and Loans to Insiders
Transactions between the Bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a bank is generally any company or entity which controls, is controlled by or is under common control with the bank but
which is not a subsidiary of the bank. The Company and its subsidiaries are affiliates of the Bank. Generally, Section 23A limits
the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal
to 10.0% of the Bank’s capital stock and surplus, and limits all such transactions with all affiliates to an amount equal to 20.0%
of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and
requires that all transactions be on terms substantially the same, or at least as favorable to the Bank, as those provided to a non-
affiliate. The term “covered transaction” includes a loan by the Bank to an affiliate, the purchase of or investment in securities
issued by an affiliate by the Bank, the purchase of assets by the Bank from an affiliate, the acceptance by the Bank of securities
issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance by the
Bank of a guarantee, acceptance or letter of credit on behalf of an affiliate. Loans by the Bank to an affiliate must be
collateralized.
In addition, subject to certain exceptions, the Federal Reserve Act and related regulations place quantitative and other
restrictions on loans to executive officers, directors and principal stockholders of the Bank and its affiliates, including a
requirement that loans to directors, executive officers and principal stockholders be made on terms substantially the same as
those offered in comparable transactions to other persons, and not involve more than the normal risk of repayment or present
other unfavorable features.
The Company and its affiliates, including the Bank, maintain programs to meet the limitations on transactions with affiliates
and restrictions on loans to insiders and the Company believes it and the Bank are currently in compliance with these
requirements.
Identity Theft
Under the Fair and Accurate Credit Transactions Act, the Bank is required to develop and implement a written Identity Theft
Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with the opening of certain accounts
or certain existing accounts. Under the FACT Act, the Bank is required to adopt reasonable policies and procedures to (i)
identify relevant red flags for covered accounts and incorporate those red flags into the program: (ii) detect red flags that have
been incorporated into the program; (iii) respond appropriately to any red flags that are detected to prevent and mitigate identity
theft; and (iv) ensure the program is updated periodically, to reflect changes in risks to clients or to the safety and soundness of
the financial institution or creditor from identity theft.
The Bank maintains a program to meet the requirements of the FACT Act and the Bank believes it is currently in compliance
with these requirements.
Consumer Protection Laws and Regulations; Other Regulations
The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern
almost every aspect of its business relationships with consumers, including but not limited to the Truth-in-Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Fair Housing Act, the Secure and Fair Enforcement in Mortgage Licensing Act, the Real Estate Settlement Procedures
Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service
Members Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer
Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws
governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and
various regulations that implement the foregoing. Among other things, these laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal with clients when taking deposits, making loans,
servicing loans and providing other services. If the Bank fails to comply with these laws and regulations, it may be subject to
various penalties.
The Dodd-Frank Act established the CFPB as an independent bureau within the Federal Reserve System that is responsible for
regulating consumer financial products and services under federal consumer financial laws. The CFPB has broad rulemaking
authority with respect to these laws. While the Company and the Bank are below $10 billion in assets and therefore are not
subject to supervision and examination by the CFPB, we continue to be subject to CFPB regulation regarding consumer
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financial services and products. The CFPB has issued numerous regulations, and is expected to continue to do so in the next
few years. The CFPB’s rulemaking, examination and enforcement authority has significantly affected, and is expected to
continue to significantly affect, financial institutions involved in the provision of consumer financial products and services,
including the Company and the Bank.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs
and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have
also recently implemented or modified their data breach notification and data privacy requirements. For example, the California
Consumer Privacy Act became effective on January 1, 2020 and key provisions of an additional law strengthening the
protection became effective on January 1, 2023. We expect this trend of state-level activity and consumer expectations in those
areas to continue to heighten, and we are continually monitoring for developments in the states in which our clients are located.
On November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification
requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new
rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after,
the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has
occurred. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the
viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the
financial sector. Service providers are required under the rule to notify affected banking organization customers as soon as
possible when the provider determines that it has experienced a computer-security incident that has materially affected or is
reasonably likely to materially affect the banking organization’s customers for four or more hours. Compliance with the new
rule was required by May 1, 2022.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the NYSE, to
require policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former
executive officer during the three fiscal years preceding a required accounting restatement, including to correct an error that
would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
The excess compensation would be based on the amount the executive officer would have received had the incentive-based
compensation been determined using the restated financials. The final rule, which became effective on January 27, 2023,
requires the exchanges to propose conforming listing standards by February 24, 2023 and requires the standards to become
effective no later than November 28, 2023. Each listed issuer, which includes the Company as a listed issuer on the NYSE,
would then be required to adopt a clawback policy within 60 days after its exchange’s listing standard has become effective.
The Company has in place a “clawback” policy and will work to implement any new requirements as the rule becomes
effective.
The Dodd-Frank Act also imposes a variety of requirements on entities that service mortgage loans.
The Bank is a member of the FHLB, which makes loans or advances to members. All advances are required to be fully secured
by sufficient collateral as determined by the FHLB. To be a FHLB member, financial institutions must demonstrate that they
originate and/or purchase long-term home mortgage loans or mortgage-backed securities. The Bank is required to purchase and
maintain stock in the FHLB. At December 31, 2022, the Bank had $22.6 million in FHLB stock, which was in compliance with
this requirement.
Volcker Rule
The so-called “Volcker Rule” issued under the Dodd-Frank Act, which became effective in July 2015, imposes certain
restrictions on the ability of the Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to
engage in certain types of proprietary trading. Under the regulations, FDIC-insured depository institutions, their holding
companies, subsidiaries and affiliates (collectively, banking entities), are generally prohibited, subject to certain exemptions,
from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in a
“covered fund.”
Trading in certain government obligations is not prohibited. These include, among others, obligations of or guaranteed by the
United States or an agency or GSE of the United States, obligations of a State of the United States or a political subdivision
thereof, and municipal securities. Proprietary trading generally does not include transactions under repurchase and reverse
repurchase agreements, securities lending transactions and purchases and sales for the purpose of liquidity management if the
liquidity management plan meets specified criteria; nor does it generally include transactions undertaken in a fiduciary capacity.
Future Legislation or Regulation
In light of recent conditions in the United States economy and the financial services industry, the current administration,
Congress, the regulators and various states continue to focus attention on the financial services industry. Additional proposals
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that affect the industry have been, and will likely continue to be, introduced. We cannot predict whether any of these proposals
will be enacted or adopted or, if they are, the effect they would have on our business, our operations or financial condition.
Item 1A. Risk Factors
An investment in our securities is subject to certain risks. These risk factors should be considered by prospective and current
investors in our securities when evaluating the disclosures in this Annual Report on Form 10-K. The risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following
risks actually occur, our business, results of operations and financial condition could suffer. In that event, the value of our
securities could decline, and you may lose all or part of your investment.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations and financial results.
Risks Relating to Our Operations
• New lines of business, new products and services, or strategic project initiatives, or new partnerships may subject us to
additional risks.
• We are subject to certain risks in connection with our use of technology.
•
To the extent we acquire other banks, bank branches, other assets or other businesses, such as the Deepstack
Acquisition, we may be negatively impacted by certain risks inherent with such acquisitions.
If we fail to comply with the applicable requirements of the payment card networks or NACHA, we could be fined,
suspended or have our registrations terminated.
Fraud by merchants or others could adversely affect our business, and our merchants may be unable to satisfy
obligations, including chargebacks, for which we may also be liable.
•
•
• We face significant operational risks.
• Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for
losses.
• Managing reputational risk is important to attracting and maintaining clients, investors and employees.
• We depend on key management personnel.
• We rely on numerous external vendors.
• We have a net deferred tax asset that may or may not be fully realized.
Interest Rate and Credit Risks
•
•
•
If actual losses on our loans exceed our estimates used to establish our allowance for credit losses, our business,
financial condition and profitability may suffer.
There are risks associated with our lending activities, and our allowance for credit losses may be insufficient.
Our business may be adversely affected by difficult economic conditions, including inflationary pressures or volatility
in the financial markets, which may impact our business, financial position and results of operations.
• Our business may be adversely affected by credit risk associated with residential property and declining property
values.
Our loan portfolio possesses increased risk due to our level of adjustable rate loans.
•
• Our underwriting practices may not protect us against losses in our loan portfolio.
• Our non-traditional and interest only SFR loans expose us to increased lending risk.
•
Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default.
• We are exposed to risks of environmental liabilities with respect to real properties acquired.
•
Secondary mortgage market conditions could have a material adverse impact on our business, results of operations,
financial condition or liquidity.
• Any breach of representations and warranties made by us to our residential mortgage loan purchasers or credit default
•
on our loan sales may require us to repurchase such loans.
Credit impairment in our investment securities portfolio could result in losses and adversely affect our continuing
operations.
Collateralized loan obligations represent a significant portion of our assets.
•
• Our income property loans, consisting of commercial real estate and multifamily loans, involve higher principal
amounts than other loans and repayments of these loans may be dependent on factors outside our control or the control
of our borrowers.
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• Our business is subject to interest rate risk and variations in interest rates may hurt our profits.
• Uncertainty relating to the LIBOR transition process and phasing out of LIBOR may adversely affect us.
Funding and Liquidity Risks
• We may not be able to develop and maintain a strong core deposit base or other low cost funding sources.
•
• We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
needed or on acceptable terms.
• Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of
funds for cash dividends to our stockholders.
There can be no assurance as to the level of dividends we may pay on our common stock.
•
Legal and Compliance Risks
• We are a party to a variety of litigation and other actions.
•
Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial
condition and results of operations.
• We operate in a highly regulated environment and our operations and income may be adversely affected by changes in
laws, rules and regulations governing our operations.
• We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material
penalties.
• Non-compliance with laws and regulations could result in fines or sanctions or operating restrictions.
•
The Volcker Rule covered fund provisions could adversely affect us.
Risks Relating to Markets and External Events
•
•
•
Climate change could have a material impact on us and our customers.
Severe weather, natural disasters, pandemics, acts of war or terrorism and other external events could significantly
impact our business.
Our financial condition and results of operations are dependent on the national and local economy, particularly in the
Bank's market areas. A worsening in economic conditions in the market areas we serve may impact our earnings
adversely and could increase the credit risk of our loan portfolio.
• We are subject to risk arising from the soundness of other financial institutions and counterparties.
•
Strong competition within our market areas may limit our growth and profitability.
• Our business could be negatively affected as a result of actions by activist stockholders.
•
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
The foregoing summary of risks should be read in conjunction with the more detailed Risk Factors below and is not an
exhaustive summary of all risks facing our business.
Risks Relating to Our Operations
New lines of business, new products and services, or strategic project initiatives, or new partnerships may subject us to
additional risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of
business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets
are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest
significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new
products or services may not be achieved, and price and profitability targets may not prove feasible, which could in turn have a
material negative effect on our operating results. New lines of business and/or new products or services also could subject us to
additional regulatory requirements, increased scrutiny by our regulators and other legal risks.
Additionally, from time to time we undertake strategic project initiatives, including but not limited to, payment processing,
investment in technology, process improvement, client experience and fintech partnerships or acquisitions, such as our
Deepstack Acquisition. Significant effort and resources are necessary to manage and oversee the successful completion of these
initiatives. These initiatives often place significant demands on a limited number of employees with subject matter expertise
and management and may involve significant costs to implement as well as increase operational risk as employees learn to
process transactions under new systems. The failure to properly execute on these strategic initiatives could adversely impact our
business and results of operations.
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Increasingly, community banks, including the Bank, are partnering with fintech providers to distribute or market our products
and services. Bank regulators have, and may in the future, hold banks responsible for the activities of these fintech companies,
including in respect of bank secrecy act or anti-money laundering matters, or may take the view that these relationships present
safety and soundness issues.
We are subject to certain risks in connection with our use of technology.
Our cyber-security measures may not be sufficient to mitigate losses or exposure to cyber-attack or cyber theft.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our
client relationships, our general ledger and virtually all other aspects of our business as well as process customer and merchant
payments via the Deepstack platform. Our operations rely on the secure processing, storage, and transmission of confidential
and other information in our computer systems and networks. Although we take protective measures and endeavor to modify
them as circumstances warrant, the security of our computer systems, software, and networks are vulnerable to breaches,
unauthorized access either directly or indirectly through our vendors, misuse, computer viruses, or other malicious code and
other types of cyber-attacks. Such risks have increased with the work-from-home arrangements implemented in response to the
COVID-19 pandemic. If one or more of these events occur, this could jeopardize our clients' confidential and other information
that we process and store, or otherwise cause interruptions in our operations or the operations of our clients or counterparties. In
addition, the U.S. banking regulatory agencies recently adopted a rule requiring us to notify the FRB within 36 hours of any
significant computer security incident, and in March 2022, the SEC proposed new rules that would require reporting on Form
8-K of material cybersecurity incidents. Several states and their governmental agencies also have adopted or proposed
cybersecurity laws. Privacy laws in the State of California, for example, require regulated entities to establish measures to
identify, manage, secure, track, produce, and delete personal information. The occurrence of cyber-attacks may require us to
expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or
other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered
through our current insurance policies. If a cyber-attack succeeds in disrupting our operations or disclosing confidential data,
we could also suffer significant reputational damage in addition to possible regulatory fines or client lawsuits.
We provide internet banking services to our clients which have additional cyber risks related to our client’s personal electronic
devices and electronic communication. Any compromise of personal electronic device security could jeopardize the confidential
information of our clients (including user names and passwords) and expose our clients to account take-overs (“ATO”) and the
possibility for financial crimes such as fraud or identity theft and deter clients from using our internet banking services. We rely
on and employ industry-standard tools and processes to safeguard data. These precautions may not protect our systems from
future vulnerabilities, data breaches or other cyber threats. Losses due to unauthorized account activity could harm our
reputation and may have a material adverse effect on our business, financial condition, results of operations and prospects.
Our security measures may not protect us from systems failures or interruptions.
While we have established policies and technical controls to prevent or limit the impact of systems failures and interruptions,
there are no absolute assurances that such events will not occur or that the resulting damages will be adequately mitigated.
We rely on communications, information, operating and financial control systems technology from third party service
providers, and we may suffer an interruption in those systems.
We outsource certain aspects of our data processing and operational functions to third party service providers. If our third party
service providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process
and account for transactions could be affected, and our business operations could be adversely impacted.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business,
could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a
material adverse effect on our financial condition and results of operations.
We rely heavily on third party service providers for much of our communications, information, operating and financial control
systems technology, including our online banking services and data processing systems.
We rely on third party service providers to help ensure the confidentiality of our client information and acknowledge the
additional risks these third parties expose us to. Third party service providers may experience unauthorized access to and
disclosure of our consumer or client information or result in the destruction or corruption of Company information. In addition,
we are exposed indirectly through our third party service providers who may experience their own cyber breach and as a result
compromise our data and/or lead to service interruptions. Any failure or interruption, or breaches in security, of these systems
could result in failures or interruptions in our client relationship management, general ledger, deposit, loan origination and
servicing systems, thereby harming our business reputation, operating results and financial condition. Additionally,
interruptions in service and security breaches could lead existing clients to terminate their banking relationships with us and
could make it more difficult for us to attract new banking clients in the future.
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To the extent we acquire other banks, bank branches, other assets or other businesses, such as the Deepstack
Acquisition, we may be negatively impacted by certain risks inherent with such acquisitions.
Acquiring other banks, bank branches, other assets or other businesses involves various risks, including the risks of incorrectly
assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks, branches
or businesses, or in the development of technology platforms, the risk of loss of clients and/or employees of the acquired bank,
branch or business, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing the
transaction’s anticipated benefits. We continue to face these risks in connection with the recently completed Deepstack
Acquisition. Our ability to address these matters successfully cannot be assured. There is also the risk that the requisite
regulatory approvals might not be received and other conditions to consummation of a transaction might not be satisfied during
the anticipated timeframes, or at all. In addition, pursuing an acquisition may divert resources or management’s attention from
ongoing business operations, may require investment in integration and in development and enhancement of additional
operational and reporting processes and controls, and may subject us to additional regulatory scrutiny. To finance an
acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital,
which could dilute the interests of our existing stockholders.
Acquiring other banks, bank branches, other assets or other businesses, such as the Deepstack Acquisition, also involve risks
associated with integration, which may cause us to not fully realize the benefits of an acquisition.
The success of any such transaction will depend on, among other things, our ability to combine and integrate the acquired assets
or business into our business. If we are not able to successfully achieve this objective, the anticipated benefits of the transaction
may not be realized fully, or at all, or may take longer to realize than expected. The integration process for an acquisition will
likely result in the diversion of management’s time on integration-related issues and could result in the disruption of our
business. These transition matters could have an adverse effect on us for an undetermined amount of time after the completion
of any acquisition.
If we fail to comply with the applicable requirements of the payment card networks or NACHA, they could seek to fine
us, suspend us or terminate our registrations.
Our subsidiary, Deepstack, offers payment processing solutions to clients. In order to provide our payment processing services,
we are registered with Visa and Mastercard and other networks as members or service providers for purposes of conducting
merchant acquiring and interacting with the applicable payment networks. As such, we are subject to these payment card and
other network rules.
If we fail to comply with these rules, we could be fined, and our membership registrations or certifications could be suspended
or terminated. The termination of our registrations or our membership or our status as a service provider or a merchant
processor, could limit our ability to provide merchant acquiring or transaction processing services to clients and could have a
material adverse effect on our business, financial condition and results of operations.
If a merchant or client fails to comply with these rules, it could be subject to a variety of fines or penalties levied by the
payment card associations or other networks. If we cannot collect the amounts from the applicable client or merchant, we may
have to bear the cost of the fines or penalties, resulting in lower earnings for us.
In addition, changes to the networks' rules or how they are interpreted, including those that increase the cost of doing business
or that would impair our registrations or otherwise limit our ability to provide transaction processing services to merchants,
could have a significant impact on our business, financial condition and results of operations.
We maintain business relationships with certain independent sales organizations that act as intermediaries in providing our
merchant acquiring services that may expose us to losses. These independent sales organizations may engage in activities such
as merchant acquiring, soliciting merchants and other clients and client service, among other activities. We face risks related to
our oversight and supervision of these independent sales organizations, as well as to the reputation and financial viability of the
independent sales organizations with which we do business. Any failure by us to appropriately oversee and supervise our
independent sales organizations could damage our reputation, result in regulatory or compliance issues, result in third party
litigation, and cause financial losses to us.
Fraud by merchants or others could adversely affect our business, and our merchants may be unable to satisfy
obligations, including chargebacks, for which we may also be liable.
In connection with our merchant acquiring and payment processing business, we face potential chargeback liability for
fraudulent payment transactions initiated by merchants or others. In the event a transaction dispute between a cardholder and a
merchant is not resolved in favor of the merchant, the transaction is normally charged back to the merchant and the purchase
price is refunded to the cardholder.
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If we are unable to collect such amounts from the merchant, either due to their refusal, closure, bankruptcy, or otherwise, we are
responsible to the card issuing bank for the amount of the refund paid to the cardholder. Failure to effectively manage these
risks and prevent fraud could increase our chargeback liability or other liabilities due to merchant failures. Increases in
chargebacks or other liabilities not paid by our merchants could have a material adverse effect on our business, financial
condition and results of operations.
We face significant operational risks.
We operate many different financial service functions and rely on the ability of our employees, third party vendors and systems
to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by
employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology
errors or hacking and breaches of internal control systems. These risks have increased in light of work-from-home arrangements
implemented in response to, and remain in effect as a result of, the COVID-19 pandemic.
Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for
losses.
Our enterprise risk management framework seeks to mitigate risk and loss to us. We have established comprehensive policies
and procedures and an internal control framework designed to provide a sound operational environment for the types of risk to
which we are subject, including credit risk, market risk (interest rate and price risks), liquidity risk, operational risk, compliance
risk, strategic risk, and reputational risk. However, as with any risk management framework, there are inherent limitations to
our current and future risk management strategies, including risks that we have not appropriately anticipated or identified. In
certain instances, we rely on models to measure, monitor and predict risks. However, these models are inherently limited
because they involve techniques, including the use of historical data in some circumstances, and judgments that cannot
anticipate every economic and financial outcome in the markets in which we operate, nor can they anticipate the specifics and
timing of such outcomes. There is no assurance that these models will appropriately capture all relevant risks or accurately
predict future events or exposures. Accurate and timely enterprise-wide risk information is necessary to enhance management’s
decision-making in times of crisis. In addition, our businesses and the markets in which we operate are continuously evolving.
We may fail to fully understand the implications of changes in our businesses or the financial markets or fail to adequately or
timely enhance our enterprise risk framework to address those changes. If our enterprise risk framework is ineffective, either
because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties,
clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of
compliance with applicable regulatory or contractual mandates.
Managing reputational risk is important to attracting and maintaining clients, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally,
unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies,
regulatory investigations, marketplace rumors and questionable or fraudulent activities of our clients. We have policies and
procedures in place to promote ethical conduct and protect our reputation. However, these policies and procedures may not be
fully effective and cannot adequately protect against all threats to our reputation. Negative publicity regarding our business,
employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a
decline in revenues and increased governmental oversight.
If the public perception of financial institutions remains negative, then our reputation and business may be adversely affected by
negative publicity or information regarding our business and personnel, whether or not accurate or true. Such information may
be posted on social media or other Internet forums or published by news organizations and the speed and pervasiveness with
which information can be disseminated through these channels, in particular social media, may magnify risks relating to
negative publicity.
We depend on key management personnel.
Our success will, to a large extent, depend on the continued employment of our key management personnel. The unexpected
loss of the services of any of these individuals could have a detrimental effect on our business. Although we have entered into
employment agreements with our Chief Executive Officer and our Chief Financial Officer, no assurance can be given that these
individuals, or any of our key management personnel, will continue to be employed by us. The loss of any of these individuals
could negatively affect our ability to achieve our business plan and could have a material adverse effect on our results of
operations and financial condition.
We rely on numerous external vendors.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the
contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial
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condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our
operations, which in turn could have a material negative impact on our financial condition and results of operations. We also
could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less
favorable to us.
We have a net deferred tax asset that may or may not be fully realized.
We have a net DTA and cannot assure that it will be fully realized. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities computed using
enacted tax rates. If we determine that we will not achieve sufficient future taxable income to realize our net deferred tax asset,
we are required under GAAP to establish a full or partial valuation allowance. If we determine that a valuation allowance is
necessary, we are required to incur a charge to operations. We regularly assess available positive and negative evidence to
determine whether it is more likely than not that our net deferred tax asset will be realized. Realization of a deferred tax asset
requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with
certainty. As of December 31, 2022, we had a net DTA of $50.5 million. For additional information, see Note 13 — Income
Taxes of the Notes to Consolidated Financial Statements included in Item 8.
Risks Related to Interest Rate and Credit
If actual losses on our loans exceed our estimates used to establish our allowance for credit losses, our business, financial
condition and profitability may suffer.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity
and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of
many of our loans. In determining the amount of the allowance for credit losses, we review our loans and the loss and
delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future
trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for credit losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase
in the provision for loan losses. Deterioration in economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans, fraud and other factors, both within and outside of our control, may require an
increase in the allowance for loan losses. Our allowance for credit losses was 1.28% of total loans held-for-investment and
165.18% of nonperforming loans as of December 31, 2022. In addition, bank regulatory agencies periodically review our
allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further charge-
offs (which will in turn also require an increase in the provision for credit losses if the charge-offs exceed the allowance for
credit losses), based on judgments different than that of management. Any increases in the provision for credit losses will result
in a decrease in net income and may have a material adverse effect on our financial condition and results of operations.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020, substantially
changed the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other
organizations. The standard changed the previous incurred loss impairment methodology in GAAP with a methodology that
reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information
for credit loss estimates. The CECL model materially impacts how we determine our allowance for credit losses and required us
to significantly increase our allowance for credit losses. Furthermore, we may experience more fluctuations in our allowance for
credit losses, which may be significant.
There are risks associated with our lending activities and our allowance for credit losses may prove to be insufficient to
absorb actual losses in our loan portfolio.
Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance
with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other
things:
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Cash flow of the borrower and/or the project being financed;
In the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
The credit history of a particular borrower;
Changes in interest rates;
Changes in economic and industry conditions; and
The duration of the loan.
We maintain an allowance for credit losses which we believe is appropriate to provide for probable losses inherent in our loan
portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of
several factors, including, but not limited to:
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An ongoing review of the quality, size and diversity of the loan portfolio;
Evaluation of nonperforming loans;
Historical default and loss experience;
Historical recovery experience;
Existing and forecasted economic conditions;
Risk characteristics of the various classifications of loans; and
The amount and quality of collateral, including guarantees, securing the loans.
Our business may be adversely affected by difficult economic conditions, including inflationary pressures or volatility in
the financial markets, which may impact our business, financial position and results of operations.
Robust demand, labor shortages and supply chain constraints have led to persistent inflationary pressures throughout the
economy. In response to these inflationary pressures, the FRB has raised benchmark interest rates in the past year and is
expected to continue raising interest rates in response to economic conditions, particularly a continued high rate of inflation.
Amidst these uncertainties, including potential recessionary economic conditions, financial markets have continued to
experience volatility. Changes in interest rates can affect numerous aspects of our business and may impact our future
performance.
Prolonged periods of inflation may impact our profitability by negatively impacting our costs and expenses, including
increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our
products and services. Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively
affect the need or demand for our products and services. If significant inflation continues, our business could be negatively
affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit
extensions.
If financial markets remain volatile, this may impact the future performance of various segments of our business, including the
value of our investment securities portfolio. We continue to closely monitor economic conditions and the pace of inflation and
the impacts of inflation on the larger market, including labor and supply chain impacts.
Any of the effects of these adverse economic conditions would likely have an adverse impact on our earnings, with the
significance of the impact generally depending on the nature and severity of such adverse economic conditions.
Our business may be adversely affected by credit risk associated with residential property and declining property
values.
As of December 31, 2022, $1.94 billion, or 27.2% of our total loans held-for-investment, was secured by SFR mortgage loans
and HELOCs, as compared with $1.44 billion, or 19.9% of our total loans held-for-investment, as of December 31, 2021. This
type of lending is particularly sensitive to regional and local economic conditions that significantly impact the ability of
borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate
values as a result of a downturn in the California housing markets may reduce the value of the real estate collateral securing
these types of loans and increase the risk that we would incur losses if borrowers default on their loans. Residential loans with
high combined loan-to-value ratios generally will be more sensitive to declining property values than those with lower
combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if
the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result,
these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial
condition and results of operations.
Our loan portfolio possesses increased risk due to our level of adjustable rate loans.
A majority of our real estate secured loans held-for-investment are adjustable rate loans. Any rise in prevailing market interest
rates may result in increased payments for some borrowers who have adjustable rate mortgage loans, increasing the possibility
of defaults.
Our underwriting practices may not protect us against losses in our loan portfolio.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices, including: analyzing
a borrower’s credit history, financial statements, tax returns and cash flow projections; valuing collateral based on reports of
independent appraisers; and verifying liquid assets. Notwithstanding these practices, we have incurred losses on loans that have
met these criteria, and may continue to experience higher than expected losses depending on economic factors and borrower
behavior. In addition, our ability to assess the creditworthiness of our clients may be impaired if the models and approaches we
use to select, manage, and underwrite our clients become less predictive of future behaviors, or in the case of borrower fraud.
Finally, we may have higher credit risk, or experience higher credit losses, to the extent our loans are concentrated by loan type,
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industry segment, borrower type, or location of the borrower or collateral. As of December 31, 2022, 64.7% of our commercial
real estate loans, 58.5% of our multifamily loans and 63.2% of our SFR mortgage loans were secured by collateral in Southern
California. Deterioration in real estate values and underlying economic conditions in Southern California could result in
significantly higher credit losses to our portfolio.
Our non-traditional and interest only SFR loans expose us to increased lending risk.
Many of the residential mortgage loans we have originated for investment consist of non-traditional SFR mortgage loans that do
not conform to Fannie Mae or Freddie Mac underwriting guidelines as a result of loan-to-value ratios or debt-to-income ratios,
loan terms, loan size (exceeding agency limits) or other exceptions from agency underwriting guidelines. Moreover, many of
these loans do not meet the qualified mortgage definition established by the CFPB, and therefore contain additional regulatory
and legal risks. In addition, the secondary market demand for nonconforming mortgage loans generally is limited, and
consequently, we may have a difficult time selling the nonconforming loans in our portfolio should we decide to do so.
In the case of interest only loans, a borrower’s monthly payment is subject to change when the loan converts to fully-amortizing
status. Since the borrower’s monthly payment may increase by a substantial amount, even without an increase in prevailing
market interest rates, the borrower might not be able to afford the increased monthly payment. In addition, interest only loans
have a large, balloon payment at the end of the loan term, which the borrower may be unable to pay. Negative amortization
involves a greater risk to us because credit risk exposure increases when the loan incurs negative amortization and the value of
the home serving as collateral for the loan does not increase proportionally. Negative amortization is only permitted up to 110%
of the original loan to value ratio during the first five years the loan is outstanding, with payments adjusting periodically as
provided in the loan documents, potentially resulting in higher payments by the borrower. The adjustment of these loans to
higher payment requirements can be a substantial factor in higher loan delinquency levels because the borrowers may not be
able to make the higher payments. Also, real estate values may decline, and credit standards may tighten in concert with the
higher payment requirement, making it difficult for borrowers to sell their homes or refinance their loans to pay off their
mortgage obligations. For these reasons, interest only loans and negative amortization loans are considered to have an increased
risk of delinquency, default and foreclosure than conforming loans and may result in higher levels of realized losses. Our
interest only loans increased during the year ended December 31, 2022, to $855.3 million, or 12.0% of our total loans held-for-
investment from $613.3 million, or 8.5% of our total loans held-for-investment, as of December 31, 2021.
Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default.
We make our commercial and industrial loans primarily based on the identified cash flow of the borrower and secondarily on
the underlying collateral provided by the borrower. Collateral securing commercial and industrial loans may depreciate over
time, be difficult to appraise and fluctuate in value and in the event we are required to assume direct responsibility for the
collateral, including but not limited to residential mortgage loans in the case of warehouse credit facilities that we provide to
non-bank financial institutions, our allowance for credit losses may increase, which may, in turn, adversely affect our financial
condition and results of operations. In the case of loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from its
clients. As of December 31, 2022, our commercial and industrial loans totaled $1.85 billion, or 25.9% of our total loans held-
for-investment.
We are exposed to risk of environmental liabilities with respect to real properties acquired.
In prior years, due to weakness of the U.S. economy and, more specifically, the California economy, including higher levels of
unemployment than the nationwide average and declines in real estate values, certain borrowers have been unable to meet their
loan repayment obligations and, as a result, we have had to initiate foreclosure proceedings with respect to and take title to a
number of real properties that had collateralized their loans. As an owner of such properties, we could become subject to
environmental liabilities and incur substantial costs for any property damage, personal injury, investigation and clean-up that
may be required due to any environmental contamination that may be found to exist at any of those properties, even though we
did not engage in the activities that led to such contamination. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties seeking damages for environmental contamination
emanating from the site. If we were to become subject to significant environmental liabilities or costs, our business, financial
condition, results of operations and prospects could be adversely affected.
Secondary mortgage market conditions could have a material adverse impact on our business, results of operations,
financial condition or liquidity.
In addition to being affected by interest rates, the secondary mortgage markets are subject to investor demand for mortgage
loans and mortgage-backed securities and investor yield requirements for those loans and securities. These conditions may
fluctuate or even worsen in the future.
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From time to time, as part of our balance sheet management process, we may also sell SFR loans and other types of mortgage
loans from our portfolio, including multifamily loans. We may use the proceeds of loan sales for generating new loans or for
other purposes. If secondary mortgage market conditions were to deteriorate in the future and we cannot sell loans at our
desired levels, our balance sheet management objectives might not be met. As a result, our business, results of operations,
financial condition or liquidity may be adversely affected.
Any breach of representations and warranties made by us to our loan purchasers or credit default on our loan sales may
require us to repurchase loans we have sold.
We have sold or securitized loans we originated into the secondary market pursuant to agreements that generally require us to
repurchase loans in the event of a breach of a representation or warranty made by us to the loan purchaser. Any fraud or
misrepresentation during the loan origination process, whether by us, the borrower, or other party in the transaction, or, in some
cases, upon any early payment default on such loans, may require us to repurchase such loans.
We believe that, as a result of the increased defaults and foreclosures during the 2007 to 2009 recession resulting in increased
demand for repurchases and indemnification in the secondary market, many purchasers of loans are particularly sensitive to
obtaining indemnification or the requirement of originators to repurchase loans, and would benefit from enforcing any
repurchase remedies they may have. Our exposure to repurchases under our representations and warranties could include the
current unpaid balance of all loans we have sold. During the years ended December 31, 2022, 2021 and 2020, we sold
multifamily and SFR mortgage loans aggregating zero, $10.7 million, and $17.4 million, respectively. To recognize the
potential loan repurchase or indemnification losses on all SFR mortgage and multifamily loans sold, we maintained a total
reserve of $3.0 million as of December 31, 2022. Increases to this reserve as a result of the sale of loans are a reduction in our
gain on the sale of loans. Increases and decreases to this reserve subsequent to the sale are included as a component of
noninterest expense. The determination of the appropriate level of the reserve inherently involves a high degree of subjectivity
and requires us to make estimates of repurchase and indemnification risks and expected losses. The estimates used could be
inaccurate, resulting in a level of reserve that is less than actual losses.
Deterioration in the economy, an increase in interest rates or a decrease in home and collateral values could increase client
defaults on loans that were sold and increase demand for repurchases and indemnification and increase our losses from loan
repurchases and indemnification. If we are required to indemnify loan purchasers or repurchase loans and incur losses that
exceed our reserve, this could adversely affect our business, financial condition and results of operations. In addition, any
claims asserted against us in the future by loan purchasers may result in liabilities or legal expenses that could have a material
adverse effect on our results of operations and financial condition.
Credit impairment in our investment securities portfolio could result in losses and adversely affect our continuing
operations.
As of December 31, 2022, we had $868.3 million of securities available-for-sale, as compared with $1.32 billion of securities
available-for-sale as of December 31, 2021.
As of December 31, 2022, securities available-for-sale that were in an unrealized loss position had a total fair value of $865.4
million with aggregate unrealized losses of $41.3 million. These unrealized losses related primarily to changes in overall
interest rates and the resulting impact on valuations of mortgage-backed securities, collateralized mortgage obligations,
municipal securities and collateralized loan obligations.
As of December 31, 2021, securities available-for-sale that were in an unrealized loss position had a fair value of $580.7
million and aggregate unrealized losses of $7.3 million. These unrealized losses related primarily to collateralized loan
obligations.
As of December 31, 2022, we had $328.6 million of securities held-to-maturity, of which all were in an unrealized loss position
and had a total fair value of $262.5 million. There were no securities held-to-maturity as of December 31, 2021.
The Company monitors to ensure it has adequate credit support and, as of December 31, 2022 we believed there was no credit
losses and did not have the intent to sell any of our securities in an unrealized loss position and it is likely that we will not be
required to sell such securities before their anticipated recovery. Debt securities held-to-maturity and available-for-sale are
analyzed for credit losses under ASC 326, Financial Instruments - Credit Losses. For debt securities held-to-maturity, the
Company estimates current expected credit losses. For debt securities available-for-sale, the Company determines whether
impairment exists as of the reporting date and whether that impairment is due to credit losses. An allowance for credit losses is
established for losses on debt securities held-to-maturity and available-for-sale due to credit losses and is reported as a
component of provision for credit losses. Accrued interest is excluded from our expected credit loss estimates. For more
information about ASC Topic 326, see Note 1 — Significant Accounting Policies of the Notes to Consolidated Financial
Statements included in Item 8.
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We closely monitor our investment securities for changes in credit risk. The valuation of our investment securities also is
influenced by external market and other factors, including implementation of SEC and FASB guidance on fair value
accounting. Accordingly, if market conditions deteriorate further and we determine our holdings of other investment securities
have experienced credit losses, our future earnings, stockholders’ equity, regulatory capital and continuing operations could be
materially adversely affected.
Collateralized loan obligations represent a significant portion of our assets.
As of December 31, 2022, based on fair value, $476.6 million, or 5.2% of our total assets, was invested in CLOs. Our CLO
portfolio consists entirely of variable rate securities, which we believe supports our interest rate risk management strategy by
lowering the extension risk and duration risk inherent to certain fixed rate investment securities. However, in a decreasing
interest rate environment, our interest income may be negatively impacted.
As of December 31, 2022, based on amortized cost, $24.4 million of our CLO holdings were AAA rated and $467.8 million
were AA rated. As of December 31, 2022, there were no CLOs rated below AA and none of the CLOs were subject to ratings
downgrade in 2022. All of our CLOs are floating rate, with rates set on a quarterly basis at a benchmark rate (3-Month LIBOR
or 3-Month Term SOFR) plus a spread.
As an investor in CLOs, we purchase specific tranches of debt instruments that are secured by professionally managed
portfolios of senior secured loans to corporations. CLOs are not secured by residential or commercial mortgages. CLO
managers are typically large non-bank financial institutions or banks. CLOs are typically $300 million to $1 billion in size,
contain 100 or more loans, and have five to six credit tranches including AAA, AA, A, BBB, BB, and B and an equity tranche.
Interest and principal are typically paid to the AAA tranche first then move down the capital stack. Losses are typically borne
by the equity tranche first then move up the capital stack. CLOs typically have subordination levels that range from
approximately 33% to 39% for AAA, 20% to 28% for AA, 15% to 18% for A and 10% to 14% for BBB. The market value of
CLOs may be affected by, among other things, perceived changes in the economy, performance by the manager and
performance of the underlying loans.
The CLOs we currently hold, from time to time, may not be actively traded, and under certain market conditions may be
relatively illiquid investments, and volatility in the CLO trading market may cause the value of these investments to decline.
Although we attempt to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of
AA or higher and by maintaining a pre-purchase due diligence and ongoing review process by a dedicated credit administration
team, no assurance can be given that these risk mitigation efforts will be successful. A deterioration in market conditions and
decline in the market value of CLOs could adversely impact our financial condition, results of operations and stockholders'
equity.
Our income property loans, consisting of commercial real estate and multifamily loans, involve higher principal
amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control
of our borrowers.
We originate commercial real estate and multifamily loans for individuals and businesses for various purposes, which are
secured by commercial properties. These loans typically involve higher principal amounts than other types of loans, and
repayment is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts
sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local
market conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained
or renewed in a timely manner or at all, the borrower’s ability to repay the loan may be impaired.
Commercial real estate and multifamily loans also expose us to credit risk because the collateral securing these loans often
cannot be sold easily. In addition, many of our commercial real estate and multifamily loans are not fully amortizing and
contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the
underlying property in order to make the payment, which may increase the risk of default or non-payment.
If we foreclose on a commercial real estate or multifamily loan, our holding period for the collateral typically is longer than for
residential mortgage loans because there are fewer potential purchasers of the collateral. Additionally, commercial real estate
and multifamily loans generally have relatively large balances to single borrowers or groups of related borrowers. Accordingly,
if we make any errors in judgment in the collectability of our commercial real estate and multifamily loans, any resulting
charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Our
commercial real estate and multifamily loans increased during the year ended December 31, 2022, to $2.95 billion, or 41.5% of
our total loans held-for-investment from $2.67 billion, or 36.8% of our total loans held-for-investment, as of December 31,
2021.
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Our business is subject to interest rate risk and variations in interest rates may hurt our profits.
To be profitable, we have to earn more money in interest that we receive on loans and investments than we pay to our
depositors and lenders in interest. If interest rates rise, our net interest income and the value of our assets could be reduced if
interest paid on interest-bearing liabilities, such as deposits and borrowings, increases more quickly than interest received on
interest-earning assets, such as loans, and investment securities. This is most likely to occur if short-term interest rates increase
at a faster rate than long-term interest rates, which would cause our net interest income to go down. In addition, rising interest
rates may hurt our income, because that may reduce the demand for loans and the value of our securities. In a rapidly changing
interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our
financial condition and results of operations.
Uncertainty relating to the LIBOR transition process and phasing out of LIBOR may adversely affect us.
In March 2021, the administrator of LIBOR announced that the cessation date for the wide majority of U.S. Dollar LIBOR
tenors will be June 30, 2023. The U.S. federal banking regulatory agencies issued guidance strongly encouraging banking
organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021, and have said
that use of the U.S. Dollar LIBOR rates as a reference rate in new contracts after that date would create safety and soundness
risks, including litigation, operational and consumer protection risks. The Adjustable Interest Rate (LIBOR) Act (the “LIBOR
Act”), enacted in March 2022, provides a statutory framework to replace U.S. Dollar LIBOR with a benchmark rate based on
the SOFR for contracts governed by U.S. law that have no fallback or fallbacks that would require the use of a LIBOR based
rate. In addition, in December 2022, the FRB adopted rules which identified different SOFR based replacement rates for
derivative contracts, for cash instruments such as floating rate notes and preferred stock, for consumer loans, for certain
government sponsored enterprise contracts and for certain asset backed securities. The Company continues to evaluate the
effects of the LIBOR Act and its implementing regulations on the Company and its LIBOR-linked contracts.
The discontinuation of a benchmark rate, changes in a benchmark rate, or changes in market perceptions of the acceptability of
a benchmark rate, including LIBOR, could, among other things, adversely affect the value of and return on certain of our assets
or products, result in changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such
discontinuation or changes, whether actual or anticipated, could result in market volatility, increased compliance, legal and
operational costs, and risks associated with customer disclosures and contract negotiations. Although the LIBOR Act includes
safe harbors if the FRB-identified SOFR-based replacement rate is selected, these safe harbors are untested. As a result, and
despite the enactment of the LIBOR Act, the implementation of substitute indices for the calculation of interest rates under our
loan agreements with our borrowers, may cause us to incur significant expenses in effecting the transition, and may be subject
to disputes or litigation with clients over the appropriateness or comparability to LIBOR of the substitute indices, which could
have a material adverse effect on our results of operations and financial condition.
At December 31, 2022, approximately 15.9% of our total loan portfolio was indexed to 30-day, 90-day, 180-day and one-year
LIBOR. These amounts include our warehouse lending portfolio which totals 8.4% of our total loan portfolio and will renew or
mature prior to the cessation of LIBOR publication, which is expected to discontinue on June 30, 2023. Many of our loan
agreements that are indexed to LIBOR include provisions that do not require us to default to any alternative index
recommendations but instead allow us, in our sole discretion, to designate an alternative interest rate index in the event that
LIBOR should become unavailable or unstable. While we believe these provisions within our loan agreements address the
future unavailability of LIBOR, there can be no assurance that such provisions will be effective or that they, or our actions in
this respect, will not be challenged by our borrowers. At December 31, 2022, approximately 40.7% of our debt securities held-
to-maturity and available-for-sale portfolios were indexed to 30-day or 90-day LIBOR. We are monitoring those investments
for updates from the related issuers related to alternative indexes.
Funding and Liquidity Risks
We may not be able to develop and maintain a strong core deposit base or other low cost funding sources.
We depend on checking, savings and money market deposit account balances and other forms of deposits as the primary source
of funding for our lending activities. Our future growth will largely depend on our ability to expand core deposits, to provide a
less costly and stable source of funding. The deposit markets are competitive, and therefore it may prove difficult to grow our
core deposit base.
Beginning in 2019, the Bank focused on remixing the deposit base towards core relationship deposits. The Bank experienced
net deposit outflows from high-rate large balance accounts (defined as $100 million or more in balances) primarily in the
former Institutional Banking business unit.
The Bank increased its focus and attention toward expanding its core relationship deposit business, including recruiting sales
and product personnel and adding subject matter expertise. The competitive landscape for deposits continued throughout 2020
and 2021 and was exacerbated in 2022 by the rising interest rate environment. Outflows were partially offset by new account
and client acquisitions. In a competitive market, depositors have many choices as to where to place their deposit accounts. As
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the Bank continues to grow its core deposit base and seeks to reduce its exposure to high rate/high volatility accounts, it may
experience a net deposit outflow, which could negatively impact our business, financial condition and results of operations.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other
sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance
our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial
services industry or economy in general.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as
a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative
views and expectations about the prospects for the financial services industry.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is
needed or on acceptable terms.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some
point, we may need to raise additional capital to support continued growth.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, our
financial performance and a number of other factors, many of which are outside our control. Accordingly, we cannot assure you
of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when
needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could
be materially and adversely affected.
Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of
funds for cash dividends to our preferred and common stockholders.
Our primary source of revenue at the holding company level is dividends from the Bank and we also have previously relied on
the net proceeds of capital raising transactions as the primary source of funds for cash dividends to our preferred and common
stockholders. To the extent the holding company is limited in the amount of dividends the Bank pays to the holding company or
in its ability to raise capital in the future, the holding company's ability to pay cash dividends to its stockholders could likewise
be limited.
The OCC regulates and, in some cases, must approve the amounts the Bank pays as dividends to us. Currently, the Bank does
not have sufficient dividend-paying capacity to declare and pay such dividends to us without obtaining prior approval from the
OCC under applicable regulations, which requires prior approval if a cash dividend would exceed the sum of current period net
income and retained earnings from the past two years, after deducting dividends previously declared (among other amounts).
Further, the Bank’s ability to pay dividends can be restricted or eliminated if the Bank does not meet the capital conservation
buffer requirement or for other supervisory reasons. If the Bank is unable to pay dividends to the holding company, then we
may not be able to service our debt, including our senior notes and subordinated notes, pay our other obligations or pay cash
dividends on our preferred and common stock. Our inability to service our debt, pay our other obligations or pay dividends to
our stockholders could have a material adverse impact on our financial condition and the value of your investment in our
securities.
There can be no assurance as to the level of dividends we may pay on our common stock.
Holders of our common stock are only entitled to receive such dividends as our board of directors declares out of funds legally
available for such payments. Although we have historically declared cash dividends on our common stock, we are not required
to do so and there may be circumstances under which we would reduce, suspend, or eliminate our common stock dividend in
the future. This could adversely affect the market price of our common stock.
In addition, the FRB supervisory staff issued Federal Reserve Supervision and Regulation Letter SR-09-4, which reiterates and
heightens expectations that bank holding companies inform and consult with Federal Reserve supervisory staff prior to
declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. If the Company
experiences losses in a series of consecutive quarters, it may be required to inform and consult with the Federal Reserve
supervisory staff prior to declaring or paying any dividends. In this event, there can be no assurance that the Company's
regulators will approve the payment of such dividends.
Legal and Compliance Risks
We are a party to a variety of litigation and other actions.
We are subject to a variety of litigation pertaining to fiduciary and other claims and legal proceedings. Currently, there are
certain legal proceedings pending against us in the ordinary course of business. While the outcome of any legal proceeding is
30
inherently uncertain, we believe that any liabilities arising from pending legal matters would be immaterial based on
information currently available. However, if actual results differ from our expectations, it could have a material adverse effect
on the Company's financial condition, results of operations, or cash flows. For a detailed discussion on current legal
proceedings, see Item 3 —Legal Proceedings, and Note 26 — Litigation of the Notes to Consolidated Financial Statements
included in Item 8.
Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial condition
and results of operations.
We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to
previous periods and as a result could negatively affect our current and future financial performance. In particular, the Tax Cuts
and Jobs Act, which was signed into law in December 2017, includes a number of provisions impacting the banking industry
and the borrowers and the market for residential and commercial real estate. Changes include a lower limit on the deductibility
of interest on residential mortgage loans and home equity loans; a limitation on the deductibility of business interest expense; a
limitation on the deductibility of property taxes and state and local income taxes, etc. The law's limitation on the mortgage
interest deduction and state and local tax deduction for individual taxpayers has increased the after-tax cost of owning a home
for many of our existing clients. The Inflation Reduction Act, which was signed into law in the United States in August 2022,
among other things, imposes a surcharge on stock repurchases. The value of the properties securing loans in our loan portfolio
may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our
provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial
condition and results of operations. Further, these changes implemented by this tax law could make some businesses and
industries less inclined to borrow, potentially reducing demand for our commercial loan products. Finally, we may be
negatively impacted more than our competitors because our business strategy focuses on California, which has a higher cost
real estate market compared to other states.
We are also subject to potential tax audits in various jurisdictions and in such event, tax authorities may disagree with certain
positions we have taken and assess penalties or additional taxes. While we assess regularly the likely outcomes of these
potential audits, there can be no assurance that we will accurately predict the outcome of a potential audit, and an audit could
have a material adverse impact on our business, results of operations, and financial condition.
We operate in a highly regulated environment and our operations and income may be adversely affected by changes in
laws, rules and regulations governing our operations.
We are subject to extensive regulation and supervision by the FRB, the OCC and the CFPB. The FRB regulates the supply of
money and credit in the United States. Its fiscal and monetary policies determine in a large part our cost of funds for lending
and investing and the return that can be earned on those loans and investments, both of which affect our net interest margin.
FRB policies can also materially affect the value of financial instruments that we hold, such as debt securities, certain mortgage
loans held-for-sale and MSRs. Its policies also can affect our borrowers, potentially increasing the risk that they may fail to
repay their loans or satisfy their obligations to us. Changes in policies of the FRB are beyond our control and the impact of
changes in those policies on our activities and results of operations can be difficult to predict.
The Company and the Bank are heavily regulated. This oversight is to protect depositors, the federal Deposit Insurance Fund
(“DIF”) and the banking system as a whole, and not stockholders or debt holders. These regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities, including the ability to impose increased capital
requirements and restrictions on a bank’s operations, to reclassify assets, to determine the adequacy of a bank’s allowance for
credit losses and to set the level of deposit insurance premiums assessed.
Congress, state legislatures and federal and state agencies continually review banking, lending and other laws, regulations and
policies for possible changes. We face the risk of becoming subject to new or more stringent requirements in connection with
the introduction of new regulations or modifications of existing regulations, which could require us to hold more capital or
liquidity or have other adverse effects on our businesses or profitability. Any change in such regulation and oversight, whether
in the form of regulatory policy, new regulations or legislation, that applies to us or additional deposit insurance premiums
could have a material adverse impact on our operations. Because our business is highly regulated, the laws and applicable
regulations are subject to frequent change. Any new laws, rules and regulations such as the California Consumer Privacy Act
(“CCPA”) could make compliance more difficult, expensive, costly to implement or may otherwise adversely affect our
business, financial condition or growth prospects. Such changes could subject us to additional costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products,
among other things.
The CFPB is an independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal
consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB
has examination and primary enforcement authority with respect to depository institutions, their affiliates, their service
providers and certain non-depository entities such as debt collectors and consumer reporting agencies if the assets of the
31
institution exceed the $10 billion threshold. As a smaller financial institution with assets under $10 billion, we are generally
subject to supervision and enforcement by the OCC with respect to compliance with federal consumer financial protection laws
and regulations. However, we are still subject to regulations issued by the CFPB.
Compliance with the rules and policies adopted by the CFPB has limited the products we may offer to some or all of our clients,
or limited the terms on which those products may be issued, or may adversely affect our ability to conduct our business as
previously conducted. We may also be required to add compliance personnel or incur other significant compliance-related
expenses. Our business, financial condition, results of operations and/or competitive position may be adversely affected as a
result.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material
penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose
nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state
agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance
under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of
sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on
merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business,
financial condition and results of operations.
Non-compliance with laws and regulations could result in fines or sanctions or operating restrictions.
We are subject to government legislation and regulation, including but not limited to the USA PATRIOT and Bank Secrecy
Acts, which require financial institutions to develop programs to detect money laundering, terrorist financing, and other
financial crimes. If detected, financial institutions are obligated to report such activity to the Financial Crimes Enforcement
Network, a bureau of the United States Department of the Treasury. These regulations require financial institutions to establish
procedures for identifying and verifying the identity of clients and beneficial owners of clients that establish and maintain a
relationship with a financial institution. Failure to comply with these regulations could result in fines, sanctions or restrictions
that could have a material adverse effect on our strategic initiatives and operating results, and could require us to make changes
to our operations and the clients that we serve. Several banking institutions have received large fines, or suffered limitations on
their operations, for non-compliance with these laws and regulations. Although we have developed policies, procedures and
processes designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and
procedures will be effective in detecting violations of these laws and regulations.
Our federal regulators have extensive discretion in connection with their supervisory and enforcement activities over our
operations and compliance with the USA PATRIOT and Bank Secrecy Acts. Any new laws and regulations could make
compliance more difficult or expensive or otherwise adversely affect our business. One aspect of our business that we believe
presents risks in this particular area is the conflict between federal and state law, including but not limited to cannabis and
cannabis related businesses, which are legal in the State of California and prohibited by federal law. If our risk management and
compliance programs prove to be ineffective, incomplete or inaccurate, we could suffer unexpected losses and/or incur fines,
penalties or restrictions to operations, which could materially adversely affect our results of operations or financial condition.
As part of our federal regulators' enforcement authority, significant civil or criminal monetary penalties, consent orders, or other
regulatory actions can be assessed against the Bank. Such actions could require us to make changes to our operations, including
the clients that we serve, and may have an adverse impact on our operating results.
The Volcker Rule covered fund provisions could adversely affect us.
The so-called “Volcker Rule” (adopted pursuant to the Dodd-Frank Act) restricts our ability to sponsor or invest in “covered
funds” (as defined in the applicable regulations). The Volcker Rule excludes from the definition of “covered fund” loan
securitizations that meet specified investment criteria and do not invest in impermissible assets. Accordingly, investments in
CLOs that qualify for the loan securitization exclusion are not prohibited by the Volcker Rule. It is our practice to invest only in
CLOs that meet the Volcker Rule’s definition of permissible loan securitizations and therefore are Volcker Rule compliant.
However, it is possible that certain CLOs in which we have invested may be found subsequently to be covered funds. If so, we
may be required to divest our interest in nonconforming CLOs, and we could incur losses on such divestitures.
Risks Relating to Markets and External Factors
Climate change could have a material negative impact on us and our customers
Our business, as well as the operations and activities of our customers, is subject to the potential risks associated with climate
change. Climate change presents both immediate and long-term risks to us and our customers and these risks are expected to
increase over time. Climate changes presents multi-faceted risks, including (i) operational risk from the physical effects of
32
climate events on our facilities and other assets as well as those of our customers; (ii) credit risk from borrowers with
significant exposure to climate risk; and (iii) reputational risk from stakeholder concerns about our practices related to climate
change and our carbon footprint. Our business, reputation and ability to attract and retain employees may also be harmed if our
response to climate changed is perceived to be ineffective or insufficient.
Climate change exposes us to physical risk as its effects may lead to more frequent and more extreme weather events, such as
prolonged droughts, an increase in the number and severity of wildfires and extreme seasonal weather; and longer-term shifts,
such as increasing average temperatures, ozone depletion and rising sea levels. Such events and long-term shifts may damage,
destroy or otherwise impact the value or productivity of our properties and other assets; reduce the availability of insurance;
and/or disrupt our operations and other activities through prolonged outages. Such events and long-term shifts may also have a
significant impact on our customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or
collateral values, and other businesses and counterparties with whom we transact, which could have a broader impact on the
economy, supply chains and distribution networks.
Climate change also exposes us to transition risks associated with the transition to a less carbon-dependent economy. Transition
risks may result from changes in policies; laws and regulations; technologies; and/or market preferences to address climate
change. Such changes could materially, negatively impact our business, results of operations, financial condition and/or our
reputation, in addition to having a similar impact on our customers. Federal and state banking regulators and supervisory
authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address
the risks related to climate change both directly and with respect to their customers, which may result in financial institutions
coming under increased pressure regarding the disclosure and management of their climate risks and related lending and
investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in
economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a
less carbon-intensive environment, we face regulatory risk of increasing focus on our resilience to climate-related risks,
including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and
changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational
risks and costs.
Severe weather, natural disasters, pandemics, acts of war or terrorism and other external events could significantly
impact our business.
Severe weather, natural disasters such as earthquakes and wildfires, acts of war or terrorism (and any responses thereto),
pandemics (including the ongoing COVID-19 pandemic), epidemics and other health-related crises, and other adverse external
events have had and could have a significant impact on our ability to conduct business. Such events could affect the stability of
our deposit base, impair the ability of our borrowers to repay their outstanding loans, cause significant property damage or
otherwise impair the value of collateral securing our loans, and result in loss of revenue and/or cause us to incur additional
expenses. Although we have established disaster recovery and business continuity plans and procedures, and we monitor the
effects of any such events on our loans, properties and investments, the occurrence of any such event could have a material
adverse effect on us or our results of operations and our financial condition.
Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely
affected by the COVID-19 pandemic. The COVID-19 pandemic created economic and financial disruptions that have adversely
affected, and may continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. We
cannot predict at this time the extent to which the COVID-19 pandemic will continue to negatively affect our business, financial
condition, liquidity, capital and results of operations. The extent of any continued or future adverse effects of the COVID-19
pandemic will depend on future developments, which are highly uncertain and outside our control, including the scope and
duration of the pandemic, the direct and indirect impact of the pandemic on our employees, clients, customers, counterparties
and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties
in response to the pandemic.
Ongoing geopolitical instability, including as a result of Russia’s invasion of Ukraine, has negatively impacted, and could in the
future negatively impact, the global and U.S. economies, including by causing supply chain disruptions, rising prices for oil and
other commodities, volatility in capital markets and foreign currency exchange rates, rising interest rates and heightened
cybersecurity risks. The extent to which such geopolitical instability, such as Russia’s invasion of Ukraine, adversely affects
our business, financial condition and results of operations, as well as our liquidity and capital profile, will depend on future
developments, which are highly uncertain and unpredictable, including with respect to Russia’s invasion, the extent and
duration of the invasion and economic sanctions imposed on Russia, and the humanitarian toll inflicted on Ukraine. If
geopolitical instability adversely affects us, it may also have the effect of heightening other risks related to our business.
Our financial condition and results of operations are dependent on the national and local economy, particularly in the
Bank’s market areas. A worsening in economic conditions in the market areas we serve may impact our earnings
adversely and could increase the credit risk of our loan portfolio.
33
We cannot accurately predict the possibility of the national or local economy’s return to recessionary conditions or to a period
of economic weakness, which would adversely impact the markets we serve. Our primary market area is concentrated in the
greater Los Angeles, Orange, San Diego, and Santa Barbara counties. Adverse economic conditions in any of these areas can
reduce our rate of growth, affect our clients’ ability to repay loans and adversely impact our financial condition and earnings.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may affect our
profitability adversely.
A deterioration in economic conditions could result in a number of consequences, including but not limited to the following,
any of which could have a material adverse effect on our business, financial condition and results of operations:
•
•
•
•
Demand for our products and services may decline;
Loan delinquencies, problem assets and foreclosures may increase;
Collateral for our loans may decline in value; and
The amount of our low cost or noninterest-bearing deposits may decrease.
We are subject to risk arising from the soundness of other financial institutions and counterparties.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of
these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full
amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our business,
financial condition and results of operations.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks,
savings institutions, mortgage brokerage firms, credit unions, finance companies, non-bank lenders, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have
substantially greater name recognition, resources and lending limits than we do and may offer certain services or prices for
services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our
markets.
Continued technological advances, including cryptocurrencies and blockchain and other distributed ledger technologies, and the
growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally
were banking products, and for financial institutions and other companies to provide electronic and internet-based financial
solutions, including electronic securities trading, lending and payment solutions. In addition, technological advances, including
digital currencies and alternative payment methods, may diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
In addition, our future success will depend, in part, upon our ability to address the needs of our clients by using technology to
provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not
be able to effectively implement new technology-driven products and services or be successful in marketing these products and
services to our clients.
Our business could be negatively affected as a result of actions by activist stockholders.
Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase
stockholder value through various corporate actions. In the past, we have added to our board of directors members affiliated
with two of our major stockholders, PL Capital Advisors LLC (“PL Capital”) and Patriot Financial Partners.
However, we may have disagreements with activist stockholders which could prove disruptive to our operations. Activist
stockholders could seek to elect their own candidates to our board of directors or could take other actions intended to challenge
our business strategy and corporate governance. Responding to actions by activist stockholders may adversely affect our
profitability or business prospects, by diverting the attention of management and our employees from executing our strategic
plan. Any perceived uncertainties as to our future direction or strategy arising from activist stockholder initiatives could also
cause increased reputational, operational, financial, regulatory and other risks, harm our ability to raise new capital, or
adversely affect the market price or increase the volatility of our securities.
34
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a
third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit
from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement
shares. Some short sellers may seek to drive down the price of shares they have sold short by disseminating negative reports
about the issuers of such shares.
During late 2016, we became aware of certain allegations posted anonymously in various financial blog posts. The authors of
the blog posts have typically disclosed that they hold a short position in our stock. Following the blog posting in late 2016, the
market price of our common stock initially dropped significantly. While the price of our common stock subsequently increased,
any additional postings and other negative publicity that have previously led to intense public scrutiny, may cause further
volatility in our stock price and a decline in the value of a stockholder’s investment in us.
When the market price of a company's stock drops significantly, as ours did initially following the posting of the first blog, it is
not unusual for stockholder lawsuits to be filed or threatened against the company and its board of directors and for a company
to suffer reputational damage. Multiple lawsuits were in fact threatened and filed against us shortly following the posting of the
first blog. These lawsuits, and any other lawsuits, have caused us to incur substantial costs and diverted the time and attention
of our board and management, and may continue to do so in the future. In addition, reputational damage to us may affect our
ability to attract and retain deposits and may cause our deposit costs to increase, which could adversely affect our liquidity and
earnings. Reputational damage may also affect our ability to attract and retain loan clients and maintain and develop other
business relationships, which could likewise adversely affect our earnings. Continued negative reports issued by short sellers
could also negatively impact our ability to attract and retain employees.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2022, we conduct our operations from 34 offices, including our main and executive offices at 3 MacArthur
Place, Santa Ana, California and 28 branch offices in Los Angeles, Orange, San Diego, and Santa Barbara counties in
California. We also lease additional office space outside of our headquarters and branch locations. For additional information,
see Note 6 — Premises and Equipment, net and Note 7— Leases of the Notes to Consolidated Financial Statements included in
Item 8.
Item 3. Legal Proceedings
From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business.
The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. 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 4. Mine Safety Disclosures
Not applicable.
35
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our voting common stock (symbol BANC) is listed on the NYSE. Our Class B non-voting common stock is not listed or traded
on any national securities exchange or automated quotation system, and there currently is no established trading market for such
stock. The approximate number of holders of record of our voting common stock as of December 31, 2022 was 1,203. Certain
shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or
included in the foregoing number. There were three holders of record of our Class B non-voting common stock as of
December 31, 2022. At December 31, 2022, there were 65,168,380 shares and 58,544,534 shares of voting common stock
issued and outstanding, respectively, and 477,321 shares of Class B non-voting common stock issued and outstanding.
During 2022, we redeemed all outstanding Series E Preferred Stock, and the corresponding depositary shares, each representing
a 1/40th interest in a share of the Series E Preferred Stock. The redemption price for the Series E Preferred Stock was $1,000
per share (equivalent to $25 per Series E Depositary Share). Upon redemption, the Series E Preferred Stock and the Series E
Depositary Shares were no longer outstanding and all rights with respect to such stock and depositary shares ceased and
terminated, except the right to payment of the redemption price. Also upon redemption, the Series E Depositary Shares were
delisted from trading on the New York Stock Exchange. As of December 31, 2022, we had no shares of preferred stock issued
and outstanding.
Dividend Policy
The timing and amount of cash dividends paid to our preferred and common stockholders depends on our earnings, capital
requirements, financial condition, regulatory approval and other relevant factors, including the discretion of the Board of
Directors with respect to common stockholder dividends. Our primary source of revenue at the holding company level is
dividends from the Bank, and to a lesser extent our ability to raise capital or debt. To the extent we are unable to access
dividends from the Bank or are limited in our ability to raise capital in the future, our ability to pay cash dividends to our
stockholders would likely be limited. See in Item 1A. — Risk Factors of this Annual Report on Form 10-K for a discussion
regarding the holding company's reliance on dividends from the Bank for substantially all of its income and as a result the
primary source of funds for cash dividends to our preferred and common stockholders. During the year ended December 31,
2022, the holding company paid dividends in the amount of $14.5 million to its common stockholders and $1.7 million to its
preferred stockholders. The Bank paid dividends of $126.0 million to the holding company during the year ended December 31,
2022. For a description of the regulatory restrictions on the ability of the Bank to pay dividends to the holding company, and on
the ability of Banc of California, Inc. to pay dividends to its stockholders, see Item 1 — Regulation and Supervision included in
this Annual Report on Form 10-K.
36
Issuer Purchases of Equity Securities
($ in thousands, except per share data)
Common Stock:
From October 1, 2022 to October 31, 2022
From November 1, 2022 to November 30, 2022
From December 1, 2022 to December 31, 2022
Total
Purchases 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
Total Number
of Shares (or
Approximate
Dollar Value)
That May Yet
be Purchased
Under the Plan
876,014 $
210,556 $
59,908 $
1,146,478 $
16.60
16.51
15.52
16.53
876,014 $
4,368,180
209,910 $
902,055
57,900 $
—
1,143,824
During the three months and year ended December 31, 2022, purchases of shares of common stock related to shares purchased
under our stock repurchase program and shares surrendered by employees in order to pay employee tax liabilities associated
with vested awards under our employee stock benefit plans.
On March 15, 2022, we announced a repurchase program of up to $75 million of our common stock. As of December 31, 2022,
we completed the authorized common stock repurchase program totaled $75 million, or 4,212,882 shares at a weighted average
price of $17.80 per share.
Stock Performance Graph
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant
to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or “filed” with the SEC (other than as
provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or
the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language
contained therein, except to the extent that we specifically incorporate it by reference into a filing.
The following graph shows a comparison of stockholder total return on Banc of California, Inc.’s voting common stock with
the cumulative total returns for: (i) the NYSE Composite Index; (ii) the KBW NASDAQ Regional Banking Index, and (iii) the
S&P U.S. BMI Banks - Western Region Index. The graph assumes an initial investment of $100 on December 31, 2017, in our
common stock and the comparison indices and assumes the reinvestment of dividends. The graph is historical only and may not
be indicative of possible future performance.
37
Index
Banc of California, Inc.
NYSE Composite
KBW NASDAQ Regional Banking
Index
S&P U.S. BMI Banks - Western Region
Index
$
$
$
$
December 31,
2017
2018
2019
2020
2021
2022
100.00 $
66.32 $
87.42 $
76.43 $
103.23 $
84.99
100.00 $
91.05 $
114.28 $
122.26 $
147.54 $
133.75
100.00 $
82.50 $
102.15 $
93.25 $
127.42 $
118.59
100.00 $
79.17 $
96.55 $
72.25 $
111.40 $
86.45
Item 6. Reserved
38
Index ValueTotal Return PerformanceBanc of California, Inc.NYSE CompositeKBW NASDAQ Regional Banking IndexS&P U.S. BMI Banks - Western Region Index12/31/201712/31/201812/31/201912/31/202012/31/202112/31/2022$40$60$80$100$120$140$160 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
We follow accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices
generally applicable to the financial services industry, the most significant of which are described in Note 1 — Summary of
Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8. 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, valuation of acquired loans, goodwill and deferred income taxes. See
Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 for
a description of these policies.
Allowance for Credit Losses (“ACL”). The ACL is estimated on a quarterly basis and represents management’s estimate of
CECL in our loan portfolio. The ACL estimate is based on the accounting standard commonly known as CECL. Under the
CECL method, pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk
characteristics with loan pools are evaluated individually. 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 allowance for loan losses includes qualitative adjustments to bring the allowance to the level
management believes is appropriate based on factors that have not otherwise been fully accounted for, including those
described in the federal banking agencies' joint interagency policy statement on ALL. 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 allowance
for loan losses and the reserve for unfunded noncancellable loan commitments.
Business Combinations. Business combinations are accounted for using the acquisition method of accounting under ASC Topic
805, Business Combinations. Under the acquisition method, we measure the identifiable assets acquired, including identifiable
intangible assets, and liabilities assumed in a business combination at fair value on acquisition date. Goodwill is generally
determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date.
We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated
fair values at the acquisition date. The fair values of other intangibles are determined utilizing information available near the
acquisition date based on expectations and assumptions that are deemed reasonable by management. The estimates used to
determine the fair values of assets and liabilities acquired in a business combination can be complex and require judgment, as
such we typically engage third-party valuation specialists for significant items.
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 term of
the non-compete agreement assuming the agreement is in place and compare 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.
39
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 addition to the fair value adjustment, at the date of acquisition, an
ACL is established with a corresponding increase to the overall acquired loan balance. This initial ACL is determined using our
application of the CECL method.
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 provisions for credit losses in future periods if actual losses
materially differ from the estimated assumptions utilized in our initial valuation of acquired loans.
Deferred Income Taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement
and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets 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 evaluates both positive and negative evidence on a quarterly basis, including the
consideration of several sources of future taxable income, such as future reversal of existing taxable temporary differences,
future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback
year(s), and future tax planning strategies.
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.
40
Recent Accounting Pronouncements
See Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item
8 for information on recent accounting pronouncements and their expected impact, if any, on our consolidated financial
statements.
Non-GAAP Measures
Under Item 10(e) of SEC Regulation S-K, public companies disclosing 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 additional
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 operations 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 equity to tangible assets, 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,
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 EPS and adjusted
ROAA constitute supplemental financial information determined by methods other than in accordance with GAAP. These non-
GAAP measures are used by management in our analysis of our 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 from tangible equity. Return on average tangible
common equity is computed by dividing net income (loss) 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 computed by dividing annualized PTPP income
by average assets. Adjusted PTPP income ROAA is computed by dividing annualized adjusted PTPP income by average assets.
Efficiency ratio is computed by dividing noninterest expense by total revenue. Adjusted efficiency ratio is computed 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
computed by dividing annualized adjusted net income by average assets. Adjusted net income (loss) available to common
stockholders is computed by removing the impact of preferred stock redemptions from adjusted net income. Adjusted diluted
EPS is computed by dividing adjusted net income available to common stockholders by the weighted average diluted common
shares outstanding.
Management believes the presentation of these financial measures adjusting the impact of these items provides useful
supplemental information that is essential to a proper understanding of the financial results and operating performance of the
Company. This disclosure should not be viewed as a substitute for results determined in accordance with GAAP, nor is it
necessarily comparable to non-GAAP performance measures that may be presented by other companies.
41
The following tables provide reconciliations of the non-GAAP measures with financial measures defined by GAAP.
(Dollars in thousands, except per share data)(Unaudited)
Tangible common equity, and tangible common equity to tangible assets ratio
Total assets
Less goodwill
Less other intangible assets
Tangible assets(1)
Total stockholders' equity
Less preferred stock
Total common stockholders' equity
Total stockholders' equity
Less goodwill
Less other intangible assets
Tangible equity(1)
Less preferred stock
Tangible common equity(1)
Total stockholders' equity to total assets
Tangible equity to tangible assets(1)
Tangible common equity to tangible assets(1)
Common shares outstanding
Class B non-voting non-convertible common shares outstanding
Total common shares outstanding
Book value per common share
Tangible common equity per share(1)
(1)
Non-GAAP measure.
December 31,
2022
2021
$ 9,197,016
$ 9,393,743
(114,312)
(7,526)
(94,301)
(6,411)
$ 9,075,178
$ 9,293,031
$
959,618
$ 1,065,290
—
(94,956)
$
959,618
$
970,334
$
959,618
$ 1,065,290
(114,312)
(7,526)
837,780
—
(94,301)
(6,411)
964,578
(94,956)
$
837,780
$
869,622
10.43 %
9.23 %
9.23 %
11.34 %
10.38 %
9.36 %
58,544,534
62,188,206
477,321
477,321
59,021,855
62,665,527
$
$
16.26
14.19
$
$
15.48
13.88
42
(Dollars in thousands)(Unaudited)
Return on tangible common equity
Average total stockholders' equity
Less average preferred stock
Average common stockholders' equity
Less average goodwill
Less average other intangible assets
Average tangible common equity(1)
Net income
Net income (loss) available to common stockholders
Add amortization of intangible assets
Less tax effect on amortization of intangible assets(2)
Net income available to common stockholders after adjustments for
intangible assets(1)
Year Ended December 31,
2022
2021
2020
$
992,252
$
896,988
$
882,050
(18,731)
973,521
(100,715)
(5,884)
866,922
120,939
115,772
1,705
(504)
(112,201)
(186,209)
784,787
(49,688)
(2,924)
732,175
62,346
50,563
1,276
(377)
$
$
$
695,841
(37,144)
(3,392)
655,305
12,574
(1,103)
1,518
(449)
$
$
$
$
$
$
$
116,973
$
51,462
$
(34)
Return on average equity
Return on average tangible common equity(1)
12.19 %
13.49 %
6.95 %
7.03 %
1.43 %
(0.01) %
(1)
(2)
Non-GAAP measure.
Adjustments shown at a statutory tax rate of 29.6%.
(Dollars in thousands)(Unaudited)
Adjusted noninterest income and expense
Total noninterest income
Noninterest income adjustments:
Net loss (gain) on sale of securities available-for-sale
Adjusted noninterest income(1)
Total noninterest expense
Noninterest expense adjustments:
Naming rights termination
Extinguishment of debt
Indemnified legal (fees) recoveries
Acquisition, integration and transaction costs
Noninterest expense adjustments before (loss) gain on alternative
energy partnership investments
(Loss) gain in alternative energy partnership investments
Total noninterest expense adjustments
Adjusted noninterest expense(1)
Year Ended December 31,
2022
2021
2020
$
17,350
$
19,376
$
18,870
7,692
25,042
194,373
$
$
—
19,376
183,678
(2,011)
16,859
199,385
$
$
$
$
—
—
(497)
—
—
2,073
(2,080)
(15,869)
(26,769)
(2,515)
673
—
(2,577)
(2,313)
(4,890)
(13,796)
(28,611)
204
365
(13,592)
(28,246)
$
189,483
$
170,086
$
171,139
Average assets
$ 9,350,054
$ 8,294,004
$ 7,689,016
Noninterest income to total revenue
Adjusted noninterest income to adjusted total revenue(1)
Noninterest expense to average total assets
Adjusted noninterest expense to average total assets(1)
(1)
Non-GAAP measure.
5.23 %
7.38 %
2.08 %
2.03 %
7.09 %
7.09 %
2.21 %
2.05 %
7.75 %
6.98 %
2.59 %
2.23 %
43
(Dollars in thousands)(Unaudited)
Adjusted pre-tax pre-provision income
Net interest income
Noninterest income
Total revenue
Noninterest expense
Pre-tax pre-provision income(1)
Total revenue
Total noninterest income adjustments
Adjusted total revenue(1)
Adjusted noninterest expense(1)
Adjusted pre-tax pre-provision income(1)
Average assets
Pre-tax pre-provision income ROAA(1)
Adjusted pre-tax pre-provision income ROAA(1)
Efficiency ratio(1)
Adjusted efficiency ratio(1)
(1)
Non-GAAP measure.
Year Ended December 31,
2022
2021
2020
$
314,365
$
253,778
$
224,594
17,350
331,715
194,373
19,376
273,154
183,678
18,870
243,464
199,385
$
137,342
$
89,476
$
44,079
$
331,715
$
273,154
$
243,464
7,692
339,407
—
273,154
(2,011)
241,453
189,483
170,086
171,139
$
149,924
$
103,068
$
70,314
$ 9,350,054
$ 8,294,004
$ 7,689,016
1.47 %
1.60 %
58.60 %
55.83 %
1.08 %
1.24 %
67.24 %
62.27 %
0.57 %
0.91 %
81.90 %
70.88 %
44
Adjusted net income
Net income (1)(2)(3)
Adjustments:
Noninterest income adjustments
Noninterest expense adjustments
Tax impact of adjustments above(4)
Tax impact from exercise of stock appreciation rights
Adjustments to net income
Adjusted net income(5)
Average assets
ROAA
Adjusted ROAA(5)
Year Ended December 31,
2021
2020
2022
$
120,939
$
62,346
$
12,574
7,692
4,890
(3,720)
—
8,862
—
13,592
(4,018)
(2,093)
7,481
$
129,801
$
69,827
$
(2,011)
28,246
(7,757)
—
18,478
31,052
$ 9,350,054
$ 8,294,004
$ 7,689,016
1.29 %
1.39 %
0.75 %
0.84 %
0.16 %
0.40 %
Adjusted net income available to common stockholders
Net income (loss) available to common stockholders
$
115,772
$
50,563
$
(1,103)
Adjustments to net income
Adjustments for impact of preferred stock redemption
Adjusted net income available to common stockholders(5)
8,862
3,747
7,481
3,347
18,478
(568)
$
128,381
$
61,391
$
16,807
Average diluted common shares
61,175,108
53,302,926
50,182,096
Diluted EPS
Adjusted diluted EPS(5)(6)
(1) Net income for the years ended December 31, 2022, 2021 and 2020 include a $(7.7) million, zero and $2.0 million pre-tax
(0.02)
2.10
1.15
1.89
0.33
0.95
$
$
$
$
$
$
(loss) gain on sale of securities.
(2) Net income for the year ended December 31, 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.
(3) Net income for the year ended December 31, 2021 includes an $11.3 million pre-tax charge for the expected lifetime credit
losses for non-PCD loans acquired in the PMB Acquisition.
(4) Tax impact of adjustments shown at a statutory tax rate of 29.6%.
(5) Non-GAAP measure.
(6) Represents adjusted net income available to common stockholders divided by average diluted common shares.
45
Executive Overview
We are focused on providing core banking products and services, including customized and innovative banking and lending
solutions, designed to cater to the unique needs of California's diverse businesses, entrepreneurs and communities through our
28 full service branches in Orange, Los Angeles, San Diego, and Santa Barbara Counties. Through our dedicated professionals,
we are committed to servicing and building enduring relationships by providing a higher standard of banking. We offer a
variety 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. We continue to grow average loans and earning assets, improve our
deposit mix, manage our cost of deposits, and maintain disciplined expense control.
Financial Highlights
For the years ended December 31, 2022, 2021 and 2020, net income (loss) available to common stockholders was $115.8
million, $50.6 million and $(1.1) million, or $1.89, $0.95, and $(0.02) per diluted common share. On an adjusted basis(1) , net
income available to common stockholders was $128.4 million, $61.4 million and $16.8 million for the years ended
December 31, 2022, 2021 and 2020, or $2.10, $1.15 and $0.33 per diluted common share (refer to section 'Non-GAAP
Measures'). Net income and adjusted net income available to common stockholders for 2022 included a pre-tax $31.3 million
recovery from the settlement of a previously charged-off loan.
Total assets were $9.20 billion at December 31, 2022, a decrease of $196.7 million, or 2.1%, from $9.39 billion at
December 31, 2021.
2022 financial and strategic highlights include(1):
•
•
•
•
•
•
•
•
•
•
Diluted EPS of $1.89 and adjusted diluted EPS of $2.10
Noninterest-bearing deposits represented 39% of average deposits compared to 30% in the prior year
Net interest margin of 3.59%, an increase of 33 basis points
Return on average assets of 1.29% and adjusted return on average assets of 1.39%
Book value per share of $16.26, up from $15.48
Tangible common equity per share of $14.19, up from $13.88
Completed $75.0 million in common stock repurchases representing 7% of the shares outstanding at the time this
program was authorized
$31.3 million pre-tax recovery from the settlement of a previously charged-off loan
Redeemed all Series E Preferred Stock for total consideration of $98.7 million with annual savings of $6.9 million
Completed the acquisition of Deepstack Technologies on September 15, 2022
(1) Adjusted net income available to common stockholders, adjusted diluted EPS, adjusted return on average assets, and tangible
common equity per share represent non-GAAP measures; see "Non-GAAP Measures"
Refer to the 2021 Form 10-K filed on March 1, 2022 for discussion related to 2021 activity compared to 2020 activity.
Economy
Elevated inflation levels and a significant rise in market interest rates dramatically changed the operating environment during
2022 and contributed to headwinds in the market. As our assets and liabilities are primarily monetary in nature, the effect of
changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and
inflation in general. Additionally, interest rates generally increase as the rate of inflation increases.
The rising interest rate environment may lead to lower demand for loans, higher credit losses, 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.
We delivered positive results this year, driven by continued execution of strategic initiatives to build long-term franchise value
while maintaining disciplined expense management. We also remained steadfastly focused on credit quality and continued to
grow a stable, high quality deposit base by bringing new commercial relationships to the bank. Through our disciplined
approach, we believe that we are well positioned to manage through the uncertainty in the macroeconomic environment.
Business Combinations
Deepstack Acquisition
On September 15, 2022, we completed the acquisition of the assets of Global Payroll Gateway, Inc. and its wholly owned
subsidiary, Deepstack Technologies, LLC (collectively, "Deepstack"), for $24 million in total consideration. The purchase was
46
accounted for as a business combination under U.S. GAAP and assets purchased and liabilities assumed were recorded at their
respective acquisition date estimated fair values. During the measurement period (not to exceed one year from the acquisition
date), the fair value of assets acquired and liabilities assumed are subject to adjustment if additional information becomes
available to indicate a more accurate or appropriate value for an asset or liability.
Deepstack's results of operations have been included in our results since the September 15, 2022 acquisition date. Transaction
costs related to the acquisition were $2.1 million for the year ended December 31, 2022.
The fair value amounts of identified assets acquired and liabilities assumed as part of the Deepstack acquisition are as follows:
($ in thousands)
Assets acquired:
Cash and cash equivalents
Other intangibles
Other assets
Total assets acquired
Liabilities assumed:
Accounts payable
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Total consideration
Goodwill
Fair
Value
4,068
3,800
1,385
9,253
3,443
3,443
5,810
24,000
18,190
$
$
$
$
$
Total consideration of $24 million includes cash consideration paid of $14.4 million, common stock issued of $7.2 million, or
412,473 shares, and additional cash consideration of $2.4 million expected to be paid 18 months after the acquisition date.
The acquisition of Deepstack resulted in the recognition of $2.8 million in developed technology and $1.0 million in other
intangibles, including trademarks, client relationships and non-compete agreements. Goodwill in the amount of $18.2 million
was also recognized and represents the strategic, operational and financial benefits expected from integrating the payment
processing solutions and technology of Deepstack into our operations.
Pacific Mercantile Bancorp Acquisition
On October 18, 2021, we completed our merger with PMB, pursuant to which PMB merged with and into the Company, with
the Company as the surviving corporation. PMB was the bank holding company of the wholly-owned subsidiary Pacific
Mercantile Bank, a California state chartered commercial bank headquartered in Costa Mesa, California which operated seven
banking offices, including three full service branches, located throughout Southern California.
Under the terms and conditions of the merger, each outstanding share of PMB common stock, aggregating 23,713,417 shares,
was converted into the right to receive 0.5 of a share of the Company's common stock. In addition, at the effective time of the
merger, we paid $3.2 million in cash for all outstanding PMB share-based awards, including outstanding shares subject to
unvested restricted stock awards. In the merger, we issued 11,856,713 shares of common stock with an estimated fair value of
$222.2 million based upon the $18.74 closing price of the Company's common stock on October 18, 2021. Together with the
cash consideration, this resulted in an aggregate purchase price of $225.4 million. The operating results of PMB have been
included since the date of acquisition and consequently, may impact the comparison of the financial results for the periods
presented.
Goodwill in the amount of $59.0 million was recognized and represents the synergies and economies of scale expected
from combining the operations of PMB with ours. Refer to Note 2 - Business Combinations and Note 8 - Goodwill and Other
Intangibles in Item 8 of this Annual Report for further information.
47
Results of Operations
The following table presents condensed statements of operations for the periods indicated:
($ in thousands, except per share data)
Interest and dividend income
Interest expense
Net interest income
(Reversal of) provision for credit losses
Noninterest income
Noninterest expense
Income from operations before income taxes
Income tax expense
Net income
Preferred stock dividends
Less: income allocated to participating securities
Less: participating securities dividends
Impact of preferred stock redemption
Net income (loss) available to common stockholders
Earnings (loss) per common share
Basic
Diluted
Selected financial data:
Return on average assets
Return on average equity
Return on average tangible common equity (1)
Dividend payout ratio (2)
Average equity to average assets
Book value per common share
Tangible common equity per common share (1)
Total stockholders' equity to total assets
Tangible common equity to tangible assets (1)
Year Ended December 31,
2022
2021
2020
$
372,772
$
291,659
$
290,607
58,407
314,365
(31,542)
17,350
194,373
168,884
47,945
120,939
1,420
—
—
3,747
115,772
1.90
1.89
$
$
$
37,881
253,778
6,854
19,376
183,678
82,622
20,276
62,346
8,322
114
—
3,347
50,563
0.95
0.95
$
$
$
66,013
224,594
29,719
18,870
199,385
14,360
1,786
12,574
13,869
—
376
(568)
(1,103)
(0.02)
(0.02)
1.29 %
12.19 %
13.51 %
12.63 %
10.61 %
0.75 %
6.95 %
7.04 %
25.26 %
10.81 %
0.16 %
1.43 %
0.01 %
(1,200.00) %
11.47 %
December 31,
2022
2021
2020
$
$
16.26
14.19
10.43 %
9.23 %
$
$
15.48
13.88
11.34 %
9.36 %
14.18
13.39
11.39 %
8.58 %
$
$
$
$
$
(1) Non-GAAP measure. See non-GAAP measures for reconciliation of the calculation.
(2) Ratio of dividends declared per common share to basic earnings per common share.
Management's Discussion and Analysis of Financial Condition and Results of Operations generally includes tables with 3-year
financial performance, accompanied by narrative for the years ended December 31, 2022 and 2021. For further discussion of
financial results for the years ended December 31, 2021 and 2020, refer to Item 7 of the 2021 Form 10-K filed on March 1,
2022.
48
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Rate/Volume Analysis
The following table presents the changes in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. Information is provided on 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.
Year Ended December 31,
2022 vs. 2021
Year Ended December 31,
2021 vs. 2020
Increase (Decrease) Due to
Volume
Rate
Net
Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Net
Increase
(Decrease)
$
49,200 $
17,658 $
66,858 $
19,809 $
(16,422) $
3,387
(1,447)
(917)
46,836
(53)
(1,205)
570
2,912
—
82
750
3,056
12,386
4,233
34,277
8,123
127
7,958
218
—
1,078
(34)
10,939
3,316
81,113
8,070
(1,078)
8,528
3,130
—
1,160
716
17,470
20,526
4,364
(88)
(5,814)
(797)
24,085
(23,033)
1,767
(199)
(4,463)
(8,715)
(2)
51
3,766
(7,795)
(7,566)
(6,902)
(8,140)
2,698
(2)
(17)
(408)
(1,450)
(885)
1,052
(5,799)
(7,101)
(12,603)
(6,017)
(4)
34
3,358
$
43,780 $
16,807 $
60,587 $
31,880 $
(2,696) $
29,184
(20,337)
(28,132)
($ in thousands)
Interest-earning assets:
Total loans
Securities
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing checking
Savings and money market
Certificates of deposit
FHLB advances
Securities sold under repurchase
agreements
Other borrowings
Long-term debt, net
Total interest-bearing liabilities
Net interest income
Provision for Credit Losses
The provision for credit losses is charged to earnings and is adjusted in each period to a level required to cover current expected
credit losses in our loan portfolio and unfunded noncancellable loan commitments. The following table presents the
components of our provision for credit losses:
($ in thousands)
Provision for (reversal of ) credit losses - loans
Provision for (reversal of) credit losses - unfunded noncancellable loan commitments
Total provision for (reversal of) credit losses
Year Ended December 31,
2022
2021
2020
$
$
(31,242) $
4,432 $
29,374
(300)
2,422
345
(31,542) $
6,854 $
29,719
During the year ended December 31, 2022, the provision for credit losses was a reversal of $31.5 million, compared to a
provision for credit losses of $6.9 million during 2021. The reversal of credit losses for the year ended December 31, 2022 was
due to a $31.3 million recovery from the settlement of a loan previously charged-off in 2019. The provision for credit losses
during the year ended December 31, 2021 included a $11.3 million charge related to establishing the initial allowance for credit
losses established for non-PCD loans acquired in the PMB Acquisition. This charge was offset by the benefit of improvements
in key macroeconomic forecast variables. The provision for credit losses during the year ended December 31, 2020 reflected the
adoption of the CECL method of accounting, the estimated impact of the COVID-19 pandemic on our loans, and higher
specific reserves.
See further discussion in Allowance for Credit Losses included in this Item 7.
51
Noninterest Income
The following table presents noninterest income for the years indicated:
($ in thousands)
Customer service fees
Loan servicing income
Income from bank owned life insurance
Net (loss) gain on sale of securities available-for-sale
Other income
Total noninterest income
Year Ended December 31,
2022
2021
2020
$
9,540 $
7,685 $
1,518
3,402
(7,692)
10,582
595
2,871
—
8,225
5,771
505
2,489
2,011
8,094
$
17,350 $
19,376 $
18,870
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Noninterest income for the year ended December 31, 2022 decreased $2.0 million to $17.4 million compared to 2021. The
decrease was mainly due to a $7.7 million loss on the sale of investment securities, offset by higher customer service fees, loan
servicing income, income from bank-owned life insurance, and all other income. Many of these increases are a result of
including PMB's operations for the full year in 2022 compared to 2021. Customer services fees increased $1.9 million due
mostly to higher deposit activity fees of $2.6 million attributed to higher average deposit balances, partially offset by lower loan
fees of $755 thousand. Loan servicing income increased $923 thousand due mostly to the acquisition of mortgage servicing
rights at the end of the second quarter of 2022. Income from bank-owned life insurance increased $531 thousand due to higher
average balances gained in the PMB acquisition and all other income increased $2.4 million due mostly to higher gains from
equity investments. Gains or losses from equity investments are recorded based on the most recent information
available from the investee and fluctuates based on their underlying performance.
Noninterest Expense
The following table presents noninterest expense for the years indicated:
($ in thousands)
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing
Regulatory assessments
Extinguishment of debt
Loss (gain) on alternative energy partnership investments
Reversal of provision for loan repurchases
Amortization of intangible assets
Acquisition, integration and transaction costs
Naming rights termination
All other expense
Total noninterest expense
Year Ended December 31,
2022
2021
2020
$
113,060 $
103,358 $
32,811
15,001
7,053
3,626
—
2,313
(1,004)
1,705
2,080
—
17,728
29,452
10,584
6,861
3,395
—
(204)
(948)
1,276
15,869
—
14,035
96,809
29,350
15,736
6,574
2,741
2,515
(365)
(697)
1,518
—
26,769
18,435
$
194,373 $
183,678 $
199,385
52
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Noninterest expense for the year ended December 31, 2022 increased $10.7 million to $194.4 million compared to 2021. The
increase was primarily due to: (i) higher salaries and employee benefits of $9.7 million and occupancy and equipment expense
of $3.4 million due mainly to the increases in personnel and facilities from the acquisition of PMB, (ii) higher professional fees
of $4.4 million, due mostly to a $2.6 million increase in indemnified legal fees (net of insurance recoveries) and a $1.8 million
increase in other professional fees, (iii) higher all other expenses of $3.7 million due to including the operations of PMB since
the date of acquisition, (iv) higher loss in alternative energy partnership investments of $2.5 million, and (v) higher
amortization of intangible assets of $429 thousand due to the acquisitions of PMB in 2021 and Deepstack in 2022. These
increases were partially offset by lower acquisition, integration and transaction costs of $13.8 million.
Income Tax Expense
Income tax expense totaled $47.9 million for the year ended December 31, 2022, representing an effective tax rate of 28.4%,
compared to $20.3 million and an effective tax rate of 24.5% for 2021. The effective tax rate for the year ended December 31,
2022 was higher than the prior year due in part to 2021 including a net tax benefit of $2.5 million resulting from the exercise of
all previously issued outstanding stock appreciation rights.
For additional information, see Note 13 — Income Taxes of the Notes to Consolidated Financial Statements included in Item 8.
53
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 Federal Reserve Discount Window, or other financial institutions for repurchase
agreements. Investment securities with carrying values of $356.5 million and $28.9 million as of December 31, 2022 and 2021
were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
Investment Securities Held-to-Maturity
Securities held-to-maturity totaled $328.6 million at December 31, 2022 and included $214.4 million in agency securities and
$114.2 million in municipal securities. During 2022, we transferred certain longer-duration fixed-rate mortgage-backed
securities and municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio to lower the adverse
impact rising interest rates may have on the fair value of such securities and consequently tangible equity. At the time of the
transfer, the securities had a fair value of $329.4 million, including an unrealized gross loss of $16.6 million, which became part
of the securities' amortized cost basis. This amount, along with the unrealized loss included in accumulated other
comprehensive income, is then amortized over the life of the security as an adjustment to its yield using the interest method. As
a result, there is no impact on the consolidated statements of operations.
The following table presents the amortized cost and fair value of investment securities held-to-maturity as of the dates
indicated:
($ in thousands)
December 31, 2022
Securities held-to-maturity:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. government agency and U.S. government sponsored enterprise
residential mortgage-backed securities
U.S. government agency and U.S. government sponsored enterprise
collateralized mortgage obligations
Municipal securities
$
153,033 $
— $
(29,807) $
123,226
61,404
114,204
—
—
(11,946)
(24,428)
49,458
89,776
Total securities held-to-maturity
$
328,641 $
— $
(66,181) $
262,460
There were no investment securities held-to-maturity at December 31, 2021
Investment Securities Available-for-Sale
The following table presents the amortized cost and fair value of investment securities available-for-sale and the corresponding
amounts of gross unrealized gains and losses recognized in accumulated other comprehensive (loss) income as of the dates
indicated:
($ in thousands)
December 31, 2022
Securities available-for-sale:
SBA loan pool securities
U.S. government agency and U.S. government sponsored enterprise
residential mortgage-backed securities
U.S. government agency and U.S. government sponsored enterprise
collateralized mortgage obligations
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
11,241 $
— $
(54) $
11,187
40,431
99,075
90,832
492,203
175,781
—
—
—
—
32
(225)
40,206
(5,884)
(10,340)
(15,600)
(9,195)
93,191
80,492
476,603
166,618
Total securities available-for-sale
$
909,563 $
32 $
(41,298) $
868,297
54
December 31, 2021
Securities available-for-sale:
SBA loan pool securities
U.S. government agency and U.S. government sponsored enterprise
residential mortgage-backed securities
U.S. government agency and U.S. government sponsored enterprise
collateralized mortgage obligations
Municipal securities
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Total securities available-for-sale
$
14,679 $
— $
(88) $
14,591
190,382
2,898
(1,311)
191,969
242,458
117,913
56,014
521,275
162,002
1,171
2,641
11
—
11,603
(2,088)
(1,539)
—
(2,311)
(7)
241,541
119,015
56,025
518,964
173,598
$ 1,304,723 $
18,324 $
(7,344) $ 1,315,703
Securities available-for-sale totaled $868.3 million at December 31, 2022, a decrease of $447.4 million, or 34.0%, from $1.32
billion at December 31, 2021. The decrease was mainly due to the transfer of certain securities to the held-to-maturity portfolio
as described above, principal payments of $36.9 million, collateralized loan obligation (CLO) payoffs of $28.5 million, sales of
$128.8 million and higher unrealized net losses of $60.0 million, offset by purchases of $152.3 million.
Net unrealized losses on securities available-for-sale were $41.3 million at December 31, 2022, compared to net unrealized
gains of $11.0 million at December 31, 2021. The net unrealized (losses) gains on securities available-for-sale, net of tax, are
reflected in accumulated other comprehensive (loss) income. Increases in longer term 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.
CLOs totaled $476.6 million and $519.0 million and were all AAA and AA rated at December 31, 2022 and 2021. We perform
due diligence and ongoing credit quality review of our CLO holdings, which includes monitoring performance factors such as
external credit ratings, collateralization levels, collateral concentration levels, and other performance factors.
We did not record credit impairment for any investment securities for the years ended December 31, 2022, 2021 or 2020. We
monitor our securities portfolio to ensure all of our investments have adequate credit support and we consider the lowest credit
rating for identification of potential credit impairment. As of December 31, 2022, we believe there was no credit impairment
and we did not have the current intent to sell securities with a fair value below amortized cost at December 31, 2022, and it is
more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis. As of
December 31, 2022, all of our investment securities in an unrealized loss position received an investment grade credit rating.
The overall net decreases in fair value during the period were attributable to a combination of changes in interest rates and
credit market conditions.
55
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Loans Receivable
The following table presents the composition of our loan portfolio as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial(1)
Commercial real estate
Multifamily
SBA(2)
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans(3)
Allowance for loan losses
Total loans receivable, net
December 31,
2022
2021
Amount
Percent
Amount
Percent
$ 1,845,960
1,259,651
1,689,943
68,137
243,553
25.9 % $ 2,668,984
17.7 % 1,311,105
23.8 % 1,361,054
1.0 %
205,548
3.4 %
181,841
1,920,806
27.0 % 1,420,023
86,988
1.2 %
102,925
36.8 %
18.1 %
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2.8 %
2.5 %
19.6 %
1.4 %
7,115,038
100.0 % 7,251,480
100.0 %
(85,960)
$ 7,029,078
(92,584)
$ 7,158,896
Includes warehouse lending balances of $602.5 million and $1.60 billion at December 31, 2022 and 2021.
Includes PPP loans totaling $5.7 million and $123.1 million at December 31, 2022 and 2021.
(1)
(2)
(3) Total loans includes net deferred loan origination costs (fees), purchased premiums/(discounts), and fair value allocations of
premiums (discounts) of $7.1 million and $5.5 million at December 31, 2022 and 2021.
Total loans were $7.12 billion at December 31, 2022, a decrease of $136.4 million, or 1.9%, from $7.25 billion at December 31,
2021. The decrease was due to lower warehouse lending balances of $1.00 billion and other paydowns and payoffs of $2.63
billion, partially offset by loan fundings and advances of $3.50 billion, including SFR purchases of $814.3 million.
Total commercial loans, excluding warehouse lending and SBA, increased $516.1 million, or 13.2% on an annualized basis
during the year ended December 31, 2022.
We ceased originating SFR mortgage loans in 2019, however we have purchased and may continue to purchase these loans as
part of an overall strategy to manage portfolio runoff and overall portfolio concentration risk.
We continue to focus the real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and
commercial real estate loans. As of December 31, 2022, loans secured by residential real estate (single-family, multifamily,
single-family construction, and warehouse lending credit facilities) represent approximately 62.6% of our total loans
outstanding.
57
The following table summarizes the balances of the C&I portfolio by industry concentration and the percentage of total
outstanding C&I loan balances:
($ in thousands)
C&I Portfolio by Industry
Finance and Insurance - Warehouse Lending
Real Estate and Rental Leasing
Finance and Insurance - Other
Healthcare
Manufacturing
Television / Motion Pictures
Arts, Entertainment & Recreation
Gas Stations
Other Retail Trade
Construction
Professional Services
Wholesale Trade
Management of Companies and Enterprises
Educational Services
Food Services
Transportation
Accommodations
Other
Total
December 31, 2022
December 31, 2021
Amount
% of
Portfolio
Amount
% of
Portfolio
$
602,508
33 % $ 1,602,487
60 %
172,948
159,532
110,132
95,900
75,863
71,933
59,698
57,321
40,345
40,345
38,710
38,678
35,103
34,523
31,471
19,345
8,720
193,230
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108,098
85,666
91,533
46,762
12,646
71,381
43,202
24,777
47,924
54,227
24,712
33,684
32,598
16,783
2,069
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$ 1,845,960
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The following table presents the interest rate profile of the loan portfolio due after one year at December 31, 2022:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total
Due After One Year
Fixed Rate
Variable Rate
Total
$
398,643 $
614,169 $
1,012,812
808,413
423,792
11,469
25,965
1,396,830
69,851
409,380
1,259,762
55,944
125,770
520,564
15,356
1,217,793
1,683,554
67,413
151,735
1,917,394
85,207
$
3,134,963 $
3,000,945 $
6,135,908
Loan Originations, Purchases, Sales and Repayments
The following table presents loan originations, purchases, sales, and repayment activities, excluding loans originated for sale,
for the periods indicated:
($ in thousands)
Origination by rate type (excluding warehouse):
Variable rate:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Single family residential mortgage
Other consumer
Total variable rate
Fixed rate:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Other consumer
Total fixed rate
Total loans originated
Acquired in business combination
Purchases:
Multifamily
Construction
Single family residential mortgage
Total loans purchased
Transferred to loans held-for-sale
Other items:
Year Ended December 31,
2022
2021
2020
$
225,791 $
289,987 $
83,686
367,058
12,820
42,189
—
—
85,430
232,950
10,111
36,951
—
1,115
272,616
44,806
132,836
6,393
8,139
5,404
37
731,544
656,544
470,231
95,295
277,043
269,596
2,360
12,270
25,682
682,246
1,413,790
—
—
—
814,262
814,262
—
117,474
284,252
120,785
149,353
6,831
6,519
685,214
1,341,758
962,856
29,764
—
795,773
825,537
(15,205)
71,388
59,565
22,773
265,609
12,594
—
431,929
902,160
—
120,900
14,750
149,687
285,337
—
Net repayment activity (1)
Warehouse credit facilities activity, net (2)
Total other items
Net increase (decrease)
(1,364,515)
(2,024,349)
(1,640,193)
(999,979)
262,478
399,216
(2,364,494)
(1,761,871)
(1,240,977)
$
(136,442) $
1,353,075 $
(53,480)
60
(1) Amounts represent disbursements on credit lines, principal paydowns and payoffs and other net activity for loans subsequent to
origination (excluding warehouse credit facilities).
(2) Amounts represent net disbursement and repayment activity subsequent to origination for warehouse credit facilities which are
included in commercial and industrial loans.
Non-Traditional Mortgage ("NTM") Portfolio
NTM loans are included in our SFR mortgage portfolio and are comprised primarily of interest only loans. As of December 31,
2022 and 2021, the NTM loans totaled $862.3 million, or 12.1% of total loans, and $635.3 million, or 8.8% of total loans,
respectively. The total NTM portfolio increased by $227.1 million, or 35.7%, during the year ended December 31, 2022. The
increase was due to loan purchases, partially offset by principal paydowns and payoffs.
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. Interest only loans are primarily SFR first mortgage loans that
generally have a 30 to 40-year term at the time of origination and include payment features that allow interest only payments in
initial periods before converting to a fully amortizing loan.
At December 31, 2022 and 2021, nonperforming NTM loans totaled $3.0 million and $4.0 million.
Non-Traditional Mortgage Loan Credit Risk Management
We perform detailed reviews of collateral values on loans collateralized by residential real property included in our NTM
portfolio based on appraisals or estimates from third party Automated Valuation Models (“AVMs”) to analyze property value
trends periodically. AVMs are used to identify loans that may have experienced potential collateral deterioration. Once a loan
has been identified that may have experienced collateral deterioration, we will obtain updated drive by or full appraisals in
order to confirm the valuation. This information is used to update key monitoring metrics such as LTV ratios. Additionally,
FICO scores are obtained in conjunction with the collateral analysis. In addition to LTV ratios and FICO scores, we evaluate
the portfolio on a specific loan basis through delinquency and portfolio charge-offs to determine whether any risk mitigation or
portfolio management actions are warranted. The borrowers may be contacted as necessary to discuss material changes in loan
performance or credit metrics.
Our risk management policy and credit monitoring include reviewing delinquency, FICO scores, and LTV ratios on the NTM
loan portfolio. We also continuously monitor market conditions for our geographic lending areas. We have determined that the
most significant performance indicators for NTM first lien loans are LTV ratios. At December 31, 2022, our NTM first lien
portfolio had a weighted average LTV of approximately 59%.
For additional information regarding NTMs, see Note 5 — Loans and Allowance for Credit Losses of the Notes to Consolidated
Financial Statements included in Item 8.
61
Asset Quality
Past Due Loans
The following table presents a summary of total loans that were past due as of the dates indicated:
December 31, 2022
December 31, 2021
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Greater
than 89
Days
Past due
Total
Past Due
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Greater
than 89
Days
Past due
Total
Past Due
($ in thousands)
Commercial:
Commercial and industrial
$
4,002 $
481 $
13,833 $
18,316 $
9,342 $
1,351 $
9,503 $
20,196
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential
mortgage
Other consumer
Total loans
311
—
287
—
—
—
—
—
910
—
10,299
—
1,221
—
10,586
—
—
786
987
—
—
—
2,360
—
—
—
—
786
15,941
19,288
—
—
36,338
163
5,068
16
19,431
81
60,837
260
24,867
449
—
—
7,076
89
31,943
538
$
41,101 $
5,565 $
44,554 $
91,220 $
36,431 $
3,711 $
32,609 $
72,751
Total past due loans of $91.2 million, or 1.28% of total loans, at December 31, 2022, compared to $72.8 million, or 1.00% of
total loans, at December 31, 2021. The $18.5 million increase is mostly due to a net increase in delinquent SFR loans, which are
well secured with low loan-to-value ratios, of $28.9 million, offset by a $8.7 million reduction in delinquent SBA loans. The
$10.3 million of SBA loans greater than 89 days past due includes $8.6 million in loans that are guaranteed and were
repurchased solely for the purpose of resolving the credit through the SBA.
Non-performing Assets
The following table presents a summary of nonperforming assets as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
SBA
Lease financing
Consumer:
Single family residential mortgage
Other consumer
Total nonaccrual loans
Loans past due over 90 days or more and still on accrual
Other real estate owned
Total nonperforming assets
Performing troubled debt restructured loans
Nonaccrual loans to total loans
Nonperforming loans to total loans
Nonperforming assets to total assets
December 31,
2022
2021
$
22,613
$
28,594
910
10,417
—
21,116
195
55,251
—
—
—
16,653
—
7,076
235
52,558
—
—
$
$
55,251
2,739
$
$
52,558
12,538
0.78 %
0.78 %
0.60 %
0.72 %
0.72 %
0.56 %
Nonperforming assets totaled $55.3 million or 0.60% of total assets at December 31, 2022, compared to $52.6 million or 0.56%
of total assets at December 31, 2021. The $2.7 million increase in nonaccrual loans during the year was primarily due to the
62
addition of $43.9 million in nonaccrual loans, offset by $9.0 million of loans returning to accrual status and $32.2 million of
other pay offs or pay downs.
At December 31, 2022, nonperforming loans included (i) SFR mortgages of $21.1 million, (ii) $8.9 million of commercial loans
in a current payment status, which however are on nonaccrual based on other criteria, and (iii) other commercial loans of $25.3
million. Excluding SFR mortgages, which are well secured with low loan-to-value ratios, non-performing loans decreased
$11.3 million during the year. During the year ended December 31, 2022, a $7.4 million partial charge-off was recognized on a
PCD commercial and industrial loan, which has a remaining carrying value of $4.0 million at year end.
With respect to loans that were on nonaccrual status as of December 31, 2022, the gross interest income that would have been
recorded during the year ended December 31, 2022 had such loans been current in accordance with their original terms and
been outstanding throughout the year ended December 31, 2022 (or since origination, if held for part of the year ended
December 31, 2022), was $3.1 million. The amount of interest income on such loans that was included in net income for the
year ended December 31, 2022 was $2.3 million.
Troubled Debt Restructured Loans
Loans that we modify or restructure where the debtor is experiencing financial difficulties and make a concession to the
borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only
payments and, in limited cases, reductions in the outstanding loan balances relative to current or prevailing market terms are
classified as troubled debt restructurings (“TDRs“). TDRs are loans modified for the purpose of alleviating temporary
impairments to the borrower’s financial condition. A workout plan between a borrower and us is designed to provide a bridge
for the cash flow shortfalls in the near term. If the borrower works through the near-term issues, in most cases, the original
contractual terms of the loan will be reinstated.
At December 31, 2022 and 2021, we had 15 and 18 loans with an aggregate balance of $16.1 million and $16.7 million
classified as TDRs. When a loan becomes a TDR, we cease accruing interest, and classify it as nonaccrual until the borrower
demonstrates that the loan is again performing.
At December 31, 2022, of the 15 loans classified as TDRs, 6 loans totaling $2.7 million were making payments according to
their modified terms and were in accruing status. At December 31, 2021, of the 18 loans classified as TDRs, 11 loans totaling
$12.5 million were making payments according to their modified terms and were in accruing status.
Risk Ratings
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of
lesser quality, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized
by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified
as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve or charge-off is not warranted.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish higher general
allocation allowances for loan losses in an amount deemed prudent by management and approved by the Board of Directors.
General allocation allowances represent loss allowances which have been established to recognize the inherent risk associated
with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured
institution classifies problem assets as loss, it is required either to establish a specific allocation allowance for losses equal to
100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the
classification of its assets and the amount of its specific allocation allowances are subject to review by their regulators, which
may order the establishment of additional general or specific loss allocation allowances.
In connection with the filing of the Bank’s periodic reports with the OCC and in accordance with policies for the Bank's
classification of assets, the Bank regularly reviews the problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of management’s review of assets, at December 31, 2022
and 2021, we had classified assets totaling $119.0 million and $101.4 million. The total amount classified represented 1.29%
and 1.08% of our total assets at December 31, 2022 and 2021.
63
The following table presents the risk categories for total loans as of December 31, 2022:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans(1)
December 31, 2022
Pass
Special Mention
Substandard
Doubtful
Total
$
1,749,284 $
49,399 $
43,273 $
4,004 $
1,845,960
1,248,196
1,658,521
55,789
243,553
1,889,911
86,599
1,745
2,997
800
—
9,101
138
9,710
28,425
11,548
—
21,794
251
—
—
—
—
—
—
1,259,651
1,689,943
68,137
243,553
1,920,806
86,988
$
6,931,853 $
64,180 $
115,001 $
4,004 $
7,115,038
(1) There were no loans classified "loss" at December 31, 2022.
The following table presents the risk categories for total loans as of December 31, 2021:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans(1)
December 31, 2021
Pass
Special Mention
Substandard
Total
2,550,540
1,292,837
1,312,038
181,129
171,731
1,395,785
102,538
65,659
4,845
46,314
6,040
10,110
10,423
92
52,785
13,423
2,702
18,379
—
13,815
295
2,668,984
1,311,105
1,361,054
205,548
181,841
1,420,023
102,925
$
7,006,598 $
143,483 $
101,399 $
7,251,480
(1) There were no loans classified "doubtful" or "loss" at December 31, 2021.
Allowance for Credit Losses
The following table provides a summary of components of the ACL and related ratios as of the dates indicated:
($ in thousands)
Allowance for credit losses:
Allowance for loan losses (ALL)
Reserve for unfunded noncancellable loan commitments
Total allowance for credit losses (ACL)
ALL to total loans
ACL to total loans
ACL to total loans, excluding PPP loans
ALL to nonaccrual loans
ACL to nonaccrual loans
64
December 31,
2022
2021
$
$
85,960
5,305
91,265
$
$
92,584
5,605
98,189
1.21 %
1.28 %
1.28 %
155.58 %
165.18 %
1.28 %
1.35 %
1.38 %
176.16 %
186.82 %
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 December 31, 2022. The published forecasts consider the FRB's monetary
policy, labor market constraints, rising inflation, higher oil prices and the military conflict between Russia and Ukraine, 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 than 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 ACL, which includes the reserve for unfunded noncancellable loan commitments, totaled $91.3 million, or 1.28% of total
loans at December 31, 2022 compared to $98.2 million or 1.35% at December 31, 2021. The $6.9 million decrease in the ACL
was due primarily to net charge offs of $6.7 million, which included the charge-off a $7.1 million specific reserve related to a
PCD loan; lower general reserves of $1.4 million due to changes in portfolio mix including lower loan balances offset by the
impact of weaker economic forecasts, and $0.3 million lower RUC from lower volume of unfunded noncancellable
commitments; partially offset by new specific reserves totaling $1.5 million. The $31.3 million recovery in the first quarter of
2022 from the settlement of a loan previously charged-off in 2019 also resulted in a reversal of provision for credit losses and
therefore had no net impact on the ACL.
The ACL coverage of nonperforming loans was 165% at December 31, 2022 compared to 187% at December 31, 2021.
The following table presents a summary of net (charge-offs) recoveries and the annualized ratio of net charge-offs to average
loans by loan class for the periods indicated:
($ in thousands)
Commercial:
Year Ended December 31,
Net
(Charge-
offs)
Recoveries
2022
Average
Loans
Annualized
(Charge-off)
Recovery
Ratio
Net
(Charge-
offs)
Recoveries
2021
Average
Loans
Annualized
(Charge-off)
Recovery
Ratio
Net
(Charge-
offs)
Recoveries
2020
Average
Loans
Annualized
(Charge-off)
Recovery
Ratio
Commercial and industrial
$
24,290
$ 2,263,154
1.07 % $
(3,059) $ 2,110,492
(0.14) % $
(12,984) $ 1,557,558
(0.83) %
Commercial real estate
Multifamily
SBA
Construction
Lease financing
Consumer:
Single family residential
mortgage
Other consumer
Total loans
7
1,273,088
—
1,533,764
— %
— %
(576)
998,068
(0.06) %
—
1,299,582
— %
—
—
859,848
1,449,749
363
—
—
68,221
221,200
—
0.53 %
(2,648)
— %
— %
—
—
223,097
159,758
—
(1.19) %
(755)
— %
— %
—
—
185,816
212,863
—
183
1,795,951
0.01 %
(247)
1,310,029
(0.02) %
(78)
1,370,861
(225)
91,030
(0.25) %
2
40,046
— %
215
38,941
$
24,618
$ 7,246,408
0.34 % $
(6,528) $ 6,141,072
(0.11) % $
(13,602) $ 5,675,636
— %
— %
(0.41) %
— %
— %
(0.01) %
0.55 %
(0.24) %
Net recoveries increased to $24.6 million, or 0.34% of average loans, for the year ended December 31, 2022 from net charge-
offs of $6.5 million, or 0.11% of average loans for 2021. Net recoveries in December 31, 2022 were due mostly the result of the
$31.3 million recovery in the first quarter of 2022 from the settlement of a loan previously charged-off in 2019.
65
The following table presents information regarding activity in the ACL for the periods indicated:
($ in thousands)
Allowance for loan losses (ALL)
Balance at beginning of year
Impact of adopting ASU 2016-13
Initial reserve for purchased credit-deteriorated loans(1)
Charge-offs
Recoveries
Net recoveries (charge-offs)
(Reversal of) provision for credit losses
Balance at end of year
Reserve for unfunded noncancellable loan commitments
Balance at beginning of year
Impact of adopting ASU 2016-13
Provision for credit losses
Balance at end of year
Year Ended December 31,
2022
2021
2020
$
92,584
$
81,030
$
57,649
—
—
(9,278)
33,896
24,618
(31,242)
—
13,650
(9,886)
3,358
(6,528)
4,432
7,609
—
(15,417)
1,815
(13,602)
29,374
$
85,960
$
92,584
$
81,030
$
5,605
$
3,183
$
4,064
—
(300)
$
5,305
$
—
2,422
5,605
(1,226)
345
$
3,183
Allowance for credit losses (ACL)
$
91,265
$
98,189
$
84,213
(1) Represents the amounts, at acquisition date, of expected credit losses on PCD loans and expected recoveries of PCD loans
charged-off prior to acquisition date that we have a contractual right to receive.
The following table presents the ALL allocation among loans portfolio as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total
December 31,
2022
2021
Percentage
of Loans
to Total
Loans
ALL
Amount
Percentage
of Loans
to Total
Loans
ALL
Amount
$
34,156
25.9 % $
33,557
15,977
14,696
2,648
5,850
12,050
583
17.7 %
23.8 %
1.0 %
3.4 %
21,727
17,893
3,017
5,622
27.0 %
1.2 %
9,608
1,160
36.8 %
18.1 %
18.8 %
2.8 %
2.5 %
19.6 %
1.4 %
$
85,960
100.0 % $
92,584
100.0 %
66
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 $22.5 million and $1.3 million at December 31, 2022 and 2021, and 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 2022. At December 31, 2022, the carrying value of these purchased
servicing rights was $21.3 million and the unpaid principal balance of the loans underlying these purchased servicing rights was
$1.68 billion at December 31, 2022.
During the years ended December 31, 2022, 2021 and 2020, we recognized loan servicing income of $1.5 million, $595
thousand and $505 thousand.
Alternative Energy Partnerships
We invest in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects
that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits) and other tax
benefits. These investments help promote the development of renewable energy sources and lower the cost of housing for
residents by lowering homeowners’ monthly utility costs.
The following table presents the activity related to our investment in alternative energy partnerships for the periods indicated:
($ in thousands)
Balance at beginning of period
New funding
Change in unfunded equity commitments
Return of capital
(Loss) gain on investments using HLBV method
Balance at end of period
Unfunded equity commitments
Year Ended December 31,
2022
2021
2020
$
25,888 $
27,977 $
—
—
(2,165)
(2,313)
—
—
(2,293)
204
$
$
21,410 $
25,888 $
— $
— $
29,300
3,631
(3,225)
(2,094)
365
27,977
—
Our returns on investments in alternative energy partnerships are primarily obtained through the realization of energy tax credits
and other tax benefits rather than through distributions or through the sale of the investment. The balance of these investments
was $21.4 million and $25.9 million at December 31, 2022 and 2021.
During the years ended December 31, 2022 and 2021, we did not fund into our alternative energy partnerships but received a
return of capital of $2.2 million and $2.3 million from our alternative energy partnerships. During the year ended December 31,
2020, we funded $3.6 million into these partnerships and received a return of capital of $2.1 million.
During the year ended December 31, 2022 we recognized a loss of $2.3 million and during the years ended December 31, 2021
and 2020, we recognized gains of $204 thousand and $365 thousand through the application of the Hypothetical Liquidation at
Book Value (“HLBV”) method of accounting. The HLBV losses for the year ended December 31, 2022 were largely driven by
contractual decreases in liquidation preference and the resulting impact on HLBV amounts. The gains for the years ended
December 31, 2021 and 2020 were largely driven by lower tax depreciation on equipment and fewer energy tax credits utilized
which reduces the amount distributable to the investee in a hypothetical liquidation under the contractual liquidation provisions.
There were no investment tax credits related to these investments included in income tax expense for the years ended
December 31, 2022, 2021 and 2020. Income tax expense (benefit) related to the gains (losses) on these investments were $(668)
thousand, $59 thousand, and $45 thousand for the years ended December 31, 2022, 2021 and 2020.
For additional information, see Note 1 — Summary of Significant Accounting Policies and Note 21 — Variable Interest Entities
of the Notes to the Consolidated Financial Statements included in Item 8.
67
Deposits
The following table presents the composition of deposits by type as of the dates indicated:
($ in thousands)
Noninterest-bearing deposits
Interest-bearing demand deposits
Savings and money market
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
December 31, 2022
December 31, 2021
Amount
% of Total
Deposits
Amount
% of Total
Deposits
Amount
Change
$
2,809,328
39.5 % $
2,788,196
37.5 % $
21,132
1,947,247
1,174,925
793,040
396,381
27.3 %
2,393,386
32.2 %
(446,139)
16.4 %
1,751,135
23.5 %
(576,210)
11.1 %
5.6 %
285,768
220,950
3.8 %
3.0 %
507,272
175,431
Total deposits
$
7,120,921
100.0 % $
7,439,435
100.0 % $
(318,514)
Total deposits were $7.12 billion at December 31, 2022, compared to $7.44 billion at December 31, 2021. The $318.5 million
decrease was due mostly to lower savings and money market balances of $576.2 million and lower interest-bearing demand
deposits of $446.1 million, partially offset by higher certificates of deposits of $682.7 million and noninterest-bearing checking
balances of $21.1 million. We focus on growing noninterest-bearing deposits as a fundamental source of funds and key to
driving our franchise value. Noninterest-bearing deposits totaled $2.81 billion and represented 39.5% of total deposits at
December 31, 2022 compared to $2.79 billion, or 37.5% of total deposits, at December 31, 2021.
Uninsured deposits were $4.50 billion at December 31, 2022, compared to $4.43 billion at December 31, 2021.
Brokered deposits were $614.9 million at December 31, 2022, an increase of $604.9 million from $10.0 million at
December 31, 2021. The increase in brokered deposits is due to strategically replacing certain higher-cost deposits with
wholesale certificates of deposit and longer term fixed rate advances (refer to section "Borrowings" below).
The following table presents the scheduled maturities of certificates of deposit as of December 31, 2022:
($ in thousands)
Three Months
or Less
Over Three
Months
Through Six
Months
Over Six
Months
Through
Twelve
Months
Over One
Year
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
Total certificates of deposit (1)
$
$
204,387 $
173,454 $
286,525 $
128,674 $
245,988
89,470
19,681
41,242
450,375 $
262,924 $
306,206 $
169,916 $
1,189,421
Total
793,040
396,381
(1) Total certificates of deposit includes $179 thousand of fair value adjustments related to certificates of deposit acquired in business
combinations at December 31, 2022.
For additional information, see Note 10 — Deposits of the Notes to Consolidated Financial Statements included in Item 8.
68
Borrowings
The following table presents our FHLB advances and other borrowings as of the dates indicated:
($ in thousands)
FHLB advances:
Overnight advances
Term advances
Term advances (putable)
Unamortized costs
Total FHLB advances
Other borrowings:
Line of credit
December 31, 2022
Weighted
Average
Interest
Rate
Weighted
Average
Maturity
(years)
4.59%
2.91%
3.40%
3.02%
0.01
3.50
4.93
3.60
SOFR + 1.85%
0.96
December 31,
2021
Outstanding
Balance
Outstanding
Balance
$
20,000 $
70,000
611,000
100,000
411,000
—
(3,652)
(4,941)
727,348 $
476,059
— $
25,000
$
$
We maintain secured lines of credit with the FHLB and the FRB to leverage our capital base to provide funds for lending and
investing activities and to provide secondary sources of liquidity to enhance our interest rate and liquidity risk management. In
addition, we maintain unsecured borrowing arrangements from other financial institutions.
During the year ended December 31, 2022, advances from the FHLB increased $251.3 million to $727.3 million, net of
unamortized debt issuance costs of $3.7 million, as of December 31, 2022, due to the addition of term advances of $300.0
million, offset by a decrease in overnight borrowings of $50.0 million.
At December 31, 2022, FHLB advances included $20.0 million in overnight borrowings, $611.0 million in term advances and
$100.0 million in term advances with a put feature. The putable advances have a 5-year term but can be called quarterly until
maturity at the option of the FHLB beginning December 6, 2023.
FHLB advances are collateralized by a blanket lien on all real estate loans. Our secured borrowing capacity with the FHLB
totaled $1.99 billion based on qualifying loans with an aggregate unpaid principal balance of $2.96 billion as of that date. The
Bank has additional borrowing capacity with the FHLB of $162.4 million based on investment securities pledged with a
carrying value of $214.4 million. As of December 31, 2022, the available secured borrowings from FHLB totaled $1.06 billion.
FRB Borrowings. We maintain additional borrowing availabilities from the Federal Reserve Discount Window and BIC
program.
At December 31, 2022, the Bank had borrowing capacity with the FRBSF of $949.1 million, including the secured borrowing
capacity through the Federal Reserve Discount Window and BIC program. Borrowings under the BIC program are overnight
advances with interest chargeable at the discount window (“primary credit”) borrowing rate. At December 31, 2022, we had
pledged certain qualifying loans with an unpaid principal balance of $1.31 billion and securities with a carrying value of $122.6
million as collateral for these FRB programs.
There were no borrowings from the Federal Reserve Discount Window and no borrowings under the BIC program for the years
ended December 31, 2022 and 2021.
Other Borrowings. We maintained available unsecured federal funds lines with five correspondent banks totaling $210.0
million, with no outstanding borrowings at December 31, 2022. The Bank also has the ability to access unsecured overnight
borrowings from various financial institutions through the AFX platform. The availability of such unsecured borrowings
fluctuates regularly and are subject to the counterparties discretion and totaled $445.0 million at December 31, 2022. There was
no borrowing under the AFX platform at December 31, 2022 and 2021.
In December 2021, the holding company entered into a $50.0 million revolving line of credit, which was renewed in December
2022. The line of credit matures on December 18, 2023 and is subject to certain operational and financial covenants. We have
the option to select paying interest using either (i) Prime Rate or (ii) SOFR + 1.85% and are subject to an unused commitment
fee of 0.40% per annum. There were no borrowings outstanding under this line of credit at December 31, 2022 and we were in
compliance with all covenants.
69
The Bank also maintained repurchase agreements and had no outstanding securities sold under such agreements at
December 31, 2022. Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and the
pledging of additional investment securities.
For additional information, see Note 11 — Federal Home Loan Bank Advances and Other Borrowings of the Notes to
Consolidated Financial Statements included in Item 8.
Long-Term Debt
The following table presents our long-term debt as of the dates indicated:
December 31,
2022
2021
($ in thousands)
Senior notes
Subordinated notes
PMB Statutory Trust III, junior
subordinated debentures
PMB Capital Trust III, junior
subordinated debentures
Total long-term debt, net
Interest
Rate
5.250%
4.375%
LIBOR +
3.40%
LIBOR +
2.00%
Maturity
Date
Par Value
Unamortized
Debt Issuance
Cost and
Discount
Par Value
Unamortized
Debt Issuance
Cost and
Discount
4/15/2025
$
175,000 $
(722) $
175,000 $
10/30/2030
85,000
(1,899)
85,000
9/26/2032
10/8/2034
7,217
10,310
—
—
7,217
10,310
(1,014)
(2,127)
—
—
$
277,527 $
(2,621) $
277,527 $
(3,141)
At December 31, 2022, we were in compliance with all covenants under our long-term debt agreements.
In connection with the PMB Acquisition in 2021, we assumed $17.5 million of junior subordinated debentures. The junior
subordinated debentures include $7.2 million floating rate subordinated debentures due September 26, 2032 and $10.3 million
floating rate subordinated debentures due October 8, 2034.
On October 30, 2020, we issued a 4.375% fixed-to-floating rate subordinated notes due October 30, 2030 with an aggregate
principal amount of $85.0 million (the “Subordinated Notes”). Net proceeds after debt issuance costs were approximately $82.6
million.
For additional information, see Note 12 – Long-Term Debt of the Notes to Consolidated Financial Statements included in Item
8.
Loan Repurchase Reserve
We maintain a reserve for potential losses on loans that are off of our balance sheet, but are subject to certain repurchase
provisions, which we refer to as the "Loan Repurchase Reserve."
The following table presents a summary of activity in the loan repurchase reserve for the periods indicated:
($ in thousands)
Balance at beginning of year
Subsequent change in the reserve
Utilization of reserve for loan repurchases
Balance at end of year
Year Ended December 31,
2022
2021
2020
$
$
4,348 $
5,515 $
(1,004)
(355)
(948)
(219)
2,989 $
4,348 $
6,201
(686)
—
5,515
Our loan repurchase reserve totaled $3.0 million at December 31, 2022, compared to $4.3 million at December 31, 2021. The
$1.4 million, or 31.3%, decrease during the year ended December 31, 2022 was due to releasing reserves related to pay downs,
run-off of the underlying loan portfolio, and charge-offs.
We believe that all repurchase demands received were adequately reserved for at December 31, 2022. For additional
information, see Note 14 — Loan Repurchase Reserve of the Notes to Consolidated Financial Statements included in Item 8.
70
Liquidity Management
We are required to maintain 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 adequate to meet the requirements of normal operations, including
both expected and unexpected cash flow needs such as funding loan commitments, potential deposit outflows and dividend
payments. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained. We also
monitor our liquidity requirements in light of rising interest rate trends, changes in the economy and scheduled maturity and
interest rate sensitivity of our investment and loan portfolio and deposits.
Banc of California, N.A.
The Bank's liquidity, represented by cash and cash equivalents and securities available-for-sale, is a product of its operating,
investing, and financing activities. The Bank's primary sources of funds are deposits, payments and maturities of outstanding
loans and investment securities; sales 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.
The Bank also generates cash through secured and unsecured secondary sources of funds. The Bank maintains pre-established
secured lines of credit with the FHLB and the FRB as secondary sources of liquidity to provide funds for lending and
investment activities and to enhance interest rate risk and liquidity risk management. At December 31, 2022, we had available
unused secured borrowing capacities of $1.06 billion from the FHLB and $949.1 million through the Federal Reserve Discount
Window and BIC programs. At December 31, 2022 and 2021, FHLB advances totaled $727.3 million and $476.1 million, net
of unamortized debt issuance costs of $3.7 million and $4.9 million. At December 31, 2022, the Bank had pledged certain
qualifying loans with an unpaid principal balance of $2.96 billion and securities with a carrying value of $214.4 million.
Borrowings under the FRB's BIC program are overnight advances with interest chargeable at the discount window (“primary
credit”) borrowing rate. At December 31, 2022, the Bank had pledged certain qualifying loans with an unpaid principal balance
of $1.31 billion and securities with a carrying value of $122.6 million as collateral for these FRB programs. There were no
borrowings under the Federal Reserve Discount Window and BIC programs at December 31, 2022 and December 31, 2021.
The Bank may also utilize securities sold under repurchase agreements to leverage its capital base and while it maintains
repurchase agreements, there were none outstanding at December 31, 2022 and 2021. Availabilities and terms on repurchase
agreements are subject to the counterparties' discretion and would require the Bank to pledge additional investment securities.
In addition, the Bank had unpledged securities available-for-sale of $840.4 million at December 31, 2022.
In addition, the Bank has additional sources of secondary liquidity through pre-established unsecured fed funds lines with
correspondent banks, pre-approved unsecured overnight borrowing lines with various financial institutions through the AFX
platform, and its ability to obtain brokered deposits. At December 31, 2022, the Bank had $210.0 million in pre-established
unsecured federal funds lines of credit with correspondent banks. There were no borrowings with these correspondent banks at
December 31, 2022 and 2021. The availability of unsecured borrowings through the AFX platform fluctuates regularly and is
subject to the counterparties' discretion and totaled $445.0 million at December 31, 2022. Borrowings under the AFX platform
totaled zero and $25.0 million at December 31, 2022 and 2021. The brokered deposits outstanding at December 31, 2022 and
December 31, 2021 totaled $614.9 million and $10.0 million and demonstrated our ability to access this secondary source of
funds.
The following table presents a summary of pledged assets, borrowing capacity, utilization and available capacity:
71
($ in thousands)
December 31, 2022
Secured:
Federal Home Loan Bank of San Francisco
Standard program(1)
Securities program(2)
Federal Reserve Bank
Discount Window
Unsecured:
American Financial Exchange (AFX)
Correspondent banks
Total
Pledged Assets
Loans
(UPB)
Investment
Securities
Borrowing
Capacity
Amounts
Used
Available
Capacity
$ 2,955,907 $
— $ 1,992,757 $ 1,079,801 $
912,956
—
—
—
—
214,437
162,381
20,000
142,381
122,555
—
—
—
90,060
859,045
445,000
210,000
—
—
—
—
90,060
859,045
445,000
210,000
$ 4,261,043 $
336,992 $ 3,759,243 $ 1,099,801 $ 2,659,442
Borrower in Custody Program
1,305,136
(1) Amounts used include $711.0 million of term advances and $368.8 million of outstanding letters of credit.
(2) Amounts used include $20.0 million of overnight advances.
Banc of California, Inc.
The primary sources of funds for Banc of California, Inc., on a stand-alone holding company basis, are dividends and
intercompany tax payments from the Bank, outside borrowing, and its ability to raise capital and issue debt securities.
Dividends from the Bank are largely dependent upon the Bank's earnings and are subject to restrictions under certain
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 redemptions 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 year ended December 31, 2022, the Bank
paid $126.0 million of dividends to Banc of California, Inc. At December 31, 2022, Banc of California, Inc. had $25.9 million
in cash, all of which was on deposit at the Bank.
In December 2021, the holding company entered into a $50.0 million revolving line of credit. The line of credit matures on
December 18, 2023. We have the option to pay interest using either (i) Prime Rate or (ii) SOFR + 1.85%. The line of credit is
also subject to an unused commitment fee of 0.40% per annum. At December 31, 2022, there were no borrowings under this
line of credit.
On March 15, 2022, we announced that our Board of Directors authorized the repurchase of up to $75 million of our common
stock. During the year ended December 31, 2022, we completed the authorized common stock repurchase program, with
repurchases of 4,212,882 shares at a weighted average price of $17.80, or $74,995,368. The repurchased shares represent
approximately 7% of the shares outstanding at the time this program was authorized.
On March 15, 2022 we redeemed all outstanding Series E Preferred Stock, and the corresponding depositary shares, each
representing a 1/40th interest in a share of the Series E Preferred Stock. The redemption price for the Series E Preferred Stock
was $1,000 per share (equivalent to $25 per Series E Depositary Share). Upon redemption, the Series E Preferred Stock and the
Series E Depositary Shares were no longer outstanding and all rights with respect to such stock and depositary shares ceased
and terminated, except the right to payment of the redemption price. Also upon redemption, the Series E Depositary Shares
were delisted from trading on the New York Stock Exchange. The $3.7 million difference between the consideration paid and
the $95.0 million aggregate carrying value of the Series E Preferred Stock was reclassified to retained earnings and resulted in a
decrease to net income allocated to common stockholders.
On a consolidated basis, cash and cash equivalents totaled $228.9 million, or 2.5% of total assets at December 31, 2022. We
believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements as of December 31,
2022.
72
Commitments
The following table presents information as of December 31, 2022 regarding our commitments and contractual obligations:
($ in thousands)
Commitments to extend credit
Unused lines of credit
Standby letters of credit
Total commitments
Commitments and Contractual Obligations
Total Amount
Committed
Less Than
One Year
One to Three
Years
Over Three
Years to Five
Years
More than
Five Years
$
230,889 $
15,465 $
172,445 $
17,837 $
1,513,514
1,263,283
9,477
6,581
165,899
2,896
54,987
—
25,142
29,345
—
$
1,753,880 $
1,285,329 $
341,240 $
72,824 $
54,487
FHLB advances
Long-term debt
Operating and finance lease obligations
Certificates of deposit
$
731,000 $
20,000 $
291,000 $
420,000 $
—
277,527
35,207
—
8,837
1,189,421
1,019,505
175,000
15,346
167,221
—
7,941
2,695
102,527
3,083
—
Total contractual obligations
$
2,233,155 $
1,048,342 $
648,567 $
430,636 $
105,610
At December 31, 2022, we had unfunded commitments of $17.5 million, $8.6 million, and $5.8 million for LIHTC investments,
SBIC investments, and other investments, respectively.
Stockholders’ Equity
Stockholders’ equity totaled $959.6 million at December 31, 2022, a decrease of $105.7 million, or 9.9%, from $1.07 billion at
December 31, 2021. The decrease was primarily the result of the redemption of our Series E Preferred Stock for an aggregate
amount of $98.7 million, repurchases of common stock of $75.1 million, total other comprehensive net loss of $48.3 million,
cash dividends for common stock of $14.5 million and cash dividends for preferred stock of $1.4 million, partially offset by net
income of $120.9 million, the issuance of $7.2 million in shares for the Deepstack Acquisition and share-based compensation of
$6.2 million. For additional information, see Note 18 — Stockholders' Equity of the Notes to Consolidated Financial Statements
included in Item 8.
Book value per common share increased to $16.26 as of December 31, 2022, from $15.48 at December 31, 2021. Tangible
common equity per share (refer to section Non-GAAP Measures) increased to $14.19 as of December 31, 2022 from $13.88 at
December 31, 2021. The primary items impacting tangible common equity were net income, offset by changes in accumulated
other comprehensive income, common stock repurchases, the redemption of preferred stock, and the Deespstack Acquisition.
During the year ended December 31, 2022, we completed the authorized common stock repurchase program, with repurchases
of 4,212,882 shares at a weighted average price of $17.80, or $74,995,368. The repurchased shares represent approximately 7%
of the shares outstanding at the time this program was authorized.
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. During the 2022, 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 decrease 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 impact our total and tangible stockholders’ equity.
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%, respectively. For additional information
on Basel III capital rules, see Note 19 — Regulatory Capital Matters of the Notes to Consolidated Financial Statements
included in Item 8.
73
The following table presents the regulatory capital ratios for the Company and the Bank as of dates indicated:
December 31, 2022
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity tier 1 capital ratio
Tier 1 leverage ratio
December 31, 2021
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity tier 1 capital ratio
Tier 1 leverage ratio
Banc of
California, Inc.
Banc of
California, NA
Minimum
Regulatory
Requirements
Well-Capitalized
Requirements
(Bank)
14.21 %
11.80 %
11.80 %
9.70 %
14.98 %
12.55 %
11.31 %
10.37 %
16.02 %
14.94 %
14.94 %
12.25 %
15.71 %
14.60 %
14.60 %
12.06 %
8.00 %
6.00 %
4.50 %
4.00 %
8.00 %
6.00 %
4.50 %
4.00 %
10.00 %
8.00 %
6.50 %
5.00 %
10.00 %
8.00 %
6.50 %
5.00 %
Capital
Conservation
Buffer
Requirements
(Bank)
10.50 %
8.50 %
7.00 %
N/A
10.50 %
8.50 %
7.00 %
N/A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established
contractually for a period of time. Market interest rates change over time. 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 (“Management ALCO”), comprised of select members of senior
management, and a joint asset/liability committee of the Boards of Directors of the Company and the Bank (“Board ALCO”,
together with Management ALCO, “ALCOs”). 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:
•
•
•
Originating and purchasing adjustable rate mortgage loans,
Selling longer duration fixed or hybrid mortgage loans,
Originating shorter-term consumer loans,
• Managing the level of investments and duration of investment securities,
• Managing our deposits to establish stable deposit relationships,
•
• Managing the percentage of fixed rate loans in our portfolio.
Using FHLB advances and/or certain derivatives such as swaps to align maturities and repricing terms, and
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
74
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 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.
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. Board ALCO delegates the day to day management of interest rate risk to the Management
ALCO. Management ALCO ensures that the Bank is following the appropriate and current regulatory guidance in the
formulation and implementation of our interest rate risk program. Board ALCO reviews the results of our interest rate risk
modeling quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately
and any residual risk is acceptable. In addition to our annual review of our asset liability management policy, our Board of
Directors periodically reviews the interest rate risk policy limits.
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.
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, 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, as rates paid on our interest-bearing liabilities reprice higher at a pace faster
than rates earned on our interest-earning assets.
At December 31, 2022, our interest rate risk profile reflects a mildly “asset sensitive” position. 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 from those predicted by our models.
75
The following table presents the projected change in the Company’s economic value of equity at December 31, 2022 and net
interest income over the next twelve months, that would occur upon an immediate change in interest rates based on independent
analysis, but without giving effect to any steps that management might take to counteract that change:
($ in thousands)
December 31, 2022
+200 bps
+100 bps
0 bps
-100 bps
-200bps
Change in Interest Rates in Basis Points (bps) (1)
Economic Value of Equity
Net Interest Income
Amount
Amount
Change
Percentage
Change
Amount
Amount
Change
Percentage
Change
$ 1,663,256 $
(1,069)
(0.1) % $
342,138 $
1,668,040
1,664,325
1,637,298
1,587,893
3,715
0.2 %
338,711
335,139
(27,027)
(76,432)
(1.6) %
328,276
(4.6) %
318,317
(6,863)
(16,822)
6,999
3,572
2.1 %
1.1 %
(2.0) %
(5.0) %
(1) Assumes an instantaneous uniform change in interest rates at all maturities and no rate shock has a rate lower than zero percent.
We believe we are well positioned in the current cycle of rising interest rates. Due to the transformation of the franchise to our
relationship-based banking model, with higher percentages of noninterest-bearing deposits and variable rate commercial loans,
our one year gap ratio, which compares the percentage of earning assets that are scheduled to mature or reprice within one year
to the percentage of rate sensitive term liabilities that are scheduled to mature or reprice within one year, has increased since
December 31, 2019. At December 31, 2022, our one year gap ratio stood at 20%.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the
foregoing table. 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.
Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency exchange
risk and commodity price risk, do not directly impact us in the normal course of our business activities and operations.
76
Item 8. Financial Statements and Supplementary Data
BANC OF CALIFORNIA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022, 2021, and 2020
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Ernst & Young, LLP, Irvine, CA, Auditor Firm ID: 42)
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
78
80
81
82
83
85
87
77
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Banc of California, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Banc of California, Inc. (the “Company”)
as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 27, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the account or disclosure to which it relates.
78
Description of
the Matter
How We
Addressed the
Matter in Our
Audit
Allowance for Loan Losses
The Company’s loan portfolio totaled $7.1 billion as of December 31, 2022 and the associated allowance
for loan losses (ALL) was $86.0 million. The ALL is estimated on a quarterly basis and represents
management’s estimate of current expected credit losses in the Company’s loan portfolio. 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. Loans with
similar risk characteristics are aggregated into homogeneous pools. Management’s estimate of the ALL
consists of a specific allowance established for current expected credit losses on loans individually
evaluated, a quantitative allowance for current expected loan losses based on the portfolio and expected
economic conditions over a reasonable and supportable forecast period that reverts back to long-term
trends to cover the life of loan, and a qualitative allowance including management judgment to capture
factors and trends that are not adequately reflected in the quantitative allowance, including an evaluation
of underwriting, other credit-related processes, and other credit risk factors such as concentration risk.
Auditing management’s estimate of the ALL involved a high degree of subjectivity due to the judgment
in management’s determination of the probabilities assigned to the forecast scenarios utilized to estimate
the future credit losses within the loan portfolio. Management’s estimate of the future economic
conditions could have a significant impact on the ALL.
Our considerations and procedures performed were reflective of the re-occurring ALL process for the
year and included evaluation of the process utilized by management to challenge the model results and
determine the best estimate of the ALL as of the statement of financial condition date. We obtained an
understanding of the Company’s process for establishing the ALL, including determination of the
probabilities assigned to the forecast scenarios utilized. We evaluated the design and tested the operating
effectiveness of the controls associated with the ALL process, including controls around the reliability
and accuracy of data used in the model, management’s review and approval of the probabilities assigned
to the forecast scenarios utilized, the governance of the credit loss methodology, and management’s
review and approval of the ALL.
To test the reasonableness of the probabilities of the forecast scenarios, our procedures included, among
others, obtaining an understanding of the forecasted economic scenarios used. We tested the
probabilities assigned to the forecast scenarios utilized within the model by evaluating the probabilities
and the model results. Within the testing performed, we considered the assumptions included within each
forecast scenario and probabilities assigned and how those assumptions and probabilities compared to
key economic variables available through external sources. In addition, we evaluated the Company’s
estimate of the overall ALL considering the Company’s borrowers, loan portfolio, and macroeconomic
trends, compared such information to comparable financial institutions and considered whether new or
contrary information existed. In addition, we evaluated the overall ALL as compared to peer coverage
ratios and whether the amount reflects expected losses in the loan portfolio as of the statement of
financial condition date.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
Irvine, California
February 27, 2023
79
ITEM 1 – FINANCIAL STATEMENTS
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
($ in thousands, except share and per share data)
Cash and due from banks
Interest-earning deposits in financial institutions
Total cash and cash equivalents
ASSETS
Securities held-to-maturity, at amortized cost (fair value of $262,460 at December 31, 2022)
Securities available-for-sale, carried at fair value
Loans receivable
Allowance for loan losses
Loans receivable, net
Federal Home Loan Bank and other bank stock, at cost
Premises and equipment, net
Bank owned life insurance
Goodwill
Deferred income taxes, net
Other intangibles
Other assets
Total Assets
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
LIABILITIES AND STOCKHOLDERS’ EQUITY
Federal Home Loan Bank advances, net
Other borrowings
Long-term debt, net
Accrued expenses and other liabilities
Total liabilities
Commitments and contingent liabilities (Note 22)
Preferred stock
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 65,168,380 shares issued and
58,544,534 shares outstanding at December 31, 2022; 64,599,170 shares issued and 62,188,206 shares
outstanding at December 31, 2021
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 December 31, 2022 and 2021
Additional paid-in capital
Retained earnings
Treasury stock, at cost (6,623,846 and 2,410,964 shares at December 31, 2022 and 2021)
Accumulated other comprehensive (loss) income, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2022
2021
$
47,434 $
181,462
228,896
328,641
868,297
7,115,038
(85,960)
7,029,078
57,092
107,345
127,122
114,312
50,518
7,526
278,189
41,729
186,394
228,123
—
1,315,703
7,251,480
(92,584)
7,158,896
44,632
112,868
123,720
94,301
50,774
6,411
258,315
$
$
9,197,016 $
9,393,743
2,809,328 $
4,311,593
7,120,921
727,348
—
274,906
114,223
2,788,196
4,651,239
7,439,435
476,059
25,000
274,386
113,573
8,237,398
8,328,453
—
—
651
5
866,478
248,988
(115,907)
(40,597)
959,618
$
9,197,016 $
—
94,956
646
5
854,873
147,894
(40,827)
7,743
1,065,290
9,393,743
See accompanying notes to consolidated financial statements.
80
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
Year Ended December 31,
2022
2021
2020
Interest and dividend income
Loans, including fees
Securities
Other interest-earning assets
Total interest and dividend income
Interest expense
Deposits
Federal Home Loan Bank advances
Long-term debt and other interest-bearing liabilities
Total interest expense
Net interest income
(Reversal of) provision for credit losses
Net interest income after (reversal of) provision for credit losses
Noninterest income
Customer service fees
Loan servicing income
Income from bank owned life insurance
Net (loss) gain on sale of securities available-for-sale
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing
Regulatory assessments
Extinguishment of debt
Loss (gain) on investments in alternative energy partnerships
(Reversal of) provision for loan repurchases
Amortization of other intangibles
Acquisition, integration and transaction costs
Naming rights termination
Other expense
Total noninterest expense
Income from operations before income taxes
Income tax expense
Net income
Preferred stock dividends
Income allocated to participating securities
Participating securities dividends
Impact of preferred stock redemption
Net income (loss) available to common stockholders
Earnings (loss) per common share:
Basic
Diluted
Earnings (loss) per class B common share:
Basic
Diluted
$
327,545 $
260,687 $
38,527
6,700
372,772
27,833
15,153
15,421
58,407
314,365
(31,542)
345,907
9,540
1,518
3,402
(7,692)
10,582
17,350
113,060
32,811
15,001
7,053
3,626
—
2,313
(1,004)
1,705
2,080
—
17,728
194,373
168,884
47,945
120,939
1,420
—
—
3,747
27,588
3,384
291,659
12,313
12,023
13,545
37,881
253,778
6,854
246,924
7,685
595
2,871
—
8,225
19,376
103,358
29,452
10,584
6,861
3,395
—
(204)
(948)
1,276
15,869
—
14,035
183,678
82,622
20,276
62,346
8,322
114
—
3,347
$
$
$
$
$
115,772 $
50,563 $
1.90 $
1.89 $
1.90 $
1.90 $
0.95 $
0.95 $
0.95 $
0.95 $
257,300
29,038
4,269
290,607
37,816
18,040
10,157
66,013
224,594
29,719
194,875
5,771
505
2,489
2,011
8,094
18,870
96,809
29,350
15,736
6,574
2,741
2,515
(365)
(697)
1,518
—
26,769
18,435
199,385
14,360
1,786
12,574
13,869
—
376
(568)
(1,103)
(0.02)
(0.02)
(0.02)
(0.02)
See accompanying notes to consolidated financial statements.
81
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on securities available-for-sale:
Unrealized (loss) gain arising during the period
Reclassification adjustment for loss (gain) included in net income
Amortization of unrealized loss on securities transferred from available-for-
sale to held-to-maturity
Total other comprehensive (loss) income
Comprehensive income
Year Ended December 31,
2022
2021
2020
$
120,939 $
62,346 $
12,574
(54,001)
5,048
613
(48,340)
(3)
—
—
(3)
$
72,599 $
62,343 $
21,064
(1,418)
—
19,646
32,220
See accompanying notes to consolidated financial statements.
82
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C
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for credit losses
Reversal of provision for loan repurchases
Depreciation and amortization on premises, equipment and operating lease right-of-use assets
Amortization of intangible assets
Amortization of debt issuance cost
Net amortization of premium and discount on securities
Net amortization (accretion) of deferred loan costs (fees) and purchased premiums (discounts)
Write-off of other assets related to naming rights termination, net
Debt extinguishment fee
Deferred income tax expense (benefit)
Bank owned life insurance income
Share-based compensation expense
(Income) loss on interest rate swaps
Loss on investments in alternative energy partnerships and affordable housing investments
Net loss (gain) on sale of securities available-for-sale
Gain on sale-leaseback transactions
Repurchase of mortgage loans
Proceeds from sales of and principal collected on loans held-for-sale
Change in accrued interest receivable and other assets
Change in accrued interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
Proceeds from maturities and calls of securities available-for-sale
Proceeds from principal repayments of securities held-to-maturity and available-for-sale
Purchases of securities available-for-sale
Net cash (used) acquired in business combinations
Loan originations and principal collections, net
Purchases of loans
Redemption of Federal Home Loan Bank stock
Purchases of Federal Home Loan Bank and other bank stock
Proceeds from sale of loans held-for-sale
Proceeds from sale of other real estate owned
Purchase of mortgage servicing rights
Additions to premises and equipment
Proceeds from sale-leaseback transactions
Payments of finance lease obligations
Funding of equity investments
Net decrease (increase) in investments in alternative energy partnerships
Net cash provided by (used in) investing activities
Year Ended December 31,
2022
2021
2020
$
120,939 $
62,346 $
12,574
(31,542)
(1,004)
15,346
1,705
1,809
402
64
—
—
19,078
(3,402)
6,197
(216)
7,258
7,692
(771)
(1,503)
45
4,687
(10,662)
136,122
128,795
38,500
38,117
6,854
(948)
19,278
1,276
1,757
1,574
(348)
—
—
5,844
(2,871)
5,295
(295)
4,023
—
(841)
(1,853)
29
1,947
2,672
105,739
—
191,230
35,629
29,719
(697)
16,298
1,518
972
1,145
(3,455)
6,669
2,515
(9,259)
(2,489)
5,781
200
4,888
(2,011)
—
—
19,325
19,173
(28,004)
74,862
22,729
46,100
12,132
(162,744)
(312,710)
(371,092)
(10,332)
975,298
475,562
411,035
—
327,554
(814,302)
(825,537)
(285,337)
6,143
(18,603)
—
—
(22,726)
(4,119)
2,400
—
(9,064)
2,165
149,528
8,334
(562)
15,189
3,618
—
(2,810)
3,913
(100)
(10,749)
2,293
(5,665)
24,296
(9,382)
—
1,078
—
(5,092)
—
(532)
(27,832)
(1,537)
(266,915)
85
Cash flows from financing activities:
Net (decrease) increase in deposits
Net decrease in short-term Federal Home Loan Bank advances
Repayment of long-term Federal Home Loan Bank advances
Proceeds from long-term Federal Home Loan Bank advances
Debt extinguishment and financing fees paid
Net (decrease) increase in other borrowings
Net proceeds from issuance of long-term debt
Redemption of preferred stock
Purchase of common stock
Proceeds from exercise of stock options
Purchase of stock surrendered to pay tax liability
Dividend equivalents paid on stock appreciation rights
Dividends paid on preferred stock
Dividends paid on common stock
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Interest paid on deposits and borrowed funds
Income taxes paid
Supplemental disclosure of non-cash activities
Transfer from loans to other real estate owned, net
Transfer of loans held-for-investment to loans held-for-sale
Reclassification of securities from securities available-for-sale to held-to-maturity
Operating lease right of use assets received in exchange for lease liabilities
Net assets acquired in business combination (Note 2)
Fair value of stock consideration
Fair value of net assets acquired
Impact of adoption of ASU 2016-13 on retained earnings
Year Ended December 31,
2022
2021
2020
(318,091)
(50,000)
—
300,000
—
(25,000)
—
(98,703)
(75,080)
—
(1,786)
—
(1,727)
(14,490)
(284,877)
773
228,123
68,921
(65,000)
—
—
—
25,000
—
(93,269)
—
300
(7,557)
—
(8,322)
(12,843)
(92,770)
7,304
220,819
658,633
(425,000)
(335,000)
111,000
(9,368)
—
82,570
(4,379)
(12,041)
—
(923)
(376)
(13,869)
(11,847)
39,400
(152,653)
373,472
$
228,896 $
228,123 $
220,819
$
53,140 $
36,292 $
66,014
23,547
16,003
762
—
—
329,416
2,060
7,200
5,810
—
3,253
15,205
—
17,201
222,195
168,227
—
1,116
—
—
3,289
—
—
(4,503)
See accompanying notes to consolidated financial statements.
86
BANC OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022, 2021 and 2020
NOTE 1 – 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. 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 as a bank holding company
by the FRB and the Bank operates under a national bank charter issued by the OCC, the Bank's primary regulator. The Bank is
a member of the FHLB system, and maintains insurance on deposit accounts with the FDIC.
The Bank offers a variety of financial services to meet the banking and financial needs of the communities it serves, with
operations conducted through 28 full-service branches extending from San Diego to Santa Barbara as of December 31, 2022.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and the
Bank. All significant intercompany balances and transactions have been eliminated in consolidation. Our accounting and
reporting policies are based upon U.S. generally accepted accounting principles, which we may refer to as “GAAP,” and
conform to predominant practices within the financial services industry. Certain prior period amounts have been reclassified to
conform to current period presentation. In the consolidated statement of financial condition, we reclassified loans held for sale
to other assets and in the consolidated statements of operations, we reclassified: (i) the fair value adjustment for loans held-for-
sale to other income, (ii) the income or loss from equity investments to other income, and (iii) advertising and promotion to
other expense. Significant accounting policies followed by the Company are presented below.
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 ACL (which includes the ALL and the reserve for unfunded noncancellable loan commitments), loan
repurchase reserve, realization of deferred tax assets, the fair value of assets and liabilities acquired in business combinations
and related purchase price allocation, the valuation of goodwill and other intangible assets, other derivatives, 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.
Segment Reporting: We regularly assess our strategic plans, operations and reporting structures to identify our reportable
segments. Changes to our reportable segments are expected to be infrequent. We operate one reportable segment —
Commercial Banking. The factors considered in making this determination include the nature of products and services offered,
geographic regions in which we operate and how information is reviewed by the chief executive officer and other key decision
makers. As a result, we determined that all services we offer relate to Commercial Banking.
Variable Interest Entities (“VIE”): We hold ownership interests in certain special purpose entities. We evaluate our interest in
these entities to determine whether they meet the definition of a VIE and whether we meet the criteria as their primary
beneficiary and are therefore required to consolidate these entities. A primary beneficiary of a VIE is defined as the party that
has both the power to direct the activities that most significantly impact the VIE and a variable interest that could be significant
to the VIE. A variable interest is a contractual ownership or other interest that changes with changes in the fair value of the
VIE’s net assets. To determine whether or not a variable interest we hold could 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 continually
analyze whether we are the primary beneficiary of a VIE. Changes in facts and circumstances occurring since the previous
primary beneficiary determination are considered as part of this ongoing assessment. See Note 21 — Variable Interest Entities
for additional information.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, cash items in transit, cash due from the Federal
Reserve Bank and other financial institutions, and federal funds sold with original maturities less than 90 days.
Held-to-Maturity Debt Securities: Securities held-to-maturity consist of debt securities that we have the positive intent and
ability to hold to maturity. These securities are recorded at cost, adjusted for the amortization of premiums or accretion of
discounts. Premiums and discounts are amortized or accreted over the life of the security as an adjustment to its yield using the
interest method. Transfers of debt securities into the held-to-maturity portfolio are accounted for at fair value. The unrealized
gain or loss at the date of transfer is recognized as part of the amortized cost of the transferred security. This amount, along with
the unrealized gain or loss included in accumulated other comprehensive income, is amortized or accreted over the life of the
security as an adjustment to its yield using the interest method.
87
Securities held-to-maturity are analyzed for credit losses under ASC 326, Financial Instruments - Credit Losses, which requires
us to determine whether any impairment exists as of the reporting date and, as applicable, whether that impairment is due to
credit deterioration. An allowance for credit losses would be established for losses on held-to-maturity debt securities due to
credit deterioration and would be recorded as a component of the provision for credit losses. Accrued interest is excluded from
our expected credit loss estimates. Held-to-maturity debt securities are typically classified as nonaccrual when the contractual
payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability
of principal or interest. When held-to-maturity debt securities are placed on nonaccrual status, unpaid interest recognized as
interest income is reversed.
Available-for-Sale Debt Securities: Available-for-sale debt securities are carried at fair value. Accreted discounts and
amortized premiums are included in interest income using the interest method, and realized gains or losses from sales of
securities are calculated using the specific identification method.
Available-for-sale debt securities are analyzed for credit losses under ASC Subtopic 326-30, which requires us to determine
whether credit impairment exists as of the reporting date. If credit impairment exists, an allowance for credit losses would be
established for available-for-sale debt securities and would be reported as a component of provision for credit losses. Accrued
interest is excluded from our expected credit loss estimates. Available-for-sale debt securities are typically classified as
nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious
doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual
status, unpaid interest recognized as interest income is reversed.
Loans: A determination is made at the time of commitment to originate or purchase loans whether such loans will be classified
as held-for-investment or held-for-sale. Loans held-for-investments are loans where we have the ability and intent to hold such
loans to maturity or for the foreseeable future, subject to periodic review under our management evaluation processes, including
asset/liability management. Loans, excluding PCD loans, that management has the intent and ability to hold for the foreseeable
future, or until maturity or payoff, are recorded at the principal balance outstanding, net of charge-offs, unamortized purchase
premiums and discounts, and deferred loan fees and costs. Loans held for sale are recorded at fair value.
Amortization of deferred loan origination fees and costs or purchase premiums and discounts are recognized in interest income
as an adjustment to yield over the terms of loans using the interest method. Deferred loan origination fees and costs on
revolving lines of credit are amortized using the straight-line method. Interest on loans is credited to interest income as earned
based on the interest rate applied to principal amounts outstanding. Interest income is accrued on the unpaid principal balance
and is discontinued when management believes, after considering economic and business conditions and collection efforts, that
the borrower’s financial condition is such that full collection of principal or interest becomes doubtful, regardless of the length
of past due status.
Generally, loans are placed on nonaccrual status when scheduled payments become past due for 90 days or more. When accrual
of interest is discontinued, any unpaid accrued interest receivable is reversed against interest income. Interest received on such
loans is accounted for on a cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned
to accrual status when all the principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
A charge-off is generally recorded at 180 days past due for SFR mortgage loans if the unpaid principal balance exceeds the fair
value of the collateral less costs to sell. Commercial and industrial and commercial real estate loans are subject to a detailed
review when 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is made to
put a loan on nonaccrual status. A charge-off for commercial and industrial and commercial real estate loans is recorded when a
loss is confirmed. Consumer loans, other than those secured by real estate, are typically charged off no later than 120 days past
due.
Acquired Loans: At the 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 addition to the fair value adjustment, at the date of acquisition, an
allowance for credit losses is established with a corresponding increase to the overall acquired loan balance. This initial ACL is
determined using our application of CECL method.
Acquired loans that are not considered PCD loans (“non-PCD loans”) are 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 through a charge to the
provision for credit losses. This initial ACL is determined using our application of CECL method.
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Subsequent to the acquisition date, the allowance for credit losses 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.
Allowance for Credit Losses: The ACL is estimated on a quarterly basis and represents management’s estimate of current
expected credit losses in our loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated while loans
that no longer share risk characteristics with loan pools are evaluated individually. The ACL is established through the
provision for credit loss expense. Loans deemed uncollectible are charged off and deducted from the allowance. Recoveries on
loans previously charged off are added to the allowance. The ACL process involves subjective and complex judgments. Credit
losses are not estimated for accrued interest receivable as interest that is deemed uncollectible is written off through interest
income.
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. Loans with similar risk characteristics
are aggregated into homogeneous pools. The ACL consists of: (i) a specific allowance established for current expected credit
losses on loans individually evaluated, (ii) a quantitative allowance for current expected loan losses based on the portfolio and
expected economic conditions over a reasonable and supportable forecast period that reverts back to long-term trends to cover
the expected life of the loan, (iii) a qualitative allowance including management judgment to capture factors and trends that are
not adequately reflected in the quantitative allowance and (iv) the reserve for unfunded noncancellable loan commitments
detailed below.
The need for a loan to be individually evaluated, based on current information and events, is when it no longer meets the risk
characteristics of the similarly identified pool of financial assets to be collectively evaluated. We measure expected credit losses
on all individually evaluated loans under the guidance of ASC 326, Receivables, primarily through the evaluation of collateral
values and estimated cash flows expected to be collected. Cash receipts on individually evaluated loans for which the accrual of
interest has been discontinued are applied first to principal and then to interest income. Prior to the adoption of ASC Topic 326,
individually evaluated loans were referred to as impaired loans.
Expected credit losses are estimated over the contractual term of the loans, adjusted for estimated prepayments, as appropriate.
The contractual term excludes expected extensions and renewals unless those extension or renewal options are included in the
underlying contract and we do not have the ability to unconditionally cancel. The contractual term also excludes expected
modifications unless management has a reasonable expectation, at the reporting period, that a troubled debt restructuring will be
executed.
The allowance for loan losses includes qualitative adjustments to bring the allowance to the level management believes is
appropriate based on factors that have not otherwise been fully accounted for, including those described in the federal banking
agencies' joint interagency policy statement on ALL. 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) changes in the nature and volume of the loan portfolio, (ii) changes in lending policies and procedures, (iii)
changes in the level and quality of experience held by lending management, (iv) changes in the value of the underlying
collateral; and (v) the existence and effect of concentration of credit and the changes in the level of such concentration. 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.
We have established credit risk management processes that include regular management review of the loan portfolio to identify
problem loans. During the ordinary course of business, management may become aware of borrowers who may not be able to
fulfill their contractual payment requirements within the loan agreements. Such loans are subject to increased monitoring.
Consideration is given to placing these loans on nonaccrual status, assessing the need for additional allowance for credit loss,
and partially or fully charging off the principal balance.
The credit risk monitoring system is designed to identify loans with credit deterioration and potential problem loans, perform
periodic evaluation of impairment, and determine the adequacy of the allowance for credit losses in a timely manner. In
addition, management has adopted a credit policy that includes a credit review and control system that it believes should be
effective in ensuring that we maintain an adequate ACL. Further, the Board of Directors provides oversight and guidance for
the ACL process.
At December 31, 2022, the following loan portfolio segments have been identified:
•
Commercial and industrial (general commercial and industrial, warehouse lending, and indirect/direct leveraged
lending)
Commercial real estate
•
• Multifamily
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•
•
•
•
Small Business Administration (“SBA”)
Construction
SFR - 1st deeds of trust (generally SFR mortgage)
Other consumer (automotive and HELOC)
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their obligations
such as current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk.
Loans secured by multifamily and commercial real estate properties generally involve a greater degree of credit risk. Payments
on loans secured by multifamily and commercial real estate properties are often dependent on the successful operation or
management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the
economy. In addition, commercial and industrial loans are also considered to have a greater degree of credit risk due to the fact
that commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash
flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may
be substantially dependent on the success of the business itself (which, in turn, is often dependent, in part, upon general
economic conditions). Within the commercial and industrial portfolio, warehouse credit facilities are considered to have a lesser
degree of risk then other commercial and industrial loans. Warehouse credit facilities are secured by newly granted single
family residential mortgages underwritten with current borrower financial information. SBA loans are similar to commercial
and industrial loans, however, they have additional credit enhancement in the form of a guaranty provided by the U.S. Small
Business Administration, for up to 85% of the loan amount for loans up to $150 thousand and 75% of the loan amount for loans
of more than $150 thousand. We often sell the guaranteed portion of certain SBA loans into the secondary market. The
availability of funds for the repayment of financing may be substantially dependent on the success of the business itself which
is often dependent, in part, upon general economic conditions.
Consumer loans, including single family mortgage loans, have credit risk given that collection of these loans is dependent on
the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or
personal bankruptcy.
Troubled Debt Restructurings: A loan is identified as a TDR when a borrower is experiencing financial difficulties and, for
economic or legal reasons related to these difficulties, we grant a concession (or we reasonably expect to grant a concession) to
the borrower in the restructuring that we would not otherwise consider. We have granted a concession when, as a result of the
restructuring to a troubled borrower, we do not expect to collect all amounts due, including principal and/or interest accrued at
the original terms of the loan. The concessions may be granted in various forms, including a below-market change in the stated
interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a note split with principal
forgiveness. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the
probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
This evaluation is performed under our internal underwriting policy. Loans for which the borrower has been discharged under
Chapter 7 bankruptcy are considered collateral dependent TDRs, and charged down to the fair value of collateral less cost to
sell. A restructuring executed at an interest rate that is at market interest rates based on the current credit characteristics of the
borrower is not a TDR.
Our policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on nonaccrual status for a
minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to
place them on nonaccrual status. Loans qualify for return to accrual status once they have demonstrated performance under the
restructured terms of the loan for a minimum of 6 months. Generally, TDRs are reported as TDRs for the remaining life of the
loan. TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum
of 6 months, through one fiscal year-end and the restructuring agreement specifies a market rate of interest equal to that which
would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is
removed from TDR classification, it is our policy to continue to base our measure of loan impairment on the contractual terms
specified by the loan agreement.
Reserve for Unfunded Noncancellable Loan Commitments: The reserve for unfunded noncancellable loan commitments
provides for current estimated credit losses for the unused portion of collective pools of lending commitments expected to be
funded, except for unconditionally cancellable commitments for which no reserve is required under ASC Topic 326. The
reserve for unfunded noncancellable loan commitments includes reserve factors that are consistent with the ACL methodology
for loans using the expected loss factors and an estimated utilization or probability of draw factor, which are based on historical
experience. Changes in the reserve for unfunded noncancellable loan commitments are reported as a component of provision for
credit losses in the consolidated statements of operations and the reserve for unfunded noncancellable loan commitments is
included in accrued expenses and other liabilities in the consolidated statements of financial condition.
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Fair Values of Financial Instruments: We measure certain assets and liabilities on a fair value basis, in accordance with ASC
820, Fair Value Measurement. Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the
primary basis of accounting. Examples of these include derivative instruments and available-for-sale securities. Additionally,
fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment in accordance with ASC 825,
Financial Instruments. Examples of these include loans individually evaluated for credit losses, long-lived assets, OREO,
goodwill, and core deposit intangible assets.
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants. When observable market prices are not available, fair value is estimated using modeling
techniques such as discounted cash flow analysis. These modeling techniques utilize assumptions that market participants
would use in pricing the asset or the liability, including assumptions about the risk inherent in a particular valuation technique,
the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Depending on the nature of the asset or
liability, we use various valuation techniques and assumptions when estimating the instrument’s fair value. Considerable
judgment may be involved in determining the amount that is most representative of fair value.
To increase consistency and comparability of fair value measures, ASC Topic 820, Fair Value Measurement, established a
three-level hierarchy to prioritize the inputs used in valuation techniques between observable inputs among (i) observable inputs
that reflect quoted prices in active markets, (ii) inputs other than quoted prices with observable market data, and (iii)
unobservable data such as our own data or single dealer non-binding pricing quotes. We assess the valuation hierarchy for each
asset or liability measured at the end of each quarter; as a result, assets or liabilities may be transferred within hierarchy levels
due to changes in availability of observable market inputs to measure fair value at the measurement date.
Federal Home Loan Bank and Federal Reserve Bank Stock: The Bank is a member of the FHLB and FRB system. Members
are required to own a certain amount of FHLB and FRB stock based on the level of borrowings and other factors, and may
invest in additional amounts. FHLB and FRB stock are carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported on the
consolidated statements of operations under interest and dividend income from other interest-earning assets.
Other Real Estate Owned (“OREO"): OREO, which represents real estate acquired through foreclosure in satisfaction of
commercial and real estate loans, is initially recorded at fair value less estimated selling costs of the real estate, based on current
independent appraisals obtained at the time of acquisition, less costs to sell when acquired, establishing a new cost basis. Loan
balances in excess of fair value of the real estate acquired at the date of acquisition are charged off against the ACL. A
valuation allowance is established for any subsequent declines in fair value less estimated selling costs and adjusted as
applicable. Gains and losses on the sale of OREO and reductions in fair value subsequent to foreclosure, and any subsequent
operating expenses or income of such properties are included in all other expense on the consolidated statements of operations.
Premises and Equipment: Land is carried at cost. Premises and equipment are recorded at cost less accumulated depreciation.
The straight-line method is used for depreciation with the following estimated useful lives: building - 40 years; leasehold
improvements - shorter of useful life or life of lease; and furniture, fixtures, and equipment - 3 to 7 years. Maintenance and
repairs are expensed as incurred and improvements that extend the useful lives of assets are capitalized.
Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from
future undiscounted cash flows. If impaired, the assets are recorded at fair value, less selling costs. For impairment purposes,
fair value is determined utilizing market values of similar assets or replacement cost as applicable.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key employees. BOLI is recorded at
the amount that can be realized under the insurance contract, which is the cash surrender value.
Mortgage Servicing Rights: Mortgage servicing rights ("MSRs") give us the contractual rights to receive service fees in
exchange for performing loan servicing functions on behalf of investors who have an ownership interest in the mortgage loan
balances. Purchased mortgage servicing rights are recorded at the purchase price at the time of acquisition, which approximates
the fair value of such assets. Subsequent to acquisition, MSRs are accounted for under the amortization method and are then
amortized over the period of estimated net servicing income (level yield method) generated from servicing the loans. MSRs are
evaluated quarterly for impairment by estimating the fair value of the MSRs and comparing that value to their amortized cost.
Impairment, if any, is recognized in a valuation allowance to the extent the fair value is less than the carrying amount of the
MSRs. Subsequent increases in the fair value of impaired MSRs are recognized only up to the amount of the previously
recognized valuation allowance. The estimated fair value of the MSRs is obtained through independent third party valuations
based on an analysis of future cash flows, incorporating key assumptions including discount rates, prepayment speeds and
interest rates that we believe are consistent with the assumptions used by other similar market participants in valuing MSRs.
Leases: Leases are accounted for in accordance with ASC 842, Leases. We review contracts to determine if an arrangement
contains a lease. At contract inception an operating lease right-of-use (“ROU”) asset is recognized with a corresponding lease
liability based on the present value of future lease payments over the lease term. While operating leases may include options to
extend the term, these options are not included when calculating the ROU asset and lease liability unless it is reasonably certain
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such options will be exercised. The present value of lease payments is determined using our incremental borrowing rate if the
rate is not implicit in the lease. Our incremental borrowing rate is an actual borrowing rate with comparable terms or the
published FHLB Advance borrowing rate at or near the lease commencement date for a comparable maturity. Leases with an
initial term of 12 months or less are not recorded in the consolidated balance sheets. Our lease agreements include both lease
and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for
together with the lease as a single lease component. Expense for operating leases is recognized on a straight line basis and is
included as a component of lease expense. Sublease income is recorded separately as a component of other noninterest income.
Operating lease ROU assets are regularly reviewed for impairment.
Business Combinations: Business combinations are accounted for using the acquisition method of accounting under ASC 805,
Business Combinations. Under the acquisition method, we measure the identifiable assets acquired, including identifiable
intangible assets, and liabilities assumed in a business combination at fair value on acquisition date. Goodwill is generally
determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date.
Acquisition, integration and transaction costs, which may include advisory, legal, accounting, valuation, other professional or
consulting fees, conversion, employee severance and change in control costs, and facilities-related charges are expensed in the
periods in which the costs are incurred and the services are received.
Goodwill and Other Intangible Assets: Goodwill represents the excess purchase price of businesses acquired over the fair
value of the identifiable net assets acquired and is assigned to specific reporting units. 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 it would more likely than not result in a reduction of the fair value of a
reporting unit below its carrying value.
Goodwill is evaluated for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative
evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less
than its carrying amount. If it is more likely than not that the fair value of a reporting unit is below its carrying value, we
perform a quantitative test whereby the fair value of a reporting unit is compared to its carrying amount, including goodwill.
We determine the estimated fair value of each reporting unit using a discounted cash flow analysis and comparable public
company market values. Discounted cash flow estimates include significant management assumptions relating to revenue
growth rates, net interest margins, weighted-average cost of capital, and future economic and market conditions. If the fair
value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. Otherwise, if
a reporting unit's carrying value exceeds fair value, the difference is charged to noninterest expense.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because
of contractual or other legal rights, or because the asset is capable of being sold or exchanged either separately or in
combination with a related contract, asset or liability. Other intangible assets, such as Core Deposit Intangibles (“CDI”), with
finite useful lives are amortized to noninterest expense over their estimated useful lives and are evaluated for impairment
whenever events occur or circumstances change indicating the carrying amount of the asset may not be recoverable.
Alternative Energy Partnerships: We invest 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) and other tax credits. We are a limited partner in these partnerships, which were formed to invest in newly
installed residential and commercial solar leases and power purchase agreements.
As our respective investments in these entities are more than minor, we have significant influence, but not control, over the
investee’s activities that most significantly impact its economic performance. As a result, we are required to apply the equity
method of accounting, which generally prescribes applying the percentage ownership interest to the investee’s GAAP net
income in order to determine the investor’s earnings or losses in a given period. However, because the liquidation rights, tax
credit allocations and other benefits to investors can change upon the occurrence of specified events, application of the equity
method based on the underlying ownership percentages would not accurately represent our investment. As a result, we apply
the HLBV method of the equity method of accounting. The HLBV method is a balance sheet approach where a calculation is
prepared at each balance sheet date to estimate the amount that we would receive if the equity investment entity were to
liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the
contractually defined liquidation 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.
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Low Income Housing Tax Credit Investments: We have invested in limited partnerships that were formed to develop and
operate several apartment complexes designed as high-quality affordable housing for lower income tenants throughout the State
of California and other states. We account for these investments under the proportional amortization method. Each of the
partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period
to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any
period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest.
Investments accounted for under the proportional amortization method are required to be tested for impairment when events or
changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be realized.
Impairment is measured as the difference between the investment’s carrying amount and its fair value and would be recorded in
other noninterest expense in the consolidated statements of operations.
Loan Repurchase Reserve: We maintain a reserve for expected losses on loans that were sold and are no longer on our balance
sheet that we may be required to repurchase (or the indemnity payments we may be required to make to purchasers) which we
refer to as the loan repurchase reserve. When we sell loans into the secondary mortgage market, we make customary
representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination,
the nature and extent of underwriting standards applied and the types of documentation being provided. Typically, these
representations and warranties are in place for the life of the loan. If a defect in the origination process is identified, we may be
required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects,
generally we have no liability to the purchaser for losses it may incur on such loan. The reserve takes into account both the
estimate of expected losses on loans sold during the current accounting period, as well as adjustments to the previous estimates
of expected losses on loans sold. In each case, these estimates are based on the most recent data available, including data from
third parties, regarding demand for loan repurchases, actual loan repurchases, and actual credit losses on repurchased loans,
among other factors.
Deferred Financing Costs: Deferred financing costs associated with our senior notes and subordinated notes are included in
long-term debt, net on the consolidated statements of financial condition. The deferred financing costs are being amortized on a
basis that approximates an interest method over the 8-year term of the senior notes and the 10-year term of the subordinated
notes.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial letters of credit, issued to meet client financing needs. The face amount for
these items represents the exposure to loss, before considering client collateral or ability to repay. Such financial instruments
are recorded as loans when they are funded.
Stock-Based Compensation: Compensation cost is recognized for stock options, restricted stock awards and units, and stock
appreciation rights issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-
Scholes model is utilized to estimate the fair value of stock options and stock appreciation rights, while the market price of our
voting common stock at the date of grant is used for restricted stock awards and units. For stock awards and units which contain
a market condition, a Monte Carlo simulation valuation model is used to calculate the grant date fair value of such awards.
Generally, compensation cost is recognized over the required service period, defined as meeting performance goals and the
vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite
service period for the entire award. Compensation cost reflects estimated forfeitures, adjusted as necessary for actual forfeitures.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred income tax assets and liabilities are computed for differences between the GAAP and tax basis of
assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income. Deferred tax assets 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 evaluates both positive and negative evidence on a quarterly basis, including considering 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.
We and our subsidiaries 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).
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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 reclassify stranded tax effects from accumulated other comprehensive income to retained earnings in periods in which there
is a change in corporate income tax rates.
Earnings (Loss) Per Common Share: Earnings (loss) per common share is computed under the two-class method. Basic EPS is
computed by dividing net income (loss) allocated to common stockholders by the weighted-average number of shares
outstanding. Diluted EPS is computed by dividing net income (loss) allocated to common stockholders by the weighted-average
number of shares outstanding, adjusted for the dilutive effect of the restricted stock units and outstanding stock options. Net
income (loss) allocated to common stockholders is computed by subtracting income (loss) allocated to participating securities,
participating securities dividends, preferred stock dividends and preferred stock redemption from net income. Participating
securities are instruments granted in stock-based payment transactions that contain rights to receive non-forfeitable dividends or
dividend equivalents, which includes stock appreciation rights (“SARs”) to the extent they confer dividend equivalent rights.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss includes unrealized gains and losses on securities available-for-sale, net of tax, which are
recognized as a separate component of stockholders’ equity.
Derivative Instruments: We record our derivative instruments at fair value as either assets or liabilities on the consolidated
statements of financial condition in other assets and accrued expenses and other liabilities, respectively, and have elected to
present all derivatives with counterparties on a gross basis. For fair value derivatives that qualify for hedge accounting, we
record changes in the fair value in other income. For derivatives that do not qualify for hedge accounting, the fair value impact
is recorded in other income in the income statement.
Interest Rate Swaps and Caps. We offer interest rate swap and cap products to certain loan clients to allow them to hedge the
risk of rising interest rates on their variable rate loans. When such products are issued, we also enter into an offsetting swap
with institutional counterparties to eliminate the interest rate risk. These back-to-back derivative agreements, which generate fee
income for us, are intended to offset each other. We retain the credit risk of the original loan. The net cash flow for us is equal
to the interest income received from a variable rate loan originated with the client plus a fee. These swaps and caps are not
designated as accounting hedges and are recorded at fair value in other assets and accrued expenses and other liabilities in the
consolidated statements of financial condition. The changes in fair value are recorded in other income in the consolidated
statements of operations.
Foreign Exchange Contracts. We offer short-term foreign exchange contracts to our clients to purchase and/or sell foreign
currencies at set rates in the future. These products allow clients to hedge the foreign exchange rate risk of their deposits and
loans denominated in foreign currencies. In conjunction with these products we also enter into offsetting contracts with
institutional counterparties to hedge our foreign exchange rate risk. These back-to-back contracts allow us to offer our clients
foreign exchange products while minimizing our exposure to foreign exchange rate fluctuations. These foreign exchange
contracts are not designated as hedging instruments and are recorded at fair value in other assets and accrued expenses and
other liabilities on the consolidated statements of financial condition.
Transfer of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is generally considered to have been surrendered when (i) the transferred assets are
legally isolated from us or our consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee has the right
to pledge or exchange the assets with no conditions that constrain the transferee or provide more than a trivial benefit to us, and
(iii) we do not maintain an obligation or the unilateral ability to reclaim or repurchase the assets.
We have sold financial assets in the normal course of business, the majority of which are residential mortgage loan sales
primarily to GSEs through our mortgage banking activities and other individual or portfolio loans and securities sales. In
accordance with accounting guidance for asset transfers, we consider any ongoing involvement with transferred assets in
determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and certain
performance-based guarantees, our continuing involvement with financial assets sold is minimal and generally limited to
market customary representation and warranty clauses.
When we sell financial assets, we may retain servicing rights and/or other interests in the financial assets. The gain or loss on
sale depends on the previous carrying amount of the transferred financial assets and the fair value of the consideration received,
including cash, originated mortgage servicing rights and other interests in the sold assets, and any liabilities incurred in
exchange for the transferred assets. Upon transfer, any servicing assets and other interests retained by us are carried at fair value
or the lower of cost or fair value.
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Loss Contingencies: Loss contingencies, including claims and legal actions, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such
matters that will have a material effect on the consolidated financial statements that are not currently accrued for.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the
Bank to us or by us to our stockholders.
Fee Revenue: Generally, fee revenue from deposit service charges and loans is recognized when earned, except where
collection is uncertain, in which case revenue is recognized when received. We account for fee revenue in accordance with ASC
606, Revenue Recognition.
Advertising Costs: Advertising costs are expensed as incurred.
Adopted Accounting Pronouncements:
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR. Since the issuance of this
guidance, cessation of U.S. Dollar LIBOR has been extended to June 30, 2023. The amendments in this Update provide
optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for
modifications to agreements (e.g. loans, debt securities, derivatives, borrowings, among others) necessitated by reference rate
reform.
The following optional expedients for applying the requirements of certain ASC Topics or Industry Subtopics in the
Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope
guidance: 1) modifications of contracts within the scope of ASC Topic 310, Receivables, and ASC Topic 470, Debt, should be
accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of ASC Topic
842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification
and the discount rate or remeasurements of lease payments that otherwise would be required under this ASC Topic for
modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its
original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the
economic characteristics and risks of the host contract under Subtopic ASC 815-15, Derivatives and Hedging-Embedded
Derivatives; and 4) for other ASC Topics or Industry Subtopics in the Codification, the amendments in this update also include
a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does
not require contract remeasurement at the modification date or reassessment of a previous accounting determination.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, in order to clarify that certain
optional expedients and exceptions in ASC Topic 848 apply to derivatives that are affected by the discounting transition.
Specifically, certain provisions in ASC Topic 848, if elected by an entity, apply to derivative instruments that use an interest
rate for margining, discount, or contract price alignment that is modified as a result of reference rate reform.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic
848, to defer the expiration date of ASC 848 from December 31, 2022, to December 31, 2024.
These amendments are effective immediately upon issuance and due to the prospective nature of the revised guidance, the
adoption of these Updates did not have a material impact on our Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Effective
In March 2022, the FASB issued 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 CECL model. The amendments eliminate the accounting
guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance 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 and net
investment in leases 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. Early adoption is permitted if an entity has adopted
ASU 2016-13. We adopted ASU 2022-02 on January 1, 2023 and it did not have a material effect on our consolidated financial
statements.
NOTE 2 – BUSINESS COMBINATIONS
Deepstack Acquisition. On September 15, 2022, we completed the acquisition of the assets of Global Payroll Gateway, Inc. and
its wholly owned subsidiary, Deepstack Technologies, LLC (collectively, "Deepstack") for $24.0 million in total consideration.
95
The purchase was accounted for as a business combination under U.S. GAAP and assets purchased and liabilities assumed were
recorded at their respective acquisition date estimated fair values.
The fair value amounts of identified assets acquired and liabilities assumed as part of the Deepstack Acquisition are as follows:
($ in thousands)
Assets acquired:
Cash and cash equivalents
Other intangibles
Other assets
Total assets acquired
Liabilities assumed:
Accounts payable
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Total consideration
Goodwill
Fair
Value
4,068
3,800
1,385
9,253
3,443
3,443
5,810
24,000
18,190
$
$
$
$
$
Total consideration of $24.0 million includes cash consideration paid of $14.4 million, common stock issued of $7.2 million, or
412,473 shares, and additional cash consideration of $2.4 million expected to be paid 18 months after the acquisition date.
The acquisition of Deepstack resulted in the recognition of $2.8 million in developed technology and $1.0 million in other
intangibles, including trademarks, client relationships and non-compete agreements. Goodwill in the amount of $18.2 million
was also recognized and represents the strategic, operational and financial benefits expected from integrating the payment
processing solutions and technology of Deepstack into our operations.
Deepstack's results of operations have been included in our results beginning September 15, 2022. Acquisition, integration and
transaction costs related to the acquisition were $2.1 million for the year ended December 31, 2022.
Pacific Mercantile Bancorp Acquisition. On October 18, 2021, we completed our merger with PMB, pursuant to which PMB
merged with and into the Company, with the Company as the surviving corporation. PMB was the bank holding company of the
wholly-owned Pacific Mercantile Bank, a California state chartered commercial bank headquartered in Costa Mesa, California,
which operated seven banking offices, including three full service branches, located throughout Southern California.
Under the terms and conditions of the merger, each outstanding share of PMB common stock, aggregating 23,713,437 shares,
was converted into the right to receive 0.5 of a share of the Company's common stock. In addition, at the effective time of the
merger, we paid $3.2 million in cash for all outstanding PMB share-based awards, including outstanding shares subject to
unvested restricted stock awards. In the merger, we also issued 11,856,713 shares of common stock with an estimated fair value
of $222.2 million based upon the $18.74 closing price of the Company's common stock on October 18, 2021. Together with the
$3.2 million of cash consideration, this result in an aggregate purchase price of $225.4 million.
Goodwill in the amount of $59.0 million was recognized and represents the expected synergies and economies of scale from the
combination of our operations. Goodwill is not expected to be deductible for tax purposes.
The following table represents the allocation of merger consideration to the assets and liabilities of PMB as of October 18, 2021
and the fair value amounts at acquisition date:
96
($ in thousands)
Assets acquired:
Cash and due from banks
Interest-earning deposits in financial institutions
Loans receivable
Allowance for credit losses
Premises and equipment, net
Operating lease right-of-use assets
Other intangible assets, net(1)
Income tax receivable
Deferred income tax, net(1)
Bank owned life insurance
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Long term debt, net
Lease liability
Accrued expenses and other liabilities
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Consideration paid
Goodwill(1)
$
Fair
Value
3,196
475,554
962,856
(13,622)
314
9,212
4,074
2,035
9,819
9,043
20,302
$
1,482,783
$
1,284,714
17,527
9,441
4,695
1,316,377
166,406
225,384
58,978
$
(1) During the year ended December 31, 2022, goodwill was increased by $1.8 million as a result of updates to the initial fair value
amounts recognized. For additional information, see Note 8 - Goodwill and Other Intangibles
The fair value of the acquired identifiable intangible assets, representing core deposit intangibles, was $4.1 million. Core
deposit intangible assets were valued using a net cost savings method and calculated as the present value of the estimated net
cost savings attributable to the core deposit base over the expected remaining life of the deposits. The net cost savings attributed
to the core deposit base were calculated as the difference between the prevailing alternative cost of funds and the estimated cost
of the core deposits. The core deposit intangible is being amortized on an accelerated basis over its estimated useful life of 10
years.
During the year ended December 31, 2021, we incurred $15.9 million of costs to effect the merger and integrate PMB, which
were expensed in accordance with ASC Topic 805 and are included in acquisition, integration and transaction costs in our
consolidated statements of operations. These costs included investment banking fees, personnel costs, professional fees,
facilities-related charges, systems conversion costs and other costs.
NOTE 3 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Value Hierarchy
ASC Subtopic 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs 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.
97
•
•
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 significant to the fair value
measurement.
Assets and Liabilities Measured on a Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale 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 classified in the fair value hierarchy. Level 2 securities include SBA loan pool securities, U.S.
government agency 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:
Interest Rate Swaps. We offer interest rate swap products to certain loan clients to allow them to hedge the risk of rising interest
rates 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 with a correspondent bank. These back-to-back agreements are intended to offset
each other and allow us to originate a variable rate loan while providing a contract for fixed interest payments for the client. The
net cash flow for us is equal to the interest income received from a variable rate loan originated with the client plus a fee. The
fair value 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 at set rates in the future. These products allow customers to hedge the foreign exchange rate risk of their deposits 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 other 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.
98
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
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
($ in thousands)
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
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Derivative assets:
Interest rate swaps and foreign exchange contracts (1)
Liabilities
Derivative liabilities:
Interest rate swaps and foreign exchange contracts (2)
40,206
93,191
80,492
476,603
166,618
2,292
2,251
—
—
—
—
—
—
—
40,206
93,191
80,492
476,603
166,618
2,292
2,251
December 31, 2021
Assets
Securities available-for-sale:
SBA loan pools securities
$
14,591 $
— $
14,591 $
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
191,969 $
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Municipal securities
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Derivative assets:
Interest rate swaps and foreign exchange contracts (1)
Liabilities
Derivative liabilities:
Interest rate swaps and foreign exchange contracts (2)
241,541
119,015
56,025
518,964
173,598
3,565
3,740
—
—
—
—
—
—
—
—
191,969 $
241,541
119,015
56,025
518,964
173,598
3,565
3,740
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
(2)
Included in other assets in the consolidated statements of financial condition.
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 years
ended December 31, 2022 and 2021.
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 based on 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
99
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
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Fair
Value
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
($ in thousands)
December 31, 2022
Assets
Collateral dependent loans:
Single family residential mortgage
$
3,600 $
Commercial and industrial
SBA
December 31, 2021
Assets
Collateral dependent loans:
Commercial and industrial
SBA
7,115
3,704
12,272
3,886
— $
—
—
—
—
— $
—
—
—
—
3,600
7,115
3,704
12,272
3,886
The following table presents the gains (losses) recognized on assets measured at fair value on a non-recurring basis for the
periods indicated:
($ in thousands)
Collateral dependent loans:
Single family residential mortgage
Commercial and industrial
Commercial real estate
SBA
Other consumer
Year Ended December 31,
2022
2021
2020
$
(340) $
(532) $
(2,928)
—
(203)
(243)
(1,491)
(555)
(1,888)
—
(169)
(10,292)
—
(2,052)
—
100
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:
($ in thousands)
December 31, 2022
Financial assets
Cash and cash equivalents
Securities held-to-maturity
Securities available-for-sale
Loans receivable, net of allowance for credit
losses
Federal Home Loan Bank and other bank stock
Accrued interest receivable
Derivative assets
Financial liabilities
Deposits
Advances from Federal Home Loan Bank
Long-term debt
Derivative liabilities
Accrued interest payable
December 31, 2021
Financial assets
Cash and cash equivalents
Securities available-for-sale
Loans receivable, net of allowance for credit
losses
Federal Home Loan Bank and other bank stock
Accrued interest receivable
Derivative assets
Financial liabilities
Deposits
Advances from Federal Home Loan Bank
Other borrowings
Long-term debt
Derivative liabilities
Accrued interest payable
Carrying
Amount
Fair Value Measurement Level
Level 1
Level 2
Level 3
Total
$
228,896 $
228,896 $
— $
— $
228,896
262,460
868,297
—
—
262,460
868,297
—
6,526,916
6,526,916
328,641
868,297
7,029,078
57,092
37,942
2,292
—
—
—
—
37,942
—
57,092
—
2,292
7,120,921
5,931,500
1,175,857
727,348
274,906
2,251
7,004
—
—
—
7,004
699,730
269,673
2,251
—
—
—
—
—
—
—
—
—
57,092
37,942
2,292
7,107,357
699,730
269,673
2,251
7,004
$
228,123 $
228,123 $
— $
— $
228,123
1,315,703
7,158,896
44,632
30,991
3,565
—
—
—
30,991
—
7,439,435
6,932,717
476,059
25,000
274,386
3,740
3,546
—
—
—
—
3,546
1,315,703
—
1,315,703
—
7,150,703
7,150,703
44,632
—
3,565
506,711
500,323
25,000
294,404
3,740
—
—
—
—
—
—
—
—
—
—
44,632
30,991
3,565
7,439,428
500,323
25,000
294,404
3,740
3,546
The methods and assumptions used to estimate fair value for our financial instruments recorded at fair value on a recurring or
non-recurring basis are described as follows:
Cash and Cash Equivalents and Interest-earning Deposits in Financial Institutions: The carrying amounts of cash and cash
equivalents and interest-earning deposits in financial institutions approximate fair value due to the short-term nature of these
instruments (Level 1).
Securities Held-to-Maturity: The fair values of securities held-to-maturity 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). 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.
101
Federal Home Loan Bank and Other Bank Stock: FHLB, Federal Reserve Bank and other bank stock are recorded at cost,
which approximates fair value. Ownership of FHLB and Federal Reserve Bank stock is restricted to member banks, and
purchases and sales of these securities are at par value with the issuer (Level 2).
Loans Receivable, Net of ALL: The fair value of loans receivable, which is based on an exit price notion, is estimated based on
the discounted cash flow approach. The discount rate was derived from the associated market yield curve plus appropriate
spreads. The resulting fair value reflects market price for loans with similar financial characteristics. Yield curves are
constructed by product and payment types. Additionally, the fair value of our loans may differ significantly from the values that
would have been used had a ready market existed for such loans and may differ materially from the values that we may
ultimately realize (Level 3).
Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Deposits: The fair values of deposits with no stated maturity, including noninterest-bearing deposits, interest-bearing demand
deposits, money market and savings accounts are equal to the amount payable on demand as of the balance sheet date (Level 1).
The fair value of certificates of deposit is estimated based on discounted cash flows utilizing interest rates currently being
offered by the Bank on comparable deposits as to amount and remaining term (Level 2).
Advances from Federal Home Loan Bank: The fair values of advances from FHLB are estimated based on a discounted cash
flow approach. The discount rate was derived from the current market rates for borrowings with similar remaining maturities
(Level 2).
Other Borrowings: The carrying amount of other borrowings approximates its fair value due to the short-term nature of these
borrowings (Level 2).
Long-Term Debt: Fair value of long-term debt is determined by observable data such as market spreads, cash flows, yield
curves, credit information, and respective terms and conditions for debt instruments (Level 2).
Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value (Level 1).
We use our best judgment in estimating the fair value of our financial instruments; however, there are inherent limitations in
any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not
necessarily indicative of the amounts we could have realized in a sales transaction at December 31, 2022 and 2021. The
estimated fair value amounts for December 31, 2022 and 2021 have been measured as of period-end and have not been re-
evaluated or updated subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to
the reporting date may be different than the amounts reported at period-end.
102
NOTE 4 – INVESTMENT SECURITIES
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
($ in thousands)
December 31, 2022
Securities held-to-maturity:
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Municipal securities
Total securities held-to-maturity
Securities available-for-sale:
SBA loan pool securities
$
$
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
153,033 $
— $
(29,807) $
123,226
61,404
114,204
328,641 $
—
—
— $
(11,946)
(24,428)
(66,181) $
49,458
89,776
262,460
11,241 $
— $
(54) $
11,187
40,431
99,075
90,832
492,203
175,781
—
—
—
—
32
(225)
40,206
(5,884)
(10,340)
(15,600)
(9,195)
93,191
80,492
476,603
166,618
868,297
Total securities available-for-sale
$
909,563 $
32 $
(41,298) $
December 31, 2021
Securities available-for-sale:
SBA loan pool securities
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Municipal securities
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
$
14,679 $
— $
(88) $
14,591
190,382
2,898 $
(1,311)
191,969
242,458
117,913
56,014
521,275
162,002
1,171
2,641
11
—
11,603
(2,088)
(1,539)
—
(2,311)
(7)
241,541
119,015
56,025
518,964
173,598
Total securities available-for-sale
$
1,304,723 $
18,324 $
(7,344) $
1,315,703
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 portfolio to the held-to-maturity 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 then
amortized over the 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 December 31, 2022, our investment securities portfolio consisted of agency securities, municipal securities, mortgage-
backed securities, collateralized loan obligations, 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.
There was no allowance for credit losses for debt securities held-to-maturity and available-for-sale as of December 31, 2022
and 2021. We do not consider unrealized losses on these securities to be attributable to credit-related factors, as the unrealized
losses have occurred as a result of changes in non-credit related factors such as interest rates, market spreads, and market
conditions subsequent to purchase.
Accrued interest receivable on debt securities held-to-maturity and available-for-sale totaled $9.2 million and $4.7 million at
December 31, 2022 and December 31, 2021, and is included within other assets in the accompanying consolidated statements
of financial condition.
103
At December 31, 2022 and 2021, there were no holdings of any one issuer, other than the U.S. government agency and
sponsored enterprises, in an amount greater than 10% of our stockholders’ equity.
Pledged Securities
Investment securities with carrying values of $356.5 million and $28.9 million as of December 31, 2022 and 2021 were pledged
to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
Securities Available-for-Sale
The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and
losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
($ in thousands)
Gross realized gains on sales and calls
Gross realized losses on sales and calls
Net realized (losses) gains on sales and calls
Proceeds from sales and calls
Year Ended December 31,
2022
2021
2020
$
$
$
209 $
(7,901)
(7,692) $
— $
—
— $
167,295 $
191,230 $
2,011
—
2,011
68,829
The following table summarizes the investment securities available-for-sale with unrealized losses by security type and length
of time in a continuous, unrealized loss position as of the dates indicated:
($ in thousands)
December 31, 2022
Securities available-for-sale:
SBA loan pool securities
U.S. government agency and U.S. government
sponsored enterprise residential mortgage-
backed securities
U.S. government agency and U.S. government
sponsored enterprise collateralized mortgage
obligations
Non-agency residential mortgage-backed
securities
Collateralized loan obligations
Corporate debt securities
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
2,260 $
(3) $
8,927 $
(51) $
11,187 $
(54)
40,206
(225)
—
—
40,206
(225)
76,441
(2,533)
16,750
(3,351)
93,191
(5,884)
80,492
235,936
159,492
(10,340)
(7,492)
(8,374)
—
240,667
4,180
—
(8,108)
(821)
80,492
476,603
163,672
(10,340)
(15,600)
(9,195)
Total securities available-for-sale
$ 594,827 $
(28,967) $ 270,524 $
(12,331) $ 865,351 $
(41,298)
December 31, 2021
Securities available-for-sale:
SBA loan pool securities
U.S. government agency and U.S. government
sponsored enterprise residential mortgage-
backed securities
U.S. government agency and U.S. government
sponsored enterprise collateralized mortgage
obligations
Municipal securities
Collateralized loan obligations
Corporate debt securities
$
— $
— $
14,591 $
(88) $
14,591 $
(88)
67,588
(1,311)
—
—
67,588
(1,311)
85,290
44,748
81,962
4,993
(1,184)
(919)
(38)
(7)
17,754
10,762
(904)
(620)
103,044
55,510
253,002
(2,273)
334,964
—
—
4,993
(2,088)
(1,539)
(2,311)
(7)
Total securities available-for-sale
$ 284,581 $
(3,459) $ 296,109 $
(3,885) $ 580,690 $
(7,344)
104
At December 31, 2022, our securities available-for-sale portfolio consisted of 77 securities, of which 76 securities were in an
unrealized loss position. At December 31, 2021, our securities available-for-sale portfolio consisted of 119 securities, of which
46 securities were in an unrealized loss position.
During the years ended December 31, 2022, 2021 and 2020, there was no provision for credit losses related to securities
available-for-sale. We monitor our securities portfolio to ensure it has adequate credit support. We consider the lowest credit
rating for identification of credit impairment for collateralized loan obligations and other securities. The decline in fair value of
our securities since acquisition was attributable to a combination of rising interest rates and general volatility in credit market
conditions. We do not currently 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 December 31, 2022,
all of our collateralized loan obligations investment securities in an unrealized loss position received an investment grade credit
rating.
The following table presents the amortized cost and fair value of the investment securities portfolio, based on the earlier of
contractual maturity dates or next repricing date, as of December 31, 2022:
($ in thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Held-to-Maturity
Available-for-Sale
Earlier of maturity or next repricing date:
Within one year
One to five years
Five to ten years
Greater than ten years
Total
$
— $
—
28,675
299,966
— $
509,099 $
—
24,039
238,421
171,497
42,590
186,377
$
328,641 $
262,460 $
909,563 $
493,321
161,681
37,796
175,499
868,297
Contractual maturities may not reflect the actual maturities of the investments. The average lives for mortgage-backed securities
and collateralized loan obligations will likely be shorter than their contractual maturities due to prepayments and amortization.
105
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NOTE 5 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table presents the balances in our loan portfolio as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial(1)
Commercial real estate
Multifamily
SBA(2)
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans
Allowance for loan losses
Loans receivable, net
December 31,
2022
2021
$
1,845,960 $
2,668,984
1,259,651
1,689,943
68,137
243,553
1,311,105
1,361,054
205,548
181,841
1,920,806
1,420,023
86,988
102,925
7,115,038
7,251,480
(85,960)
(92,584)
$
7,029,078 $
7,158,896
(1)
(2)
Includes warehouse lending balances of $602.5 million and $1.60 billion at December 31, 2022 and 2021.
Includes 20 PPP loans totaling $5.7 million at December 31, 2022 and 397 PPP loans totaling $123.1 million at December 31, 2021.
The following table presents the components of total loans as of the dates indicated:
($ in thousands)
Unpaid principal balance
Unamortized net premiums
Unamortized net deferred costs
Unamortized SBA PPP fees
Fair value adjustment(1)
Total loans
December 31,
2022
2021
$
7,107,897 $
7,245,952
18,319
(1,880)
—
18,005
819
(831)
(9,298)
(12,465)
$
7,115,038 $
7,251,480
(1)
Includes $8.0 million related to the PMB Acquisition at December 31, 2022, of which $4.1 million related to PCD loans, and $10.6
million related to the PMB Acquisition at December 31, 2021, of which $3.9 million related to PCD loans.
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
commercial real estate 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 institution will sustain some loss if the
deficiencies are not corrected.
107
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.
108
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112
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 periods indicated:
($ in thousands)
December 31, 2022
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
than 89
Days
Past due
Total
Past Due
Current
Total
$
4,002 $
481 $
13,833 $
18,316 $ 1,827,644 $ 1,845,960
311
—
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—
—
—
—
—
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—
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1,258,430
1,259,651
—
1,689,943
1,689,943
10,299
10,586
—
—
57,551
243,553
68,137
243,553
Single family residential mortgage
Other consumer
Total loans
36,338
163
5,068
16
19,431
60,837
1,859,969
1,920,806
81
260
86,728
86,988
$
41,101 $
5,565 $
44,554 $
91,220 $ 7,023,818 $ 7,115,038
December 31, 2021
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans
$
9,342 $
1,351 $
9,503 $
20,196 $ 2,648,788 $ 2,668,984
—
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987
—
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449
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1,311,105
1,360,268
1,361,054
186,260
181,841
205,548
181,841
31,943
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1,420,023
538
102,387
102,925
$
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3,711 $
32,609 $
72,751 $ 7,178,729 $ 7,251,480
113
Nonaccrual Loans
The following table presents nonaccrual loans as of the dates indicated:
($ in thousands)
Nonaccrual loans
Commercial:
Commercial and industrial
Commercial real estate
SBA
Consumer:
Single family residential mortgage
Other consumer
Total nonaccrual loans
December 31, 2022
December 31, 2021
Total
Nonaccrual
Loans
Nonaccrual
Loans with
no ACL
Total
Nonaccrual
Loans
Nonaccrual
Loans with
no ACL
$
$
22,613 $
910
10,417
10,959 $
910
5,613
28,594 $
—
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195
55,251 $
17,187
195
34,864 $
7,076
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52,558 $
9,137
—
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7,076
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27,891
At December 31, 2022 and 2021, there were no loans that were past due 90 days or more and still accruing.
Other Real Estate Owned and Loans in Process of Foreclosure
At December 31, 2022 and December 31, 2021, there was no other real estate owned. At December 31, 2022, there were nine
consumer mortgage loans totaling $11.7 million secured by residential real estate properties for which formal foreclosure
proceedings were in process according to local requirements of the applicable jurisdiction. There were no consumer mortgage
loans secured by residential real estate properties in foreclosure at December 31, 2021.
Allowance for Credit Losses
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 December 31, 2022. The published forecasts consider the FRB's monetary
policy, labor market constraints, high inflation, supply chain stress and the military conflict between Russia and Ukraine,
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 reserve for unfunded noncancellable loan commitments 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 Topic 326. At December 31, 2022 and 2021, the reserve for unfunded noncancellable loan
commitments was $5.3 million and $5.6 million and was included in accrued expenses and other liabilities on the consolidated
statements of financial condition.
114
The following table presents a summary of activity in the ACL for the periods indicated:
($ in thousands)
Year Ended December 31,
2022
Reserve for
Unfunded
Non-
Cancellable
Loan
Commit-
ments
Allowance
for
Loan Losses
2021
Reserve for
Unfunded
Non-
Cancellable
Loan
Commit-
ments
Allowance
for
Credit
Losses
Allowance
for
Loan Losses
2020
Reserve for
Unfunded
Non-
Cancellable
Loan
Commit-
ments
Allowance
for
Credit
Losses
Allowance
for
Credit
Losses
Allowance
for
Loan Losses
Balance at beginning of year
$
92,584
$
5,605
$
98,189
$
81,030
$
3,183
$
84,213
$
57,649
$
4,064 $
61,713
Impact of adopting ASU
2016-13
Initial reserve for purchased
credit-deteriorated loans (1)
Loans charged off
Recoveries of loans previously
charged off
Net recoveries (charge-offs)
(Reversal of) provision for
credit losses
—
—
(9,278)
33,896
24,618
—
—
—
—
—
—
—
(9,278)
33,896
24,618
—
13,650
(9,886)
3,358
(6,528)
—
—
—
—
—
—
7,609
(1,226)
6,383
13,650
—
(9,886)
(15,417)
3,358
1,815
(6,528)
(13,602)
—
—
—
—
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1,815
(13,602)
(31,242)
(300)
(31,542)
4,432
2,422
6,854
29,374
345
29,719
Balance at end of year
$
85,960
$
5,305
$
91,265
$
92,584
$
5,605
$
98,189
$
81,030
$
3,183 $
84,213
(1) Represents the amounts, at acquisition date, of expected credit losses on PCD loans, net of expected recoveries of PCD loans
charged-off prior to acquisition date that we have a contractual right to receive.
During 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.
During 2021, we recorded a $13.7 million initial allowance for credit losses established for PCD loans from the PMB
Acquisition and an $11.3 million initial charge to provision for credit losses for all other loans and unfunded commitments
acquired from PMB. During 2021, net charge-offs included $4.4 million related to a commercial and industrial loan acquired
from PMB and a $2.0 million SBA relationship. During 2021, recoveries totaled $3.4 million and included $2.6 million of
recoveries related to PCD loans acquired from PMB that were charged-off prior to acquisition date that we had a contractual
right to receive.
During 2020, a $16.1 million legacy shared national credit was resolved resulting in a charge-off of $10.7 million.
115
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($ in thousands)
December 31, 2022
Commercial:
Commercial and industrial
Commercial real estate
SBA
Consumer:
Single family residential mortgage
Other consumer
Total loans
December 31, 2021
Commercial:
SBA
Consumer:
Single family residential mortgage
Other consumer
Total loans
Collateral Dependent Loans
A loan is considered collateral dependent 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 dependent loans are evaluated
individually and the ALL is determined based on the amount by which amortized costs exceed the estimated fair value of the
collateral, adjusted for estimated selling costs.
Collateral dependent loans consisted of the following as of the dates indicated:
Real Estate
Commercial
Residential
Business Assets
Automobile
Total
$
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910
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113 $
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37 $
4,776 $
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235 $
Troubled Debt Restructurings (TDRs)
TDR loans consisted of the following as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
SBA
Consumer:
Single family residential mortgage
Total loans
December 31,
2022
2021
$
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—
295
5,241
4,243
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We had commitments to lend to customers with outstanding loans that were classified as TDRs of $97 thousand and $63
thousand at December 31, 2022 and 2021. Accruing TDRs were $2.7 million and nonaccrual TDRs were $13.4 million at
December 31, 2022, compared to accruing TDRs of $12.5 million and nonaccrual TDRs of $4.1 million at December 31, 2021.
The increase in TDRs during the year ended December 31, 2022 was primarily due to the modification of two commercial and
industrial loan relationships.
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Purchases, Sales, and Transfers
The following table presents loans purchased and/or sold by portfolio segment, excluding loans held-for-sale and loans acquired
in a business combination for the periods indicated:
Year Ended December 31,
2022
2021
2020
Purchases
Sales
Purchases
Sales
Purchases
Sales
($ in thousands)
Commercial:
Multifamily
Construction
Consumer:
$
— $
—
— $
29,764 $
— $
120,900 $
—
—
—
795,773
—
—
14,750
149,687
Single family residential mortgage
814,262
Total
$
814,262 $
— $
825,537 $
— $
285,337 $
—
—
—
—
Loan purchases during the years ended December 31, 2022, 2021, and 2020 were made at a net premium of $4.0 million, $17.5
million and $4.7 million.
The following table presents PCD loans acquired for the periods indicated:
($ in thousands)
Par value
Initial reserve based on ACL methodology(1)
Net discount related to items other than credit
Total purchase price
Year Ended December 31,
2022
2021
2020
—
—
—
225,405
(16,200)
(3,786)
$
— $
205,419 $
—
—
—
—
(1) The initial reserve for PCD loans at acquisition date and based on our ACL methodology was $13.7 million and
included $2.6 million related to expected recoveries of loans that were fully or partially charged off prior to
acquisition.
There were no transfers of loans between loans held-for-sale and loans held-for-investment during the years ended
December 31, 2022 and 2020. During the year ended 2021, we transferred $4.4 million of commercial mortgage loans and
$10.8 million of SFR mortgage loans to held-for-sale.
Non-Traditional Mortgage (NTM) Loans
NTM loans are included in our SFR mortgage portfolio and are comprised primarily of interest only loans. As of December 31,
2022 and 2021, the NTM loans totaled $862.3 million, or 12.1% of total loans, and $635.3 million, or 8.8% of total loans,
respectively.
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. Interest only loans are primarily SFR first mortgage loans that
generally have a 30 to 40-year term at the time of origination and include payment features that allow interest only payments in
initial periods before converting to a fully amortizing loan.
At December 31, 2022 and 2021, nonperforming NTM loans totaled $3.0 million and $4.0 million.
Non-Traditional Mortgage Performance Indicators
Our risk management policy and credit monitoring include reviewing delinquency, FICO scores, and LTV ratios on the NTM
loan portfolio. We also continuously monitor market conditions for our geographic lending areas. We have determined that the
most significant performance indicators for NTM first lien loans are LTV ratios. At December 31, 2022, our NTM first lien
portfolio had a weighted average LTV of approximately 59%.
119
NOTE 6 – PREMISES AND EQUIPMENT, NET
The following table presents the components of premises and equipment, net, as of the dates indicated:
($ in thousands)
Land
Building and improvement
Furniture, fixtures, and equipment
Leasehold improvements
Construction in process
Total
Less accumulated depreciation
Premises and equipment, net
December 31,
2022
2021
$
7,630 $
106,413
51,043
12,173
323
177,582
(70,237)
$
107,345 $
8,230
107,465
48,737
13,559
23
178,014
(65,146)
112,868
During the year ended December 31, 2020, we recorded an impairment loss of $512 thousand on abandoned capitalized
software projects, which is included in all other expense on the consolidated statements of operations. There were no
impairment charges for abandoned capitalized software projects for the years ended December 31, 2022 and 2021.
We recognized depreciation expense of $7.7 million, $8.7 million and $10.2 million for the years ended December 31, 2022,
2021, and 2020.
NOTE 7 – LEASES
We have operating leases for corporate offices, branches and loan production offices for which we are the lessee. Our leases
have remaining lease terms of 2 months to 16 years, some of which include options to extend the leases generally for periods of
3 to 5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We
also have subleases in place for certain office locations and the income from subleases is included in other income.
The components of lease expense were as follows:
($ in thousands)
Operating lease expense
Variable lease expense
Total lease expense
Supplemental cash flow information related to leases was as follows:
($ in thousands)
Cash paid for amounts included in the measurement of lease liabilities for
operating leases:
Operating cash flows
ROU assets obtained in the exchange for lease liabilities:
ROU assets obtained in exchange for lease liabilities (1)
Year Ended December 31,
2022
2021
2020
9,168 $
6,972 $
168
366
9,336 $
7,338 $
6,024
279
6,303
Year Ended December 31,
2022
2021
2020
9,515 $
7,229 $
6,812
2,060 $
26,413 $
3,289
$
$
$
$
(1)
Includes $9.2 million during the year ended December 31, 2021 related to the PMB Acquisition.
Supplemental balance sheet information related to leases was as follows:
($ in thousands)
Operating leases:
Operating lease right-of-use assets
Operating lease liabilities
120
December 31,
2022
2021
$
28,780 $
33,122
35,442
40,675
Weighted-average remaining lease term (in years):
Operating leases
Weighted-average discount rate:
Operating leases
Maturities of operating lease liabilities at December 31, 2022 were as follows:
($ in thousands)
Year Ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total lease payments
Less: present value discount
Total Lease Liability
December 31,
2022
2021
4.90 years
5.46 years
1.88 %
1.76 %
Operating
Leases
$
$
8,726
8,415
6,910
4,992
2,949
3,083
35,075
(1,953)
33,122
During the year ended December 31, 2021, we recognized $3.8 million in impairment of ROU assets obtained in the PMB
Acquisition. This impairment related to branch and office consolidation of PMB locations and is included in acquisition,
integration and transaction costs in the accompanying consolidated statements of operations.
Sublease income totaled $1.8 million, $1.3 million and $1.0 million during the years ended December 31, 2022, 2021 or 2020
and is included in other income in the accompanying consolidated statements of operations.
We lease certain equipment under finance leases. Finance lease obligations totaled $122 thousand and $239 thousand at
December 31, 2022 and 2021. The finance lease arrangements require monthly payments through 2025.
Sale-leaseback Transactions
In January 2022, we completed a sale-leaseback transaction for one of our branch locations. We sold the branch for $2.4 million
and recognized a gain of $771 thousand. We also entered into a 18-month lease agreement for this branch and recognized a
right-of-use asset and lease liability for $107 thousand. Gains related to sale-leaseback transactions are included in other income
in the accompanying consolidated statements of operations.
In September 2021, we completed a sale-leaseback transaction for one of its branch locations. We sold the branch for $4.2
million and recognized a gain of $841 thousand. We also entered into a 5-year lease agreement for this branch and recognized a
right-of-use asset and lease liability for $811 thousand.
NOTE 8 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair values. At
December 31, 2022 and 2021, we had goodwill of $114.3 million and $94.3 million.
The following table presents changes in the carrying amount of goodwill for the periods indicated:
($ in thousands)
Goodwill, beginning of the year
Goodwill from business combinations
Goodwill adjustments for purchase accounting
Goodwill, end of year
Year Ended December 31,
2022
2021
2020
94,301 $
37,144 $
37,144
18,190
1,821
57,157
—
—
—
114,312 $
94,301 $
37,144
$
$
121
At December 31, 2022, goodwill included $18.2 million recognized in the Deepstack Acquisition and $59.0 million in the PMB
Acquisition (refer to Note 2 — Business Combinations). During the year ended December 31, 2022, we adjusted goodwill as a
result of updates to the initial fair value of core deposit intangibles and finalization of income tax returns related to PMB.
During the measurement period (not to exceed one year from the acquisition date), the fair value of assets acquired and
liabilities assumed are subject to adjustment if additional information becomes available to indicate a more accurate or
appropriate value for an asset or liability.
We evaluate goodwill for impairment as of October 1 each year, and more frequently if events or circumstances indicate that
there may be impairment. We completed our most recent annual goodwill impairment test as of October 1, 2022. Based on the
annual goodwill impairment tests performed during the years ended December 31, 2022, 2021 and 2020, we determined that
there was no impairment of goodwill.
Other Intangibles
Other intangibles are comprised of the following as of the dates indicated:
($ in thousands)
Core deposit intangibles
Developed technology
Other intangibles
Total other intangibles
December 31,
2022
December 31,
2021
$
$
3,932 $
6,411
2,637
957
—
—
7,526 $
6,411
Other intangibles are amortized over their estimated useful lives and reviewed for impairment at least quarterly. As of
December 31, 2022, the weighted average remaining amortization period for core deposit intangibles was approximately 6.7
years. Amortization periods for developed technology and other intangibles acquired in the Deepstack Acquisition have useful
lives ranging from 3 to 10 years.
The following table presents changes in the carrying amount of intangibles for the periods indicated:
($ in thousands)
Other intangibles:
Balance, beginning of year
Other intangibles acquired from business combinations
Purchase accounting adjustments
Balance, end of year
Accumulated amortization:
Balance, beginning of year
Amortization of other intangibles
Balance, end of year
Other intangibles, net
Year Ended December 31,
2022
2021
2020
$
35,958 $
30,904 $
30,904
3,800
(980)
38,778
29,547
1,705
31,252
5,054
—
35,958
28,271
1,276
29,547
$
7,526 $
6,411 $
—
—
30,904
26,753
1,518
28,271
2,633
There was no impairment of other intangibles for the years ended December 31, 2022, 2021 and 2020.
The following table presents estimated future amortization expenses of other intangibles as of December 31, 2022:
($ in thousands)
2023
2024
2025
2026
2027
2028 and
After
Total
Estimated future amortization
expense
$
1,799 $
1,425 $
1,107 $
1,013 $
811 $
1,371 $
7,526
122
NOTE 9 – OTHER ASSETS AND OTHER LIABILITIES
The following table presents the components of other assets as of the dates indicated:
($ in thousands)
Accrued interest receivable
Prepaid expenses
Derivative instruments(1)
Operating lease right-of-use assets(2)
Servicing assets
Income taxes receivable
Investments:
Alternative energy partnerships(3)
Low income housing tax credits ("LIHTC")(3)
Other equity and CRA investments(3)
Other assets
Total other assets
December 31,
2022
2021
$
37,942 $
8,068
2,292
28,780
22,484
7,679
21,410
45,726
90,295
13,513
30,991
7,267
3,565
35,442
1,309
7,952
25,888
38,982
82,809
24,110
$
278,189 $
258,315
(1) See Note 15 - Derivative Instruments for information regarding derivative instruments
(2) See Note 7 - Leases for information regarding operating lease right-of-use assets
(3) See Note 20 - 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)
Accrued interest payable
Accounts payable and accrued expenses
Derivative liabilities(1)
Lease liability(2)
Commitments to fund LIHTC(3)
Reserve for unfunded noncancellable loan commitments
Reserve for loss on repurchased loans(4)
Other liabilities
Total accrued expenses and other liabilities
December 31,
2022
2021
$
7,004 $
37,560
2,251
33,122
17,480
5,305
2,989
8,512
3,546
39,487
3,740
40,675
10,264
5,605
4,348
5,908
$
114,223 $
113,573
(1) See Note 15 - Derivative Instruments for information regarding derivative instruments
(2) See Note 7 - Leases for information regarding lease liability
(3) See Note 22 - Loan Commitments and Other Related Activities regarding commitments to fund LIHTC
(4) See Note 14 - Loan Repurchase Reserve
123
NOTE 10 – DEPOSITS
The following table presents the components of deposits as of the dates indicated:
($ in thousands)
Noninterest-bearing deposits
Interest-bearing deposits
Interest-bearing demand deposits
Money market and savings accounts
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
Total interest-bearing deposits
Total deposits
December 31,
2022
2021
$
2,809,328 $
2,788,196
1,947,247
1,174,925
793,040
396,381
2,393,386
1,751,135
285,768
220,950
4,311,593
4,651,239
$
7,120,921 $
7,439,435
The aggregate amount of deposits reclassified as loans, such as overdrafts, was $54 thousand and $129 thousand at
December 31, 2022 and 2021.
We had California State Treasurer’s deposits of $302.0 million and $75.0 million, and accrued interest on these deposits, in
certificates of deposit of more than $250,000 at December 31, 2022 and 2021. The California State Treasurer’s deposits are
subject to withdrawal based on the State’s periodic evaluations. In addition, we had other public deposits of $41.7 million and
$30.5 million at December 31, 2022 and 2021. At December 31, 2022 and 2021, we provided letters of credit of $300.0 million
and $235.0 million through the FHLB of San Francisco as collateral for California State Treasurer’s deposits and other public
deposits. There were no securities pledged as collateral for these deposits at December 31, 2022 and 2021.
The following table presents a summary of brokered deposits as of the dates indicated:
($ in thousands)
Money market accounts
Certificates of deposit of $250,000 or less
Total brokered deposits
December 31,
2022
2021
$
$
10,000 $
604,945
614,945 $
10,000
—
10,000
The following table presents scheduled maturities of certificates of deposit as of December 31, 2022:
($ in thousands)
Certificates of deposit of $250,000 or less
Certificates of deposit of more than
$250,000
Total certificates of deposit(1)
2023
2024
2025
2026
2027
Total
$
664,365 $
105,126 $
22,085 $
753 $
711 $
793,040
355,138
39,375
636
394
838
396,381
$ 1,019,503 $
144,501 $
22,721 $
1,147 $
1,549 $ 1,189,421
(1) Total certificates of deposit includes $179 thousand and $602 thousand of fair value adjustments related to certificates
of deposit acquired in business combinations at December 31, 2022 and 2021.
124
NOTE 11 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB Advances
The following table presents advances from the FHLB as of the dates indicated:
($ in thousands)
Fixed rate:
Outstanding balance (1)
Interest rates ranging from
Interest rates ranging to
Weighted average interest rate
Variable rate:
Outstanding balance
Weighted average interest rate
December 31,
2022
December 31,
2021
$
711,000
$
411,000
0.64 %
3.70 %
2.97 %
0.64 %
3.32 %
2.53 %
20,000
4.59 %
70,000
0.20 %
(1) Excludes $3.7 million and $4.9 million of unamortized debt issuance costs at December 31, 2022 and 2021.
The following table presents contractual maturities by year of the FHLB advances as of December 31, 2022:
($ in thousands)
2023
2024
2025
2026
2027
Thereafter
Total
Fixed rate
Variable rate
Total
$
$
— $
— $
291,000 $
20,000 $
400,000 $
— $
711,000
20,000
—
—
—
—
—
20,000
20,000 $
— $
291,000 $
20,000 $
400,000 $
— $
731,000
Each advance is payable at its maturity date. Advances paid early are subject to a prepayment penalty.
At December 31, 2022, FHLB advances included $20.0 million in overnight borrowings, $611.0 million in term advances and
$100.0 million in term advances with a put feature. The putable advances have a 5-year term but can be called quarterly until
maturity at the option of the FHLB beginning December 6, 2023.
FHLB advances are collateralized by a blanket lien on all real estate loans. Our secured borrowing capacity with the FHLB
totaled $1.99 billion based on qualifying loans with an aggregate unpaid principal balance of $2.96 billion as of that date. The
Bank has additional borrowing capacity with the FHLB of $162.4 million based on investment securities pledged with a
carrying value of $214.4 million. As of December 31, 2022, the available secured borrowings from FHLB totaled $1.06 billion.
In June 2020, we repaid early a $100.0 million FHLB term advance with an interest rate of 2.07% and incurred a $2.5 million
debt extinguishment fee that is included in other noninterest expense in the consolidated statements of operations. Additionally,
in June 2020 we refinanced $111.0 million of our term advances into lower market interest rates.
The Bank’s investment in capital stock of the FHLB of San Francisco totaled $22.6 million and $17.3 million at December 31,
2022 and 2021.
The following table presents financial data of FHLB advances as of the dates or for the periods indicated:
($ in thousands)
Weighted-average interest rate at end of year
Average interest rate during the year
Average balance
Maximum amount outstanding at any month-end
Balance at end of year(1)
As of or For the Year Ended December 31,
2022
2021
2020
3.02 %
2.87 %
2.19 %
2.82 %
2.15 %
2.41 %
$
$
$
528,590
771,000
731,000
$
$
$
426,875
641,000
481,000
$
$
$
749,195
1,210,000
546,000
(1) Excludes $3.7 million, $4.9 million and $6.2 million of unamortized debt issuance costs at December 31, 2022, 2021 and 2020.
FRB Advances
At December 31, 2022 and 2021, the Bank had borrowing capacity with the FRBSF of $949.1 million and $455.4 million,
including the secured borrowing capacity through the Federal Reserve Discount Window and BIC program. Borrowings under
125
the BIC program are overnight advances with interest chargeable at the discount window (“primary credit”) borrowing rate. At
December 31, 2022, the Bank had pledged certain qualifying loans with an unpaid principal balance of $1.31 billion and
securities with a carrying value of $122.6 million as collateral for these secured lines of credit. At December 31, 2021, the Bank
had pledged certain qualifying loans with an unpaid principal balance of $813.8 million and securities with a carrying value of
$8.9 million as collateral for these secured lines of credit.
There were no borrowings from the Federal Reserve Discount Window and no borrowings under the BIC program for the years
ended December 31, 2022 and 2021.
The Bank’s investment in capital stock of the Federal Reserve totaled $34.5 million and $27.3 million at December 31, 2022
and 2021.
Other Borrowings
The Bank maintained available unsecured federal funds lines with five correspondent banks totaling $210.0 million, with no
outstanding borrowings at December 31, 2022 and 2021. The Bank also has the ability to access unsecured overnight
borrowings from various financial institutions through the AFX platform. The availability of such unsecured borrowings
fluctuates regularly and are subject to the counterparties discretion and totaled $445.0 million and $441.0 million at
December 31, 2022 and 2021. Borrowings under the AFX totaled zero and $25.0 million at December 31, 2022 and 2021.
In December 2021, the holding company entered into a $50.0 million revolving line of credit, which was renewed in December
2022. The line of credit matures on December 18, 2023 and is subject to certain operational and financial covenants. We have
the option to select paying interest using either (i) Prime Rate or (ii) SOFR + 1.85% and are subject to an unused commitment
fee of 0.40% per annum. There were no borrowings outstanding under this line of credit at December 31, 2022 and 2021, and
we were in compliance with all covenants.
The Bank also maintained repurchase agreements and had no outstanding securities sold under such agreements at
December 31, 2022 and 2021. Availabilities and terms on repurchase agreements are subject to the counterparties' discretion
and the pledging of additional investment securities.
NOTE 12 – LONG-TERM DEBT
The following table presents our long-term debt as of the dates indicated:
Interest Rate
Maturity
Date
Par Value
December 31,
2022
2021
Unamortized
Debt
Issuance
Cost and
Discount
Par Value
Unamortized
Debt
Issuance
Cost and
Discount
5.250%
4.375%
LIBOR +
3.40%
LIBOR +
2.00%
4/15/2025
$
175,000 $
(722) $
175,000 $
10/30/2030
85,000
(1,899)
85,000
9/26/2032
7,217
10/8/2034
10,310
—
—
7,217
10,310
(1,014)
(2,127)
—
—
$
277,527 $
(2,621) $
277,527 $
(3,141)
($ in thousands)
Senior notes
Subordinated notes
PMB Statutory Trust III, junior
subordinated debentures
PMB Capital Trust III, junior
subordinated debentures
Total
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 the 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
maturity 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 date of redemption.
The Senior Notes were issued under the Senior Debt Securities Indenture, dated as of April 23, 2012 (the “Senior Notes Base
Indenture”), as supplemented by the Second Supplemental Indenture dated as of April 6, 2015 (the “Senior Notes Supplemental
Indenture” and together with the “Senior Notes Base Indenture”, the “Senior Notes Indenture”). The Senior Notes Indenture
contains several covenants which, among other things, restrict our ability and the ability of our subsidiaries to dispose of or
126
incur liens on the voting stock of certain subsidiaries and also contains customary events of default. We were in compliance
with all covenants under the Senior Notes Indenture at December 31, 2022.
Subordinated Notes
On October 30, 2020, we completed the issuance and sale of $85.0 million aggregate principal amount of our 4.375% fixed-to-
floating rate subordinated notes due October 30, 2030 (the “Subordinated Notes”). Net proceeds after debt issuance costs were
approximately $82.6 million.
The Subordinated Notes are unsecured debt obligations and subordinated to our present and future Senior Debt (as defined in
the Subordinated Notes Indenture (as defined below)) and subordinated to all of our subsidiaries’ present and future
indebtedness and other obligations. The Subordinated Notes bear interest at an initial fixed rate of 4.375% per annum, payable
semi-annually in arrears. From and including October 30, 2025 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-Month Term SOFR, plus a spread of 419.5 basis points, payable quarterly in arrears.
We may, at our option, redeem the Subordinated Notes in whole or in part on October 30, 2025 and on any interest payment
date thereafter. We may also, at our option, redeem the Subordinated Notes at any time, including prior to October 30, 2025, in
whole but not in part, upon the occurrence of certain events. Any redemption of the Subordinated Notes will be subject to
obtaining the prior approval of the FRB to the extent then required under the rules of the FRB, and will be at a redemption price
equal to 100% of the principal amount of the Subordinated Notes plus any accrued and unpaid interest to, but excluding, the
redemption date.
The Subordinated Notes were issued under the Subordinated Debt Securities Indenture, dated as of October 30, 2020 (the
“Subordinated Notes Base Indenture”), as supplemented by the Supplemental Indenture relating to the Subordinated Notes,
dated as of October 30, 2020 (the “Subordinated Notes Supplemental Indenture,” and together with the Subordinated Notes
Base Indenture, the “Subordinated Notes Indenture”). The Subordinated Notes Indenture contains several covenants and
customary events of default. We were in compliance with all covenants under the Subordinated Notes Indenture at
December 31, 2022.
Junior Subordinated Debentures
In connection with the PMB Acquisition, we assumed PMB's junior subordinated debentures. PMB had previously formed two
grantor trusts to sell and issue to institutional investors floating rate trust preferred securities (“trust preferred securities”). The
net proceeds from the sales of the trust preferred securities were used in exchange for PMB's issuance to the grantor trusts of
PMB's junior subordinated floating rate debentures (the “Debentures”). The payment terms of the Debentures are used by the
grantor trusts to make the payments that come due to the holders of the trust preferred securities pursuant to the terms of those
securities. The Debentures also were pledged by the grantor trusts as security for the payment obligations of the grantor trusts
under the trust preferred securities.
These Debentures require quarterly interest payments, which are used to make quarterly distributions required to be paid on the
corresponding trust preferred securities. Subject to certain conditions, we have the right, at our discretion, to defer those interest
payments, and the corresponding distributions on the trust preferred securities, for up to five years. Exercise of this deferral
right does not constitute a default of our obligations to pay the interest on the Debentures or the corresponding distributions that
are payable on the trust preferred securities. As of December 31, 2022, we were current on all interest payments. Any
redemption of the securities will be subject to obtaining the prior approval of the FRB to the extent then required under the rules
of the FRB.
127
NOTE 13 – INCOME TAXES
The following table presents the components of income tax expense of continuing operations for the periods indicated:
($ in thousands)
Current income taxes:
Federal
State
Total current income tax expense
Deferred income taxes:
Federal
State
Total deferred income tax expense (benefit)
Income tax expense
Year Ended December 31,
2022
2021
2020
$
13,290 $
7,966 $
15,577
28,867
17,992
1,086
19,078
6,466
14,432
4,950
894
5,844
$
47,945 $
20,276 $
7,332
3,713
11,045
(5,663)
(3,596)
(9,259)
1,786
The following table presents a reconciliation of the recorded income tax expense of continuing operations to the amount of
taxes computed by applying the applicable statutory Federal income tax rate of 21.0% to income from continuing operations
before income taxes for the years ended December 31, 2022, 2021, and 2020:
Computed expected income tax expense at Federal statutory rate
21.0 %
21.0 %
21.0 %
Year Ended December 31,
2022
2021
2020
Increase (decrease) resulting from:
Proportional amortization
Income tax credits (investment tax credits and other)
Other permanent book-tax differences
State tax expense, net of federal benefit
Bank owned life insurance policies
Equity compensation (windfall) shortfall tax impact
Reserve for uncertain tax positions
Other, net
Effective tax rates
2.2 %
(2.8) %
0.5 %
7.8 %
(0.4) %
(0.1) %
— %
0.2 %
28.4 %
4.3 %
(5.5) %
0.9 %
7.0 %
(0.7) %
(2.2) %
— %
(0.3) %
24.5 %
24.1 %
(30.6) %
1.9 %
0.6 %
(3.6) %
2.2 %
(0.9) %
(2.3) %
12.4 %
Our effective tax rate for the year ended December 31, 2022 was higher than the effective tax rate for the year ended
December 31, 2021 due mainly to (i) higher pre-tax income and (ii) lower tax benefit from share-based awards of $2.3 million,
primarily from 2021 including a $2.5 million tax benefit from share-based awards, including the exercise of all previously
issued outstanding stock appreciation rights.
Our effective tax rate for the year ended December 31, 2021 was higher than the effective tax rate for the year ended
December 31, 2020 due mainly to (i) higher pre-tax income, and (ii) lower net tax effects of our qualified affordable housing
partnerships, offset by (iii) higher tax benefit from share-based awards of $2.5 million, primarily from the exercise of all
previously issued outstanding stock appreciation rights in 2021.
At December 31, 2022, we had available gross unused federal NOL carryforwards of $346 thousand that may be applied
against future taxable income through 2031. At December 31, 2022, we had available gross unused state NOL carryforwards of
$24.6 million that may be applied against future taxable income through 2036. Utilization of these NOL carryforwards are
subject to annual limitations set forth in Section 382 of the U.S. Internal Revenue Code.
In addition, as of December 31, 2022 and 2021, we had income tax credit carryforwards of $2.5 million and $23.0 million.
These tax credits, if unused, will expire in 2042.
128
The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets
and deferred tax liabilities as of the dates indicated:
($ in thousands)
Deferred tax assets:
Allowance for loan losses
Stock-based compensation expense
Accrued expenses
Loan repurchase reserve
Federal net operating losses
State net operating losses
Federal income tax credits
Unrealized loss on securities available-for-sale
Deferred loan fees
Prior year state tax deduction
Lease liability
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on securities available-for-sale
Investments in partnerships
Mortgage servicing rights
Amortization of intangible assets
Deferred loan costs
Depreciation on premises and equipment
Right of use asset
Other deferred tax liabilities
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
December 31,
2022
2021
$
27,207 $
29,746
1,427
3,180
864
73
1,950
2,452
16,488
1,580
3,155
9,577
4,810
72,763
—
(2,130)
(165)
(78)
(5,100)
(6,336)
(8,322)
(114)
(22,245)
—
$
50,518 $
1,181
6,198
1,256
172
2,762
23,045
—
1,692
1,648
11,752
4,897
84,349
(3,172)
(8,857)
(130)
(47)
(4,577)
(4,916)
(10,240)
(1,636)
(33,575)
—
50,774
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: (i) future reversal of existing taxable temporary differences, (ii) future taxable
income exclusive of reversing temporary differences and carryforwards, (iii) taxable income in prior carryback year(s), and (iv)
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 at
December 31, 2022 and 2021.
We believe that our future reversing taxable temporary differences, our ability to utilize tax credits, and our projection of future
taxable income should be considered significant positive evidence that the deferred tax assets for income tax credits will be
realized in future periods prior to their expiration dates.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It
prescribes a threshold and a measurement process for recognizing 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 $816 thousand and $925 thousand at
December 31, 2022 and 2021. We do not believe that the unrecognized tax benefits will change materially within the next
twelve months. As of December 31, 2022, the total unrecognized tax benefit that, if recognized, would impact the effective tax
rate was $599 thousand.
129
At December 31, 2022 and 2021, we had no accrued interest or penalties, respectively. The table below summarizes the activity
related to our unrecognized tax benefits for the periods indicated:
($ in thousands)
Beginning balance
Decrease related to prior year tax positions
Increase in current year tax positions
Decrease related to lapsing of statute of limitations
Ending balance
Year Ended December 31,
2022
2021
2020
925 $
924 $
(60)
—
(49)
(59)
60
—
816 $
925 $
977
(6)
120
(167)
924
$
$
In the event we are assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified on 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. The statute of limitations for
examination by U.S. federal taxing authorities has expired for tax 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).
We account for low income housing tax credit investments under the proportional amortization method. The aggregate funding
commitment in these investments totaled $73.0 million and the unfunded portion was $17.5 million as of December 31, 2022.
The carrying value of these investments was $45.7 million and $39.0 million at December 31, 2022 and 2021. The proportional
amortization of these investments amounted to $4.9 million, $4.2 million and $5.3 million for the years ended December 31,
2022, 2021 and 2020. The tax deduction from these investments totaled $4.8 million, $3.7 million and $7.2 million in 2022,
2021 and 2020. The unused tax credit carryforwards for these investments totaled $2.3 million and $13.2 million as of
December 31, 2022 and 2021. For additional information on qualified affordable housing investments, see Note 20 — Variable
Interest Entities.
NOTE 14 – LOAN REPURCHASE RESERVE
The following table presents a summary of activity in the loan repurchase reserve for the periods indicated:
($ in thousands)
Balance at beginning of year
Subsequent change in the reserve
Utilization of reserve for loan repurchases
Balance at end of year
Year Ended December 31,
2022
2021
2020
$
$
4,348 $
5,515 $
(1,004)
(355)
(948)
(219)
2,989 $
4,348 $
6,201
(686)
—
5,515
We believe that our obligations for loan repurchases or loss reimbursements were adequately reserved for at December 31,
2022.
NOTE 15 – 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 to certain loan clients to allow
them to hedge the risk of rising interest rates on their variable rate loans. Refer to Note 1 — Significant Accounting Policies for
additional information on our derivative instruments.
During the years ended December 31, 2022, 2021 and 2020, changes in fair value of interest rate swaps on loans and foreign
exchange contracts were a net gain (loss) of $216 thousand, $295 thousand, and $(200) thousand, and were included in other
income on the consolidated statements of operations.
The following table presents the notional amount and fair value of our derivative instruments included in the consolidated
statements of financial condition as of the dates indicated. Note 3 — Fair Values of Financial Instruments contains further
disclosures pertaining to the fair value of derivatives.
130
($ in thousands)
Derivative assets:
Interest rate swaps on loans
Foreign exchange contracts
Total included in assets
Derivative liabilities:
Interest rate swaps on loans
Foreign exchange contracts
Total included in liabilities
December 31,
2022
2021
Notional
Amount
Fair Value (1)
Notional
Amount
Fair Value (1)
$
$
$
$
33,694 $
2,134 $
58,834 $
5,885
158
4,725
39,579 $
2,292 $
63,559 $
33,694 $
2,107 $
58,834 $
5,885
144
4,725
39,579 $
2,251 $
63,559 $
3,390
175
3,565
3,594
146
3,740
(1) The fair value of interest rate swaps on loans and foreign exchange contracts are included in 'other assets' and 'accrued expenses and
other liabilities', respectively, in the accompanying consolidated statements of financial condition.
We have entered into agreements with counterparty financial institutions, which include master netting agreements that provide
for the net settlement of all contracts with a single counterparty in the event of default. We elect, however, to account for all
derivatives with counterparty institutions on a gross basis.
NOTE 16 – 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 December 31, 2022,
2,131,185 shares were available for future awards under the 2018 Omnibus Plan.
Stock-based Compensation Expense
The following table presents total stock-based compensation expense and the related tax benefits for the periods indicated:
($ in thousands)
Restricted stock awards and units
Stock options
Total stock-based compensation expense
Related tax benefits
Year Ended December 31,
2022
2021
2020
6,197
—
6,197 $
1,790 $
5,295
—
5,295 $
1,530 $
5,777
4
5,781
1,703
$
$
Total stock-based compensation expense represents the cost of service-based restricted stock units, performance-based
restricted stock awards and awards with market conditions. At December 31, 2022, unrecognized stock-based compensation
expense related to restricted stock awards and restricted stock units totaled $11.9 million and will be recognized over a
weighted average remaining period of 2.7 years.
131
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 actual amounts of stock released upon vesting will be
determined by the Compensation Committee 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.
The following table presents unvested restricted stock awards and restricted stock units activity for the periods indicated:
Year Ended December 31,
2022
2021
2020
Number
of Shares
Weighted-
Average
Price per
Share
Number
of Shares
Weighted-
Average
Price per
Share
Number
of Shares
Weighted-
Average
Price per
Share
649,010 $
1,073,888 $
(276,863) $
(42,790) $
1,403,245 $
17.17
13.67
16.24
17.86
14.68
848,302 $
297,592 $
(388,387) $
(108,497) $
649,010 $
14.42
19.88
14.01
14.40
17.17
923,482 $
358,593 $
(331,998) $
(101,775) $
848,302 $
15.74
13.85
15.83
15.43
14.42
Outstanding at beginning of year
Granted (1)
Vested (2)
Forfeited (3)
Outstanding at end of year
(1) There were 782,451, 66,472 and 78,771 performance stock units included in shares granted for the years ended December 31, 2022,
2021 and 2020.
(2) There were 42,440, 77,327 and 18,473 performance stock units included in vested shares for the years ended December 31, 2022, 2021
and 2020.
(3) There were 9,428, 48,803 and 24,242 performance stock units included in forfeited shares for the years ended December 31, 2022, 2021
and 2020.
Performance stock units granted in the year ended December 31, 2022 included 713,326 shares which will be issued upon
achievement of both (a) our common stock achieving a twenty-day volume-weighted average price of $35 per share within four
years from the date of grant, and (b) the grantees' continued service through the fourth anniversary of the grants. Compensation
expense to be recognized over the expected life of this grant totaled $6.0 million, of which $5.2 million was unrecognized as of
December 31, 2022.
Stock Options
We have issued stock options to certain employees, officers, and directors. Stock options are issued at the closing market price
immediately before the grant date and generally have a three to five year vesting period and contractual terms of seven to ten
years. We recognize an income tax deduction upon exercise of a stock option to the extent taxable income is recognized by the
option holder. In the case of a non-qualified stock option, the option holder recognizes taxable income based on the fair market
value of the shares acquired at the time of exercise less the exercise price. There were no stock options granted during the years
ended December 31, 2022, 2021 and 2020.
The following tables represents stock option activity for periods indicated:
($ in thousands, except per share data)
Fair value of options vested
Total intrinsic value of options exercised
Cash received from options exercised
Year Ended December 31,
2022
2021
2020
$
$
$
— $
— $
— $
— $
191 $
300 $
8
29
—
132
The following table represents vested stock option activity and weighted-average exercise price per share at and for the periods
indicated:
Year Ended December 31,
2022
2021
2020
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Number
of Shares
Number
of Shares
Outstanding at beginning of year
14,904 $
13.05
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
— $
— $
14,904 $
14,904 $
—
—
13.05
13.05
55,069 $
(40,165) $
— $
14,904 $
14,904 $
13.96
14.30
—
13.05
13.05
62,521 $
(7,452) $
— $
55,069 $
55,069 $
13.85
13.05
—
13.96
13.96
The following table represents changes in unvested stock options and related information at and for the periods indicated:
Year Ended December 31,
2022
2021
2020
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Number
of Shares
Number
of Shares
— $
— $
— $
—
—
—
— $
— $
— $
—
—
—
2,248 $
(2,248) $
— $
13.75
13.75
—
Outstanding at beginning of year
Vested
Outstanding at end of year
The following table presents a summary of stock options outstanding as of December 31, 2022:
($ in thousands)
Number
of Shares
Intrinsic
Value
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Remaining
Contractual
Life
Options Outstanding and Exercisable
3,672
11,232
14,904 $
18 $
24 $
43 $
10.90
13.75
13.05
1.5 years
2.5 years
2.3 years
$10.90 to $12.33
$12.34 to $13.75
Total
133
Stock Appreciation Rights
On August 21, 2012, we granted to the then, and now former, chief executive officer, ten-year stock appreciation rights
(“SARs”), which were fully exercised during the first quarter of 2021 resulting in the issuance of 305,772 shares of voting
common stock. In connection with the exercise of the SARs, we recognized a tax benefit of $2.1 million (refer to Note 13 -
Income Taxes). There are no outstanding SARs at December 31, 2022 and 2021. The following table represents SARs activity
and the weighted average exercise price per share as of and for the periods indicated:
Year Ended December 31,
2022
2021
2020
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Number
of Shares
Number
of Shares
— $
— $
— $
— $
—
—
—
—
1,559,012 $
(1,559,012) $
— $
— $
11.60
11.60
—
—
1,559,012 $
11.60
— $
1,559,012 $
1,559,012 $
—
11.60
11.60
Outstanding at beginning of year
Exercised
Outstanding at end of year
Exercisable at end of year
NOTE 17 – EMPLOYEE BENEFIT PLANS
We have a 401(k) plan (the 401(k) Plan) whereby all employees may participate. Employees may contribute up to 100% of
their compensation subject to certain limits based on federal tax laws. We make an enhanced safe-harbor matching contribution
equal to 100% of the first 4% of the employee’s deferral rate not to exceed 4% of the employee’s compensation. The safe-
harbor matching contribution is fully vested by the participant when made.
For the years ended December 31, 2022, 2021 and 2020, expense attributable to our 401(k) plan amounted to $2.8 million, $2.3
million and $2.1 million.
NOTE 18 – STOCKHOLDERS’ EQUITY
Preferred Stock
We are authorized to issue 50,000,000 shares of preferred stock with par value of $0.01 per share. Preferred shares rank senior
to common shares both as to dividends and liquidation preference but generally have no voting rights. All of our shares of
preferred stock have a $1,000 per share liquidation preference, and there were no preferred shares outstanding at December 31,
2022. The following table presents our outstanding preferred stock as of the dates indicated:
December 31,
2022
2021
Shares
Authorized
and
Outstanding
Liquidation
Preference
Carrying
Value
Shares
Authorized
and
Outstanding
Liquidation
Preference
Carrying
Value
—
— $
—
— $
—
—
98,702
98,702
98,702 $
98,702 $
94,956
94,956
($ in thousands)
Series E
7.00% non-cumulative perpetual
Total
134
During recent years, we repurchased and redeemed Series D and Series E Depositary Shares, each representing a 1/40th interest
in a share of Series D and Series E Preferred Stock. When the consideration paid to repurchase or redeem depositary shares
exceeds such depositary shares' carrying value, the difference reduces net income allocated to common stockholders. When the
consideration paid to repurchase depositary shares is less than such depositary shares' carrying value, the difference increases
net income allocated to common stockholders. Redemptions of depositary shares are typically at par value. The following table
summarizes repurchases and redemptions of these depositary shares during the periods indicated:
($ in thousands)
Series D Preferred Stock:
Depositary shares repurchased or redeemed
Preferred Stock retired (shares)
Consideration paid
Carrying value
Impact of preferred stock redemption - Series D Preferred Stock (1)
Series E Preferred Stock:
Depositary shares repurchased or redeemed
Preferred Stock retired (shares)
Consideration paid
Carrying value
Impact of preferred stock redemption - Series E Preferred Stock (1)
Total impact of preferred stock redemption (1)
Year Ended December 31,
2022
2021
2020
—
—
3,730,767
93,269
— $
93,269 $
—
— $
89,922
3,347 $
3,948,080
98,702
98,703 $
94,956
3,747 $
3,747 $
—
—
— $
—
— $
3,347 $
$
$
$
$
$
134,410
3,360
2,698
3,240
(541)
70,967
1,774
1,680
1,707
(27)
(568)
(1) Impact of redemption includes both shares repurchased in the open market at a premium or discount and shares
redeemed at par on an eligible call date.
Series D Preferred Stock
During the first quarter of 2021, we redeemed all of our outstanding Series D Depositary Shares, resulting in an impact of
preferred stock redemption of $3.3 million in the accompanying consolidated statements of operations.
Series E Preferred Stock
During the first quarter of 2022, we redeemed all of our outstanding Series E Depositary Shares, resulting in an impact of
preferred stock redemption of $3.7 million in the accompanying consolidated statements of operations.
Common Share Repurchase Program
On March 15, 2022, we announced our Board of Directors authorized the repurchase of up to $75 million of our common stock.
Purchases were authorized to 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 depended on a variety of factors including
price, trading volume, corporate and regulatory requirements and market conditions.
During the year ended December 31, 2022, we completed the authorized common stock repurchase program, with repurchases
of 4,212,882 shares at a weighted average price of $17.80, or $74,995,368. The repurchased shares represent approximately 7%
of the shares outstanding at the time this program was authorized.
On February 10, 2020, we announced that our Board of Directors authorized the repurchase of up to $45 million of our
common stock. This repurchase authorization expired on February 10, 2021. There were no repurchases of common shares
during the year ended December 31, 2021. During the year ended December 31, 2020, we repurchased 827,584 shares of
common stock at a weighted average price of $14.50 per share and an aggregate amount of $12.0 million. Purchases were
authorized to be made in open-market transactions, in block transactions on or off an exchange, in privately negotiated
transactions, or by other means as determined by our management and in accordance with the regulations of the Securities and
Exchange Commission. The timing of purchases and the number of shares repurchased under the program depended on a
variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions.
135
Change in Accumulated Other Comprehensive Income (Loss)
Our AOCI includes unrealized gain (loss) on securities available-for-sale. Changes to AOCI are presented net of the tax effect
as a component of stockholders' equity. Reclassifications from AOCI occur when a security is sold, called or matures and are
recorded on the consolidated statements of operations either as a gain or loss. The following table presents changes to AOCI for
the periods indicated:
($ in thousands)
Unrealized (loss) gain on securities available-for -sale
Balance at beginning of period
Unrealized (loss) gain on securities available-for-sale:
Unrealized (loss) gain arising during the period
Reclassification adjustment from other comprehensive income
Total unrealized (loss) gain on securities available-for-sale
Amortization of unrealized loss of available-for-sale securities transferred to held-to-
maturity
Tax effect of current period changes
Total changes, net of taxes
Balance at end of period
Year Ended December 31,
2022
2021
2020
$
7,743 $
7,746 $
(11,900)
(76,556)
7,692
(68,864)
860
19,664
(48,340)
(7)
—
(7)
—
4
(3)
29,867
(2,011)
27,856
—
(8,210)
19,646
$
(40,597) $
7,743 $
7,746
NOTE 19 – REGULATORY CAPITAL MATTERS
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital
adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-
balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as
of December 31, 2022, the Company and the Bank met all capital adequacy requirements to which they were then subject. With
respect to the Bank, prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent
overall financial condition. Depending on the regulatory capital levels, banks are subject to limitations such as requiring
regulatory approval to accept brokered deposits if an institution is only adequately capitalized or limiting capital distributions or
asset growth and expansion and requiring a capital restoration plan if an institution is undercapitalized. At December 31, 2022,
the most recent regulatory notification categorized the Bank as well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification that management believes would have changed our
classification.
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Company and the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses. Inclusive of the fully phased-in capital conservation buffer, the CET1, Tier 1 risk-based capital and total
risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively.
136
The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of the dates indicated:
Minimum Capital
Requirements
Minimum Required to Be Well-
Capitalized Under Prompt
Corrective Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
($ in thousands)
December 31, 2022
Banc of California, Inc.
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
Banc of California, NA
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
December 31, 2021
Banc of California, Inc.
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
Banc of California, NA
$ 1,069,180
14.21 % $
601,941
887,717
887,717
887,717
11.80 %
451,456
11.80 %
338,592
9.70 %
365,892
8.00 %
6.00 %
4.50 %
4.00 %
$ 1,201,884
16.02 % $
600,116
8.00 % $
1,121,049
1,121,049
1,121,049
14.94 %
450,087
14.94 %
337,565
12.25 %
365,989
6.00 %
4.50 %
4.00 %
$ 1,140,480
14.98 % $
609,062
955,747
860,841
955,747
12.55 %
456,796
11.31 %
342,597
10.37 %
368,610
8.00 %
6.00 %
4.50 %
4.00 %
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
$ 1,195,050
15.71 % $
608,740
8.00 % $
1,110,767
1,110,767
1,110,767
14.60 %
456,555
14.60 %
342,416
12.06 %
368,306
6.00 %
4.50 %
4.00 %
N/A
N/A
N/A
N/A
750,145
600,116
487,594
457,486
N/A
N/A
N/A
N/A
760,925
608,740
494,601
460,382
N/A
N/A
N/A
N/A
10.00 %
8.00 %
6.50 %
5.00 %
N/A
N/A
N/A
N/A
10.00 %
8.00 %
6.50 %
5.00 %
Dividend Restrictions
Payment of dividends by the Company is 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 paid to us 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 below, any near term dividend by the Bank will
require OCC approval. During the year ended December 31, 2022, the Bank paid $126.0 million in dividends to Banc of
California, Inc.
During the years ended December 31, 2022, 2021 and 2020, we declared and paid dividends on our common stock of $0.24 per
share, representing a quarterly dividend of $0.06 per share. During the years ended December 31, 2022, 2021 and 2020, we paid
common stock dividends of $14.5 million, $12.8 million and $11.8 million. In addition to our common stock dividends, during
the years ended December 31, 2022, 2021 and 2020, we paid preferred stock dividends of $1.7 million, $8.3 million and
$13.9 million.
137
NOTE 20 – 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 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 Topic 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 Topic 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 $21.4 million and $25.9 million at December 31, 2022 and 2021.
The following table presents information regarding activity in our alternative energy partnerships for the periods indicated:
($ in thousands)
Fundings
Return of capital
(Loss) gain on investments in alternative energy partnerships
Tax (benefit) expense recognized from HLBV application
Year Ended December 31,
2022
2021
2020
$
— $
— $
2,165
(2,313)
(668)
2,293
204
59
3,631
2,094
365
45
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)
Cash
Equipment, net of depreciation
Other assets
Total unconsolidated assets
Total unconsolidated liabilities
Maximum loss exposure
December 31,
2022
December 31,
2021
$
$
$
$
4,110 $
237,641
9,838
251,589 $
11,679 $
21,410 $
4,227
246,421
9,098
259,746
12,129
25,888
138
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 $21.4 million, which is our recorded investment amount at December 31, 2022.
We believe that the loss exposure on our investments is reduced considering our return on investment is provided by the cash
flows of the underlying client leases and power purchase agreements, and also through significant tax benefits, including the
federal tax credit carryover that resulted from the investments. In addition, our exposure is further limited as the arrangements
include a transition manager to support any transition of the solar company sponsor, whose role includes that of the servicer and
operation and maintenance provider, in the event the sponsor would be required to be removed from its responsibilities (e.g.,
bankruptcy, breach of contract, etc.).
Qualified Affordable Housing Partnerships - Low Income Housing Tax Credits
We invest in limited partnerships that operate qualified affordable housing projects that qualify for low income housing tax
credits. The returns on these investments are generated primarily through allocated federal tax credits and other tax benefits. In
addition, LIHTC investments contribute to our compliance with the Community Reinvestment Act. These limited partnerships
are considered to be VIEs, because either (i) they do not have sufficient equity investment at risk or (ii) the limited partners with
equity at risk do not have substantive kick-out rights through voting rights or substantive participating rights over the general
partner. As a limited partner, we are not the primary beneficiary because the general partner has the ability to direct the
activities of the VIEs that most significantly impact their economic performance. As a result, we do not consolidate these
partnerships.
The following table presents information regarding balances in LIHTC investments for the periods indicated:
($ in thousands)
Ending balance(1)
Aggregate funding commitment
Total amount funded
Unfunded commitment
Maximum loss exposure
December 31,
2022
December 31,
2021
$
45,726 $
72,967
55,487
17,480
45,726
38,982
61,278
51,014
10,264
38,982
(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:
($ in thousands)
Fundings
Proportional amortization recognized
Income tax credits recognized
Other CRA Investments
Year Ended December 31,
2022
2021
2020
$
4,473 $
8,023 $
16,086
4,945
5,081
4,227
4,604
5,253
4,300
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 $85.0
million and $77.6 million at December 31, 2022 and 2021.
CRA investments that are accounted for under the equity method investments consist primarily of investments in small business
investment companies (SBICs) and limited partnerships which provide affordable housing where 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 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
139
certificates to investors. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance
with ASC Topic 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 December 31, 2022, remaining
unpaid principal balance on the securitization totaled $114.9 million and we have a $2.0 million repurchase reserve related to
this VIE.
Capital Trusts - Trust Preferred Securities
In connection with the PMB Acquisition, 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 12 - Long-term Debt). We are not the
primary beneficiary, and consequently, these grantor trusts are not consolidated in the consolidated financial statements. At
December 31, 2022 and 2021, our investment in these grantor trusts, which is included in other assets in the consolidated
statements of financial condition, totaled $527 thousand.
NOTE 21 – EARNINGS (LOSS) PER COMMON SHARE
The following table presents computations of basic and diluted EPS for the periods indicated:
($ in thousands, except per share data)
Income from continuing operations
Less: income allocated to participating securities
Less: participating securities dividends
Less: preferred stock dividends
Less: impact of preferred stock redemption
Net income (loss) allocated to common
stockholders
Weighted-average common shares outstanding -
basic
Add: Dilutive effects of restricted stock units
Add: Dilutive effects of stock options
Weighted-average common shares outstanding -
diluted
Earnings (loss) per common share:
Year Ended December 31,
2022
2021
2020
Common
Stock
Class B
Common
Stock
Common
Stock
Class B
Common
Stock
Common
Stock
Class B
Common
Stock
$ 119,990 $
949 $
61,785 $
561 $
12,454 $
120
—
—
(1,409)
(3,718)
—
—
(11)
(29)
(113)
—
(8,247)
(3,317)
(1)
—
(75)
(30)
—
(372)
(13,737)
563
—
(4)
(132)
5
$ 114,863 $
909 $
50,108 $
455 $
(1,092) $
(11)
60,324,761
477,321
52,573,659
477,321
49,704,775
477,321
368,952
4,074
—
—
246,556
5,390
—
—
—
—
—
—
60,697,787
477,321
52,825,605
477,321
49,704,775
477,321
Basic
Diluted
$
$
1.90 $
1.89 $
1.90 $
1.90 $
0.95 $
0.95 $
0.95 $
(0.02) $
0.95 $
(0.02) $
(0.02)
(0.02)
For the years ended December 31, 2022, 2021, and 2020, there were 10,897, 73,199, and 918,188 restricted stock units that
were not considered in computing diluted earnings (loss) per common share, because they were anti-dilutive. There were no
anti-dilutive stock options for the years ended December 31, 2022 and 2021. For the year ended December 31, 2020, there were
55,252 stock options that were not considered in computing diluted earnings (loss) per common share, because they were anti-
dilutive.
140
NOTE 22 – LOAN COMMITMENTS AND OTHER 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:
($ in thousands)
Commitments to extend credit
Unused lines of credit
Letters of credit
Other Commitments
December 31,
2022
2021
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
$
50,193 $
180,696 $
37,107 $
136,921
8,392
2,461
1,505,122
7,016
6,894
2,553
1,699,933
5,617
At December 31, 2022, we had unfunded commitments of $17.5 million, $8.6 million, and $5.8 million for LIHTC investments,
SBIC investments, and other qualified affordable housing investments, respectively. At December 31, 2021, we had unfunded
commitments of $10.3 million, $7.1 million and $5.0 million for LIHTC investments, SBIC investments, and other qualified
affordable housing investments, respectively.
NOTE 23 - REVENUE RECOGNITION
The following presents noninterest income, segregated by revenue streams, in-scope and out-of-scope of Topic 606 - Revenue
From Contracts With Customers, for the periods indicated:
($ in thousands)
Noninterest income
In scope of Topic 606
Deposit service fees
Debit card fees
Other
Noninterest income (in-scope of Topic 606)
Noninterest income (out-of-scope of Topic 606)
Total noninterest income
Year Ended December 31,
2021
2020
2022
$
$
6,033 $
1,910
1,115
9,058
8,292
17,350 $
3,728 $
1,760
476
5,964
13,412
19,376 $
2,264
1,325
220
3,809
15,061
18,870
Revenue considered to be within the scope of Topic 606 are discussed below.
Deposit Service Fees
Service charges on deposit accounts consist of account analysis fees, monthly service fees, check orders, and other deposit
related fees. Our performance obligation for account analysis fees and monthly service fees is generally satisfied, and the
related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related
fees are largely transactional based, and therefore, our performance obligation is satisfied, and related revenue recognized, at a
point in time as incurred.
Debit Card Fees
When clients use their debit cards to pay merchants for goods or services, we retain a fee from the funds collected from the
related deposit account and transfer the remaining funds to the payment network for remittance to the merchant. The
performance obligation to the merchant is satisfied and the fee is recognized at the point in time when the funds are collected
and transferred to the payment network.
141
Other
Other noninterest income in scope of ASC 606 primarily consists of other recurring revenue streams including merchant
referral commissions and merchant processing revenue net of interchange and other direct expenses.
Gains and Losses on Sales of OREO
Net gains (losses) on sales of OREO totaling zero, $410 thousand and $(38) thousand for the years ended December 31, 2022,
2021 and 2020 are included in other noninterest expense. Our performance obligation for sale of OREO is the transfer of title
and ownership rights of the OREO to the buyer, which occurs at the settlement date when the sale proceeds are received and
income is recognized.
We do not typically enter into long-term revenue contracts with clients. As of December 31, 2022 and 2021, we did not have
any significant contract balances. As of December 31, 2022 and 2021, we did not capitalize any revenue contract acquisition
costs.
NOTE 24 – PARENT COMPANY FINANCIAL STATEMENTS
The parent company only condensed statements of financial condition as of December 31, 2022 and 2021, and the related
condensed statements of operations and condensed statements of cash flows for the years ended December 31, 2022, 2021, and
2020 are presented below:
Condensed Statements of Financial Condition
($ in thousands)
Cash and cash equivalents
Other assets
Investment in subsidiaries
Total assets
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt, net
Accrued expenses and other liabilities
Stockholders’ equity
December 31,
2022
2021
$
$
$
25,897 $
22,813
1,191,951
98,851
29,688
1,220,368
1,240,661 $
1,348,907
274,906 $
6,137
959,618
274,386
9,231
1,065,290
Total liabilities and stockholders’ equity
$
1,240,661 $
1,348,907
Condensed Statements of Operations
($ in thousands)
Income
Dividends from subsidiaries
Legal settlement income
Other operating income
Total income
Expenses
Interest expense for notes payable and other borrowings
Other operating expense
Total expenses
Income before income taxes and undistributed earnings of subsidiaries
Income tax benefit
Income before undistributed earnings of subsidiaries
Undistributed (dividends in excess of) earnings of subsidiaries
Year Ended December 31,
2022
2021
2020
$
126,000 $
78,000 $
—
167
126,167
14,600
4,130
18,730
107,437
(6,049)
113,486
7,453
—
212
78,212
13,498
2,621
16,119
62,093
(7,385)
69,478
(7,132)
37,000
2,013
211
39,224
10,141
5,794
15,935
23,289
(5,812)
29,101
(16,527)
12,574
Net income
$
120,939 $
62,346 $
142
Condensed Statements of Cash Flows
($ in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Undistributed (dividends in excess of) earnings of subsidiaries
Stock-based compensation expense
Amortization of debt issuance cost
Deferred income tax expense (benefit)
Net change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investments
Principal from notes receivable
Net cash acquired in business combination
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net proceeds from issuance of long-term debt
Redemption of preferred stock
Purchase of treasury stock
Proceeds from exercise of stock options
Restricted stock surrendered due to employee tax liability
Dividend equivalents paid on stock appreciation rights
Dividends paid on common stock
Dividends paid on preferred stock
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2022
2021
2020
$
120,939 $
62,346 $
12,574
(7,453)
765
520
(467)
4,654
118,958
(1,000)
875
—
(125)
—
(98,703)
(75,080)
—
(1,787)
—
(14,490)
(1,727)
(191,787)
(72,954)
98,851
7,132
776
493
2,770
(4,171)
69,346
(1,000)
—
8,815
7,815
—
(93,269)
—
300
(2,182)
—
(12,843)
(8,322)
(116,316)
(39,155)
138,006
16,527
3,269
324
(417)
(7,377)
24,900
—
—
—
—
82,570
(4,379)
(12,041)
—
(923)
(376)
(11,847)
(13,869)
39,135
64,035
73,971
$
25,897 $
98,851 $
138,006
NOTE 25 – RELATED-PARTY 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-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’s underwriting guidelines, and do not involve more than
the normal risk of collectability or present other unfavorable features. As of December 31, 2022, no related party loans were
categorized as nonaccrual, past due, restructured or potential problem loans.
Deposits from related parties and their affiliates amounted to $21.6 million and $17.5 million at December 31, 2022 and 2021.
Transactions with Related Parties
The Company and the Bank have engaged in transactions described below with the Company’s current or former directors,
executive officers, and beneficial owners of more than five percent of the outstanding shares of the Company’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
143
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 on behalf of certain current directors in
connection with the Indemnified Matters, in the aggregate amount of $397 thousand, $495 thousand and $1.5 million during the
years ended December 31, 2022, 2021 and 2020, respectively.
NOTE 26 – 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 respect 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.
NOTE 27 – SUBSEQUENT EVENTS
On February 13, 2023, we announced that our Board of Directors had declared a quarterly cash dividend of $0.10 per share on
our outstanding common stock. The dividend will be payable on April 3, 2023 to stockholders of record as of March 15, 2023.
We also announced that our Board of Directors had authorized the repurchase of up to $35 million of our common stock. The
repurchase authorization will expire in February 2024.
We evaluated subsequent events through the date of issuance of the financial data included herein. Other than the event
discussed above, there have been no subsequent events 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 December 31, 2022.
144
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the Act) as of December 31, 2022 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 December 31,
2022, 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) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms.
Our Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All
internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and
the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can only provide
reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of
compliance with the policies or procedures may deteriorate.
We have assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the
framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013). Based on that assessment, management concluded that our internal control over financial
reporting was effective as of December 31, 2022 based on the criteria established in our Internal Control-Integrated Framework
(2013).
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Ernst & Young
LLP (EY), an independent registered public accounting firm, as stated in their report entitled "Report of Independent Registered
Public Accounting Firm" which appears herein under "Item 8. Financial Statements and Supplementary Data."
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the three months ended December 31, 2022 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Ernst & Young
LLP, an independent registered public accounting firm.
145
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Banc of California, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Banc of California, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Banc of California, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2022 consolidated financial statements of the Company and our report dated February 27, 2023 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Our Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Irvine, California
February 27, 2023
146
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
147
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers. The information concerning our directors and executive officers required by this item is
incorporated herein by reference from our definitive proxy statement for our 2023 Annual Meeting of Stockholders, a copy of
which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Audit Committee and Audit Committee Financial Experts. Information concerning the audit committee of our Board of
Directors required by this item, including information regarding the audit committee financial experts serving on the audit
committee, is incorporated herein by reference from our definitive proxy statement for our 2023 Annual Meeting of
Stockholders, except for information contained under the heading “Report of the Audit Committee,” a copy of which will be
filed not later than 120 days after the end of our fiscal year.
Code of Ethics. We adopted a written Code of Business Conduct and Ethics based upon the standards set forth under Item 406
of Regulation S-K of the Securities Exchange Act. The Code of Business Conduct and Ethics applies to all of our directors,
officers and employees. A full text of the Code is available on our website at investors.bancofcal.com, by clicking “Corporate
Overview” and then “Governance Documents.”
Compliance Section 16(a) Any information concerning compliance with the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934 by our directors, officers and ten percent stockholders required by this item is incorporated
herein by reference from our definitive proxy statement for our 2023 Annual Meeting of Stockholders, a copy of which will be
filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Nomination Procedures. There have been no material changes to the procedures by which stockholders may recommend
nominees to our Board of Directors.
Item 11. Executive Compensation
The information concerning compensation and other matters required by this item is incorporated herein by reference from our
definitive proxy statement for our 2023 Annual Meeting of Stockholders, except for information contained under the heading
“Report of the Compensation, Nominating and Corporate Governance Committee” a copy of which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information concerning security ownership of certain beneficial owners and management required by this item is
incorporated herein by reference from our definitive proxy statement for our 2023 Annual Meeting of Stockholders, a copy of
which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
The following table summarizes our equity compensation plans as of December 31, 2022:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Number of Securities
to be issued upon
exercise of
outstanding options
and rights
Weighted-average
exercise price of
outstanding options
and rights
Number of Securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected in
first column)(1)
14,904 $
— $
13.05
—
2,131,185
—
(1) The 2018 Omnibus Plan, which is the only equity compensation plan approved by our stockholders under which awards could be
made as of December 31, 2022, provides that the maximum number of shares that are available for awards is 4,417,882.
148
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions and director independence required by this item is
incorporated herein by reference from our definitive proxy statement for our 2023 Annual Meeting of Stockholders, a copy of
which will be filed not later than 120 days after the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
Information concerning our principal accountant's fees and services is incorporated herein by reference from our definitive
proxy statement for our 2023 Annual Meeting of Stockholders, a copy of which will be filed no later than 120 days after the end
of our fiscal year.
149
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: See Part II—Item 8. Financial Statements and Supplementary Data
(a)(2) Financial Statement Schedule: All financial statement schedules have been omitted as the information is not required
under the related instructions or is not applicable.
(a)(3) Exhibits
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Agreement and Plan of Merger, dated as of March 22, 2021, by and between Registrant and Pacific Mercantile Bancorp (filed as an
exhibit to the Registrant's Current Report on Form 8-K filed on March 23, 2021 and incorporated herein by reference).
Second Articles of Restatement of the charter of the Registrant, filed as an exhibit to the Registrant’s Current Report on Form 8-K
filed on June 5, 2018 and incorporated herein by reference.
Fifth Amended and Restated Bylaws of the Registrant, filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on
June 30, 2017 and incorporated herein by reference.
Senior Debt Securities Indenture, dated as of April 23, 2012, between the Registrant and U.S. Bank National Association, as
Trustee, filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 23, 2012 and incorporated herein by
reference.
Second Supplemental Indenture, dated as of April 6, 2015, between the Registrant and U.S. Bank National Association, as Trustee,
relating to the Registrant’s 5.25% Senior Notes due April 15, 2025 and form of 5.25% Senior Notes due April 15, 2025, filed as an
exhibit to the Registrant's Current Report on Form 8-K filed on April 6, 2015 and incorporated herein by reference.
Description of the Registrant's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934
Indenture, dated as of October 30, 2020, by and between the Registrant and U.S. Bank National Association, as trustee, filed as an
exhibit to the Registrant’s Current Report on Form 8-K filed on October 30, 2020 and incorporated herein by reference.
Supplemental Indenture, dated as of October 30, 2020, by and between the Registrant and U.S. Bank National Association, as
trustee, with respect to the Registrant’s 4.375% Fixed-to-Floating Rate Subordinated Notes due 2030, filed as an exhibit to the
Registrant’s Current Report on Form 8-K filed on October 30, 2020 and incorporated herein by reference.
Amended and Restated Employment Agreement, dated as of February 7, 2022, by and among the Registrant, Banc of California,
N.A. and Jared Wolff, filed as an exhibit to the Registrant's Current Report on Form 8-K filed on February 8, 2022 and
incorporated herein by reference.
Employment Agreement, dated as of November 13, 2019, by and among the Registrant, Banc of California, N.A. and Lynn
Hopkins, filed as an exhibit to the Registrant's Annual report on Form 10-K filed on March 2, 2020 and incorporated herein by
reference
Banc of California, Inc. Executive Incentive Compensation Plan, filed as an exhibit to the Registrant’s Current Report on Form 8-
K filed on May 2, 2019 and incorporated herein by reference.
Banc of California, Inc. Executive Change in Control Severance Plan, filed as an exhibit to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2020 and incorporated herein by reference.
Registrant’s 2013 Omnibus Stock Incentive Plan, filed as an appendix to the Registrant’s definitive proxy statement filed on
June 11, 2013 and incorporated herein by reference.
Form of Non-Qualified Stock Option Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s
Registration Statement on Form S-8 filed on July 31, 2013 and incorporated herein by reference.
Form of Restricted Stock Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 filed on July 31, 2013 and incorporated herein by reference.
Form of Restricted Stock Unit Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.
Form of Restricted Stock Unit Agreement for Employee Equity Ownership Program under 2013 Omnibus Stock Incentive Plan,
filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein
by reference.
10.10* Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under 2013 Omnibus Stock Incentive Plan, filed as
an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by
reference.
10.11* Form of Restricted Stock Agreement for Non-Employee Directors under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference.
150
10.12* Form of Performance Unit Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference.
10.13* Form of Performance-Based Non-Qualified Stock Option Agreement under the 2013 Omnibus Stock Incentive Plan, filed as an
exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by
reference.
10.14* Registrant’s 2018 Omnibus Stock Incentive Plan, included as an appendix to the Registrant’s definitive proxy statement filed on
April 19, 2018 and incorporated herein by reference.
10.15* Form of Incentive Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.16* Form of Performance-Based Incentive Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the
Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17* Form of Non-Qualified Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.18* Form of Performance-Based Non-Qualified Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the
Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.19* Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the 2018 Omnibus Plan, filed as an exhibit to
the Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.20* Form of Restricted Stock Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration Statement
on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.21* Form of Performance-Based Restricted Stock Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s
Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.22* Form of Restricted Stock Agreement for Non-Employee Directors under the 2018 Omnibus Plan, filed as an exhibit to the
Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.23* Form of Restricted Stock Unit Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.24* Form of Performance Unit Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration Statement
on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.25* Form of Restricted Stock Unit Agreement for Non-Employee Directors under the 2018 Omnibus Plan, filed as an exhibit to the
Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.26* Form Director and Executive Officer Indemnification Agreement, filed as an exhibit to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2015 and incorporated herein by reference.
10.27
10.28
21.0
23.0
24.0
31.1
31.2
32.0
101.0
Cooperation Agreement, dated as of February 8, 2017, by and between the Registrant and PL Capital Advisors, LLC, filed as an
exhibit to the Registrant's Current Report on Form 8-K filed on February 8, 2017 and incorporated herein by reference.
Amendment and Termination of LAFC-Banc of California Agreements, dated May 22, 2020, filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated herein by reference.
Subsidiaries of the Registrant
Consent of Ernst & Young LLP
Power of Attorney, included on signatory pages of this report.
Rule 13a-14(a) Certification (Principal Executive Officer)
Rule 13a-14(a) Certification (Principal Financial Officer)
Rule 13a-14(b) and 18 U.S.C. 1350 Certification
The following financial statements and footnotes from the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2022 formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial
Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv)
Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated
Financial Statements.
104.0
Cover Page Interactive Data File formatted in Inline XBRL (contained in Exhibit 101).
* Management contract or compensatory plan or arrangement.
ITEM 16. 10-K Summary
None.
151
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.
SIGNATURES
Date: February 27, 2023
BANC OF CALIFORNIA, INC.
/s/ Jared Wolff
Jared Wolff
President/Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned officers and directors of BANC OF CALIFORNIA, INC., hereby severally and individually constitute and
appoint Jared Wolff, Lynn Hopkins, and Raymond Rindone, and each of them, the true and lawful attorneys and agents of each
of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all
amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file
the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned
every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the
undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said
attorneys and agents or each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 27, 2023
/s/ Jared Wolff
Date: February 27, 2023
/s/ Lynn M. Hopkins
Jared Wolff
President/Chief Executive Officer/Director
(Principal Executive Officer)
Date: February 27, 2023
Lynn M. Hopkins
Executive Vice President/Chief Financial Officer
(Principal Financial Officer)
/s/ Raymond J. Rindone
Raymond J. Rindone
Executive Vice President/Chief Accounting Officer/Deputy Chief
Financial Officer
(Principal Accounting Officer)
Date: February 27, 2023
/s/ Robert D. Sznewajs
Date: February 27, 2023
Date: February 27, 2023
Date: February 27, 2023
Date: February 27, 2023
Date: February 27, 2023
Robert D. Sznewajs, Chairman of the Board of Directors
/s/ James A. "Conan" Barker
James A. "Conan" Barker, Director
/s/ Mary A. Curran
Mary A. Curran, Director
/s/ Shannon F. Eusey
Shannon F. Eusey, Director
/s/ Bonnie G. Hill
Bonnie G. Hill, Director
/s/ Denis P. Kalscheur
Denis P. Kalscheur, Director
152
Date: February 27, 2023
Date: February 27, 2023
Date: February 27, 2023
Date: February 27, 2023
/s/ Richard J. Lashley
Richard J. Lashley, Director
/s/ Vania E. Schlogel
Vania E. Schlogel, Director
/s/ Jonah F. Schnel
Jonah F. Schnel, Director
/s/ Andrew Thau
Andrew Thau, Director
153
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