# EDGAR Filing Document

**Accession Number:** 0001169770
**File Stem:** 0001169770-23-000038
**Filing Date:** 2023-3
**Character Count:** 320227
**Document Hash:** 24d2d20e3970ad8adbdc51badbb911c5
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001169770-23-000038.hdr.sgml**: 20230331

**ACCESSION NUMBER**: 0001169770-23-000038

**CONFORMED SUBMISSION TYPE**: ARS

**PUBLIC DOCUMENT COUNT**: 1

**CONFORMED PERIOD OF REPORT**: 20221231

**FILED AS OF DATE**: 20230331

**DATE AS OF CHANGE**: 20230330

**EFFECTIVENESS DATE**: 20230331

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** BANC OF CALIFORNIA, INC.
- **CENTRAL INDEX KEY:** 0001169770
- **STANDARD INDUSTRIAL CLASSIFICATION:** NATIONAL COMMERCIAL BANKS [6021]
- **IRS NUMBER:** 043639825
- **STATE OF INCORPORATION:** MD
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** ARS
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-35522
- **FILM NUMBER:** 23782310

**BUSINESS ADDRESS:**
- **STREET 1:** 3 MACARTHUR PLACE
- **CITY:** SANTA ANA
- **STATE:** CA
- **ZIP:** 92707
- **BUSINESS PHONE:** 949-236-5211

**MAIL ADDRESS:**
- **STREET 1:** 3 MACARTHUR PLACE
- **CITY:** SANTA ANA
- **STATE:** CA
- **ZIP:** 92707

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** FIRST PACTRUST BANCORP INC
- **DATE OF NAME CHANGE:** 20020322

### Attached PDF Documents

**Attachment 1:** `arsboc2023.pdf`

2022 ANNUAL REPORT

WE ARE
CALIFORNIA'S
BUSINESS
BANK.

![img-0.jpeg](img-0.jpeg)

BANC OF
CALIFORNIA, INC.

# **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 | Trading symbol(s) | Name of each exchange on which registered |
| --- | --- | --- |
| Common Stock, par value $0.01 per share | BANC | 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.

#### **DOCUMENTS INCORPORATED BY REFERENCE**

PART III of Form 10-K-Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 2023.

# **BANC OF CALIFORNIA, INC.**
**ANNUAL REPORT ON FORM 10-K**

**December 31, 2022**

# **Table of Contents**

|  | Page |
| --- | --- |
| Forward-Looking Statements | 3 |
| Part I |  |
| Item 1. Business | 6 |
| Item 1A. Risk Factors | 19 |
| Item 1B. Unresolved Staff Comments | 35 |
| Item 2. Properties | 35 |
| Item 3. Legal Proceedings | 35 |
| Item 4. Mine Safety Disclosures | 35 |
| Part II |  |
| Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 36 |
| Item 6. Reserved | 38 |
| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | 39 |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 74 |
| Item 8. Financial Statements and Supplementary Data | 77 |
| Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 145 |
| Item 9A. Controls and Procedures | 145 |
| Item 9B. Other Information | 147 |
| Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 147 |
| Part III |  |
| Item 10. Directors, Executive Officers and Corporate Governance | 148 |
| Item 11. Executive Compensation | 148 |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 148 |
| Item 13. Certain Relationships and Related Transactions, and Director Independence | 149 |
| Item 14. Principal Accountant Fees and Services | 149 |
| Part IV |  |
| Item 15. Exhibits and Financial Statement Schedules | 150 |
| Item 16. Form 10-K Summary | 151 |
| Signatures | 152 |

[This page intentionally left blank]

## 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:

1. i. 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;
2. ii. 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;
3. iii. 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;
4. iv. fluctuations in the demand for loans, and fluctuations in commercial and residential real estate values in our market area;
5. v. the quality and composition of our securities portfolio;
6. vi. our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our activities;
7. vii. 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;
8. viii. the costs and effects of litigation, including legal fees and other expenses, settlements and judgments;
9. ix. 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;
10. x. 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;
11. xi. 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;
12. xii. 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;
13. xiii. our ability to control operating costs and expenses;
14. xiv. staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
15. xv. the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses;

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- xvi. errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in valuation;
- xvii. uncertainty regarding the expected discontinuation of the London Interbank Offered Rate (“LIBOR”) and the use of alternative reference rates;
- xviii. 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;
- xix. our ability to attract and retain key members of our senior management team;
- xx. increased competitive pressures among financial services companies;
- xxi. changes in consumer spending, borrowing and saving habits;
- xxii. 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;
- xxiii. the ability of key third-party providers to perform their obligations to us;
- xxiv. 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;
- xxv. 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;
- xxvi. 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;
- xxvii. 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
- xxviii. 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.

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## 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.”

| ACL | Allowance for credit losses | Freddie Mae | the Federal Home Loan Mortgage Corporation |
| --- | --- | --- | --- |
| AFX | American Financial Exchange platform | GAAP | Generally Accepted Accounting Principles |
| ALCO | Asset/Liability Committee | GLBA | Gramm-Leach-Bliley Act |
| ALL | Allowance for loan losses | GSE | Government Sponsored Entity |
| AOCI | Accumulated Other Comprehensive Income | HELOC | Home Equity Lines of Credit |
| ARM | Adjustable Rate Mortgage | HLBV | Hypothetical Liquidation at Book Value |
| ASC | Accounting Standards Codification | LAFC | The Los Angeles Football Club |
| ASU | Accounting Standards Update | LIBOR | London Inter-Bank Offered Rate |
| AVMs | Automated Valuation Models | LIHTC | Low Income Housing Tax Credits |
| Bank | Banc of California, National Association | LTV | Loan-to-Value |
| BHCA | Bank Holding Company Act of 1956, as amended | MSRs | Mortgage Servicing Rights |
| BIC | Borrower-in-Custody | NACHA | National Automated Clearinghouse Association |
| Board | Board of Directors | NII at Risk | Net Interest Income at Risk |
| BOLI | Bank Owned Life Insurance | NOL | Net Operating Loss |
| C&I | Commercial and Industrial | NTM | Non-Traditional Mortgage |
| CCPA | California Consumer Privacy Act | NYSE | New York Stock Exchange |
| CDC | Certified Development Company | OCC | Office of the Comptroller of the Currency |
| CDFI | Community Development Financial Institutions | OREO | Other Real Estate Owned |
| CECL | Current Expected Credit Losses | PCAOB | Public Company Accounting Oversight Board |
| CEO | Chief Executive Officer | PCD | Purchased Credit Deteriorated |
| CET1 | Common Equity Tier 1 | PPP | Payment Protection Program |
| CFO | Chief Financial Officer | PTPP | Pre-tax Pre-Provision |
| CFPB | Consumer Financial Protection Bureau | Prime Rate | Wall Street Journal’s prime rate |
| CLO | Collateralized Loan Obligation | ROAA | Return on Average Assets |
| COSO | Committee of Sponsoring Organizations | ROU | Right of Use |
| COVID-19 | Coronavirus Disease 2019 | S&P | Standard and Poor’s |
| CRA | Community Reinvestment Act of 1977, as amended | SAR | Stock Appreciation Right |
| DIF | Federal Deposit Insurance Fund | SBA | Small Business Administration |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | SBIC | Small Business Investment Company |
| DTA | Deferred Tax Asset | SEC | Securities and Exchange Commission |
| EPS | Earnings Per Share | SFR | Single Family Residential |
| EVE | Economic Value of Equity | SOFR | Secured Overnight Financing Rate |
| EY | Ernst & Young LLP | TCE | Tangible Common Equity |
| Fannie Mae | the Federal National Mortgage Association | TDRs | Troubled Debt Restructurings |
| FASB | Financial Accounting Standards Board | TSR | Total Shareholder Return |
| FDIC | Federal Deposit Insurance Corporation | 2013 Plan | 2013 Omnibus Stock Incentive Plan |
| FRBSF | Federal Reserve Bank of San Francisco | 2018 Omnibus Plan | 2018 Omnibus Stock Incentive Plan |
| FHLB | Federal Home Loan Bank | the Company | Banc of California, Inc. |
| FICO | Fair Isaac Corporation | VIE | Variable Interest Entity |
| FRB | 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.

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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.

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### 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.

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## 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:

|  | June 30, 2022 |
| --- | --- |
| Orange County | 2.17% |
| Los Angeles County | 0.51% |
| Santa Barbara County | 0.28% |
| San Diego County | 0.19% |

### Human Capital Resources

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.

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### 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.
- Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
- We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed or on acceptable terms.
- Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of funds for cash dividends to our stockholders.
- There can be no assurance as to the level of dividends we may pay on our common stock.

### **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:

- 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

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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

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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

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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 change 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.**

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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.

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### **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.

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## 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 depository 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 Depository Share). Upon redemption, the Series E Preferred Stock and the Series E Depository Shares were no longer outstanding and all rights with respect to such stock and depository shares ceased and terminated, except the right to payment of the redemption price. Also upon redemption, the Series E Depository 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.

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## Issuer Purchases of Equity Securities

| ($ in thousands, except per share data) | Purchases of Equity Securities by the Issuer |  |  | Total Number of Shares (or Approximate Dollar Value) That May Yet be Purchased Under the Plan |
| --- | --- | --- | --- | --- |
|  | Total Number of Shares | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans |  |
| Common Stock: |  |  |  |  |
| From October 1, 2022 to October 31, 2022 | 876,014 | $16.60 | 876,014 | $4,368,180 |
| From November 1, 2022 to November 30, 2022 | 210,556 | $16.51 | 209,910 | $902,055 |
| From December 1, 2022 to December 31, 2022 | 59,908 | $15.52 | 57,900 | $ - |
| Total | 1,146,478 | $16.53 | 1,143,824 |  |

During the three months and year ended December 31, 2022, purchases of shares of common stock related to shares purchased under our stock repurchase program and shares surrendered by employees in order to pay employee tax liabilities associated with vested awards under our employee stock benefit plans.

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.

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![img-0.jpeg](img-0.jpeg)

| Index | December 31, |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
| Banc of California, Inc. | $100.00 | $66.32 | $87.42 | $76.43 | $103.23 | $84.99 |
| NYSE Composite | $100.00 | $91.05 | $114.28 | $122.26 | $147.54 | $133.75 |
| KBW NASDAQ Regional Banking Index | $100.00 | $82.50 | $102.15 | $93.25 | $127.42 | $118.59 |
| S&P U.S. BMI Banks - Western Region Index | $100.00 | $79.17 | $96.55 | $72.25 | $111.40 | $86.45 |

# **Item 6. Reserved**

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## 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.

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*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) | December 31, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Tangible common equity, and tangible common equity to tangible assets ratio |  |  |
| Total assets | $9,197,016 | $9,393,743 |
| Less goodwill | (114,312) | (94,301) |
| Less other intangible assets | (7,526) | (6,411) |
| Tangible assets (1) | $9,075,178 | $9,293,031 |
| Total stockholders' equity | $959,618 | $1,065,290 |
| Less preferred stock | - | (94,956) |
| Total common stockholders' equity | $959,618 | $970,334 |
| Total stockholders' equity | $959,618 | $1,065,290 |
| Less goodwill | (114,312) | (94,301) |
| Less other intangible assets | (7,526) | (6,411) |
| Tangible equity (1) | 837,780 | 964,578 |
| Less preferred stock | - | (94,956) |
| Tangible common equity (1) | $837,780 | $869,622 |
| Total stockholders' equity to total assets | 10.43% | 11.34% |
| Tangible equity to tangible assets (1) | 9.23% | 10.38% |
| Tangible common equity to tangible assets (1) | 9.23% | 9.36% |
| Common shares outstanding | 58,544,534 | 62,188,206 |
| Class B non-voting non-convertible common shares outstanding | 477,321 | 477,321 |
| Total common shares outstanding | 59,021,855 | 62,665,527 |
| Book value per common share | $16.26 | $15.48 |
| Tangible common equity per share (1) | $14.19 | $13.88 |

(1) Non-GAAP measure.

42

| (Dollars in thousands)(Unaudited) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Return on tangible common equity |  |  |  |
| Average total stockholders' equity | $992,252 | $896,988 | $882,050 |
| Less average preferred stock | (18,731) | (112,201) | (186,209) |
| Average common stockholders' equity | 973,521 | 784,787 | 695,841 |
| Less average goodwill | (100,715) | (49,688) | (37,144) |
| Less average other intangible assets | (5,884) | (2,924) | (3,392) |
| Average tangible common equity (1) | $866,922 | $732,175 | $655,305 |
| Net income | $120,939 | $62,346 | $12,574 |
| Net income (loss) available to common stockholders | $115,772 | $50,563 | $(1,103) |
| Add amortization of intangible assets | 1,705 | 1,276 | 1,518 |
| Less tax effect on amortization of intangible assets (2) | (504) | (377) | (449) |
| Net income available to common stockholders after adjustments for intangible assets (1) | $116,973 | $51,462 | $(34) |
| Return on average equity | 12.19% | 6.95% | 1.43% |
| Return on average tangible common equity (1) | 13.49% | 7.03% | (0.01)% |

(1) Non-GAAP measure.

(2) Adjustments shown at a statutory tax rate of 29.6%.

| (Dollars in thousands)(Unaudited) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Adjusted noninterest income and expense |  |  |  |
| Total noninterest income | $17,350 | $19,376 | $18,870 |
| Noninterest income adjustments: |  |  |  |
| Net loss (gain) on sale of securities available-for-sale | 7,692 | - | (2,011) |
| Adjusted noninterest income (1) | $25,042 | $19,376 | $16,859 |
| Total noninterest expense | $194,373 | $183,678 | $199,385 |
| Noninterest expense adjustments: |  |  |  |
| Naming rights termination | - | - | (26,769) |
| Extinguishment of debt | - | - | (2,515) |
| Indemnified legal (fees) recoveries | (497) | 2,073 | 673 |
| Acquisition, integration and transaction costs | (2,080) | (15,869) | - |
| Noninterest expense adjustments before (loss) gain on alternative energy partnership investments | (2,577) | (13,796) | (28,611) |
| (Loss) gain in alternative energy partnership investments | (2,313) | 204 | 365 |
| Total noninterest expense adjustments | (4,890) | (13,592) | (28,246) |
| Adjusted noninterest expense (1) | $189,483 | $170,086 | $171,139 |
| Average assets | $9,350,054 | $8,294,004 | $7,689,016 |
| Noninterest income to total revenue | 5.23% | 7.09% | 7.75% |
| Adjusted noninterest income to adjusted total revenue (1) | 7.38% | 7.09% | 6.98% |
| Noninterest expense to average total assets | 2.08% | 2.21% | 2.59% |
| Adjusted noninterest expense to average total assets (1) | 2.03% | 2.05% | 2.23% |

(1) Non-GAAP measure.

43

# **Year Ended December 31,**

*(Dollars in thousands)(Unaudited)*

|  | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Adjusted pre-tax pre-provision income |  |  |  |
| Net interest income | $314,365 | $253,778 | $224,594 |
| Noninterest income | 17,350 | 19,376 | 18,870 |
| Total revenue | 331,715 | 273,154 | 243,464 |
| Noninterest expense | 194,373 | 183,678 | 199,385 |
| Pre-tax pre-provision income (1) | $137,342 | $89,476 | $44,079 |
| Total revenue | $331,715 | $273,154 | $243,464 |
| Total noninterest income adjustments | 7,692 | - | (2,011) |
| Adjusted total revenue (1) | 339,407 | 273,154 | 241,453 |
| Adjusted noninterest expense (1) | 189,483 | 170,086 | 171,139 |
| Adjusted pre-tax pre-provision income (1) | $149,924 | $103,068 | $70,314 |
| Average assets | $9,350,054 | $8,294,004 | $7,689,016 |
| Pre-tax pre-provision income ROAA (1) | 1.47% | 1.08% | 0.57% |
| Adjusted pre-tax pre-provision income ROAA (1) | 1.60% | 1.24% | 0.91% |
| Efficiency ratio (1) | 58.60% | 67.24% | 81.90% |
| Adjusted efficiency ratio (1) | 55.83% | 62.27% | 70.88% |

*(1) Non-GAAP measure.*

44

|  | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Adjusted net income |  |  |  |
| Net income (1)(2)(3) | $120,939 | $62,346 | $12,574 |
| Adjustments: |  |  |  |
| Noninterest income adjustments | 7,692 | - | (2,011) |
| Noninterest expense adjustments | 4,890 | 13,592 | 28,246 |
| Tax impact of adjustments above (4) | (3,720) | (4,018) | (7,757) |
| Tax impact from exercise of stock appreciation rights | - | (2,093) | - |
| Adjustments to net income | 8,862 | 7,481 | 18,478 |
| Adjusted net income (5) | $129,801 | $69,827 | $31,052 |
| Average assets | $9,350,054 | $8,294,004 | $7,689,016 |
| ROAA | 1.29% | 0.75% | 0.16% |
| Adjusted ROAA (5) | 1.39% | 0.84% | 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 | 8,862 | 7,481 | 18,478 |
| Adjustments for impact of preferred stock redemption | 3,747 | 3,347 | (568) |
| Adjusted net income available to common stockholders (5) | $128,381 | $61,391 | $16,807 |
| Average diluted common shares | 61,175,108 | 53,302,926 | 50,182,096 |
| Diluted EPS | $1.89 | $0.95 | $(0.02) |
| Adjusted diluted EPS (5)(6) | $2.10 | $1.15 | $0.33 |

(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 (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) | Fair Value |
| --- | --- |
| Assets acquired: |  |
| Cash and cash equivalents | $4,068 |
| Other intangibles | 3,800 |
| Other assets | 1,385 |
| Total assets acquired | $9,253 |
| Liabilities assumed: |  |
| Accounts payable | $3,443 |
| Total liabilities assumed | 3,443 |
| Excess of assets acquired over liabilities assumed | $5,810 |
| Total consideration | 24,000 |
| Goodwill | $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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Interest and dividend income | $372,772 | $291,659 | $290,607 |
| Interest expense | 58,407 | 37,881 | 66,013 |
| Net interest income | 314,365 | 253,778 | 224,594 |
| (Reversal of) provision for credit losses | (31,542) | 6,854 | 29,719 |
| Noninterest income | 17,350 | 19,376 | 18,870 |
| Noninterest expense | 194,373 | 183,678 | 199,385 |
| Income from operations before income taxes | 168,884 | 82,622 | 14,360 |
| Income tax expense | 47,945 | 20,276 | 1,786 |
| Net income | 120,939 | 62,346 | 12,574 |
| Preferred stock dividends | 1,420 | 8,322 | 13,869 |
| Less: income allocated to participating securities | - | 114 | - |
| Less: participating securities dividends | - | - | 376 |
| Impact of preferred stock redemption | 3,747 | 3,347 | (568) |
| Net income (loss) available to common stockholders | $115,772 | $50,563 | $(1,103) |
| Earnings (loss) per common share |  |  |  |
| Basic | $1.90 | $0.95 | $(0.02) |
| Diluted | $1.89 | $0.95 | $(0.02) |

### Selected financial data:

| Return on average assets | 1.29% | 0.75% | 0.16% |
| --- | --- | --- | --- |
| Return on average equity | 12.19% | 6.95% | 1.43% |
| Return on average tangible common equity (1) | 13.51% | 7.04% | 0.01% |
| Dividend payout ratio (2) | 12.63% | 25.26% | (1,200.00)% |
| Average equity to average assets | 10.61% | 10.81% | 11.47% |

|  | December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Book value per common share | $16.26 | $15.48 | $14.18 |
| Tangible common equity per common share (1) | $14.19 | $13.88 | $13.39 |
| Total stockholders' equity to total assets | 10.43% | 11.34% | 11.39% |
| Tangible common equity to tangible assets (1) | 9.23% | 9.36% | 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

## Net Interest Income

The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the years indicated:

| ($ in thousands) | Year Ended December 31, |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 |  |  | 2021 |  |  | 2020 |  |  |
|  | Average Balance | Interest | Yield/Cost | Average Balance | Interest | Yield/Cost | Average Balance | Interest | Yield/Cost |
| Interest-earning assets: |  |  |  |  |  |  |  |  |  |
| Total loans (1)(2) | $7,250,312 | $327,545 | 4.52% | $6,143,495 | $260,687 | 4.24% | $5,691,444 | $257,300 | 4.52% |
| Securities | 1,230,901 | 38,527 | 3.13% | 1,295,879 | 27,588 | 2.13% | 1,112,306 | 29,038 | 2.61% |
| Other interest-earning assets (2)(3) | 273,284 | 6,700 | 2.45% | 353,190 | 3,384 | 0.96% | 360,532 | 4,269 | 1.18% |
| Total interest-earning assets | 8,754,497 | 372,772 | 4.26% | 7,792,564 | 291,659 | 3.74% | 7,164,282 | 290,607 | 4.06% |
| Allowance for loan losses | (92,988) |  |  | (82,166) |  |  | (78,152) |  |  |
| BOLI and noninterest-earning assets (3)(4) | 688,545 |  |  | 583,606 |  |  | 602,886 |  |  |
| Total assets | $9,350,054 |  |  | $8,294,004 |  |  | $7,689,016 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |
| Interest-bearing checking | $2,226,611 | 10,976 | 0.49% | $2,267,059 | 2,906 | 0.13% | $1,810,152 | 8,705 | 0.48% |
| Savings and money market | 1,528,202 | 5,985 | 0.39% | 1,664,350 | 7,063 | 0.42% | 1,559,958 | 14,164 | 0.91% |
| Certificates of deposit | 763,022 | 10,872 | 1.42% | 633,497 | 2,344 | 0.37% | 1,063,705 | 14,947 | 1.41% |
| Total interest-bearing deposits | 4,517,835 | 27,833 | 0.62% | 4,564,906 | 12,313 | 0.27% | 4,433,815 | 37,816 | 0.85% |
| FHLB advances | 528,590 | 15,153 | 2.87% | 426,875 | 12,023 | 2.82% | 749,195 | 18,040 | 2.41% |
| Securities sold under repurchase agreements | - | - | - % | - | - | - % | 584 | 4 | 0.68% |
| Other borrowings | 86,172 | 1,206 | 1.40% | 44,214 | 46 | 0.10% | 2,369 | 12 | 0.51% |
| Long-term debt, net | 274,604 | 14,215 | 5.18% | 260,122 | 13,499 | 5.19% | 187,771 | 10,141 | 5.40% |
| Total interest-bearing liabilities | 5,407,201 | 58,407 | 1.08% | 5,296,117 | 37,881 | 0.72% | 5,373,734 | 66,013 | 1.23% |
| Noninterest-bearing deposits | 2,838,697 |  |  | 1,996,449 |  |  | 1,322,681 |  |  |
| Noninterest-bearing liabilities | 111,904 |  |  | 104,450 |  |  | 110,551 |  |  |
| Total liabilities | 8,357,802 |  |  | 7,397,016 |  |  | 6,806,966 |  |  |
| Total stockholders' equity | 992,252 |  |  | 896,988 |  |  | 882,050 |  |  |
| Total liabilities and stockholders' equity | $9,350,054 |  |  | $8,294,004 |  |  | $7,689,016 |  |  |
| Net interest income/spread |  | $314,365 | 3.18% |  | $253,778 | 3.02% |  | $224,594 | 2.83% |
| Net interest margin (5) |  |  | 3.59% |  |  | 3.26% |  |  | 3.13% |
| Ratio of interest-earning assets to interest-bearing liabilities | 162% |  |  | 147% |  |  | 133% |  |  |
| Total deposits (6) | $7,356,532 | $27,833 | 0.38% | $6,561,355 | $12,313 | 0.19% | $5,756,496 | $37,816 | 0.66% |
| Total funding (7) | $8,245,898 | $58,407 | 0.71% | $7,292,566 | $37,881 | 0.52% | $6,696,415 | $66,013 | 0.99% |

49

(1) Includes average loans held for sale of \$3.9 million, \$2.4 million and \$15.8 million for the years ended December 31, 2022, 2021 and 2020, which are included in other assets in the accompanying consolidated statements of financial condition.(2) Total loans are net of deferred fees, related direct costs, premiums and discounts, but exclude the allowance for credit losses. Nonaccrual loans are included in the average balance. Interest income includes net (amortization) accretion of deferred loan (costs) fees and purchased (premiums) discounts of \$(64) thousand, \$348 thousand and \$3.5 million for the years ended December 31, 2022, 2021 and 2020, respectively, are included in interest income.(3) Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions.(4) Includes average balance of BOLI of \$125.2 million, \$114.9 million and \$110.6 million for the years ended December 31, 2022, 2021 and 2020.(5) Net interest income divided by average interest-earning assets.(6) Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of total deposits is calculated as total interest expense on interest-bearing deposits divided by average total deposits.(7) Total funding is the sum of interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as total interest expense on interest-bearing liabilities divided by average total funding.

#### **Year Ended December 31, 2022 Compared to Year Ended December 31, 2021**

Net interest income increased $60.6 million, or 23.9%, to $314.4 million for the year ended December 31, 2022 due to higher average balances and yield on interest-earning assets, partially offset by higher average balances and costs of interest-bearing liabilities. Interest income increased $81.1 million and interest expense increased $20.5 million as average earning assets increased $961.9 million and average total funding sources increased $953.3 million due largely to the impact of the acquisition of PMB in the fourth quarter of 2021.

The net interest margin increased 33 basis points to 3.59% as the average earning-assets yield increased 52 basis points and the average cost of total funding increased 19 basis points between periods. The yield on average interest-earning assets increased to 4.26% for the year ended December 31, 2022, from 3.74% for the same period in 2021 due mostly to higher market interest rates and changes in the mix of interest-earning assets. Average loans represented 82.8% of average earnings assets in 2022 compared to 78.8% for the full year in 2021. Average loans increased by $1.11 billion from organic loan growth and the impact of the PMB Acquisition. The yield on average loans increased 28 basis points to 4.52% for the year ended December 31, 2022 compared to the full year of 2021. The yield on average investment securities and other interest-earning assets increased 100 basis points and 149 basis points, respectively, for the year ended December 31, 2022, compared to the full year of 2021.

The average cost of funds increased 19 basis points to 0.71% for the year ended December 31, 2022 from 0.52% for 2021. This increase was driven by the higher cost of average interest-bearing liabilities, partially offset by the overall improved funding mix, including higher average noninterest-bearing deposits as a result of growth from business development efforts and the impact of the acquisition of PMB. The cost of average interest-bearing liabilities increased 36 basis points to 1.08% for the year ended December 31, 2022 compared to 0.72% for the same period in 2021 and included a 35 basis point increase in the cost of average interest-bearing deposits to 0.62%. Average noninterest-bearing deposits were $842.2 million higher for the year ended December 31, 2022 compared to 2021 while average total deposits were $795.2 million higher. Average noninterest-bearing deposits represented 38.6% of total average deposits for the year ended December 31, 2022 compared to 30.4% for 2021. The average cost of total deposits increased 19 basis points to 0.38% for the year ended December 31, 2022 compared to the full year of 2021.

50

### 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.

| ($ in thousands) | Year Ended December 31, 2022 vs. 2021 |  |  | Year Ended December 31, 2021 vs. 2020 |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Increase (Decrease) Due to |  | Net Increase (Decrease) | Increase (Decrease) Due to |  | Net Increase (Decrease) |
|  | Volume | Rate |  | Volume | Rate |  |
| Interest-earning assets: |  |  |  |  |  |  |
| Total loans | $49,200 | $17,658 | $66,858 | $19,809 | $(16,422) | $3,387 |
| Securities | (1,447) | 12,386 | 10,939 | 4,364 | (5,814) | (1,450) |
| Other interest-earning assets | (917) | 4,233 | 3,316 | (88) | (797) | (885) |
| Total interest-earning assets | 46,836 | 34,277 | 81,113 | 24,085 | (23,033) | 1,052 |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing checking | (53) | 8,123 | 8,070 | 1,767 | (7,566) | (5,799) |
| Savings and money market | (1,205) | 127 | (1,078) | (199) | (6,902) | (7,101) |
| Certificates of deposit | 570 | 7,958 | 8,528 | (4,463) | (8,140) | (12,603) |
| FHLB advances | 2,912 | 218 | 3,130 | (8,715) | 2,698 | (6,017) |
| Securities sold under repurchase agreements | - | - | - | (2) | (2) | (4) |
| Other borrowings | 82 | 1,078 | 1,160 | 51 | (17) | 34 |
| Long-term debt, net | 750 | (34) | 716 | 3,766 | (408) | 3,358 |
| Total interest-bearing liabilities | 3,056 | 17,470 | 20,526 | (7,795) | (20,337) | (28,132) |
| Net interest income | $43,780 | $16,807 | $60,587 | $31,880 | $(2,696) | $29,184 |

### 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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Provision for (reversal of) credit losses - loans | $(31,242) | $4,432 | $29,374 |
| Provision for (reversal of) credit losses - unfunded noncancellable loan commitments | (300) | 2,422 | 345 |
| Total provision for (reversal of) credit losses | $(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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Customer service fees | $9,540 | $7,685 | $5,771 |
| Loan servicing income | 1,518 | 595 | 505 |
| Income from bank owned life insurance | 3,402 | 2,871 | 2,489 |
| Net (loss) gain on sale of securities available-for-sale | (7,692) | - | 2,011 |
| Other income | 10,582 | 8,225 | 8,094 |
| Total noninterest income | $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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Salaries and employee benefits | $113,060 | $103,358 | $96,809 |
| Occupancy and equipment | 32,811 | 29,452 | 29,350 |
| Professional fees | 15,001 | 10,584 | 15,736 |
| Data processing | 7,053 | 6,861 | 6,574 |
| Regulatory assessments | 3,626 | 3,395 | 2,741 |
| Extinguishment of debt | - | - | 2,515 |
| Loss (gain) on alternative energy partnership investments | 2,313 | (204) | (365) |
| Reversal of provision for loan repurchases | (1,004) | (948) | (697) |
| Amortization of intangible assets | 1,705 | 1,276 | 1,518 |
| Acquisition, integration and transaction costs | 2,080 | 15,869 | - |
| Naming rights termination | - | - | 26,769 |
| All other expense | 17,728 | 14,035 | 18,435 |
| Total noninterest expense | $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) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| --- | --- | --- | --- | --- |
| December 31, 2022 |  |  |  |  |
| Securities held-to-maturity: |  |  |  |  |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | $153,033 | $ - | $(29,807) | $123,226 |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | 61,404 | - | (11,946) | 49,458 |
| Municipal securities | 114,204 | - | (24,428) | 89,776 |
| Total securities held-to-maturity | $328,641 | $ - | $(66,181) | $262,460 |

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) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| --- | --- | --- | --- | --- |
| December 31, 2022 |  |  |  |  |
| Securities available-for-sale: |  |  |  |  |
| SBA loan pool securities | $11,241 | $ - | $(54) | $11,187 |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | 40,431 | - | (225) | 40,206 |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | 99,075 | - | (5,884) | 93,191 |
| Non-agency residential mortgage-backed securities | 90,832 | - | (10,340) | 80,492 |
| Collateralized loan obligations | 492,203 | - | (15,600) | 476,603 |
| Corporate debt securities | 175,781 | 32 | (9,195) | 166,618 |
| Total securities available-for-sale | $909,563 | $32 | $(41,298) | $868,297 |

54

December 31, 2021

Securities available-for-sale:

| SBA loan pool securities | $14,679 | $ - | $(88) | $14,591 |
| --- | --- | --- | --- | --- |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | 190,382 | 2,898 | (1,311) | 191,969 |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | 242,458 | 1,171 | (2,088) | 241,541 |
| Municipal securities | 117,913 | 2,641 | (1,539) | 119,015 |
| Non-agency residential mortgage-backed securities | 56,014 | 11 | - | 56,025 |
| Collateralized loan obligations | 521,275 | - | (2,311) | 518,964 |
| Corporate debt securities | 162,002 | 11,603 | (7) | 173,598 |
| Total securities available-for-sale | $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

The following table presents the fair values and weighted average yields using amortized cost of the securities held-to-maturity portfolio as of December 31, 2022, based on the earlier of contractual maturity dates or next repricing dates:

| ($ in thousands) | One Year or Less |  | More than One Year through Five Years |  | More than Five Years through Ten Years |  | More than Ten Years |  | Total |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield |
| Securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | $ - | - % | $ - | - % | $7,987 | 2.52% | $115,239 | 2.70% | $123,226 | 2.69% |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | - | - % | - | - % | - | - % | 49,458 | 2.64% | 49,458 | 2.64% |
| Municipal securities | - | - % | - | - % | 16,052 | 2.19% | 73,724 | 2.71% | 89,776 | 2.62% |
| Total securities held-to-maturity | $ - | - % | $ - | - % | $24,039 | 2.29% | $238,421 | 2.69% | $262,460 | 2.65% |

The following table presents the fair values and weighted average yields using amortized cost of the securities available-for-sale portfolio as of December 31, 2022, based on the earlier of contractual maturity dates or next repricing dates:

| ($ in thousands) | One Year or Less |  | More than One Year through Five Years |  | More than Five Years through Ten Years |  | More than Ten Years |  | Total |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield |
| Securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |
| SBA loan pools securities | $11,187 | 3.18% | $ - | - % | $ - | - % | $ - | - % | $11,187 | 3.18% |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | - | - % | - | - % | - | - % | 40,206 | 5.59% | 40,206 | 5.59% |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | 5,531 | 4.65% | 7,941 | 3.24% | 24,918 | 2.76% | 54,801 | 4.80% | 93,191 | 4.04% |
| Non-agency residential mortgage-backed securities | - | - % | - | - % | - | - % | 80,492 | 3.68% | 80,492 | 3.68% |
| Collateralized loan obligations | 476,603 | 5.85% | - | - % | - | - % | - | - % | 476,603 | 5.85% |
| Corporate debt securities | - | - % | 153,740 | 4.82% | 12,878 | 5.73% | - | - % | 166,618 | 4.89% |
| Total securities available-for-sale | $493,321 | 5.78% | $161,681 | 4.74% | $37,796 | 3.69% | $175,499 | 4.42% | $868,297 | 5.20% |

56

### Loans Receivable

The following table presents the composition of our loan portfolio as of the dates indicated:

| ($ in thousands) | December 31, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | Amount | Percent | Amount | Percent |
| Commercial: |  |  |  |  |
| Commercial and industrial (1) | $1,845,960 | 25.9% | $2,668,984 | 36.8% |
| Commercial real estate | 1,259,651 | 17.7% | 1,311,105 | 18.1% |
| Multifamily | 1,689,943 | 23.8% | 1,361,054 | 18.8% |
| SBA (2) | 68,137 | 1.0% | 205,548 | 2.8% |
| Construction | 243,553 | 3.4% | 181,841 | 2.5% |
| Consumer: |  |  |  |  |
| Single family residential mortgage | 1,920,806 | 27.0% | 1,420,023 | 19.6% |
| Other consumer | 86,988 | 1.2% | 102,925 | 1.4% |
| Total loans (3) | 7,115,038 | 100.0% | 7,251,480 | 100.0% |
| Allowance for loan losses | (85,960) |  | (92,584) |  |
| Total loans receivable, net | $7,029,078 |  | $7,158,896 |  |

(1) Includes warehouse lending balances of $602.5 million and $1.60 billion at December 31, 2022 and 2021.

(2) Includes PPP loans totaling $5.7 million and $123.1 million at December 31, 2022 and 2021.

(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) | December 31, 2022 |  | December 31, 2021 |  |
| --- | --- | --- | --- | --- |
|  | Amount | % of Portfolio | Amount | % of Portfolio |
| C&I Portfolio by Industry |  |  |  |  |
| Finance and Insurance - Warehouse Lending | $602,508 | 33% | $1,602,487 | 60% |
| Real Estate and Rental Leasing | 172,948 | 9% | 252,610 | 9% |
| Finance and Insurance - Other | 159,532 | 9% | 108,098 | 4% |
| Healthcare | 110,132 | 6% | 85,666 | 3% |
| Manufacturing | 95,900 | 5% | 91,533 | 3% |
| Television / Motion Pictures | 75,863 | 4% | 46,762 | 2% |
| Arts, Entertainment & Recreation | 71,933 | 4% | 12,646 | - % |
| Gas Stations | 59,698 | 3% | 71,381 | 3% |
| Other Retail Trade | 57,321 | 3% | 43,202 | 2% |
| Construction | 40,345 | 2% | 24,777 | 1% |
| Professional Services | 38,710 | 2% | 47,924 | 2% |
| Wholesale Trade | 38,678 | 2% | 54,227 | 2% |
| Management of Companies and Enterprises | 35,103 | 2% | 24,712 | 1% |
| Educational Services | 34,523 | 2% | 33,684 | 1% |
| Food Services | 31,471 | 2% | 32,598 | 1% |
| Transportation | 19,345 | 1% | 16,783 | 1% |
| Accommodations | 8,720 | - % | 2,069 | - % |
| Other | 193,230 | 11% | 117,825 | 4% |
| Total | $1,845,960 | 100% | $2,668,984 | 100% |

58

The following table presents the contractual maturity with the weighted-average contractual yield of the loan portfolio as of December 31, 2022:

| ($ in thousands) | One year or less |  | More than One Year through Five Years |  | More than Five Years through Fifteen Years |  | More than Fifteen Years |  | Total |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Amount | Weighted-Average Yield | Amount | Weighted-Average Yield | Amount | Weighted-Average Yield | Amount | Weighted-Average Yield | Amount | Weighted-Average Yield |
| Commercial: |  |  |  |  |  |  |  |  |  |  |
| Commercial and industrial | $833,148 | 4.65% | $597,107 | 6.39% | $407,500 | 4.58% | $8,205 | 6.20% | $1,845,960 | 5.20% |
| Commercial real estate | 41,858 | 4.64% | 470,642 | 4.63% | 713,941 | 4.10% | 33,210 | 4.18% | 1,259,651 | 4.32% |
| Multifamily | 6,389 | 4.19% | 172,660 | 4.08% | 1,347,520 | 3.87% | 163,374 | 4.08% | 1,689,943 | 3.91% |
| SBA | 724 | 5.88% | 21,882 | 6.84% | 33,859 | 5.85% | 11,672 | 5.51% | 68,137 | 6.11% |
| Construction | 91,818 | 6.93% | 151,735 | 7.77% | - | - % | - | - % | 243,553 | 7.45% |
| Consumer: |  |  |  |  |  |  |  |  |  |  |
| Single family residential mortgage | 3,412 | 5.72% | 3,263 | 5.62% | 8,797 | 4.31% | 1,905,334 | 4.23% | 1,920,806 | 4.24% |
| Other consumer | 1,781 | 7.99% | 8,728 | 6.53% | 65,304 | 6.66% | 11,175 | 7.95% | 86,988 | 6.84% |
| Total | $979,130 | 4.87% | $1,426,017 | 5.68% | $2,576,921 | 4.14% | $2,132,970 | 4.26% | $7,115,038 | 4.59% |

59

The following table presents the interest rate profile of the loan portfolio due after one year at December 31, 2022:

| ($ in thousands) | Due After One Year |  |  |
| --- | --- | --- | --- |
|  | Fixed Rate | Variable Rate | Total |
| Commercial: |  |  |  |
| Commercial and industrial | $398,643 | $614,169 | $1,012,812 |
| Commercial real estate | 808,413 | 409,380 | 1,217,793 |
| Multifamily | 423,792 | 1,259,762 | 1,683,554 |
| SBA | 11,469 | 55,944 | 67,413 |
| Construction | 25,965 | 125,770 | 151,735 |
| Consumer: |  |  |  |
| Single family residential mortgage | 1,396,830 | 520,564 | 1,917,394 |
| Other consumer | 69,851 | 15,356 | 85,207 |
| Total | $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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Origination by rate type (excluding warehouse): |  |  |  |
| Variable rate: |  |  |  |
| Commercial and industrial | $225,791 | $289,987 | $272,616 |
| Commercial real estate | 83,686 | 85,430 | 44,806 |
| Multifamily | 367,058 | 232,950 | 132,836 |
| SBA | 12,820 | 10,111 | 6,393 |
| Construction | 42,189 | 36,951 | 8,139 |
| Single family residential mortgage | - | - | 5,404 |
| Other consumer | - | 1,115 | 37 |
| Total variable rate | 731,544 | 656,544 | 470,231 |
| Fixed rate: |  |  |  |
| Commercial and industrial | 95,295 | 117,474 | 71,388 |
| Commercial real estate | 277,043 | 284,252 | 59,565 |
| Multifamily | 269,596 | 120,785 | 22,773 |
| SBA | 2,360 | 149,353 | 265,609 |
| Construction | 12,270 | 6,831 | 12,594 |
| Other consumer | 25,682 | 6,519 | - |
| Total fixed rate | 682,246 | 685,214 | 431,929 |
| Total loans originated | 1,413,790 | 1,341,758 | 902,160 |
| Acquired in business combination | - | 962,856 | - |
| Purchases: |  |  |  |
| Multifamily | - | 29,764 | 120,900 |
| Construction | - | - | 14,750 |
| Single family residential mortgage | 814,262 | 795,773 | 149,687 |
| Total loans purchased | 814,262 | 825,537 | 285,337 |
| Transferred to loans held-for-sale | - | (15,205) | - |
| Other items: |  |  |  |
| Net repayment activity (1) | (1,364,515) | (2,024,349) | (1,640,193) |
| Warehouse credit facilities activity, net (2) | (999,979) | 262,478 | 399,216 |
| Total other items | (2,364,494) | (1,761,871) | (1,240,977) |
| Net increase (decrease) | $(136,442) | $1,353,075 | $(53,480) |

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(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.

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## Asset Quality

### Past Due Loans

The following table presents a summary of total loans that were past due as of the dates indicated:

| ($ in thousands) | 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 |
| Commercial: |  |  |  |  |  |  |  |  |
| Commercial and industrial | $4,002 | $481 | $13,833 | $18,316 | $9,342 | $1,351 | $9,503 | $20,196 |
| Commercial real estate | 311 | - | 910 | 1,221 | - | - | - | - |
| Multifamily | - | - | - | - | 786 | - | - | 786 |
| SBA | 287 | - | 10,299 | 10,586 | 987 | 2,360 | 15,941 | 19,288 |
| Construction | - | - | - | - | - | - | - | - |
| Consumer: |  |  |  |  |  |  |  |  |
| Single family residential mortgage | 36,338 | 5,068 | 19,431 | 60,837 | 24,867 | - | 7,076 | 31,943 |
| Other consumer | 163 | 16 | 81 | 260 | 449 | - | 89 | 538 |
| Total loans | $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) | December 31, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Commercial: |  |  |
| Commercial and industrial | $22,613 | $28,594 |
| Commercial real estate | 910 | - |
| SBA | 10,417 | 16,653 |
| Lease financing | - | - |
| Consumer: |  |  |
| Single family residential mortgage | 21,116 | 7,076 |
| Other consumer | 195 | 235 |
| Total nonaccrual loans | 55,251 | 52,558 |
| Loans past due over 90 days or more and still on accrual | - | - |
| Other real estate owned | - | - |
| Total nonperforming assets | $55,251 | $52,558 |
| Performing troubled debt restructured loans | $2,739 | $12,538 |
| Nonaccrual loans to total loans | 0.78% | 0.72% |
| Nonperforming loans to total loans | 0.78% | 0.72% |
| Nonperforming assets to total assets | 0.60% | 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

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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.

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The following table presents the risk categories for total loans as of December 31, 2022:

| ($ in thousands) | December 31, 2022 |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | Pass | Special Mention | Substandard | Doubtful | Total |
| Commercial: |  |  |  |  |  |
| Commercial and industrial | $1,749,284 | $49,399 | $43,273 | $4,004 | $1,845,960 |
| Commercial real estate | 1,248,196 | 1,745 | 9,710 | - | 1,259,651 |
| Multifamily | 1,658,521 | 2,997 | 28,425 | - | 1,689,943 |
| SBA | 55,789 | 800 | 11,548 | - | 68,137 |
| Construction | 243,553 | - | - | - | 243,553 |
| Consumer: |  |  |  |  |  |
| Single family residential mortgage | 1,889,911 | 9,101 | 21,794 | - | 1,920,806 |
| Other consumer | 86,599 | 138 | 251 | - | 86,988 |
| Total loans (1) | $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) | December 31, 2021 |  |  |  |
| --- | --- | --- | --- | --- |
|  | Pass | Special Mention | Substandard | Total |
| Commercial: |  |  |  |  |
| Commercial and industrial | 2,550,540 | 65,659 | 52,785 | 2,668,984 |
| Commercial real estate | 1,292,837 | 4,845 | 13,423 | 1,311,105 |
| Multifamily | 1,312,038 | 46,314 | 2,702 | 1,361,054 |
| SBA | 181,129 | 6,040 | 18,379 | 205,548 |
| Construction | 171,731 | 10,110 | - | 181,841 |
| Consumer: |  |  |  |  |
| Single family residential mortgage | 1,395,785 | 10,423 | 13,815 | 1,420,023 |
| Other consumer | 102,538 | 92 | 295 | 102,925 |
| Total loans (1) | $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) | December 31, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Allowance for credit losses: |  |  |
| Allowance for loan losses (ALL) | $85,960 | $92,584 |
| Reserve for unfunded noncancellable loan commitments | 5,305 | 5,605 |
| Total allowance for credit losses (ACL) | $91,265 | $98,189 |
| ALL to total loans | 1.21% | 1.28% |
| ACL to total loans | 1.28% | 1.35% |
| ACL to total loans, excluding PPP loans | 1.28% | 1.38% |
| ALL to nonaccrual loans | 155.58% | 176.16% |
| ACL to nonaccrual loans | 165.18% | 186.82% |

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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) | Year Ended December 31, |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 |  |  | 2021 |  |  | 2020 |  |  |
|  | Net (Charge-offs) Recoveries | Average Loans | Annualized (Charge-off) Recovery Ratio | Net (Charge-offs) Recoveries | Average Loans | Annualized (Charge-off) Recovery Ratio | Net (Charge-offs) Recoveries | Average Loans | Annualized (Charge-off) Recovery Ratio |
| Commercial: |  |  |  |  |  |  |  |  |  |
| Commercial and industrial | $24,290 | $2,263,154 | 1.07% | $(3,059) | $2,110,492 | (0.14)% | $(12,984) | $1,557,558 | (0.83)% |
| Commercial real estate | 7 | 1,273,088 | - % | (576) | 998,068 | (0.06)% | - | 859,848 | - % |
| Multifamily | - | 1,533,764 | - % | - | 1,299,582 | - % | - | 1,449,749 | - % |
| SBA | 363 | 68,221 | 0.53% | (2,648) | 223,097 | (1.19)% | (755) | 185,816 | (0.41)% |
| Construction | - | 221,200 | - % | - | 159,758 | - % | - | 212,863 | - % |
| Lease financing | - | - | - % | - | - | - % | - | - | - % |
| Consumer: |  |  |  |  |  |  |  |  |  |
| Single family residential mortgage | 183 | 1,795,951 | 0.01% | (247) | 1,310,029 | (0.02)% | (78) | 1,370,861 | (0.01)% |
| Other consumer | (225) | 91,030 | (0.25)% | 2 | 40,046 | - % | 215 | 38,941 | 0.55% |
| Total loans | $24,618 | $7,246,408 | 0.34% | $(6,528) | $6,141,072 | (0.11)% | $(13,602) | $5,675,636 | (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.

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The following table presents information regarding activity in the ACL for the periods indicated:

| ($ in thousands) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Allowance for loan losses (ALL) |  |  |  |
| Balance at beginning of year | $92,584 | $81,030 | $57,649 |
| Impact of adopting ASU 2016-13 | - | - | 7,609 |
| Initial reserve for purchased credit-deteriorated loans (1) | - | 13,650 | - |
| Charge-offs | (9,278) | (9,886) | (15,417) |
| Recoveries | 33,896 | 3,358 | 1,815 |
| Net recoveries (charge-offs) | 24,618 | (6,528) | (13,602) |
| (Reversal of) provision for credit losses | (31,242) | 4,432 | 29,374 |
| Balance at end of year | $85,960 | $92,584 | $81,030 |
| Reserve for unfunded noncancellable loan commitments |  |  |  |
| Balance at beginning of year | $5,605 | $3,183 | $4,064 |
| Impact of adopting ASU 2016-13 | - | - | (1,226) |
| Provision for credit losses | (300) | 2,422 | 345 |
| Balance at end of year | $5,305 | $5,605 | $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) | December 31, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | ALL Amount | Percentage of Loans to Total Loans | ALL Amount | Percentage of Loans to Total Loans |
| Commercial: |  |  |  |  |
| Commercial and industrial | $34,156 | 25.9% | $33,557 | 36.8% |
| Commercial real estate | 15,977 | 17.7% | 21,727 | 18.1% |
| Multifamily | 14,696 | 23.8% | 17,893 | 18.8% |
| SBA | 2,648 | 1.0% | 3,017 | 2.8% |
| Construction | 5,850 | 3.4% | 5,622 | 2.5% |
| Consumer: |  |  |  |  |
| Single family residential mortgage | 12,050 | 27.0% | 9,608 | 19.6% |
| Other consumer | 583 | 1.2% | 1,160 | 1.4% |
| Total | $85,960 | 100.0% | $92,584 | 100.0% |

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## 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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Balance at beginning of period | $25,888 | $27,977 | $29,300 |
| New funding | - | - | 3,631 |
| Change in unfunded equity commitments | - | - | (3,225) |
| Return of capital | (2,165) | (2,293) | (2,094) |
| (Loss) gain on investments using HLBV method | (2,313) | 204 | 365 |
| Balance at end of period | $21,410 | $25,888 | $27,977 |
| Unfunded equity commitments | $ - | $ - | $ - |

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.

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## Deposits

The following table presents the composition of deposits by type as of the dates indicated:

| ($ in thousands) | December 31, 2022 |  | December 31, 2021 |  | Amount Change |
| --- | --- | --- | --- | --- | --- |
|  | Amount | % of Total Deposits | Amount | % of Total Deposits |  |
| Noninterest-bearing deposits | $2,809,328 | 39.5% | $2,788,196 | 37.5% | $21,132 |
| Interest-bearing demand deposits | 1,947,247 | 27.3% | 2,393,386 | 32.2% | (446,139) |
| Savings and money market | 1,174,925 | 16.4% | 1,751,135 | 23.5% | (576,210) |
| Certificates of deposit of $250,000 or less | 793,040 | 11.1% | 285,768 | 3.8% | 507,272 |
| Certificates of deposit of more than $250,000 | 396,381 | 5.6% | 220,950 | 3.0% | 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 | Total |
| --- | --- | --- | --- | --- | --- |
| Certificates of deposit of $250,000 or less | $204,387 | $173,454 | $286,525 | $128,674 | $793,040 |
| Certificates of deposit of more than $250,000 | 245,988 | 89,470 | 19,681 | 41,242 | 396,381 |
| Total certificates of deposit (1) | $450,375 | $262,924 | $306,206 | $169,916 | $1,189,421 |

(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.

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## Borrowings

The following table presents our FHLB advances and other borrowings as of the dates indicated:

| ($ in thousands) | December 31, 2022 |  |  | December 31, 2021 |
| --- | --- | --- | --- | --- |
|  | Weighted Average Interest Rate | Weighted Average Maturity (years) | Outstanding Balance | Outstanding Balance |
| FHLB advances: |  |  |  |  |
| Overnight advances | 4.59% | 0.01 | $20,000 | $70,000 |
| Term advances | 2.91% | 3.50 | 611,000 | 411,000 |
| Term advances (putable) | 3.40% | 4.93 | 100,000 | - |
| Unamortized costs |  |  | (3,652) | (4,941) |
| Total FHLB advances | 3.02% | 3.60 | $727,348 | $476,059 |
| Other borrowings: |  |  |  |  |
| Line of credit | SOFR + 1.85% | 0.96 | $ - | $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.

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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:

| ($ in thousands) | Interest Rate | Maturity Date | December 31, |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  | 2022 |  | 2021 |  |
|  |  |  | Par Value | Unamortized Debt Issuance Cost and Discount | Par Value | Unamortized Debt Issuance Cost and Discount |
| Senior notes | 5.250% | 4/15/2025 | $175,000 | $(722) | $175,000 | $(1,014) |
| Subordinated notes | 4.375% | 10/30/2030 | 85,000 | (1,899) | 85,000 | (2,127) |
| PMB Statutory Trust III, junior subordinated debentures | LIBOR + 3.40% | 9/26/2032 | 7,217 | - | 7,217 | - |
| PMB Capital Trust III, junior subordinated debentures | LIBOR + 2.00% | 10/8/2034 | 10,310 | - | 10,310 | - |
| Total long-term debt, net |  |  | $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) | Year Ended December 31, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Balance at beginning of year | $4,348 | $5,515 | $6,201 |
| Subsequent change in the reserve | (1,004) | (948) | (686) |
| Utilization of reserve for loan repurchases | (355) | (219) | - |
| Balance at end of year | $2,989 | $4,348 | $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.

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### 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:

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| ($ in thousands) | Pledged Assets |  | Borrowing Capacity | Amounts Used | Available Capacity |
| --- | --- | --- | --- | --- | --- |
|  | Loans (UPB) | Investment Securities |  |  |  |
| December 31, 2022 |  |  |  |  |  |
| Secured: |  |  |  |  |  |
| Federal Home Loan Bank of San Francisco |  |  |  |  |  |
| Standard program (1) | $2,955,907 | $ - | $1,992,757 | $1,079,801 | $912,956 |
| Securities program (2) | - | 214,437 | 162,381 | 20,000 | 142,381 |
| Federal Reserve Bank |  |  |  |  |  |
| Discount Window | - | 122,555 | 90,060 | - | 90,060 |
| Borrower in Custody Program | 1,305,136 | - | 859,045 | - | 859,045 |
| Unsecured: |  |  |  |  |  |
| American Financial Exchange (AFX) | - | - | 445,000 | - | 445,000 |
| Correspondent banks | - | - | 210,000 | - | 210,000 |
| Total | $4,261,043 | $336,992 | $3,759,243 | $1,099,801 | $2,659,442 |

(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 depository 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 Depository Share). Upon redemption, the Series E Preferred Stock and the Series E Depository Shares were no longer outstanding and all rights with respect to such stock and depository shares ceased and terminated, except the right to payment of the redemption price. Also upon redemption, the Series E Depository 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.

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## Commitments

The following table presents information as of December 31, 2022 regarding our commitments and contractual obligations:

| ($ in thousands) | 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 |
| Commitments to extend credit | $230,889 | $15,465 | $172,445 | $17,837 | $25,142 |
| Unused lines of credit | 1,513,514 | 1,263,283 | 165,899 | 54,987 | 29,345 |
| Standby letters of credit | 9,477 | 6,581 | 2,896 | - | - |
| Total commitments | $1,753,880 | $1,285,329 | $341,240 | $72,824 | $54,487 |
| FHLB advances | $731,000 | $20,000 | $291,000 | $420,000 | $ - |
| Long-term debt | 277,527 | - | 175,000 | - | 102,527 |
| Operating and finance lease obligations | 35,207 | 8,837 | 15,346 | 7,941 | 3,083 |
| Certificates of deposit | 1,189,421 | 1,019,505 | 167,221 | 2,695 | - |
| 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 Deepstack 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.

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The following table presents the regulatory capital ratios for the Company and the Bank as of dates indicated:

|  | Banc of California, Inc. | Banc of California, NA | Minimum Regulatory Requirements | Well-Capitalized Requirements (Bank) | Capital Conservation Buffer Requirements (Bank) |
| --- | --- | --- | --- | --- | --- |
| December 31, 2022 |  |  |  |  |  |
| Total risk-based capital ratio | 14.21% | 16.02% | 8.00% | 10.00% | 10.50% |
| Tier 1 risk-based capital ratio | 11.80% | 14.94% | 6.00% | 8.00% | 8.50% |
| Common equity tier 1 capital ratio | 11.80% | 14.94% | 4.50% | 6.50% | 7.00% |
| Tier 1 leverage ratio | 9.70% | 12.25% | 4.00% | 5.00% | N/A |
| December 31, 2021 |  |  |  |  |  |
| Total risk-based capital ratio | 14.98% | 15.71% | 8.00% | 10.00% | 10.50% |
| Tier 1 risk-based capital ratio | 12.55% | 14.60% | 6.00% | 8.00% | 8.50% |
| Common equity tier 1 capital ratio | 11.31% | 14.60% | 4.50% | 6.50% | 7.00% |
| Tier 1 leverage ratio | 10.37% | 12.06% | 4.00% | 5.00% | 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,
- Using FHLB advances and/or certain derivatives such as swaps to align maturities and repricing terms, and
- Managing the percentage of fixed rate loans in our portfolio.

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

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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.

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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) | 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 |
| December 31, 2022 |  |  |  |  |  |  |
| +200 bps | $1,663,256 | $(1,069) | (0.1)% | $342,138 | $6,999 | 2.1% |
| +100 bps | 1,668,040 | 3,715 | 0.2% | 338,711 | 3,572 | 1.1% |
| 0 bps | 1,664,325 |  |  | 335,139 |  |  |
| -100 bps | 1,637,298 | (27,027) | (1.6)% | 328,276 | (6,863) | (2.0)% |
| -200bps | 1,587,893 | (76,432) | (4.6)% | 318,317 | (16,822) | (5.0)% |

(1) *Assumes an instantaneous uniform change in interest rates at all maturities and no rate shock has a rate lower than zero percent.*

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.

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