Banc of California, Inc.: Form 10-Q for the period ended Jun 30, 2025

The following is management's discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2025. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2024 (the "Form 10-K") and with the unaudited condensed consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our operating expenses, profitability, allowance for credit losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions and related integrations, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. All statements contained in this Quarterly Report on Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:

• changes in general economic conditions, either nationally or in our market areas, including the impact of tariffs, supply chain disruptions, and the risk of recession or an economic downturn;
• changes in the interest rate environment, including the recent and potential future changes in the FRB benchmark rate, which could adversely affect our revenue and expenses, the value of assets and obligations, the realization of deferred tax assets, the availability and cost of capital and liquidity, and the impacts of continuing or renewed inflation;
• the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial condition of borrowers, and the operational risk of lending activities, including the effectiveness of our underwriting practices and the risk of fraud, any of which may lead to increased loan delinquencies, losses, and non-performing assets, and may result in our allowance for credit losses not being adequate;
• fluctuations in the demand for loans, and fluctuations in commercial and residential real estate values in our market area;
• the quality and composition of our securities portfolio;
• our ability to develop and maintain a strong core deposit base, including among our venture banking clients, or other low cost funding sources necessary to fund our activities particularly in a rising or high interest rate environment;
• the rapid withdrawal of a significant amount of demand deposits over a short period of time;
• the costs and effects of litigation;
• risks related to the Company's acquisitions, including disruption to current plans and operations; difficulties in customer and employee retention; fees, expenses and charges related to these transactions being significantly higher than anticipated; and our inability to achieve expected revenues, cost savings, synergies, and other benefits;
• results of examinations by regulatory authorities of the Company and the possibility that any such regulatory authority may, among other things, limit our business activities, restrict our ability to invest in certain assets, refrain from issuing an approval or non-objection to certain capital or other actions, increase our allowance for credit losses, result in write-downs of asset values, restrict our ability or that of our bank subsidiary to pay dividends, or impose fines, penalties or sanctions;
• legislative or regulatory changes that adversely affect our business, including changes in tax laws and policies, accounting policies and practices, privacy laws, and regulatory capital or other rules;
• the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses;
• errors in estimates of fair values of certain of our assets and liabilities, as well as the value of collateral supporting our loans, which may result in significant changes in valuation or recoveries;
• failures or security breaches with respect to the network, applications, vendors, and computer systems on which we depend, including due to cybersecurity threats;
• our ability to attract and retain key members of our senior management team;
• the effects of climate change, severe weather events, natural disasters such as earthquakes and wildfires, pandemics, epidemics, and other public health crises, acts of war or terrorism, and other external events on our business;
• the impact of bank failures or other adverse developments at other banks on general depositor and investor sentiment regarding the stability and liquidity of banks;
• the possibility that our recorded goodwill could become impaired, which may have an adverse impact on our earnings and capital;
• our existing indebtedness, together with any future incurrence of additional indebtedness, could adversely affect our ability to raise additional capital and to meet our debt obligations;
• the risk that we may incur significant losses on future asset sales or may not be able to execute anticipated asset sales; and
• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in our Form 10-K and from time to time in other documents that we file with or furnish to the SEC.

All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.

Overview

Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the holding company for its wholly owned subsidiary, Banc of California (the “Bank”), a California state-chartered bank and member of the FRB. When we refer to the “holding company," we are referring to Banc of California, Inc., the parent company, on a stand-alone basis. When we refer to “we,” “us,” “our,” or the “Company,” we are referring to Banc of California, Inc. and its consolidated subsidiaries including the Bank, collectively. The Bank is a premier relationship-based business bank, providing banking and treasury management services to small-, middle-market, and venture-backed businesses. The Bank offers a broad range of loan and deposit products and services through full-service branches throughout California and in Denver, Colorado, and Durham, North Carolina, as well as through regional offices nationwide. The Bank also provides full-stack payment processing solutions through its subsidiary, Deepstack Technologies, and serves the community association management industry nationwide with its technology-forward platform, SmartStreetTM.

Recent Events

Stock Repurchase Program

On March 17, 2025, we announced that our Board of Directors authorized the repurchase of up to $150.0 million of our common stock. On April 23, 2025, the Company announced an upsize of its stock repurchase program from $150.0 million to $300.0 million and expanded the program to cover both the Company's common stock and depositary shares representing its preferred stock. The repurchase authorization expires in March 2026.

During the first quarter of 2025, common stock repurchased under the program totaled 2,684,823 shares at a weighted average price per share of $14.36, or $38.5 million in the aggregate. During the second quarter of 2025, common stock repurchased under the program totaled 8,809,814 shares at a weighted average price per share of $12.65, or $111.5 million in the aggregate. During the six months ended June 30, 2025, common stock repurchased under the program totaled 11,494,637 shares at a weighted average price per share of $13.05, or $150.0 million in the aggregate. As of June 30, 2025, the Company had $150.0 million remaining under the current stock repurchase authorization.

Purchases may be made in open-market transactions, in block transactions on or off an exchange, in privately negotiated transactions or by other means as determined by our management and in accordance with the regulations of the SEC. The timing of purchases and the number of shares repurchased under the program will depend on a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions. The program may be changed, suspended, or discontinued at any time.

Strategic Loan Sales Process

During the second quarter of 2025, the Company commenced a strategic loan sale process, reclassifying approximately $506.7 million of loans as held for sale. As of June 30, 2025, $30.5 million of these loans had been sold, while the remaining $476.2 million were transferred to held for sale at a lower of cost or market value of $441.2 million. The transferred loans included commercial real estate construction loans of $258.4 million, commercial real estate mortgage loans of $163.2 million, and multi-family loans of $19.6 million. While many of the loans being sold have sufficient collateral values, they have attributes that drive credit migration, and as a result we commenced the sales process for these loans.

As a result of the transfer, the Company recognized charge-offs totaling $36.9 million resulting in an incremental impact to provision expense of $26.3 million in the second quarter. The charge-off and provision impact reflects the estimated fair value based on active bids or other market inputs.

Key Performance Indicators

Among other factors, our operating results generally depend on the following key performance indicators:

The Level of Net Interest Income

Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Net interest margin is net interest income (annualized if related to a non-annual period) expressed as a percentage of average interest-earning assets.

Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. Our primary interest-earning assets are loans and investment securities, and our primary interest-bearing liabilities are deposits and borrowings. While our deposit balances will fluctuate depending on our customers’ liquidity and cash flow, market conditions, and competitive pressures, we seek to minimize the impact of these variances by attracting a high percentage of noninterest-bearing deposits. We continue to focus on growing granular relationship-based deposits as a key component of our core deposit strategy, which supports a stable funding base and strengthens our client franchise.

Loan and Lease Production

We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans and leases portfolio is diverse and generally includes various asset-secured loans, lender finance loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial and venture-backed companies during the various phases of their early life cycles, warehouse loans, and secured business loans.

Our loan origination process emphasizes credit quality. To augment our internal loan production, we have purchased loans such as single-family residential mortgage loans, multi-family loans from other banks, and private student loans from third-party lenders. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic risk, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.

The Magnitude of Credit Losses

We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified loans and leases, nonaccrual loans and leases, and net charge-offs. We maintain an ACL on loans and leases, which is the sum of the ALLL and the reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off-balance sheet credit exposures. Loans and leases that are deemed uncollectible are charged off and deducted from the ALLL. Recoveries on loans and leases previously charged off are added to the ALLL. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology, which considers the impact of assumptions and is reflective of historical experience, economic forecasts viewed to be reasonable and supportable by management, the current loan and lease composition, and relative credit risks known as of the balance sheet date. For originated and acquired credit-deteriorated loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively.

We regularly review loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect the collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased ACL. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because our loans are concentrated in commercial real estate loans.

The Level of Noninterest Expense

Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation expense, customer related expense, information technology and data processing expense, and occupancy expense. Customer related expenses are primarily earnings credit rate ("ECRs") payments to customers and are mostly driven by the Homeowners Association ("HOA") business. ECRs are rate-sensitive and fluctuate in response to changes in the federal funds rate. Additionally, noninterest expense includes insurance and assessments, intangible asset amortization, leased equipment depreciation, other professional services, loan expenses, acquisition, integration and organization costs, and other expense. We monitor our efficiency ratio as a key measure of operational performance.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements and the notes thereto, which have been prepared in accordance with U.S. GAAP. The preparation of the condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may ultimately differ significantly from these estimates and assumptions, which could have a material adverse effect on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

Our accounting policies and estimates are fundamental to understanding the following discussion and analysis of financial condition and results of operations. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the ACL on loans and leases held for investment, business combinations, the carrying value of goodwill and other intangible assets, and the realization of deferred income tax assets and liabilities.

Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K.

Non-GAAP Financial Measures

We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. This disclosure should not be viewed as a substitute for results determined in accordance with GAAP. The methodology for determining these non-GAAP measures may differ among companies and may not be comparable. We used the following non-GAAP measures in this Quarterly Report on Form 10-Q:

• Return on average tangible common equity, tangible common equity, tangible book value per common share, efficiency ratio, adjusted net earnings, and adjusted diluted earnings per share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity, book value per common share, and noninterest expense to total revenue, respectively. The reconciliations of these non-GAAP measures to the GAAP measures are presented in the following tables for and as of the periods presented.

(Dollars in thousands)

(1) Effective tax rates of 23.12% and 25.30% used for the three months ended June 30, 2025 and March 31, 2025. Effective tax rates of 23.12% and 28.62% used for the six months ended June 30, 2025 and 2024.

(2) Annualized net earnings divided by average stockholders' equity.

(3) Annualized adjusted net earnings available to common and equivalent stockholders for ROATCE divided by average tangible common equity.

(Dollars in thousands, except per share data)

(1) Total common equity divided by common and equivalent shares outstanding.

(2) Tangible common equity divided by common and equivalent shares outstanding.

(3) Common and equivalent shares outstanding include non-voting common stock equivalents that are participating securities.

(Dollars in thousands)

(1) Includes customer related expense of $26.6 million and $27.8 million for the three months ended June 30, 2025 and March 31, 2025, and $54.3 million and $63.3 million for the six months ended June 30, 2025 and 2024.

(2) Noninterest expense used for efficiency ratio divided by total revenue.

(Dollars in thousands)

(1) Effective tax rates of 23.12% and 25.30% used for the three months ended June 30, 2025 and March 31, 2025. Effective tax rates of 23.12% and 28.62% used for the six months ended June 30, 2025 and 2024.

(2) Adjusted net earnings available to common and equivalent stockholders divided by weighted average diluted common shares outstanding.

(3) Annualized net earnings divided by average assets.

(4) Annualized adjusted net earnings divided by average assets.

Results of Operations

The Company reported net earnings available to common and equivalent stockholders of $18.4 million, or $0.12 per diluted common share, for the second quarter of 2025. On an adjusted basis, net earnings available to common and equivalent stockholders were $48.4 million for the quarter, or $0.31 per diluted common share.(1) This compares to net earnings available to common and equivalent stockholders of $43.6 million, or $0.26 per diluted common share, for the first quarter of 2025. The second quarter included provision expense, net of tax, of an additional $20.2 million taken during the quarter as a result of transferring $506.7 million of loans to held for sale at their lower of cost or market value. The second quarter also included a one-time non-cash income tax expense of $9.8 million primarily due to the revaluation of deferred tax assets related to recent California state tax changes passed as part of the 2025 California budget.

Second Quarter of 2025 Financial Highlights:

• Total revenue of $272.8 million increased by 3% from the first quarter of 2025 driven by solid loan growth combined with continued prudent expense management.
• Total loans of $24.7 billion (including loans held for sale) increased by 2%, or 9% annualized, from the first quarter of 2025 driven by growth in lender finance loans, equity fund loans, and purchased single-family residential loans.
• Strong loan originations totaled $2.2 billion including production, purchased loans, and unfunded new commitments, with a weighted average interest rate on production of 7.29%.
• Total deposits of $27.5 billion increased by 1%, and interest-bearing deposits of $20.1 billion increased by 2% from the first quarter of 2025.
• Net interest margin up 2 basis points vs. the first quarter of 2025 to 3.10% driven by a higher average yield on loans and leases increasing by 3 basis points and flat cost of funds from the first quarter of 2025.
• Commenced sales process for $506.7 million of loans and completed sales for $30.5 million of such loans during the second quarter. The remaining $476.2 million of loans were transferred to held for sale at a lower of cost or market value of $441.2 million.
• Credit quality metrics improved substantially primarily due to the transfer of loans to held for sale in connection with the strategic loan sales process. Nonperforming, classified, and special mention loans and leases, as a percentage of total loans and leases held for investment, decreased by 19 basis points, 46 basis points, and 115 basis points, respectively, from the first quarter of 2025.
• Results include $9.8 million of one-time non-cash income tax expense largely driven by the reevaluation of deferred tax assets due to California state tax changes enacted under the 2025 California budget.
• Repurchases of 8.8 million shares of common stock at a weighted average price per share of $12.65, or $111.5 million in the aggregate, during the second quarter, and 11.5 million shares of common stock at a weighted average price per share of $13.05, or $150.0 million in the aggregate, in the first half of the year. As of June 30, 2025, the Company had $150.0 million remaining under the stock repurchase authorization.
• Maintained strong capital ratios well above the regulatory thresholds for "well capitalized" banks, including a 12.34% Tier 1 capital ratio and 9.95% CET 1 capital ratio and continued growth in book value per share to $18.58, up 2% vs. the first quarter of 2025 and tangible book value per share(1) to $16.46, up 2% vs. the first quarter of 2025.

(1) See "- Non-GAAP Financial Measures."

The following table presents financial results and performance ratios for the periods indicated:

(Dollars in thousands, except per share data)

(1) Shares include non-voting common stock equivalents that are participating securities.

(2) See "- Non-GAAP Financial Measures."

(3) Annualized.

(4) Total revenue equals the sum of net interest income and noninterest income.

(5) Ratio calculated by dividing noninterest expense (less intangible asset amortization and acquisition, integration and reorganization costs) by total revenue (less gain/loss on sale of securities). See "- Non-GAAP Financial Measures." Noninterest expense includes customer related expense of $26.6 million and $27.8 million for the three months ended June 30, 2025 and March 31, 2025, and $54.3 million and $63.3 million for the six months ended June 30, 2025 and 2024.

Net Interest Income and Net Interest Margin

The following tables summarize the distribution of average assets, liabilities, and stockholders’ equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, presented on a tax equivalent basis, for the periods indicated:

(Dollars in thousands)

(1) Total loans are net of deferred fees, related direct costs, and premiums and discounts, but exclude the allowance for loan losses. Includes net loan discount accretion of $16.1 million and $16.0 million for the three months ended June 30, 2025 and March 31, 2025.

(2) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits.

(3) Total funds is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of total funds is calculated as annualized total interest expense divided by average total funds.

(Dollars in thousands)

(1) Total loans are net of deferred fees, related direct costs, and premiums and discounts, but exclude the allowance for loan losses. Includes net loan discount accretion of $32.1 million and $44.3 million for the six months ended June 30, 2025 and 2024..

(2) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits.

(3) Total funds is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of total funds is calculated as annualized total interest expense divided by average total funds.

Second Quarter of 2025 Compared to First Quarter of 2025

Net interest income increased by $7.9 million to $240.2 million for the second quarter from $232.4 million for the first quarter attributable primarily to the following:

• An increase of $16.2 million in interest income from loans due primarily to a higher average balance in the second quarter, higher day count, and higher average yield driven by higher yield on loan production.

This was offset partially by:

• An increase of $4.4 million in interest expense on deposits due primarily to higher average interest-bearing deposit balances in the second quarter and higher day count, offset partially by lower interest rates.
• A decrease of $2.1 million in interest income from deposits in financial institutions driven mainly by a lower average balance as cash was utilized to fund strong loan growth.
• An increase of $1.6 million in interest expense on our borrowings driven primarily by a higher average balance to support loan funding activity and higher day count.

The net interest margin increased to 3.10% for the second quarter, up 2 basis points from 3.08% for the first quarter primarily driven by a higher average yield on interest-earning assets. The average yield on interest-earning assets increased to 5.42% from 5.39%, reflecting a 3 basis point increase in the average yield on loans and leases to 5.93%, due to strong growth in higher yielding loan categories and new loan production at a higher weighted average rate of 7.29%. Average loans and leases also increased by $715.7 million to $24.5 billion, supported by strong loan growth.

The average total cost of funds remained flat at 2.42% for the second quarter. The average cost of borrowings decreased by 41 basis points to 4.93%, driven by the redemption of $174 million of 5.25% Senior Notes and replacement with lower-cost long-term Federal Home Loan Bank of San Francisco ("FHLB") borrowings at a weighted average rate of 3.81%. The average cost of deposits increased slightly to 2.13% from 2.12%. Average deposits increased by $384.0 million, with a $515.0 million increase in interest-bearing deposits, offset partially by a $130.9 million decrease in noninterest-bearing deposits as the need to fund strong loan growth drove a mix shift towards interest-bearing deposits. Average noninterest-bearing deposits represented 27.8% of average total deposits in the second quarter and 28.7% in the first quarter.

Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024

Net interest income increased by $14.0 million to $472.6 million for the six months ended June 30, 2025 from $458.6 million for the six months ended June 30, 2024 attributable primarily to the following:

• A decrease of $95.4 million in interest expense on deposits due primarily to lower interest paid on interest-bearing deposits as a result of deposit rate repricing driven by the 100 basis points of federal funds rate cuts in the second half of 2024 and lower average balance due mainly to the paydown of brokered deposits.
• A decrease of $30.0 million in interest expense on borrowings driven by lower average balance resulting from the payoff of higher-cost Bank Term Funding Program ("BTFP") borrowings in 2024, which were partially replaced with lower-cost long-term FHLB advances and lower market interest rates.
• An increase of $7.3 million in interest income from investment securities reflecting the benefits from 2024 balance sheet repositioning actions and reinvestment in higher-yield securities.

This was offset partially by:

• A decrease of $65.9 million in interest income from loans due primarily to a lower average balance attributable mainly to the sale in July 2024 of $1.95 billion of Civic loans, lower net loan discount accretion, and lower market interest rates reflective of the federal funds rate cuts.
• A decrease of $55.6 million in interest income from deposits in financial institutions primarily driven by lower balances, as we maintained a lower cash target level, and lower market interest rates.

The net interest margin increased to 3.09% for the six months ended June 30, 2025, up 36 basis points from 2.73% for the six months ended June 30, 2024. The year-over-year improvement was primarily driven by a 57 basis point decrease in the average total cost of funds to 2.42%, offset partially by a 19 basis point decrease in the average yield on interest-earning assets to 5.41%.

The average total cost of funds decreased by 57 basis points to 2.42%, driven by lower market interest rates and a shift in mix. The average cost of deposits decreased 51 basis points to 2.12%, reflecting the impact of federal funds rate cuts in the second half of 2024. Average total deposits decreased by $2.0 billion year over year, including a $1.9 billion reduction in average interest-bearing deposits and a $134.3 million decrease in average noninterest-bearing deposits. Average noninterest-bearing deposits represented 28.2% of average total deposits for the six months ended June 30, 2025 compared to 26.7% for the comparable period in 2024. The average cost of borrowings also decreased by 49 basis points to 5.12%, reflecting the paydown of higher-cost BTFP borrowings in the prior year and their replacement with lower-cost long-term FHLB advances.

The average yield on interest-earning assets decreased 19 basis points to 5.41%, primarily due to a 101 basis point decrease in the average yield on deposits in financial institutions, and a 21 basis point decrease in average yield on loans and leases, offset partially by a 30 basis point increase in the average yield on investment securities. The average yield on deposits in financial institutions decreased to 4.41% from 5.42% driven by the federal funds rate cuts described above, while the average yield on loans and leases decreased to 5.92% from 6.13%, driven by lower net loan discount accretion and market rates. The average yield on investment securities increased to 3.22% from 2.92%, reflecting continued benefits from 2024 balance sheet repositioning actions and reinvestment in higher-yield assets. Average deposits in financial institutions decreased by $1.7 billion to $2.0 billion, as we maintained a lower cash position.

Provision for Credit Losses

The following table sets forth the details of the provision for credit losses on loans and leases held for investment and securities and information regarding credit quality metrics for the periods indicated:

(Dollars in thousands)

(1) See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" for detail of charge-offs and recoveries by loan portfolio segment, class, and subclass for the periods presented.

Provision for credit losses are charged to earnings for the ALLL, the reserve for unfunded loan commitments, and the ACL on HTM and AFS securities. The provision for credit losses on our loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate ACL. For further details on our loan-related ACL methodology, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.

Second Quarter of 2025 Compared to First Quarter of 2025

The provision for credit losses was $39.1 million for the second quarter compared to $9.3 million for the first quarter. The second quarter provision included a provision of loan losses of $38.6 million, offset partially by a $0.4 million reversal of the provision for unfunded loan commitments, and a provision for credit losses on investment securities of $0.9 million.

The second quarter provision for loan losses included $26.3 million related to loans transferred to held for sale for the strategic loan sales process. The remaining $12.3 million provision for loan losses was primarily driven by net charge-off activity experienced during the quarter, an increase in the quantitative reserve driven by the updated economic forecast, and an increase in the qualitative reserve related to loans secured by office properties.

The first quarter provision included a $9.7 million provision for loan losses and a $0.5 million provision for unfunded loan commitments, offset partially by a $0.9 million reversal of the provision for credit losses related to investment securities. The first quarter provision for loans and unfunded loan commitments was primarily driven by net charge-off activity experienced during the quarter, offset partially by lower specific reserves and changes in portfolio mix driven by growth in loan segments with low expected credit losses.

Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024

The provision for credit losses was $48.4 million for the six months ended June 30, 2025 compared to $21.0 million for the six months ended June 30, 2024. The provision for the six months ended June 30, 2025 primarily included a provision for loan losses of $48.3 million and a provision for unfunded loan commitments of $0.2 million.

The provision for the six months ended June 30, 2025 included $26.3 million related to loans transferred to held for sale. The remaining provision for loans and unfunded loan commitments was primarily driven by net charge-off activity experienced in the first half of the year, with additional impacts from risk rating migration activity. These were offset partially by lower specific reserves and a favorable shift in the portfolio mix due to growth in loan segments with lower expected credit losses.

The provision for loans and unfunded loan commitments for the six months ended June 30, 2024 included a $23.0 million provision for loan losses and a $2.0 million reversal of the provision for unfunded loan commitments. The provision for the six months ended June 30, 2024 was generally due to higher net charge-offs and higher qualitative reserves, offset partially by the reserves released for the Civic loans transferred to held for sale in the second quarter of 2024.

Certain circumstances may lead to increased provisions for credit losses on loans and leases in the future. Examples of such circumstances include deterioration in economic conditions and forecasts, an increased amount of classified and/or criticized loans and leases, and net loan and lease and unfunded commitment growth. Deterioration in economic conditions and forecasts may include the rate of economic growth, the unemployment rate, the rate of inflation, changes in the general level of interest rates, changes in real estate values, and adverse conditions in borrowers’ businesses. See further discussion in “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.

Noninterest Income

The following table summarizes noninterest income by category for the periods indicated:

(In thousands)

Second Quarter of 2025 Compared to First Quarter of 2025

Noninterest income decreased by $1.0 million to $32.6 million for the second quarter from $33.7 million for the first quarter due mainly to a $2.4 million decrease in dividends and gains on equity investments, offset partially by a $1.5 million increase in warrant income. The decrease in dividends and gains on equity investments was primarily related to fair value losses in the second quarter on SBIC investments compared to fair value gains in the first quarter. The increase in warrant income was driven by higher gains from warrant exercises.

Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024

Noninterest income increased by $2.7 million to $66.3 million for the six months ended June 30, 2025 from $63.6 million for the six months ended June 30, 2024 due mainly to increases of $4.0 million in other income and $2.8 million in commissions and fees, offset partially by decreases of $2.2 million in leased equipment income and $2.0 million in dividends and gains on equity investments. The increase in other income was due mainly to a $2.6 million increase in the fair value mark on the credit-linked notes and a $1.1 million increase in gain on termination of leases. The increase in commissions and fees was due principally to higher loan-related fee income and higher customer service fees. The decrease in dividends and gains on equity investments was due mostly to lower fair value net gains in the first half of 2025 on SBIC investments compared to the same period in 2024.

Noninterest Expense

The following table summarizes noninterest expense by category for the periods indicated:

(In thousands)

Second Quarter of 2025 Compared to First Quarter of 2025

Noninterest expense increased by $2.2 million to $185.9 million for the second quarter from $183.7 million for the first quarter due mainly to increases of $2.1 million in insurance and assessments and $1.9 million in compensation expense, offset partially by a decrease of $2.0 million in information technology and data processing expenses. Insurance assessments increased mainly due to lower FDIC assessment and FDIC expense true-ups in the first quarter. Compensation expense increased mainly driven by higher incentive and equity compensation reversals related to staff exits in the prior quarter. Information technology and data processing decreased mainly driven by lower software subscription costs and certain expense true-ups.

Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024

Noninterest expense decreased by $44.6 million to $369.5 million for the six-month period ended June 30, 2025 due mainly to decreases of $30.2 million in insurance and assessments, $9.0 million in customer related expenses, $4.9 million in occupancy, $3.4 million in compensation expense, and $13.1 million in all of the other expense categories, offset partially by an increase of $12.7 million in acquisition, integration and reorganization costs, as the prior-year period included a reversal of previously accrued merger-related costs due to lower actual expenses and there are no merger-related costs in the current year. Insurance and assessment decreased primarily due to incremental FDIC special assessments recorded in the first quarter of 2024, resulting from higher assessment rates. Customer related expense decreased due to lower earnings credit rate expenses, which were impacted by the lower federal funds rate. Occupancy decreased reflecting cost savings from branch consolidations following the merger. Compensation expense decreased primarily driven by reduced headcount following the merger.

Income Taxes

Second Quarter of 2025 Compared to First Quarter of 2025

Income tax expense of $19.5 million was recorded for the second quarter resulting in an effective tax rate of 40.7% compared to income tax expense of $19.5 million and an effective tax rate of 26.7% for the first quarter.

The 40.7% effective tax rate in the second quarter of 2025 included a one-time non-cash income tax expense of $9.8 million due primarily to the revaluation of deferred tax assets ("DTA") related to the California state tax changes passed as part of the 2025 California budget enacted on June 30, 2025 and effective retroactively to January 1, 2025. We expect our tax rate going forward to be positively impacted by this state tax rule change.

Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024

Income tax expense of $39.0 million was recorded for the six-month period ended June 30, 2025 resulting in an effective tax rate of 32.2% compared to income tax expense of $25.9 million and an effective tax rate of 29.7% for the comparable period in 2024. The higher 2025 year-to-date effective tax rate was due primarily to the one-time non-cash tax expense related to the DTA revaluation recorded in the second quarter of 2025.

Balance Sheet Analysis

The following table provides a summary of our balance sheet highlights as of the dates indicated:

(In thousands)

Cash and Cash Equivalents

Cash and cash equivalents decreased by $148.7 million to $2.4 billion at June 30, 2025 compared to $2.5 billion at December 31, 2024, primarily attributable to the use of cash to support loan growth in the first half of the year.

Securities Available-for-Sale

The following table presents the composition and durations of our AFS securities as of the dates indicated:

(Dollars in thousands)

AFS securities decreased by $0.7 million to $2.2 billion at June 30, 2025 compared to $2.2 billion at December 31, 2024. The decrease was primarily driven by $209.7 million of principal paydowns, $3.7 million of net amortization, and a $0.8 million provision for credit losses, offset partially by purchases of $166.9 million and a $46.7 million increase in the fair value of AFS securities due to lower interest rates. As principal paydowns occurred, we reinvested in higher-yield securities to enhance our investment yield.

As of June 30, 2025, AFS securities had aggregate unrealized net after-tax losses in AOCI of $166.6 million compared to $200.1 million at December 31, 2024. The decrease in the AFS unrealized net losses related primarily to lower interest rates and the resulting impact on valuations.

Securities Held-to-Maturity

The following table presents the composition and duration of our HTM securities as of the dates indicated:

(Dollars in thousands)

HTM securities increased by $10.6 million to $2.3 billion at June 30, 2025 compared to $2.3 billion at December 31, 2024. The increase was primarily due to the accretion of $16.7 million of the remaining unrealized losses balance deferred in other comprehensive income ("OCI") from a prior transfer of securities from AFS to HTM on June 1, 2022, and the release of $0.8 million in credit loss reserve, offset partially by $6.3 million of net amortization and $0.6 million of principal paydowns.

As of June 30, 2025, HTM securities had aggregate unrealized net after-tax losses in AOCI of $145.9 million remaining from the balance established at the time of the AFS to HTM transfer, compared to $157.9 million at December 31, 2024.

The following table shows the geographic composition of the majority of our HTM municipal securities portfolio as of the date indicated:

(Dollars in thousands)

91

Loans and Leases Held for Investment

The following table presents the composition of our loans and leases held for investment by loan portfolio segment, class, and subclass as of the dates indicated:

(Dollars in thousands)

(1) Includes land and acquisition and development loans of $200.6 million at June 30, 2025 and $223.9 million at December 31, 2024.

Total loans and leases held for investment increased by $464.2 million and totaled $24.2 billion at June 30, 2025 compared to $23.8 billion at December 31, 2024. The increase in loans and leases held for investment was due primarily to increased balances in the venture capital, asset-based, other residential real estate mortgage mainly from purchased single-family residential loans, multi-family, and other commercial loan portfolios, offset partially by a decrease in the real estate construction and land loan segment and the commercial real estate mortgage loan portfolios.

In the second quarter of 2025, we commenced a strategic loan sale process and transferred $506.7 million of loans to held for sale. As of June 30, 2025, $30.5 million of these loans had been sold, and the remaining $476.2 million were transferred to held for sale at a lower of cost or market value of $441.2 million, which included commercial real estate construction loans of $258.4 million, commercial real estate mortgage loans of $163.2 million, and multi-family loans of $19.6 million. While many of the loans being sold have sufficient collateral values, they have attributes that drive credit migration, and as a result we have commenced the sales process for these loans.

The following table presents a roll forward of loans and leases held for investment for the period indicated:

(In thousands)

93

Real Estate Loans Held for Investment

Our real estate loan portfolio encompasses commercial real estate mortgage, residential real estate mortgage, and real estate construction and land loans. As of June 30, 2025 and December 31, 2024, the real estate loan comprised 66% and 70%, respectively of the total loan portfolio. The following table presents the geographic composition of our real estate loans held for investment by the top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:

(Dollars in thousands)

At June 30, 2025 and December 31, 2024, 72% and 71% of our real estate loans were collateralized by property located in California because our full-service branches and our community banking activities are primarily located in California.

Loans and Leases Held for Sale

Total loans and leases held for sale increased by $439.2 million and totaled $465.6 million at June 30, 2025 compared to $26.3 million at December 31, 2024. The increase in loans held for sale was primarily driven by the transfer as discussed above related to the strategic loan sales process commenced in the second quarter of 2025.

Allowance for Credit Losses on Loans and Leases Held for Investment

The ACL on loans and leases held for investment is the combination of the ALLL and the reserve for unfunded loan commitments. The ALLL is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The amortized cost basis of loans and leases does not include accrued interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statement of earnings is a combination of the provision for loan and lease losses, the provision for unfunded loan commitments, the provision for AFS debt securities, and the provision for HTM debt securities.

Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates.

For further information regarding the calculation of the ACL on loans and leases held for investment using the CECL methodology, see Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of our Form 10-K.

In calculating our ACL, we continued to consider higher inflation rates, the Federal Reserve's monetary policy, the risk of a recession, technical or otherwise, and the impact of various geopolitical risks on the economy in our process for estimating expected credit losses given the changes in economic forecasts and assumptions along with the uncertainty related to the severity and duration of the economic consequences resulting from such events. Our methodology and framework along with the 4-quarter reasonable and supportable forecast period and 2-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2020. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.

For the second quarter of 2025, we used the Moody’s June 30, 2025 Baseline and S2 Downside 75th Percentile for the calculation of our quantitative component. The weightings of the scenarios were based on management’s current expectations for the economic forecast, acknowledging the risk of recession over our reasonable and supportable forecast period and the current economic uncertainty.

During the quarter, the total ACL decreased when compared to the previous quarter which was driven by a decrease in the quantitative reserve that was partially offset by an increase in the qualitative reserves. The primary drivers behind lower quantitative reserves was the sale or reclassification of more than $500 million of loans to held for sale during the quarter and net charge-off activity. The decrease in quantitative reserves was partially offset by updates to the macro-economic forecast, including the scenario weighting, and higher qualitative reserves. Growth in the loans held for investment portfolio during the quarter was primarily in portfolios with lower expected credit losses, such as warehouse lending, equity fund loans, and lender finance, while portfolios requiring higher reserves, such as commercial real estate and commercial construction, have lower overall balances.

As part of our ACL methodology, we consistently incorporate the use of qualitative factors in determining the overall ACL to capture risks that may not be appropriately reflected in our quantitative models. Such qualitative factors may include, but are not limited to: economic conditions not captured in in the quantitative reserve; collateral dependency related to certain loan portfolios including loans secured by office properties that were directly impacted by flexible/hybrid work environment; concentrations of credit within the loan portfolio including the commercial real estate portfolio; the quality of the Company’s credit review system; the volume and severity of adversely classified financial assets; the Company’s lending policies and procedures; and the effect of other external factors such as the regulatory and legal environments. During the second quarter of 2025, reserves associated with the qualitative adjustments increased when compared to the prior quarter. Primary qualitative adjustments were related to loans secured by office properties and concentration of credit associated with commercial real estate loans, multi-family loans, and construction loans.

The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of the ACL. As part of our ACL process, sensitivity analyses are performed to assess how changing certain assumptions could impact the estimated ACL. At times, these analyses can provide information to further assist management in making decisions related to certain assumptions. We calculated alternative values for our ACL using various alternative forecast scenarios weightings and the calculated amounts for the quantitative component differed from the probability-weighted multiple scenario forecast ranging from increasing the dollar amount of the quantitative component of the ACL by 4.8% to lower reserves by 5.2%. However, from a sensitivity analysis perspective, changing key assumptions such as the macro-economic variable inputs from the economic forecasts, the reasonable and supportable forecast period, prepayment rates, loan segmentation, historical loss factors and/or periods, among others, would all change the outcome of the quantitative components of the ACL. Those results would then need to be assessed from a qualitative perspective, potentially requiring further adjustments to the qualitative component to arrive at a reasonable and appropriate ACL.

The determination of the ACL is complex and highly dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses on loans and leases held for investment as quantified in the ACL incorporates certain management assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan and lease composition, and relative credit risks known as of the balance sheet date.

Management believes the ACL is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded loan commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.

The following table presents information regarding the ACL on loans and leases held for investment as of the dates indicated:

(Dollars in thousands)

96

The following table presents the changes in our ACL on loans and leases held for investment for the periods indicated:

(Dollars in thousands)

97

The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:

(In thousands)

98

The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:

(In thousands)

99

Credit Quality

The overall quality of our loan portfolio remains strong, supported by disciplined underwriting, borrower strength, and robust credit metrics. Credit quality metrics improved primarily due to the transfer of loans to held for sale in connection with the strategic loan sales process in the second quarter of 2025. These sales and transfers contributed to broad-based improvements across key credit quality metrics.

Nonperforming Assets, Classified Loans and Leases, and Special Mention Loans and Leases

The following table presents information on our nonperforming assets, classified loans and leases, and special mention loans and leases as of the dates indicated:

(Dollars in thousands)

100

Nonaccrual Loans and Leases Held for Investment

The following table presents our nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:

(In thousands)

Nonperforming loans and leases held for investment decreased by $22.1 million to $167.5 million at June 30, 2025 compared to $189.6 million at December 31, 2024, due mainly to charge-offs of $19.8 million, transfers to accrual status of $16.8 million, transfers to held for sale of $5.7 million, and principal and other reductions of $60.1 million, offset partially by additions of $80.3 million. As of June 30, 2025, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $65.7 million and represented 39% of total nonaccrual loans and leases.

Loans and leases accruing and 30-89 days past due decreased by $9.9 million to $40.9 million as of June 30, 2025 compared to $50.8 million at December 31, 2024, due mainly to a decrease of $9.4 million in multi-family real estate mortgage delinquent loans.

Foreclosed Assets, Net

The following table presents foreclosed assets (primarily OREO), net of the valuation allowance, by property type as of the dates indicated:

(In thousands)

Foreclosed assets decreased by $1.9 million to $7.8 million at June 30, 2025 compared to $9.7 million at December 31, 2024, due mainly to sales of $7.0 million and a provision for losses of $0.6 million, offset partially by transfers from loans of $5.7 million.

Classified and Special Mention Loans and Leases Held for Investment

The following table presents the credit risk ratings of our loans and leases held for investment as of the dates indicated:

(In thousands)

Classified and special mention loans and leases fluctuate from period to period as a result of loan repayments and downgrades or upgrades from our ongoing active portfolio management.

The following table presents the classified and special mention credit risk rating categories for loans and leases held for investment by loan portfolio segment and class and the related net changes as of the dates indicated:

(In thousands)

Classified loans and leases increased by $93.1 million to $656.6 million at June 30, 2025 compared to $563.5 million at December 31, 2024, due mainly to increases of $76.8 million in multi-family real estate mortgage classified loans, $69.3 million in commercial real estate construction and land classified loans, and $28.8 million in commercial asset-based classified loans, offset partially by a decrease of $83.8 million in commercial real estate mortgage classified loans primarily due to the transfer of loans to held for sale in connection with the strategic loan sales process.

Special mention loans and leases decreased by $435.7 million to $661.6 million at June 30, 2025 compared to $1.1 billion at December 31, 2024, due mainly to decreases of $203.2 million in residential real estate construction and land special mention loans resulting from credit migration out of the category, as well as $144.7 million in commercial real estate mortgage special mention loans and $118.5 million in commercial real estate construction and land special mention loans primarily due to the transfer of loans to held for sale in connection with the strategic loan sales process. These decreases were offset partially by increases of $34.0 million in commercial asset-based special mention loans and $27.1 million in venture capital special mention loans.

Deposits

The following table presents the composition of our deposit portfolio by account type as of the dates indicated:

(Dollars in thousands)

The following table presents time deposits based on the $250,000 FDIC insured limit as of the dates indicated:

(Dollars in thousands)

Total deposits increased by $336.5 million to $27.5 billion at June 30, 2025 compared to $27.2 billion at December 31, 2024. The increase of $336.5 million in total deposits was due primarily to increases of $363.7 million in checking accounts and $233.8 million in brokered time deposits, offset partially by a decrease of $278.8 million in noninterest-bearing checking accounts. At June 30, 2025, noninterest-bearing deposits totaled $7.4 billion, or 27%, of total deposits, and interest-bearing deposits totaled $20.1 billion, or 73%, of total deposits, compared to noninterest-bearing deposits of $7.7 billion, or 28% of total deposits, and interest-bearing deposits of $19.5 billion, or 72% of total deposits, at December 31, 2024.

As of June 30, 2025, FDIC-insured deposits represented approximately 71% of total deposits, including accounts eligible for pass-through insurance, down from 72% as of December 31, 2024. Available liquidity (on-balance sheet liquidity plus unused borrowing capacity and unpledged AFS securities) was $14.8 billion at June 30, 2025, which exceeded uninsured and uncollateralized deposits of $7.6 billion, with a coverage ratio of 196% as compared to a coverage ratio of 221% at December 31, 2024. Available liquidity also represented 54% of total deposits at June 30, 2025.

The following table summarizes the maturities of time deposits as of the date indicated:

Client Investment Funds

In addition to deposit products, we also offer alternative, non-depository corporate treasury solutions for clients to invest excess liquidity. These off-balance sheet client funds totaled $1.5 billion at both June 30, 2025 and December 31, 2024.

Borrowings

The following table summarizes our borrowings as of the dates indicated:

(Dollars in thousands)

Borrowings increased by $525.4 million to $1.9 billion at June 30, 2025 compared to $1.4 billion at December 31, 2024 due to higher FHLB secured advances and AFX short-term borrowings, offset partially by the payoff of $174.0 million of Senior Notes in the second quarter of 2025. We utilized these borrowings to manage liquidity needs, including, but not limited to, funding asset growth, accommodating liability maturities and deposit withdrawals, and supporting business operations.

Subordinated Debt

As of June 30, 2025, the carrying value of subordinated debt totaled $949.2 million compared to $941.9 million at December 31, 2024. The increase was primarily driven by the accretion of the acquisition discount on acquired subordinated debt and higher valuation of the Euribor-based subordinated debt. At June 30, 2025, $131.0 million of subordinated debt was included in the Company's Tier I capital and $803.1 million was included in Tier II capital.

Regulatory Matters

Capital

Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At June 30, 2025, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 capital ratio of 6.50%, a minimum Tier 1 capital ratio of 8.00%, and a minimum Total capital ratio of 10.00%.

Regulatory capital requirements limit the amount of DTAs that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are disallowed from regulatory capital. At June 30, 2025, such disallowed amounts were $315.7 million for the Company and $296.9 million for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future or that the Company and the Bank will not have increased DTAs that are disallowed.

In 2020, the federal bank regulatory authorities approved a rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. We elected the CECL phase-in option provided by regulatory capital rules which delayed for two years the estimated impact of CECL on regulatory capital and phases it in over a three-year transition period beginning in the first quarter of 2022. The full impact of the CECL standard was phased-in to regulatory capital through December 31, 2024 under this phase-in option, and beginning in the first quarter of 2025, CECL was fully reflected in our regulatory capital.

Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the common equity Tier 1, Tier 1, and Total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At June 30, 2025, the Company and the Bank were in compliance with the capital conservation buffer requirements.

The following tables present a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:

The Company's consolidated risk-based capital ratios decreased during the six months ended June 30, 2025 due mainly to the impact of stock repurchases, lower net earnings, and an increase in risk-weighted assets mostly driven by the growth in loan balances. The consolidated Tier 1 leverage ratio also decreased during the six months ended June 30, 2025 due mainly to higher average assets.

Dividends on Common Stock and Interest on Subordinated Debt

As a bank holding company, Banc of California, Inc. is required to notify and receive approval from the FRB prior to declaring and paying a dividend to common stockholders during any period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Interest payments made on subordinated debt are considered dividend payments under FRB regulations. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. The Company currently is required to receive FRB approval to declare or pay a dividend to stockholders. Further, if the Company defaults or elects to defer the interest payments on its subordinated debt, it is restricted from paying dividends on its Series F preferred and common stock.

Dividends on Preferred Stock

The Company's ability to pay dividends on the Series F preferred stock depends on the ability of the Bank to pay dividends to the holding company. The ability of the Company and the Bank to pay dividends in the future is subject to bank regulatory requirements, including capital regulations and policies established by the FRB, and the DFPI, as applicable. Dividends on the Series F preferred stock will not be declared, paid, or set aside for payment to the extent such act would cause us to fail to comply with applicable laws and regulations, including applicable FRB capital adequacy regulations and policies.

Dividends on the Series F preferred stock are not cumulative or mandatory. If the Company's Board of Directors does not declare a dividend on the Series F preferred stock in respect of a dividend period, then no dividend shall be deemed to be payable for such dividend period or be cumulative, and the Company will have no obligation to pay any dividend for that dividend period, whether or not the Board of Directors declares a dividend on the Series F preferred stock or any other class or series of its capital stock for any future dividend period. However, if dividends on the Series F preferred stock have not been declared or paid for the equivalent of six dividend payments, whether or not for consecutive dividend periods, holders of the outstanding shares of Series F preferred stock, together with holders of any other series of the Company's preferred stock ranking equal with the Series F preferred stock with similar voting rights, will generally be entitled to vote for the election of two additional directors. Additionally, so long as any share of Series F preferred stock remains outstanding, unless dividends on all outstanding shares of Series F preferred stock for the most recently completed dividend period have been paid in full or declared and a sum sufficient for the payment thereof has been set aside for payment, no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on the Company's common stock.

Liquidity

Liquidity Management

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in the Company’s business operations or unanticipated events.

We have a Management Finance Committee ("MFC") that is comprised of members of senior management and is responsible for managing commitments to meet the needs of customers while achieving our financial objectives. MFC meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.

We manage our liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and receivables due from banks, interest-earning deposits in other financial institutions, and unpledged AFS securities, which we refer to as our primary liquidity. We also maintain available borrowing capacity under secured credit lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.

As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $7.1 billion at June 30, 2025, offset partially by $568.7 million pledged for letters of credit and a balance outstanding of $1.7 billion as of that date. The FHLB secured credit line was collateralized by a blanket lien on $10.6 billion of certain qualifying loans and $19.4 million of securities. The Bank also had secured borrowing capacity with the FRBSF under the Discount Window program totaling $5.7 billion at June 30, 2025, of which $5.7 billion was available. The FRBSF Discount Window secured credit line was collateralized by liens on $5.3 billion of qualifying loans and $1.5 billion of pledged securities.

In addition to its secured lines of credit with the FHLB and FRBSF, the Bank also maintains unsecured capacity for the purpose of borrowing overnight funds, subject to availability, of $265.0 million in the aggregate with several correspondent banks. As of June 30, 2025, there was no balance outstanding related to these sources. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of June 30, 2025, there was a $100.0 million outstanding balance through the AFX. Additionally, the holding company has a $100.0 million unsecured revolving line of credit. As of June 30, 2025, there was no balance outstanding.

The following tables provide a summary of the Company's primary and secondary liquidity levels at the dates indicated:

(Dollars In thousands)

(In thousands)

During the six months ended June 30, 2025, the Company's primary liquidity decreased by $124.4 million to $4.2 billion at June 30, 2025 due mainly to a $148.7 million decrease in total cash and cash equivalents which was primarily used to fund loan growth. We also include certain unencumbered HTM securities in our internal liquidity stress test buffer which are not included in our primary liquidity. During the six months ended June 30, 2025, the Company's secondary liquidity decreased by $950.2 million to $10.6 billion at June 30, 2025 due to decreases in available secured borrowing capacity with the FHLB of $389.9 million and available secured borrowing capacity with the FRB of $560.3 million.

Obtaining new customer deposits, or having existing customers increase their deposit balances with us, are the primary sources of funding for our operations and is one of the highest priorities of the Company. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our deposits. Additionally, we fund our operations with cash flows from our loan and securities portfolios.

Our deposit balances may decrease if customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk from fluctuating deposit balances, the Bank maintains adequate levels of available liquidity on and off the balance sheet.

We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulations, for liquidity management purposes. At June 30, 2025, brokered deposits totaled $2.9 billion, consisting of $0.6 billion of non-maturity brokered accounts and $2.3 billion of brokered time deposits. At December 31, 2024, brokered deposits totaled $2.7 billion, consisting of $0.6 billion of non-maturity brokered accounts and $2.1 billion of brokered time deposits.

Our Liquidity Management Policy includes guidelines, which are governed by the Company's Risk Appetite Statement, which include the following metrics: Primary Liquidity Ratio (unencumbered liquid assets, which reflects cash and cash equivalents excluding restricted cash and the market value of unpledged AFS securities, net of a haircut, divided by total assets), Primary + Secondary Liquidity (unencumbered liquid assets, which reflect cash and cash equivalents excluding restricted cash and the market value of unpledged AFS securities, net of a haircut, and available borrowing capacity at the FHLB and FRB, divided by total assets), Brokered Deposits to Total Funding Ratio (brokered deposits to total deposits plus borrowings), Total Borrowings to Total Funding Ratio (borrowings to total deposits and borrowings), and Non-Core Funding to Total Funding Ratio (brokered deposits and borrowings to total deposits plus borrowings). At June 30, 2025, the Bank was in compliance with all of its funding concentration liquidity guidelines.

Holding Company Liquidity

Banc of California, Inc. acts as a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and Banc of California, Inc.'s ability to raise capital, issue subordinated and senior debt, and secure outside borrowings. Banc of California, Inc.'s ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common and preferred stock, and other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends. Banc of California, Inc.'s ability to pay dividends is also subject to the restrictions set forth by the FRB, and by certain covenants contained in our subordinated debt. See "- Regulatory Matters - Dividend on Preferred Stock" for information regarding the payment of dividends on the Series F preferred stock.

On December 23, 2024, Banc of California, Inc. entered into an unsecured revolving line of credit agreement as a borrower for $50.0 million. On March 17, 2025, the Company executed an amendment to the credit agreement which increased the Company's unsecured revolving line of credit to $100.0 million. As of June 30, 2025 and December 31, 2024, there was no balance outstanding.

On March 17, 2025, we announced that our Board of Directors authorized the repurchase of up to $150.0 million of our common stock. On April 23, 2025, we announced an upsize of our stock repurchase program from $150.0 million to $300.0 million and expanded the program to cover both the Company's common stock and depositary shares representing its preferred stock. The repurchase authorization expires in March 2026. During the six months ended June 30, 2025, common stock repurchased under the program totaled 11,494,637 shares at a weighted average price per share of $13.05, or $150.0 million in the aggregate. As of June 30, 2025, the Company had $150.0 million remaining under the stock repurchase authorization. The program may be changed, suspended, or discontinued at any time.

At June 30, 2025, Banc of California, Inc. had $146.6 million in cash and cash equivalents, of which a substantial amount was on deposit at the Bank. We believe this amount of cash, along with anticipated future dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months.

Commitments and Contingencies

Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a portion is expected to be funded, and standby letters of credit. At June 30, 2025, our loan commitments and standby letters of credit were $4.7 billion and $207.8 million. The loan commitments, a portion of which will eventually result in funded loans, increase our profitability through net interest income when drawn and unused commitment fees prior to being drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "- Liquidity - Liquidity Management," have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments, see Note 10. Commitments and Contingencies, of our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2024, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.

Market Risk - Foreign Currency Exposure

We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps and foreign exchange contracts to hedge exposures to loans and debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar and the derivatives that hedge those exposures in order to minimize our foreign exchange risk.

As of June 30, 2025, the U.S. Dollar notional amounts of loans receivable and subordinated debt payable denominated in foreign currencies were $65.6 million and $30.4 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $65.4 million and $28.5 million. We recognized a foreign currency translation net gain of $54,000 for the six months ended June 30, 2025 and a foreign currency translation net loss of $355,000 for the six months ended June 30, 2024.

Asset/Liability Management and Interest Rate Sensitivity

Interest Rate Risk - Company Governance. On at least a quarterly basis, we measure our IRR position using two methods: (i) Net Interest Income ("NII") simulation analysis and (ii) Economic Value of Equity ("EVE") modeling. The Management Finance Committee ("MFC") and the Finance Committee of the Company's Board of Directors review the results of these analyses at least quarterly. As discussed in more detail below, if projected changes to interest rates cause changes to our simulated net present value of equity and/or net interest income to be outside our pre-established IRR limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.

The pre-established IRR Limits are recommended by management, determined based on analytical review and available peer data published by regulatory agencies about the IRR Limits utilized by other regional banks, and documented in the Company's ALM Policy. The ALM Policy is approved by MFC and the Finance Committee of the Board of Directors annually. We believe our ALM Policy IRR Limits are consistent with prevailing practice in the regional banking industry.

We use a balance sheet simulation model (the "IRR Model") to estimate changes in NII and EVE that would result from immediate and sustained changes in interest rates as of the measurement date. This IRR Model assesses the changes in NII and EVE that would occur in response to an instantaneous and sustained increase and decrease in market interest rates of +-100, +-200, +-300, and +-400 basis points. This model is an IRR management tool, and the results are not necessarily an indication of our future net interest income. The IRR Model has inherent limitations and the model's results are based on a given set of rate changes and assumptions at a single point in time.

The IRR Model is updated at least quarterly, and the IRR Model results are reported to MFC and the Finance Committee of the Company's Board of Directors at each quarterly meeting, as applicable.

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time, except for non-maturity deposits. 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.

The Management Finance Committee ("MFC") is comprised of select members of senior management. The Company also has a Finance Committee of the Boards of Directors of the Company and the Bank (together with MFC, the “ALCOs”). In order to manage the risk of potential adverse effects of material and prolonged or volatile changes in interest rates on our results of operations, we have adopted asset/liability management policies to align maturities and repricing terms of interest-earning assets to interest-bearing liabilities. The asset/liability management policies establish guidelines for the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs, while management monitors adherence to those guidelines with oversight by the ALCOs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals. The ALCOs meet no less than quarterly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to our economic value of equity analysis.

In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability, and capital targets, we evaluate various strategies including:

• Complementing our current loan origination platform through strategic acquisitions of whole loans,
• Strategically managing multiple warehouse relationships,
• Originating shorter-term consumer loans,
• Managing the level of investments and duration of investment securities,
• Managing our deposits to establish stable deposit relationships, and
• Using certain derivatives such as interest rate swaps and collars as hedges to align maturities and repricing terms.

At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCOs may decide to increase our interest rate risk position within the asset/liability tolerance set forth by our Board of Directors. As part of its procedures, the ALCOs regularly review interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and our economic value of equity.

Interest Rate Sensitivity of Economic Value of Equity and Net Interest Income

Interest rate risk results from our banking activities and is the primary market risk for us. Interest rate risk is caused by the following factors:

• Repricing risk - timing differences in the repricing and maturity of interest-earning assets and interest-bearing liabilities;
• Option risk - changes in the expected maturities of assets and liabilities, such as borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity;
• Yield curve risk - changes in the yield curve where interest rates increase or decrease in a nonparallel fashion; and
• Basis risk - changes in spread relationships between different yield curves, such as U.S. Treasuries, U.S. Prime Rate, and SOFR.

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 Finance Committee of the Boards of Directors of the Company and Bank, which delegates the day-to-day management of interest rate risk to the MFC. MFC ensures that the Bank is following the appropriate and current regulatory guidance in the formulation and implementation of our interest rate risk program. The Finance Committee of the Boards of Directors of the Company and the Bank reviews the results of our interest rate risk modeling at least quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable. In addition to our annual review of our asset liability management policy, our Board of Directors periodically reviews the interest rate risk policy limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic repricing characteristics of our assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

Our interest rate risk exposure is measured and monitored through various risk management tools, including a simulation model that performs interest rate sensitivity analysis under multiple scenarios. The simulation model is based on the actual maturities and re-pricing characteristics of the Bank’s interest-rate sensitive assets and liabilities. The simulated interest rate scenarios include an instantaneous parallel shift in the yield curve (“Rate Shock”). We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”), and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled utilizing various assumptions for assets, liabilities, and derivatives.

We used a NII simulation model to measure the estimated changes in NII that would result over the next twelve months from immediate and sustained changes in interest rates as of June 30, 2025. We have assumed no growth or changes in the product mix of either our total interest-sensitive assets or liabilities over the next twelve months, therefore the results reflect an interest rate shock to a static balance sheet. This model is an interest rate risk management tool, and the results are not necessarily an indication of our future net interest income.

EVE measures the period end present value of assets minus the present value of liabilities. Asset liability management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios. In some ways, the economic value approach provides a broader scope than net interest income volatility approach since it captures all anticipated future cash flows.

The balance sheet is considered “asset sensitive” when an increase in interest rates is expected to expand our net interest income, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities. Conversely, the balance sheet is considered “liability sensitive” when an increase in interest rates is expected to compress our net interest income, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets.

At both June 30, 2025 and December 31, 2024, our interest rate risk profile remained close to "neutral." This position reflects our balanced composition of repricing assets and beta-adjusted repricing deposits and other interest-bearing liabilities over the course of the next twelve months. Given the uncertainty of the magnitude, timing, and direction of future interest rate movements, as well as the shape of the yield curve, actual results may vary materially from those predicted by our model.

The following table presents the projected change in the Company’s economic value of equity at June 30, 2025 and net interest income over the next twelve months, which would occur upon an immediate change in interest rates, but without giving effect to any steps that management might take to counteract that change:

(Dollars in millions)

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

Earnings-at-Risk

In addition to interest rate risk associated with net interest income, certain noninterest expense items are also sensitive to changes in market interest rates. One such item is the cost of earnings credit rates ("ECRs") provided on certain deposit accounts, primarily those associated with our HOA business. ECRs comprise most of our customer related expense and fluctuate in response to changes in short term rates and can therefore influence the Company's overall earnings sensitivity profile. We expect that a declining interest rate environment would reduce ECR costs and thereby reduce noninterest expense, conversely, when interest rates rise, ECR costs would also rise, thereby increasing noninterest expense. The Company's Earnings-at-Risk ("EaR") modeling incorporates the impact of these rate-sensitive noninterest expenses, in addition to interest income and expense, to assess the effect of interest rate movements on projected earnings over a twelve-month horizon.

As of June 30, 2025, client deposits eligible for ECRs totaled approximately $3.7 billion. Taking into account the rate sensitivity of ECRs, which are primarily attributable to such deposits, the Company's overall earnings profile would be considered "liability sensitive." During the second quarter of 2025, the Company also entered into interest rate collars with a notional value of $1.0 billion to mitigate the risk of increasing interest expense if short term interest rates increase. For further information on the interest rate collars, see Note 9. Derivatives, of our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of June 30, 2025 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the second quarter of 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For information regarding factors that could affect the Company's results of operations, financial condition, and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Form 10-K. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this Quarterly Report on Form 10-Q. There have been no material changes to the risk factors previously disclosed in our Form 10-K.