Dividend Availability and Regulatory Matters

12 Months Ended

Dec. 31, 2023

Dividend Availability and Regulatory Matters [Abstract]

Dividend Availability and Regulatory Matters

NOTE 22. DIVIDEND AVAILABILITY AND REGULATORY MATTERS

Holders of Company common stock may receive dividends declared by the Board out of funds legally available under Maryland General Corporation Law (“MGCL”) and certain federal laws and regulations governing the banking and financial services business. Our ability to pay dividends to our stockholders is subject to the restrictions set forth in MGCL and certain covenants contained in our subordinated debt and borrowing agreements. In addition, federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. Under the FRB’s policy statement on the payment of cash dividends, a bank holding company generally should not pay dividends if its net income for the past year is not sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition. FRB policy also provides that a bank holding company should inform the FRB reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure.

The regulatory framework also imposes various restrictions on the ability of the Bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other items. For example, taking into account the financial condition of the Bank and other factors, the DFPI may object and therefore prevent the Bank from paying dividends to the Company. Generally, the Bank may declare a dividend without the approval of the DFPI as long as the total dividends declared in a calendar year do not exceed either the retained earnings of the Bank or the total of net earnings of the Bank for three previous fiscal years less any dividend paid during such period. Because substantially all of our business activities, income and cash flow are expected to be generated by the Bank, an inability of the Bank to pay dividends or distribute capital to the Company would adversely affect the Company’s liquidity. Dividends can also be restricted if the capital conservation buffer requirement is not met. In general, the Bank may declare a dividend without the approval of the FRB as long as the total of all dividends declared by the Bank during the calendar year, including the proposed dividend, does not exceed the sum of the Bank’s net income during the current calendar year and the retained net income of the prior two calendar years. The Bank had a cumulative net loss of $0.8 billion during the three fiscal years of 2023, 2022, and 2021, compared to dividends of $357.0 million paid by the Bank during that same period. During 2023, Banc of California, Inc. received $46.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $3.1 billion at December 31, 2023, for the foreseeable future, dividends from the Bank to Banc of California, Inc. will require DFPI and FRB approval.

Banc of California, Inc., as a bank holding company, is subject to regulation by the FRB under the BHCA. The Federal Deposit Insurance Improvement Act required that the federal regulatory agencies adopt regulations defining capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off‑balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1, Tier 1, and total capital to risk‑weighted assets (“total capital ratio”), and of Tier I capital to average assets, adjusted for goodwill and other non-qualifying intangible assets and other assets (“leverage ratio”). Common equity Tier 1 capital includes common stockholders’ equity less goodwill and certain other deductions (including a portion of servicing assets and the after‑tax unrealized net gains and losses on securities available‑for‑sale). Tier 1 capital includes common equity Tier 1 plus additional Tier 1 capital instruments meeting certain requirements. Total capital includes Tier 1 capital and other items such as subordinated debt and the allowance for credit losses. All three measures are stated as a percentage of risk‑weighted assets, which are measured based on their perceived credit risk and include certain off‑balance sheet exposures, such as unfunded loan commitments and letters of credit.

Banks considered to be “adequately capitalized” are required to maintain a minimum total capital ratio of 8.0%, a minimum Tier 1 capital ratio of 6.0%, a minimum common equity Tier 1 capital ratio of 4.5%, and a minimum leverage ratio of 4.0%. Banks considered to be “well capitalized” must maintain a minimum total capital ratio of 10.0%, a minimum Tier 1 capital ratio of 8.0%, a minimum common equity Tier 1 capital ratio of 6.5%, and a minimum leverage ratio of 5.0%. As of December 31, 2023, the most recent notification date to the regulatory agencies, the Company and the Bank are each “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s or any of the Bank’s categories.

Management believes, as of December 31, 2023, that the Company and the Bank met all capital adequacy requirements to which we are subject.

Basel III, the comprehensive regulatory capital rules for U.S. banking organizations, requires all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order 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 capital conservation buffer is fully phased-in at 2.5%, such that the common equity Tier 1, Tier 1 and total capital ratio minimums inclusive of the capital conservation buffers were 7%, 8.5%, and 10.5%. At December 31, 2023, the Company and Bank were in compliance with the capital conservation buffer requirements.

The Company and Bank elected the CECL five-year regulatory transition guidance for calculating regulatory capital ratios and the December 31, 2023 ratios include this election. This guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2021. This cumulative amount is now being phased out of regulatory capital evenly over the three years from 2022 to 2024.

The following tables present actual capital amounts and ratios for the Company and the Bank as of the dates indicated:

				Well Capitalized			Capital
				Minimum			Conservation
	Actual			Requirement			Buffer
	Balance		Ratio	Balance		Ratio	Requirement
	(Dollars in thousands)
December 31, 2023
Tier I leverage capital (to average assets):
Banc of California, Inc.	$	3,402,044	9.00%	$	1,889,775	5.00%	N/A
Banc of California	$	3,617,643	9.62%	$	1,880,850	5.00%	N/A
CET1 capital (to risk-weighted assets):
Banc of California, Inc.	$	2,772,528	10.14%	$	1,777,025	6.50%	7.00%
Banc of California	$	3,617,643	13.27%	$	1,772,549	6.50%	7.00%
Tier I capital (to risk-weighted assets)
Banc of California, Inc.	$	3,402,044	12.44%	$	2,187,108	8.00%	8.50%
Banc of California	$	3,617,643	13.27%	$	2,181,599	8.00%	8.50%
Total capital (to risk-weighted assets):
Banc of California, Inc.	$	4,490,493	16.43%	$	2,733,885	10.00%	10.50%
Banc of California	$	4,295,821	15.75%	$	2,726,998	10.00%	10.50%

				Well Capitalized			Capital
				Minimum			Conservation
	Actual			Requirement			Buffer
	Balance		Ratio	Balance		Ratio	Requirement
	(Dollars in thousands)
December 31, 2022
Tier I leverage capital (to average assets):
Banc of California, Inc.	$	3,503,201	8.61%	$	2,033,411	5.00%	N/A
Banc of California	$	3,408,289	8.39%	$	2,031,413	5.00%	N/A
CET1 capital (to risk-weighted assets):
Banc of California, Inc.	$	2,873,685	8.70%	$	2,147,012	6.50%	7.00%
Banc of California	$	3,408,289	10.32%	$	2,145,738	6.50%	7.00%
Tier I capital (to risk-weighted assets)
Banc of California, Inc.	$	3,503,201	10.61%	$	2,642,477	8.00%	8.50%
Banc of California	$	3,408,289	10.32%	$	2,640,909	8.00%	8.50%
Total capital (to risk-weighted assets):
Banc of California, Inc.	$	4,495,750	13.61%	$	3,303,096	10.00%	10.50%
Banc of California	$	4,074,047	12.34%	$	3,301,136	10.00%	10.50%

We issued or assumed through mergers subordinated debt to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. On April 30, 2021, the Bank completed the sale of $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due May 1, 2031.

The carrying value of subordinated debt totaled $936.6 million at December 31, 2023. At December 31, 2023, $131.0 million of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $790.8 million was included in Tier II capital.

Interest payments on subordinated debt are considered dividend payments under the FRB regulations and subject to the same notification requirements for declaring and paying dividends on common stock.