REGULATORY CAPITAL MATTERS

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2017, the Company and the Bank met all capital adequacy requirements to which they were then subject. With respect to the Bank, prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and a capital restoration plan is required. At December 31, 2017, the most recent regulatory notification categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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



					Minimum Capital Requirements				Minimum Required to Be Well-Capitalized Under Prompt Corrective Action Provisions
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2017
Banc of California, Inc.
Total risk-based capital	$	1,002,200	14.56	%	$	550,499	8.00	%	N/A		N/A
Tier 1 risk-based capital	949,151		13.79	%	412,874		6.00	%	N/A		N/A
Common equity tier 1 capital	682,539		9.92	%	309,656		4.50	%	N/A		N/A
Tier 1 leverage	949,151		9.39	%	404,339		4.00	%	N/A		N/A
Banc of California, NA
Total risk-based capital	$	1,131,057	16.56	%	$	546,359	8.00	%	$	682,949	10.00	%
Tier 1 risk-based capital	1,078,008		15.78	%	409,769		6.00	%	546,359		8.00	%
Common equity tier 1 capital	1,078,008		15.78	%	307,327		4.50	%	443,917		6.50	%
Tier 1 leverage	1,078,008		10.67	%	404,060		4.00	%	505,074		5.00	%
December 31, 2016
Banc of California, Inc.
Total risk-based capital	$	975,918	13.70	%	$	569,856	8.00	%	N/A		N/A
Tier 1 risk-based capital	941,429		13.22	%	427,392		6.00	%	N/A		N/A
Common equity tier 1 capital	672,358		9.44	%	320,544		4.50	%	N/A		N/A
Tier 1 leverage	941,429		8.17	%	460,840		4.00	%	N/A		N/A
Banc of California, NA
Total risk-based capital	$	1,042,617	14.73	%	$	566,405	8.00	%	$	708,007	10.00	%
Tier 1 risk-based capital	999,788		14.12	%	424,804		6.00	%	566,405		8.00	%
Common equity tier 1 capital	999,788		14.12	%	318,603		4.50	%	460,204		6.50	%
Tier 1 leverage	999,788		8.71	%	459,368		4.00	%	574,210		5.00	%

In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Company and the Bank became subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in through 2019.

The final rule:

•

Permits banking organizations that had less than $15 billion in total consolidated assets as of December 31, 2009, to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock that were issued and included in Tier 1 capital prior to May 19, 2010, subject to a limit of 25 percent of Tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.


•	Establishes new qualifying criteria for regulatory capital, including new limitations on the inclusion of deferred tax assets and mortgage servicing rights.


•	Requires a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent.


•	Increases the minimum Tier 1 capital to risk-weighted assets ratio requirement from 4 percent to 6 percent.


•	Retains the minimum total capital to risk-weighted assets ratio requirement of 8 percent.


•	Retains a minimum leverage ratio requirement of 4 percent.

•

Changes the prompt corrective action standards so that in order to be considered well-capitalized, a depository institution must have a ratio of common equity Tier 1 capital to risk-weighted assets of 6.5 percent (new), a ratio of Tier 1 capital to risk-weighted assets of 8 percent (increased from 6 percent), a ratio of total capital to risk-weighted assets of 10 percent (unchanged), and a leverage ratio of 5 percent (unchanged).


•	Retains the existing regulatory capital framework for one-to-four family residential mortgage exposures.


•	Permits banking organizations that are not subject to the advanced approaches rule, such as the Company and the Bank, to retain, through a one-time election, the existing treatment for most accumulated other comprehensive income, such that unrealized gains and losses on securities available-for-sale will not affect regulatory capital amounts and ratios.

•

Implements a new capital conservation buffer requirement for a banking organization to maintain a common equity capital ratio more than 2.5 percent above the minimum common equity Tier 1 capital, Tier 1 capital and total risk-based capital ratios in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments. The capital conservation buffer requirement is being phased in, beginning on January 1, 2016 at 0.625 percent, with additional 0.625 percent increments annually, and will be fully phased in at 2.50 percent by January 1, 2019. A banking organization with a buffer of less than the required amount would be subject to increasingly stringent limitations on such distributions and payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions or payments during any quarter if its eligible retained income is negative and its capital conservation buffer ratio was 2.5 percent or less at the end of the previous quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income.


•	Increases capital requirements for past due loans, high volatility commercial real estate exposures, and certain short-term commitments and securitization exposures.


•	Expands the recognition of collateral and guarantors in determining risk-weighted assets.


•	Removes references to credit ratings consistent with the Dodd-Frank Act and establishes due diligence requirements for securitization exposures.

Dividend Restrictions

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal banking laws and regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, in the case of the Bank, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. At December 31, 2017, the Bank had $276.9 million available to pay dividends to the Company without prior OCC approval. However, any dividend granted by the Bank would be limited by the need to maintain its well capitalized status plus the capital buffer in order to avoid additional dividend restrictions. The Bank paid dividends of $18.0 million to Banc of California, Inc. during the year ended December 31, 2017.