BANC OF CALIFORNIA INC

Previous wording

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, 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the "Form 10-K") and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q.

Current wording

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 nine months ended September 30, 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the "Form 10-K") and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q.

Previous wording

The Bank is a relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses. The Bank offers a broad range of loan and lease and deposit products and services through full-service branches throughout California and in Durham, North Carolina and Denver, Colorado, and loan production offices around the country.

Current wording

The Bank is a relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses. The Bank offers a broad range of loan and lease and deposit products and services through 80 full-service branches located throughout California and in Durham, North Carolina and Denver, Colorado, and loan production offices around the country.

Previous wording

At June 30, 2024, the Company had total assets of$35.2 billion, including$25.2 billion of total loans and leases, net of deferred fees,$2.2 billion of securities available-for-sale,$2.3 billion of securities held-to-maturity, and$2.5 billion of interest-earning deposits in financial institutions compared to $38.5 billion of total assets at December 31, 2023, including $25.6 billion of total loans and leases, net of deferred fees, $2.3 billion of securities available-for-sale, $2.3 billion securities held-to-maturity, and $5.2 billion of interest-earning deposits in financial institutions. The$3.3 billion decrease in total assets since year-end was due primarily to a$2.7 billion decrease in interest-earning deposits in financial institutions.

Current wording

At September 30, 2024, the Company had total assets of $33.4 billion, including $23.6 billion of total loans and leases, net of deferred fees, $2.3 billion of securities available-for-sale, $2.3 billion of securities held-to-maturity, and $2.3 billion of interest-earning deposits in financial institutions compared to $38.5 billion of total assets at December 31, 2023, including $25.6 billion of total loans and leases, net of deferred fees, $2.3 billion of securities available-for-sale, $2.3 billion securities held-to-maturity, and $5.2 billion of interest-earning deposits in financial institutions. The $5.1 billion decrease in total assets since year-end was due mainly to a $2.9 billion decrease in interest-earning deposits in financial institutions and a $2.1 billion decrease in total loans and leases, net of deferred fees.

Previous wording

At June 30, 2024, the Company had total liabilities of$31.8 billion, including total deposits of$28.8 billion and borrowings of$1.4 billion, compared to $35.1 billion of total liabilities at December 31, 2023, including $30.4 billion of total deposits and $2.9 billion borrowings. The$3.3 billion decrease in total liabilities since year-end was due mainly to a$1.6 billion decrease in deposits and a$1.5 billion decrease in borrowings.

Current wording

At September 30, 2024, the Company had total liabilities of$29.9 billion, including total deposits of$26.8 billion and borrowings of$1.6 billion, compared to $35.1 billion of total liabilities at December 31, 2023, including $30.4 billion of total deposits and $2.9 billion borrowings. The$5.2 billion decrease in total liabilities since year-end was due mainly to a$3.6 billion decrease in deposits and a$1.3 billion decrease in borrowings.

Previous wording

The Merger was accounted for as a reverse merger using the acquisition method of accounting, therefore, PacWest Bancorp was deemed the accounting acquirer, even though Banc of California, Inc. was the legal acquirer. We recorded the legacy Banc of California, Inc. acquired assets and assumed liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in goodwill of $215.9 million. The Bank is headquartered in Los Angeles, California, and operates more than 80 branches in California, as well as branches in North Carolina and Colorado. We completed the Merger to, among other things, enhance our scale and presence in California and augment and diversify our sources of revenue.

Current wording

The Merger was accounted for as a reverse merger using the acquisition method of accounting, therefore, PacWest Bancorp was deemed the accounting acquirer, even though Banc of California, Inc. was the legal acquirer. We recorded the legacy Banc of California, Inc. acquired assets and assumed liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in goodwill of $216.8 million. The Bank is headquartered in Los Angeles, California, and operates 80 branches located throughout California, and in North Carolina and Colorado. We completed the Merger to, among other things, enhance our scale and presence in California and augment and diversify our sources of revenue.

Previous wording

Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation and occupancy expense. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the ratio of noninterest expense to average total assets.

Current wording

Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation expense, customer related expense, and occupancy expense. Customer related expenses are primarily earnings credit rate payments to customers and are mostly driven by the Homeowners Association ("HOA") business. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. Additionally, noninterest expense included acquisition, integration and reorganization costs related to the Merger and a goodwill impairment charge recorded in 2023. We measure success in controlling both fixed and variable costs through monitoring of the ratio of noninterest expense to average total assets.

Previous wording

The following table presents the calculation of our ratio of noninterest expense to average total assets for the periods indicated:

Current wording

The following table presents the calculation of our ratio of noninterest expense to average total assets and for the periods indicated:

Previous wording

•Return on average tangible common equity, tangible common equity ratio, and tangible book value per common 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, equity to assets ratio, and book value per common share, 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.

Current wording

•Return on average tangible common equity ("ROATCE"), tangible common equity ratio, and tangible book value per common 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, equity to assets ratio, and book value per common share, 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.

Previous wording

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

Current wording

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

Previous wording

Net earnings available to common and equivalent stockholders for the second quarter of 2024 was $20.4 million, or $0.12 per diluted share, compared to a net earnings available to common and equivalent stockholders for the first quarter of 2024 of $20.9 million, or $0.12 per diluted share. The $0.5 million decrease in net earnings available to common and equivalent stockholders from the first quarter of 2024 was due mainly to lower noninterest income of $4.0 million, higher provision for credit losses of $1.0 million, and higher income tax expense of $2.8 million, offset partially by higher net interest income of $0.4 million and lower noninterest expense of $6.9 million. The decrease in noninterest income was due mainly to a decrease of $2.9 million in other income and a decrease of $1.9 million in dividends and gains on equity investments. The increase in income tax expense was due to higher pre-tax income for the second quarter compared to the first quarter and a higher effective tax rate of 32.0% for the second quarter compared to 27.2% for the first quarter. Net interest income was higher in the second quarter compared to the first quarter due to lower interest expense on interest-bearing liabilities, offset partially by lower interest income on interest-earning assets. The decrease in noninterest expense was due mainly to decreases of $12.7 million in acquisition, integration and reorganization costs and $6.3 million in compensation expense, offset partially by increases of $6.0 million in insurance and assessments expense and $5.1 million in other expense.

Current wording

Net loss available to common and equivalent stockholders for the third quarter of 2024 was $1.2 million, or a loss of $0.01 per diluted common share, compared to a net earnings available to common and equivalent stockholders for the second quarter of 2024 of $20.4 million, or $0.12 per diluted common share. The $21.5 million decrease in net earnings available to common and equivalent stockholders from the second quarter of 2024 was due mainly to lower noninterest income of $45.2 million, offset partially offset by higher net interest income of $2.7 million, lower noninterest expense of $7.4 million, lower provision for credit losses of $2.0 million and lower income tax expense of $11.6 million. The decrease in noninterest income was due mainly to a $59.9 million loss on the sale of $741.8 million of securities in the third quarter of 2024, offset partially by a $7.5 million increase in other income and a $5.7 million increase in leased equipment income. Net interest income was higher in the third quarter compared to the second quarter due to lower interest expense on interest-bearing liabilities, offset partially by lower interest income on interest-earning assets. The decrease in noninterest expense was due mainly to decreases of $13.7 million in insurance and assessments expense and $5.8 million in other expense, offset partially by a $12.1 million increase in acquisition, integration and reorganization costs. The decrease in income tax expense was due to lower pre-tax income for the third quarter compared to the second quarter and a lower effective tax rate of 23.7% for the third quarter compared to 32.0% for the second quarter.

Previous wording

Net earnings available to common and equivalent stockholders for the six months ended June 30, 2024 was $41.3 million, or $0.25 per diluted share, compared to a net loss available to common and equivalent stockholders for the six months ended June 30, 2023 of $1.4 billion, or a loss of $18.21 per diluted share. The $1.5 billion increase in net earnings available to common and equivalent stockholders was due mainly to a $1.5 billion decrease in noninterest expense and a $155.3 million increase in noninterest income, offset partially by a $6.8 million decrease in net interest income, a $16.0 million increase in the provision for credit losses, and a $157.8 million increase in income tax expense. The decrease in noninterest expense was due, in part, to a $1.38 billion goodwill impairment charge in the first quarter of 2023. The increase in noninterest income was due almost entirely to a decrease in the loss on sale of loans and leases of $156.6 million. The decrease in net interest income was due primarily to lower interest income on lower interest-earning assets and higher interest expense on deposits, offset partially by lower interest expense on borrowings. The increase in income tax expense was due to the income tax expense recorded on earnings before taxes in the six months ended June 30, 2024, compared to an income tax benefit recorded on a net loss before income taxes in the six months ended June 30, 2023.

Current wording

Net earnings available to common and equivalent stockholders for the nine months ended September 30, 2024 was $40.1 million, or $0.24 per diluted common share, compared to a net loss available to common and equivalent stockholders for the nine months ended September 30, 2023 of $1.4 billion, or a loss of $18.61 per diluted common share. The $1.5 billion increase in net earnings available to common and equivalent stockholders was due mainly to lower noninterest expense of $1.5 billion, higher noninterest income of $96.0 million and higher net interest income of $94.7 million, offset partially by higher provision for credit losses of $25.0 million and higher income tax expense of $163.7 million . The decrease in noninterest expense was due, in part, to a $1.38 billion goodwill impairment charge in the first quarter of 2023. The increase in noninterest income was due mainly to a decrease in the loss on sale of loans and leases of $158.4 million, offset partially by an increase in the loss on sale of securities of $59.9 million. The increase in net interest income was due primarily to lower interest expense on interest-bearing liabilities, offset partially by lower interest income on interest-earning assets. The increase in income tax expense was due to the income tax expense recorded on earnings before taxes in the nine months ended September 30, 2024, compared to an income tax benefit recorded on a net loss before income taxes in the nine months ended September 30, 2023.

Previous wording

(1) Includes net loan discount accretion of$21.8 million and $22.4 million for the three months ended June 30, 2024 and March 31, 2024.

Current wording

(1) Includes net loan discount accretion of$23.0 million and $21.8 million for the three months ended September 30, 2024 and June 30, 2024.

Previous wording

(2) Includes net loan discount accretion of $44.3 million for the six months ended June 30, 2024 and net loan premium amortization of $4.4 million for the six months ended June 30, 2023.

Current wording

(2) Includes net loan discount accretion of $67.3 millionfor the nine months ended September 30, 2024 and net loan premium amortization of $6.0 million for the nine months ended September 30, 2023.

Previous wording

(3) Includes tax-equivalent adjustments of $0.0 million and $2.3 million for the six months ended June 30, 2024 and 2023, related to tax-exempt income on loans. The federal statutory rate utilized was 21%.

Current wording

(3) Includes tax-equivalent adjustments of $0.0 million and $2.3 million for the nine months ended September 30, 2024 and 2023, related to tax-exempt income on loans. The federal statutory rate utilized was 21%.

Previous wording

The average yield on loans and leases increased by 10 basis points to 6.18%for the second quarter of 2024 from 6.08%for the first quarterof 2024 as a result of new originations being at rates higher than the existing portfolio and the change in the mix of loan product balances.

Current wording

The average yield on loans and leases was unchanged at 6.18%for the third quarter compared to the second quarter as a result of new originations being at rates higher than the existing portfolio, slightly higher loan discount accretion, and the change in the mix of loan product balances including the impact of the sale of the $1.95 billion Civic loan portfolio.

Previous wording

The average total cost of funds decreased by 7 basis points to 2.95% for the second quarter from 3.02% in the first quarter due mainly to decreases in average interest-bearing deposits combined with an increase in average noninterest-bearing deposits. The average cost of interest-bearing liabilities increased by 1 basis point to 3.93% for the second quarter from 3.92% for the first quarter. The average total cost of deposits decreased by 6 basis points to 2.60% for the second quarter compared to 2.66% in the first quarter. Average noninterest-bearing deposits increased by $196.6 million for the second quarter compared to the first quarter and average total deposits decreased by $655.5 million.

Current wording

The average total cost of funds decreased by 13 basis points to 2.82% for the third quarter from 2.95% in the second quarter due mainly to lower market interest rates and reduced average borrowings. The average cost of interest-bearing liabilities decreased by 13 basis points to 3.80% for the third quarter from 3.93% for the second quarter. The average total cost of deposits decreased by 6 basis points to 2.54% for the third quarter compared to 2.60% in the second quarter. Average noninterest-bearing deposits decreased by $35.0 million for the third quarter compared to the second quarter, average total deposits decreased by $474.2 million, and average borrowings decreased by $950.1 million.

Previous wording

Average interest-earning assets decreased by$6.5 billion to $33.8 billion for the first six months of 2024 due to sales of non-core loan portfolios in the second quarter of 2023, fourth quarter of 2023 securities sales, and lower cash balances due to the pay down of higher-cost borrowings in 2024 offset partially by the fourth quarter of 2023 acquisition of legacy Banc of California loans. The NIM increased by 39 basis points to 2.73% for the six months ended June 30, 2024 compared to 2.34% for the same period in 2023 due to the average yield on interest-earning assets increasing by 29 basis points, while the average total cost of funds decreased by 8 basis points.

Current wording

Average interest-earning assets decreased by$5.7 billion to $33.0 billion for the first nine months of 2024 due to lower average balances in loans and leases, investments securities, and deposits in financial institutions. Average loans and leases decreased by$1.0 billion primarily due to the sale in July 2024 of $1.95 billion of Civic loans which had been moved to held for sale during the second quarter of 2024 and the sales of non-core loan portfolios in the second quarter of 2023, offset partially by the acquisition of legacy Banc of California loans completed in the fourth quarter of 2023. Average investment securities decreased by$2.4 billion mostly due to securities sales completed in the fourth quarter of 2023. Average deposits in financial institutions decreased by$2.3 billiondue to lower cash balances which were used to pay down higher-cost borrowings. The net interest margin increased by 72 basis points to 2.79% for thenine months ended September 30, 2024 compared to 2.07% for the same period in 2023 due to the average yield on interest-earning assets increasing by 41 basis points, while the average total cost of funds decreased by 31 basis points.

Previous wording

The average yield on interest-earning assets increased by 29 basis points to 5.60%for the first six months of 2024 from 5.31%for the same period in 2023 duemainly to the change in the interest-earning asset mix. This was driven by the increase in the balance of average loans and leases as a percentage of average interest-earning assets to 75% for the six months ended June 30, 2024 from 69% for the six months ended June 30, 2023, the decrease in the balance of average investment securities as a percentage of average interest-earning assets to 14% for the first six months of 2024 from 18% for comparable period in 2023, and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets to 11% for the six months ended June 30, 2024 from 13% for the same period in 2023.

Current wording

The average yield on interest-earning assets increased by 41 basis points to 5.61% for the first nine months of 2024 from 5.20% for the same period in 2023 due mainly to the change in the interest-earning asset mix. This was driven by the increase in the balance of average loans and leases as a percentage of average interest-earning assets to 75% for thenine months ended September 30, 2024 from 67%for thenine months ended September 30, 2023, the decrease in the balance of average investment securities as a percentage of average interest-earning assets to 14% for the first nine months of 2024 from 18% for the same period in 2023, and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets to 10%for thenine months ended September 30, 2024 from 15% for the same period in 2023.

Previous wording

The average yield on loans and leases increased by 2 basis points to 6.13%for the first six months of 2024 from 6.11% for the same period in 2023 as a result of changes in portfolio mix and higher net accretion of loan discounts/premiums.

Current wording

The average yield on loans and leases increased by 19 basis points to 6.14% for the first nine months of 2024 from 5.95% for the same period in 2023 as a result of changes in portfolio mix and higher net accretion of loan discounts.

Previous wording

The average total cost of funds decreased by 8 basis points to 2.99% for the six months ended June 30, 2024 from 3.07% for the six months ended June 30, 2023 due mainly to changes in the total funds mix. This was driven by the increase in the balance of lower cost average total deposits as a percentage of average total funds to 90% for the first six months of 2024 from 76% for the comparable period in 2023, and the decrease in the balance of higher cost average borrowings as a percentage of average total funds to 8% for the six months ended June 30, 2024 from 22% for the same period in 2023. The average cost of interest-bearing liabilities increased by 6 basis points to 3.93% for the first six months of 2024 from 3.87% for the comparable period in 2023. The average total cost of deposits increased by 36 basis points to 2.63% for the six months ended June 30, 2024 compared to 2.27% for the six months ended June 30, 2023. Average noninterest-bearing deposits decreased by$305.9 millionfor the first six months of 2024 compared to the same period in 2023 and average total deposits decreased by$545.6 million.

Current wording

The average total cost of funds decreased by 31 basis points to 2.93% for thenine months ended September 30, 2024 from 3.24% for thenine months ended September 30, 2023 due mainly to changes in the total funds mix. This was driven by the increase in the balance of lower-cost average total deposits as a percentage of average total funds to 91% for the first nine months of 2024 from 77% for the same period in 2023, and the decrease in the balance of higher cost average borrowings as a percentage of average total funds to 6% for thenine months ended September 30, 2024 from 21% for the same period in 2023. The average cost of interest-bearing liabilities decreased by 14 basis points to 3.89% for the first nine months of 2024 from 4.03% for the same period in 2023. The average total cost of deposits increased by 10 basis points to 2.60% for thenine months ended September 30, 2024 compared to 2.50% for thenine months ended September 30, 2024. Average noninterest-bearing deposits increased by$480.9 millionfor the first nine months of 2024 compared to the same period in 2023 and average total deposits decreased by$60.3 million.

Previous wording

The provision for credit losses was$11.0 millionfor the second quarter compared to$10.0 millionfor the first quarter. The$11.0 million second quarter provision was driven mainly by higher net charge-offs, higher qualitative reserves for office loans and other concentrations of credit, and an increase in special mention and classified loans and leases, offset partially by the reserves released for the Civic loans transferred to held for sale. The $10.0 million first quarter provision was driven by an increase in qualitative reserves related to loans secured by office properties and an increase in quantitative reserves due to an increase in nonaccrual and classified loans and leases.

Current wording

The provision for credit losses was$9.0 millionfor thethird quarter of 2024 compared to$11.0 millionfor thesecond quarter of 2024. The$9.0 million third quarter provision was driven by increases in qualitative reserves for loans secured by office properties and concentrations of credit, and specific reserves for nonperforming loan downgrades. The $11.0 million second quarter provision was driven by higher net charge-offs and higher qualitative reserves for office loans and other concentrations of credit, offset partially by the reserves released for the Civic loans transferred to held for sale.

Previous wording

The provision for credit losses increased by $16.0 million to $21.0 million for the six months ended June 30, 2024 compared to $5.0 million for the six months ended June 30, 2023. The higher provision in the 2024 period was generally due to higher net charge-offs, higher qualitative reserves, and higher levels of special mention and classified loans and leases, offset partially by the reserves released for the Civic loans transferred to held for sale.

Current wording

The provision for credit losses increased by $25.0 million to $30.0 million for the nine months ended September 30, 2024 compared to $5.0 million for the nine months ended September 30, 2023. The higher provision in the 2024 period was generally due to higher net charge-offs and higher qualitative reserves for office loans and other concentrations of credits, offset partially by the reserves released for the Civic loans transferred to held for sale in the second quarter of 2024 and sold in the third quarter of 2024.

Previous wording

Noninterest income increased by $155.3 million to $63.6 million for the six months ended June 30, 2024 compared to a loss of $91.7 million for the six months ended June 30, 2023 due almost entirelyto a decrease in the loss on sale of loans and leases of $156.6 million. The Company sold $529.6 million of loans for a net gain of $0.7 million in the six months ended June 30, 2024 and $5.4 billion of loans for a net loss of $155.9 million in the six months ended June 30, 2023.

Current wording

Noninterest income increased by $96.0 million to $48.2 million for the nine months ended September 30, 2024 compared to a loss of $47.9 million for the nine months ended September 30, 2023, due mostly to a decrease in the loss on sale of loans and leases of $158.4 million, offset partially by a $59.9 million loss on the sale of $741.8 million of securities in the third quarter of 2024. The decrease in the loss on sale of loans and leases was due to the sales of $2.5 billion of loans for a net gain of $0.6 million in the nine months ended September 30, 2024 compared to the sales of $6.1 billion of loans for a net loss of $157.8 million in the nine months ended September 30, 2023.

Previous wording

Noninterest expense decreased by $6.9 million to $203.6 million for the second quarter of 2024 compared to the first quarter of 2024 due mainly to decreases of $12.7 million in acquisition, integration and reorganization costs and $6.3 million in compensation expense, offset partially by increases of $6.0 million in insurance and assessments expense and $5.1 million in other expense. The decrease in acquisition, integration and reorganization costs was due to actual amounts for certain expenses being lower than the estimated amounts accrued at merger close. The decrease in compensation expense was mostly due to a lower headcount. The increase in insurance and assessments expense was due to higher assessment rates for both the regular FDIC assessment and the special assessment. The increase in other expense was mostly due to a repurchase reserve recorded for standard representations and warranties associated with the Civic loan sale.

Current wording

Noninterest expense decreased by $7.4 million to $196.2 million for the third quarter of 2024 due mainly to decreases of $13.7 million in insurance and assessments expense and $5.8 million in other expense, offset partially by a lower reversal of $12.1 million in acquisition, integration and reorganization costs. The decrease in insurance and assessments expense was due to lower assessment rates for both the regular FDIC assessment and the special assessment. The decrease in other expense was mostly due to a repurchase reserve recorded in the second quarter of 2024 for standard representations and warranties associated with the Civic loan sale. Acquisition, integration and reorganization costs included an adjustment of $0.5 million for the third quarter and $12.7 million for the second quarter due to actual amounts for certain expenses being lower than the estimated amounts accrued at merger close.

Previous wording

Noninterest expense decreased by $1.5 billion to $414.2 million for the six months ended June 30, 2024 compared to $1.9 billion for the six months ended June 30, 2023 due mainly to a $1.4 billion goodwill impairment recorded in the 2023 period and a $107.2 million decrease in other expense as the 2023 period included $106.8 million of fair value loss adjustments related to sold unfunded loan commitments.

Current wording

Noninterest expense decreased by $1.5 billion to $610.4 million for the nine months ended September 30, 2024 compared to $2.1 billion for the nine months ended September 30, 2023, due mainly to a $1.4 billion goodwill impairment recorded in the 2023 period.

Previous wording

Income tax expense of $14.3 million was recorded for the second quarter resulting in an effective tax rate of 32.0% compared to tax expense of $11.5 million for the first quarter and an effective tax rate of 27.2%. The increase is due primarily to an increase in disallowed executive compensation expense and a higher shortfall on equity compensation expense from second quarter restricted stock vesting.

Current wording

Income tax expense of $2.7 million was recorded for the third quarter resulting in an effective tax rate of 23.7% compared to income tax expense of $14.3 million for the second quarter and an effective tax rate of 32.0%. The lower third quarter effective tax rate was due primarily to a true-up to the full year tax rate, an increase in disallowed executive compensation expense, and loss of tax benefits with respect to restricted stock vested during the second quarter.

Previous wording

Income tax expense of$25.9 millionwas recorded for the six months ended June 30, 2024 resulting in an effective tax rate of 29.7% compared to a benefit of$131.9 millionfor the same period in 2023 and an effective tax rate of 8.7%. Excluding goodwill impairment, the effective tax rate for thesix months ended June 30, 2023 was 22.7%. The increase is primarily due to a higher shortfall on equity compensation expense from restricted stock vesting in the second quarter of 2024.

Current wording

Income tax expense of$28.6 millionwas recorded for thenine months ended September 30, 2024, resulting in an effective tax rate of 29.0% compared to an income tax benefit of$135.2 millionfor the same period in 2023 and an effective tax rate of 8.7%. Excluding goodwill impairment, the effective tax rate for thenine months ended September 30, 2023 was 21.7%. The lower effective tax rate in 2023 was due primarily to higher FDIC insurance premiums in relation to the reported net loss for 2023.

Previous wording

(1) Includes land and acquisition and development loans of $213.6 million at June 30, 2024 and $228.9 million at December 31, 2023.

Current wording

(1) Includes land and acquisition and development loans of $208.3 million at September 30, 2024 and $228.9 million at December 31, 2023.

Previous wording

Due to hybrid and remote working policies adopted by most companies during the COVID-19 pandemic which remain in place today, there are concerns over the utilization of commercial office space which could impact the long-term performance of some types of office properties within our commercial real estate portfolio. Furthermore, higher interest rates have presented a new emerging risk for the variable rate and hybrid loans in our portfolio. Due to these concerns and concentrations of credit associated with commercial real estate loans, excluding owner occupied real estate loans, we have increased the qualitative reserve component of our allowance for credit losses for our office loan exposure. At June 30, 2024, mortgage loans secured by office properties represent 3.9% of total loans and leases held for investment.

Current wording

Due to hybrid and remote working policies adopted by most companies during the COVID-19 pandemic, many of which remain in place today, there are concerns over the utilization of commercial office space which could impact the long-term performance of some types of office properties within our commercial real estate portfolio. Furthermore, higher interest rates presented a risk for the variable rate and hybrid loans in our portfolio, even considering the recent interest rate cut and expected future incremental interest rate cuts. Due to these concerns and concentrations of credit associated with commercial real estate loans, excluding owner occupied real estate loans, we have increased the qualitative reserve component of our allowance for credit losses for our office loan exposure. At September 30, 2024, mortgage loans secured by office properties represent 7.5% of total loans and leases held for investment.

Previous wording

The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses 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 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 (loss) is a combination of the provision for loan and lease losses, the provision for unfunded loan commitments, and the provision for held-to-maturity debt securities.

Current wording

The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses 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 (loss) is a combination of the provision for loan and lease losses, the provision for unfunded loan commitments, and the provision for held-to-maturity debt securities.

Previous wording

For the second quarter of 2024, we used the Moody’s June 30, 2024 Baseline, S2 Downside 75th Percentile, and S7 Next-Cycle Recession forecast scenarios 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 inherent uncertainty in the economy. Compared to the first quarter of 2024, the economic forecasts were relatively consistent, resulting in an immaterial impact to the allowance for credit losses.

Current wording

For the third quarter of 2024, we used the Moody’s September 30, 2024 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 inherent uncertainty in the economy. Compared to the second quarter of 2024, updates to the economic forecasts, including the Company's scenario weighting, resulted in an immaterial impact to the allowance for credit losses.

Previous wording

As part of our allowance for credit losses methodology, we consistently incorporate the use of qualitative factors in determining the overall allowance for credit losses to capture risks that may not be adequately 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 2024, reserves associated with the qualitative adjustments increased when compared to the prior quarter. Primary qualitative adjustments are related to loans secured by office properties and concentration of credit associated with commercial real estate loans, excluding owner occupied real estate loans.

Current wording

As part of our allowance for credit losses methodology, we consistently incorporate the use of qualitative factors in determining the overall allowance for credit losses to capture risks that may not be adequately 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 third quarter of 2024, reserves associated with the qualitative adjustments increased when compared to the prior quarter. Primary qualitative adjustments are related to loans secured by office properties and concentration of credit associated with commercial real estate loans, multi-family loans, and construction loans.

Previous wording

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 allowance for credit losses. As part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the estimated allowance for credit losses. 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 lower reserves by 3.12% to higher reserves by 3.88%. However, changing one assumption and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate, hence all assumptions and information must be considered. 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 allowance for credit losses. 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 allowance for credit losses.

Current wording

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 allowance for credit losses. As part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the estimated allowance for credit losses. 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 decreases in the dollar amount of the quantitative component of the ACL by 2.03% to 6.65%. However, changing one assumption and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate, hence all assumptions and information must be considered. 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 allowance for credit losses. 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 allowance for credit losses.

Previous wording

During the six months ended June 30, 2024, total deposits decreased by$1.6 billion, or 5.3%, to$28.8 billion at June 30, 2024 due primarily to a decrease of$1.4 billion in money market accounts and a decrease of $0.5 billion in interest-bearing checking accounts. At June 30, 2024, noninterest-bearing deposits totaled$7.8 billion, or 27%, of total deposits and interest-bearing deposits totaled$21.0 billion, or 73%, of total deposits.

Current wording

During the nine months ended September 30, 2024, total deposits decreased by$3.6 billion, or 11.8%, to$26.8 billion at September 30, 2024, due primarily to a decrease of $1.5 billion in brokered time deposits and a decrease of$1.1 billion in money market accounts. At September 30, 2024, noninterest-bearing deposits totaled$7.8 billion, or 29%, of total deposits and interest-bearing deposits totaled$19.0 billion, or 71%, of total deposits.

Previous wording

As of June 30, 2024, FDIC-insured deposits represented approximately 74% of total deposits, including accounts eligible for pass-through insurance, down from 76% as of December 31, 2023. Available liquidity (on-balance sheet liquidity plus unused borrowing capacity and unpledged AFS securities) was $16.9 billion at June 30, 2024, which exceeded uninsured and uncollateralized deposits of$6.8 billion, with a coverage ratio of 247% as compared to a coverage ratio of 247%at December 31, 2023. Available liquidity also represented 59% of total deposits at June 30, 2024.

Current wording

As of September 30, 2024, FDIC-insured deposits represented approximately 72% of total deposits, including accounts eligible for pass-through insurance, down from 76% as of December 31, 2023. Available liquidity (on-balance sheet liquidity plus unused borrowing capacity and unpledged AFS securities) was $16.2 billion at September 30, 2024, which exceeded uninsured and uncollateralized deposits of$6.7 billion, with a coverage ratio of 241% as compared to a coverage ratio of 247%at December 31, 2023. Available liquidity also represented 60% of total deposits at September 30, 2024.

Previous wording

The Bank is a participant in the IntraFi Network, a network that offers deposit placement services such as ICS and CDARS, and other reciprocal deposit networks which offer products that qualify large deposits for FDIC insurance. At June 30, 2024, the Bank had$8.0 billion of reciprocal deposits compared to $8.9 billion at December 31, 2023.

Current wording

The Bank is a participant in the IntraFi Network, a network that offers deposit placement services such as ICS and CDARS, and other reciprocal deposit networks which offer products that qualify large deposits for FDIC insurance. At September 30, 2024, the Bank had$8.2 billion of reciprocal deposits compared to $8.9 billion at December 31, 2023.

Previous wording

In addition to deposit products, we also offer select clients non-depository cash investment options through BAM, our registered investment adviser subsidiary, and third-party money market sweep products. BAM provides customized investment advisory and asset management solutions. At June 30, 2024, total off-balance sheet client investment funds were$1.2 billion, of which$0.7 billion was managed by BAM. At December 31, 2023, total off-balance sheet client investment funds were $0.6 billion, of which $0.2 billion was managed by BAM.

Current wording

In addition to deposit products, we also offer select clients non-depository cash investment options through BAM, our registered investment adviser subsidiary, and third-party money market sweep products. BAM provides customized investment advisory and asset management solutions. At September 30, 2024, total off-balance sheet client investment funds were$1.3 billion, of which$0.6 billion was managed by BAM. At December 31, 2023, total off-balance sheet client investment funds were $0.6 billion, of which $0.2 billion was managed by BAM.

Previous wording

During the six months ended June 30, 2024, nonperforming loan and leases held for investment incr eased by$42.8 million to$117.1 million at June 30, 2024 due mainly to additions of$119.0 million, offset partially bytransfers to held for sale of$19.6 million, transfers to accrual status of$14.1 million, charge-offs of $13.6 million, andprincipal and other reductions of$29.0 million. As of June 30, 2024, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $35.9 million and represented 31% of total nonaccrual loans and leases.

Current wording

During the nine months ended September 30, 2024, nonperforming loan and leases held for investment incr eased by$94.1 million to$168.3 million at September 30, 2024 due mainly to additions of$188.6 million, offset partially bytransfers to held for sale of $19.6 million, transfers to accrual status of$15.3 million, charge-offs of $14.7 million, andprincipal and other reductions of$44.9 million. As of September 30, 2024, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $49.0 million and represented 29% of total nonaccrual loans and leases.

Previous wording

Loans and leases accruing 30-89 days past due generally fluctuate from period to period. The $76.8 million decrease to $25.1 million as of June 30, 2024 was due mainly to decreases in other residential and commercial real estate delinquent loans.

Current wording

Loans and leases accruing 30-89 days past due decreased$78.5 million to$23.4 million as of September 30, 2024 due mainly to decreases in other residential and commercial real estate delinquent loans. Decrease in other residential real estate delinquent loans was primarily due to the Civic loan sale.

Previous wording

During the six months ended June 30, 2024, foreclosed assets increased by$5.9 million to$13.3 million at June 30, 2024 due mainly to additions of$14.8 million, offset partially by sales of $8.1 million.

Current wording

During the nine months ended September 30, 2024, foreclosed assets increased by$1.3 million to$8.7 million at September 30, 2024 due mainly to transfers from loans of $15.6 million, offset partially by sales of $13.6 million.