Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-35522

 

 

BANC OF CALIFORNIA, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

(State or other jurisdiction of

incorporation or organization)

04-3639825

(IRS Employer Identification No.)

18500 Von Karman Ave, Suite 1100, Irvine, California

(Address of principal executive offices)

92612

(Zip Code)

(949) 236-5211

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of July 31, 2014, the registrant had outstanding 27,759,686 shares of voting common stock and 602,783 shares of Class B non-voting common stock.

 

 

 


Table of Contents

BANC OF CALIFORNIA, INC.

FORM 10-Q QUARTERLY REPORT

June 30, 2014

Table of Contents

 

         Page  

Part I – Financial Information

     5   

Item 1 –

 

Financial Information

     5   

Item 2 –

 

Management’s Discussion and Analysis of Financial Condition and Result of Operations

     54   

Item 3 –

 

Quantitative and Qualitative Disclosures About Market Risk

     83   

Item 4 –

 

Controls and Procedures

     85   

Part II – Other Information

     85   

Item 1 –

 

Legal Proceedings

     85   

Item 1A –

 

Risk Factors

     86   

Item 2 –

 

Unregistered Sales of Equity Securities and Use of Proceeds

     88   

Item 3 –

 

Defaults Upon Senior Securities

     89   

Item 4 –

 

Mine Safety Disclosure

     89   

Item 5 –

 

Other Information

     89   

Item 6 –

 

Exhibits

     90   

Signatures

     94   

 

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Forward-looking Statements

When used in this report and in public shareholder communications, in other documents of Banc of California, Inc. (the “Company,” “we,” “us” and “our”) filed with or furnished to the Securities and Exchange Commission (the “SEC”), or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” “guidance” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenue, expense or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following:

 

i. the ability of the Company to successfully integrate the branches its wholly owned bank subsidiary, Banc of California, N.A. (the “Bank”), has agreed to acquire from Banco Popular North America (“BPNA”);

 

ii. the Company’s ability to receive regulatory approval and otherwise satisfy the closing conditions for the pending acquisition of branches from BPNA, including raising sufficient financing from public or private offerings to complete the acquisition of branches from BPNA;

 

iii. risks that the Company’s merger and acquisition activities, including but not limited to the pending acquisition of the BPNA branches and the recently completed acquisitions of The Private Bank of California (PBOC), The Palisades Group, LLC and CS Financial, Inc., as well as the recent merger of the Company’s subsidiary banks, may disrupt current plans and operations and lead to difficulties in customer and employee retention, risks that the amount of the costs, fees, expenses and charges related to these transactions could be significantly higher than anticipated and risks that the expected revenues, cost savings, synergies and other benefits of these transactions might not be realized within the anticipated timetables or at all;

 

iv. risks that funds obtained from capital raising activities will not be utilized efficiently or effectively;

 

v. a worsening of current economic conditions, as well as turmoil in the financial markets;

 

vi. the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial condition of borrowers, may lead to increased loan and lease delinquencies, losses and nonperforming assets in our loan and lease portfolio, and may result in our allowance for loan and lease losses not being adequate to cover actual losses and require us to materially increase our loan and lease loss reserves;

 

vii. the quality and composition of our securities portfolio;

 

viii. changes in general economic conditions, either nationally or in our market areas;

 

ix. continuation of the historically low short-term interest rate environment, changes in the levels of general interest rates, and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

 

x. fluctuations in the demand for loans and leases, the number of unsold homes and other properties and fluctuations in commercial and residential real estate values in our market area;

 

xi. results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan and lease losses, write-down asset values, increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

 

xii. legislative or regulatory changes that adversely affect our business, including changes in regulatory capital or other rules;

 

xiii. our ability to control operating costs and expenses;

 

xiv. staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

 

xv. errors in our estimates in determining fair value of certain of our assets, which may result in significant declines in valuation;

 

xvi. the network and computer systems on which we depend could fail or experience a security breach;

 

xvii. our ability to attract and retain key members of our senior management team;

 

xviii. costs and effects of litigation, including settlements and judgments;

 

xix. increased competitive pressures among financial services companies;

 

xx. changes in consumer spending, borrowing and saving habits;

 

xxi. adverse changes in the securities markets;

 

xxii. earthquake, fire or other natural disasters affecting the condition of real estate collateral;

 

xxiii. the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions;

 

xxiv. inability of key third-party providers to perform their obligations to us;

 

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Table of Contents
xxv. changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board or their application to our business, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

 

xxvi. war or terrorist activities; and

 

xxvii. other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this report and from time to time in other documents that we file with or furnish to the SEC, including, without limitation, the risks described under “Item 1A. Risk Factors” presented elsewhere in this report.

The Company undertakes no obligation to update any such statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made, except as required by law.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Amounts in thousands, except share and per share data)

(Unaudited)

 

     June 30,
2014
    December 31,
2013
 
ASSETS     

Cash and due from banks

   $ 5,764      $ 4,937   

Interest-bearing deposits

     252,287        105,181   
  

 

 

   

 

 

 

Total cash and cash equivalents

     258,051        110,118   

Time deposits in financial institutions

     2,145        1,846   

Securities available for sale, at fair value

     233,013        170,022   

Loans held for sale, carried at fair value

     244,778        192,613   

Loans held for sale, carried at lower of cost or fair value

     850,963        524,120   

Loans and leases receivable, net of allowance of $22,627 at June 30, 2014 and $18,805 at December 31, 2013

     2,579,586        2,427,306   

Federal Home Loan Bank and other bank stock, at cost

     34,392        22,600   

Servicing rights, net ($9,816 measured at fair value at June 30, 2014 and $13,535 at December 31, 2013)

     10,191        13,883   

Accrued interest receivable

     11,170        10,866   

Other real estate owned, net

     605        —     

Premises, equipment, and capital leases, net

     67,457        66,260   

Bank-owned life insurance

     18,984        18,881   

Goodwill

     32,150        30,143   

Affordable housing fund investment

     5,293        5,628   

Deferred income tax

     2,546        —     

Income tax receivable

     —          2,995   

Other intangible assets, net

     10,959        12,152   

Other assets

     24,239        18,590   
  

 

 

   

 

 

 

Total Assets

   $ 4,386,522      $ 3,628,023   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Noninterest-bearing deposits

   $ 408,404      $ 429,158   

Interest-bearing deposits

     2,938,951        2,489,486   
  

 

 

   

 

 

 

Total deposits

     3,347,355        2,918,644   

Advances from Federal Home Loan Bank

     450,000        250,000   

Notes payable, net

     96,481        82,320   

Reserve for loss on repurchased loans

     6,174        5,427   

Income taxes payable

     31        —     

Accrued expenses and other liabilities

     47,163        46,763   
  

 

 

   

 

 

 

Total liabilities

     3,947,204        3,303,154   

Commitments and contingent liabilities

    

Preferred stock, $0.01 par value per share, 50,000,000 shares authorized:

    

Series A, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 32,000 shares authorized, 32,000 shares issued and outstanding at June 30, 2014 and December 31, 2013

     31,934        31,934   

Series B, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 10,000 shares authorized, 10,000 shares issued and outstanding at June 30, 2014 and December 31, 2013

     10,000        10,000   

Series C, 8.00% non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 40,250 shares authorized, 40,250 shares issued and outstanding at June 30, 2014 and December 31, 2013

     37,943        37,943   

Common stock, $0.01 par value per share, 446,863,844 shares authorized; 28,658,873 shares issued and 27,032,464 shares outstanding at June 30, 2014; 20,959,286 shares issued and 19,561,469 shares outstanding at December 31, 2013

     287        210   

Class B non-voting non-convertible Common stock, $.01 par value per share, 3,136,156 shares authorized; 596,018 shares issued and outstanding at June 30, 2014 and 584,674 shares issued and outstanding at December 31, 2013

     6        6   

Additional paid-in capital

     369,530        256,306   

Retained earnings

     18,779        16,981   

Treasury stock, at cost (1,626,409 shares at June 30, 2014 and 1,397,817 shares at December 31, 2013)

     (29,652     (27,911

Accumulated other comprehensive income (loss), net

     491        (600
  

 

 

   

 

 

 

Total shareholders’ equity

     439,318        324,869   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 4,386,522      $ 3,628,023   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014      2013     2014      2013  

Interest and dividend income

          

Loans, including fees

   $ 42,077       $ 26,153      $ 83,607       $ 44,690   

Securities

     993         369        1,917         867   

Dividends and other interest-earning assets

     564         219        886         352   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     43,634         26,741        86,410         45,909   

Interest expense

          

Deposits

     6,071         3,303        11,806         5,302   

Federal Home Loan Bank advances

     99         58        199         121   

Notes payable and other interest-bearing liabilities

     1,889         1,755        3,645         3,502   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     8,059         5,116        15,650         8,925   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     35,575         21,625        70,760         36,984   

Provision for loan and lease losses

     2,108         1,918        4,037         4,086   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     33,467         19,707        66,723         32,898   

Noninterest income

          

Customer service fees

     356         509        609         1,055   

Loan servicing income

     774         458        2,027         646   

Income from bank owned life insurance

     56         50        103         88   

Net gain on sale of securities available for sale

     15         1        522         309   

Net gain on sale of loans

     3,038         3,724        5,641         4,036   

Net gain on mortgage banking activities

     26,133         20,261        43,457         36,631   

Other income

     5,000         1,069        8,291         1,235   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     35,372         26,072        60,650         44,000   

Noninterest expense

          

Salaries and employee benefits

     39,130         25,311        73,811         44,391   

Occupancy and equipment

     7,425         3,630        15,962         6,823   

Professional fees

     3,528         2,947        7,393         5,244   

Data processing

     1,270         1,365        2,061         2,275   

Advertising

     710         890        1,785         1,412   

Regulatory assessments

     1,046         211        1,987         592   

Loan servicing and foreclosure expense

     175         148        350         352   

Operating loss on equity investment

     161         131        335         290   

Valuation allowance for other real estate owned

     —           —          —           79   

Net (gain) loss on sales of other real estate owned

     —           (37     —           (151

Provision for loan repurchases

     330         732        901         988   

Amortization of intangible assets

     944         367        1,883         734   

All other expense

     5,746         3,899        11,765         6,123   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expense

     60,465         39,594        118,233         69,152   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     8,374         6,185        9,140         7,746   

Income tax expense

     253         1,822        262         2,454   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     8,121         4,363        8,878         5,292   

Preferred stock dividends

     910         —          1,820         288   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income available to common shareholders

   $ 7,211       $ 4,363      $ 7,058       $ 5,004   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per common share

   $ 0.27       $ 0.35        0.30       $ 0.41   

Diluted earnings per common share

   $ 0.27       $ 0.35        0.30       $ 0.41   

Basic earnings per class B common share

   $ 0.27       $ 0.35        0.30       $ 0.41   

Diluted earnings per class B common share

   $ 0.25       $ 0.29        0.24       $ 0.36   

See accompanying notes to unaudited consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net income

   $ 8,121      $ 4,363      $ 8,878      $ 5,292   

Unrealized gain (loss) on available-for-sale securities:

        

Unrealized gain (loss) arising during the period, net of tax (expense) benefit of $0 and $0, respectively

     1,099        (400     2,122        (300

Reclassification adjustment for gain included in net income, net of tax expense of $0 and $0, respectively

     (15     (1     (522     (309
  

 

 

   

 

 

   

 

 

   

 

 

 

Total change in unrealized loss (gain) on available-for-sale securities

     1,084        (401     1,600        (609

Unrealized loss on cash flow hedge

        

Unrealized loss arising during the period, net of tax (expense) benefit of $0 and $0, respectively

     (292     —          (509     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total change in unrealized loss on cash flow hedge

     (292     —          (509     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     792        (401     1,091        (609
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 8,913      $ 3,962      $ 9,969      $ 4,683   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

    Preferred Stock     Common Stock     Additional
Paid-
    Retained     Treasury     Accumulated
Other
Comprehensive
       
    Series A     Series B     Series C     Class A     Class B     in Capital     Earnings     Stock     Income (Loss)     Total  

Balance at December 31, 2012

  $ 31,934      $ —        $ —        $ 120      $ 11      $ 154,563      $ 26,550      $ (25,818   $ 1,397      $ 188,757   

Comprehensive income (loss):

                   

Net income

    —          —          —          —          —          —          5,292        —          —          5,292   

Other comprehensive income, net

    —          —          —          —          —          —          —          —          (609     (609

Issuance of common stock

    —          —          —          42        (6     43,450        —          —          —          43,486   

Issuance of preferred stock

    —          —          33,734        —          —          —          —          —          —          33,734   

Purchase of 6,216 shares of treasury stocks

    —          —          —          —          —          —          —          (69     —          (69

Issuance of stock awards from treasury stock

    —          —          —          —          —          (1,799     —          1,799       

Shares purchased under the Dividend Reinvestment Plan

    —          —          —          —          —          186        (186     —          —          —     

Stock option compensation expense

    —          —          —          —          —          215        —          —          —          215   

Restricted stock compensation expense

    —          —          —          —          —          657        —          —          —          657   

Dividends declared ($0.24 per common share)

    —          —          —          —          —          —          (2,690     —          —          (2,690

Preferred stock dividends

    —          —          —          —          —          —          (288     —          —          (288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 31,934      $ —        $ 33,734      $ 162      $ 5      $ 197,272      $ 28,678      $ (24,088   $ 788      $ 268,485   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  $ 31,934      $ 10,000      $ 37,943      $ 210      $ 6      $ 256,306      $ 16,981      $ (27,911   $ (600   $ 324,869   

Comprehensive income:

                      —     

Net income

    —          —          —          —          —          —          8,878        —          —          8,878   

Other comprehensive income, net

    —          —          —          —          —          —          —          —          1,091        1,091   

Issuance of common stock

    —          —          —          77        —          55,397        —          —          —          55,474   

Issuance of tangible equity units

    —          —          —          —          —          51,720        —          —          —          51,720   

Purchase of 10,888 shares of treasury stock

    —          —          —          —          —          —          —          (134     —          (134

Reclassification adjustment for awards issued from treasury stock

    —          —          —          —          —          1,926        —          (1,926     —          —     

Exercise of stock options

    —          —          —          —          —          757        —          —          —          757   

Stock option compensation expense

    —          —          —          —          —          156        —          —          —          156   

Restricted stock compensation expense

    —          —          —          —          —          2,663        —          —          —          2,663   

Stock appreciation right expense

    —          —          —          —          —          514        —          —          —          514   

Issuance of stock awards from treasury stock

    —          —          —          —          —          (319     —          319        —          —     

Shares purchased under the Dividend Reinvestment Plan

    —          —          —          —          —          410        28        —          —          438   

Dividends declared ($0.24 per common share)

    —          —          —          —          —          —          (5,288     —          —          (5,288

Preferred stock dividends

    —          —          —          —          —          —          (1,820     —          —          (1,820
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 31,934      $ 10,000      $ 37,943      $ 287      $ 6      $ 369,530      $ 18,779      $ (29,652   $ 491      $ 439,318   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 8,878      $ 5,292   

Adjustments to reconcile net income to net cash used in operating activities

    

Provision for loan losses

     4,037        4,086   

Provision for loan repurchases

     901        988   

Net gain on mortgage banking activities

     (43,457     (36,631

Gain on sale of loans

     (5,641     (4,036

Net amortization (accretion) of securities

     345        576   

Depreciation on premises and equipment

     3,250        1,510   

Amortization of intangibles

     1,883        734   

Amortization of debt issuance cost

     239        192   

Stock option compensation expense

     156        215   

Stock award compensation expense

     2,663        657   

Stock appreciation right expense

     514        298   

Bank owned life insurance income

     (103     (88

Operating loss on equity investment

     335        290   

Net (gain) loss on sale of securities available for sale

     (522     (309

Gain on sale of other real estate owned

     —          (151

Loss (Gain) on sale or disposal of property and equipment

     297        (2

Increase in valuation allowances on other real estate owned

     —          79   

Originations of loans held for sale from mortgage banking

     (1,226,599     (867,640

Originations of other loans held for sale

     (751,061     —     

Proceeds from sales of and principal collected on loans held for sale from mortgage banking

     1,215,423        752,478   

Proceeds from sales of and principal collected on other loans held for sale

     339,144        —     

Change in deferred loan (costs) fees

     617        (399

Amortization of premiums and discounts on purchased loans

     (19,311     (8,001

Change in accrued interest receivable

     (304     (2,885

Change in other assets

     8,917        8,710   

Change in accrued interest payable and other liabilities

     (984     863   
  

 

 

   

 

 

 

Net cash used in operating activities

     (460,383     (143,174
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of securities available-for-sale

     52,245        8,539   

Proceeds from maturities and calls of securities available-for-sale

     1,105        8,767   

Proceeds from principal repayments of securities available-for-sale

     16,843        45,130   

Purchases of securities available-for-sale

     (131,407     (48,626

Net cash used in acquisitions

     (1,000     —     

Loan originations and principal collections, net

     (116,192     (144,707

Purchase of loans

     (11,956     (374,878

Redemption of Federal Home Loan Bank stocks

     —          25   

Purchase of Federal Home Loan Bank and other bank stocks

     (11,792     (2,021

Proceeds from sale of loans held for investment

     73,398        155,209   

Net change in time deposits in financial institutions

     (299     2,438   

Proceeds from sale of other real estate owned

     48        3,474   

Additions to premises and equipment

     (5,355     (4,033

Payments of capital lease obligations

     (504     (113
  

 

 

   

 

 

 

Net cash used in investing activities

     (134,866     (350,796
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     428,711        803,489   

Net increase (decrease) in Federal Home Loan Bank advances

     200,000        (30,000

Net proceeds from issuance of common stock

     54,474        43,486   

Net proceeds from issuance of preferred stock

     —          33,734   

Net proceeds from issuance of tangible equity units

     65,642        —     

Purchase of treasury stock

     (134     (69

Proceeds from exercise of stock options

     757        —     

Dividends paid on preferred stock

     (1,832     (288

Dividends paid on common stock

     (4,436     (2,690
  

 

 

   

 

 

 

Net cash provided by financing activities

     743,182        847,662   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     147,933        353,692   

Cash and cash equivalents at beginning of period

     110,118        108,643   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 258,051      $ 462,335   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid on deposits and borrowed funds

   $ 15,563      $ 8,893   

Income taxes paid

     —          —     

Income taxes refunds received

     —          2,305   

Supplemental disclosure of noncash activities

    

Transfer from loans to other real estate owned, net

     653        —     

Transfer of loans receivable to loans held for sale, net of transfer of $963 and $0 from allowance for loan and lease losses for the six months ended June 30, 2014 and 2013, respectively

     62,057        10,358   

Transfer of loans held for sale to loans receivable

     94,837        —     

Equipment acquired under capital leases

     989        714   

See accompanying notes to unaudited consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying unaudited consolidated financial statements include the accounts of Banc of California, Inc. (the Company, we, us and our) and its wholly owned subsidiaries, Banc of California, National Association (the Bank), the Palisades Group, LLC (the Palisades Group), and PTB Property Holdings, LLC, as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013, except that the accounts of the Palisades Group were not included for amounts for the three and six months ended June 30, 2013. Significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries.

Nature of Operations: The principal business of the Company is the ownership of the Bank. The Bank operates under a national bank charter issued by the Office of the Comptroller of the Currency (the OCC), its primary regulator. The Bank is a member of the Federal Home Loan Bank (FHLB) system, and maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation (FDIC). PTB Property Holdings, LLC manages and disposes of other real estate owned properties and the Palisades Group provides financial advisory and asset management services.

The Bank is engaged in the business of retail banking, with operations conducted through 17 banking offices, serving San Diego, Los Angeles, and Orange counties, California and 60 producing loan production offices in California, Arizona, Oregon, Montana, Virginia, North Carolina, Colorado, Indiana, and Maryland as of June 30, 2014. As of June 30, 2014, single family residential (SFR) mortgage loans and Green loans (SFR mortgage lines of credit) accounted for approximately 41.5 percent and 5.1 percent, respectively, of the Company’s loan and lease portfolio, with a high percentage of such loans concentrated in Southern California. The customer’s ability to repay their loans or leases is dependent on the real estate market and general economic conditions in the area.

The accounting and reporting polices of the Company are based upon U.S. generally accepted accounting principles (GAAP) and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies or in its estimates and assumptions from those disclosed in its 2013 Annual Report on Form 10-K other than the adoption of new accounting pronouncements and other authoritative guidance that became effective for the Company on or after January 1, 2014. Refer to Accounting Pronouncements for discussion of accounting pronouncements adopted in 2014.

Basis of Presentation: The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by GAAP are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2013 filed by the Company with the Securities and Exchange Commission. The December 31, 2013 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission, but does not include all of the disclosures required by GAAP.

In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.

The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan and lease losses, reserve for loss on repurchased loans, servicing rights, other real estate owned, realization of deferred tax assets, goodwill, other intangible assets, derivatives, fair value of assets and liabilities acquired in business combinations, and the fair value of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance is established when necessary to reduce deferred tax assets when it is more-likely-than-not that a portion or all of the net deferred tax assets will not be realized. As of June 30, 2014, the Company had a net deferred tax asset of $2.5 million, net of a $13.0 million valuation allowance and as of December 31, 2013, the Company had a net deferred tax asset of $0, net of a $17.3 million valuation allowance (See further discussion in Note 11, Income Taxes).

 

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Earnings Per Share: Earnings per share is computed under the two-class method. Basic earnings per common share (EPS) is computed by dividing net income allocated to common shareholders by the weighted average number of shares outstanding, including the minimum number of shares issuable under purchase contracts relating to the tangible equity units. Diluted EPS is computed by dividing net income allocated to common shareholders by the weighted average number of shares outstanding, adjusted for the dilutive effect of the restricted stock units, the potentially issuable shares in excess of the minimum under purchase contracts relating to the tangible equity units, outstanding stock options, and warrants to purchase common stock. Net income allocated to common shareholders is computed by subtracting income allocated to participating securities and preferred stock dividend from net income. Participating securities are instruments granted in share-based payment transactions that contain rights to receive nonforfeitable dividends or dividend equivalents, which includes the Stock Appreciation Rights to the extent they confer dividend equivalent rights, as described under “Stock Appreciation Rights” in Note 14.

Correction of Prior Period Errors: During the three months ended June 30, 2014, the Company made cumulative prior period (three months ended March 31, 2014 and years ended December 31, 2013 and 2012) adjustments related to the allowance for loan and lease losses, restricted stock compensation expense, and other expenses, which increased provision for loan and lease losses by $758 thousand, stock compensation expense by $483 thousand, and other expense by $160 thousand. The Company reviewed the impact of these corrections in accordance with Securities Exchange Commission Staff Accounting Bulletin No. 99 “Materiality”, and determined that the correction was not material to prior and current periods.

Accounting Pronouncements: During the six months ended June 30, 2014, the following pronouncements applicable to the Company were issued or became effective:

In January 2014, the FASB issued guidance within ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in ASU 2014-01 to Topic 323, “Equity Investments and Joint Ventures,” provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for fiscal years, and interim periods within those years, beginning after December 31, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. All of the Company’s affordable housing fund investments are within the scope of this guidance. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 clarifies that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure. Interim and annual disclosure is required of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. ASU 2014-04 is effective using either the modified retrospective transition method or a prospective transition method for fiscal years and interim periods within those years, beginning after December 15, 2014, and early adoption is permitted. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue From Contracts With Customers”, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. The ASU changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. In addition, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The ASU also requires disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the

 

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initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. There are also additional disclosure requirements for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

NOTE 2 – BUSINESS COMBINATIONS AND BRANCH SALES

The Company completed the following acquisitions between January 1, 2013 and June 30, 2014 and used the acquisition method of accounting. Accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective dates of acquisition. The following table presents a summary of acquired assets and assumed liabilities along with a summary of the acquisition consideration as of the dates of acquisition:

 

     Acquisition and Date Acquired  
     Renovation
Ready
     CS Financial      The Palisades
Group
     Private Bank
of California
 
     January 31,
2014
     October 31,
2013
     September 10,
2013
     July 1,
2013
 
     (In thousands)  

Assets acquired:

           

Cash and due from banks

   $ —         $ 482       $ 900       $ 33,752   

Interest-bearing deposits

     —           —           5         —     

Securities available for sale

     —           —           —           219,298   

Loans held for sale

     —           4,982         —           —     

Loans and leases receivable

     —           —           —           385,256   

Premises, equipment, and capital leases

     —           704         —           1,501   

Income tax receivable

     —           —           —           682   

Goodwill

     3,000         7,178         —           14,925   

Other intangible assets

     —           690         —           10,400   

Other assets

     —           608         364         6,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 3,000       $ 14,644       $ 1,269       $ 672,392   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities assumed:

           

Deposits

   $ —         $ —         $ —         $ 561,689   

Advances from Federal Home Loan Bank

     —           —           —           41,833   

Other liabilities

     1,000         6,722         1,219         2,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     1,000         6,722         1,219         606,003   

SBLF preferred stock assumed

     —           —           —           10,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consideration paid

   $ 2,000       $ 7,922       $ 50       $ 56,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Summary of consideration

           

Cash paid

   $ 1,000       $ 1,500       $ 50       $ 28,077   

Common stock issued

     1,000         1,964         —           28,282   

Replacement awards

     —           —           —           30   

Noninterest-bearing note

     —           3,150         —           —     

Performance based equity

     —           1,308         —           —     

Earn-out liabilities

     1,000         —           —           —     

RenovationReady® Acquisition

Effective January 31, 2014, the Company acquired certain assets, including service contracts and intellectual property, of RenovationReady, a provider of specialized loan services to financial institutions and mortgage bankers that originate agency eligible residential renovation and construction loan products.

 

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The RenovationReady acquisition was accounted for under GAAP guidance for business combinations. The purchased identifiable intangible assets and assumed liabilities were recorded at their estimated fair values as of January 31, 2014. Because of the short time period between the acquisition date and June 30, 2014, the Company used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The closing date valuations related to other intangible assets and assumed liabilities are preliminary and could differ significantly when finalized.

CS Financial Acquisition

Effective October 31, 2013, the Company acquired CS Financial, Inc. (CS Financial), a California corporation and Southern California-based mortgage banking firm controlled by former Company director and current Company executive Jeffery T. Seabold. CS Financial became a wholly owned subsidiary of the Bank. For additional information regarding this transaction, see note 18-Related-Party Transactions.

The CS Financial acquisition was accounted for under GAAP guidance for business combinations. The purchased assets, including identifiable intangible assets and assumed liabilities were recorded at their estimated fair values as of October 31, 2013. The Company recorded $7.2 million of goodwill and $690 thousand of other intangible assets. The other intangible assets are related to a trade name intangible.

The Palisades Group, LLC, Acquisition

Effective September 10, 2013, the Company acquired The Palisades Group, a Delaware limited liability company and a registered investment adviser under the Investment Advisers Act of 1940, pursuant to the terms of the Amended and Restated Units Purchase Agreement dated as of November 30, 2012, amended and restated as of August 12, 2013, for $50 thousand. The Palisades Group provides financial advisory and asset management services to third parties, including the Bank, with respect to the purchase, sale and management of portfolios of residential mortgage loans.

The Palisades Group acquisition was accounted for under GAAP guidance for business combinations. The assets and liabilities were recorded at their estimated fair values as of the September 10, 2013 acquisition date. No goodwill was recognized.

The Private Bank of California Acquisition

Effective July 1, 2013, the Company completed its acquisition of The Private Bank of California, (PBOC) pursuant to the terms of the Agreement and Plan of Merger, dated as of August 21, 2012, as amended (the PBOC Merger Agreement), by and between the Company, Beach Business Bank (Beach) (then a separate subsidiary bank of the Company) and PBOC. PBOC merged with and into Beach, with Beach continuing as the surviving entity in the merger and a wholly owned subsidiary of the Company, and changing its name to “The Private Bank of California.” On October 11, 2013, The Private Bank of California was merged with the Company’s other wholly owned banking subsidiary, Banc of California, National Association (formerly Pacific Trust Bank), to form the Bank.

Pursuant to the terms of the PBOC Merger Agreement, the Company paid aggregate merger consideration of (1) 2,082,654 shares of Company common stock (valued at $28.3 million based on the $13.58 per share closing price of Company common stock on July 1, 2013), and (2) $25.4 million in cash. Additionally, the Company paid out $2.7 million for certain outstanding options to acquire PBOC common stock in accordance with the PBOC Merger Agreement and converted the remaining outstanding PBOC stock options to Company stock options with an assumed fair value of approximately $30 thousand. On the basis of the number of shares of PBOC common stock issued and outstanding immediately prior to the completion of the merger, each outstanding share of PBOC common stock was converted into the right to receive $6.52 in cash and 0.5379 shares of Company common stock.

In addition, upon completion of the acquisition, each share of preferred stock issued by PBOC as part of the Small Business Lending Fund (SBLF) program of the United States Department of Treasury (10,000 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company. The terms of the preferred stock issued by the Company in exchange for the PBOC preferred stock are substantially identical to the preferred stock previously issued by the Company as part of its own participation in the SBLF program (32,000 shares in aggregate with a liquidation preference amount of $1,000 per share).

PBOC provided a range of financial services, including credit and deposit products as well as cash management services, from its headquarters located in the Century City area of Los Angeles, California as well as full-service branches in Hollywood and Irvine, and a loan production office in downtown Los Angeles. PBOC’s target clients included high-net worth and high income individuals, business professionals and their professional service firms, business owners, entertainment service businesses and non-profit organizations.

 

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In accordance with GAAP guidance for business combinations, the Company has expensed approximately $2.6 million of direct acquisition costs, all of which were recognized in 2013, and recorded $14.9 million of goodwill and $10.4 million of other intangible assets. The other intangible assets are primarily related to core deposits and are being amortized on an accelerated basis over 2-7 years. Loans that were acquired from PBOC that were considered credit impaired were written down at the acquisition date in accordance with purchase accounting to fair value. In addition, the allowance for loan losses for all PBOC loans was not carried over to the Company’s allowance for loan and lease losses. A full valuation allowance for the deferred tax asset was recorded based on management’s evaluation of the expectation of recovery of deferred tax assets for the Company. For tax purposes purchase accounting adjustments, including goodwill are all nontaxable and/or non-deductible.

Pro Forma Information

The following table presents unaudited pro forma information as if the acquisitions of PBOC, Palisades and CS Financial had occurred on January 1, 2013 after giving effect to certain adjustments. The unaudited pro forma information for the three and six months ended June 30, 2013 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (In thousands, except per share data)  

Net interest income

   $ 35,575       $ 26,863       $ 70,760       $ 47,392   

Provision for loan and lease losses

     2,108         2,412         4,037         4,929   

Noninterest income

     35,372         34,348         60,650         58,958   

Noninterest expense

     60,465         50,851         118,233         90,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     8,374         7,948         9,140         11,145   

Income tax expense

     253         2,564         262         3,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 8,121       $ 5,384       $ 8,878       $ 7,263   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per total common share

   $ 0.27       $ 0.36       $ 0.30       $ 0.47   

Diluted earnings per total common share

   $ 0.27       $ 0.35       $ 0.30       $ 0.47   

The above unaudited pro forma financial information for 2013 includes the pre-acquisition periods for PBOC, Palisades, and CS Financial. The above unaudited pro forma financial information includes pre-acquisition provisions for loan and lease losses recognized by PBOC and CS Financial of $494 thousand and $843 thousand for the three and six months ended June 30, 2013, respectively. No pro forma information for RenovationReady is presented for the three and six months ended June 30, 2014, as it is immaterial. Pro forma statements do not include cost saves or integration costs and may not be reflective of what it would have looked like had they been put together at that date.

Branch Sales

On October 4, 2013, the Bank completed a branch sale transaction to AmericanWest Bank, a Washington state chartered bank (AWB). In the transaction, the Bank sold eight branches and related assets and deposit liabilities to AWB. The transaction was completed with a transfer of $464.3 million deposits to AWB in exchange for a deposit premium of 2.3 percent. Certain other assets related to the branches include the real estate for three of the branch locations and certain overdraft and other credit facilities related to the deposit accounts. The Company recognized a gain of $12.6 million from this transaction, of which $12.1 million was recognized in 2013.

Pending Acquisition of Banco Popular’s California Branch Network

On April 22, 2014, the Bank entered into a Purchase and Assumption Agreement (the Purchase Agreement) with Banco Popular North America (BPNA), pursuant to which the Bank agreed to acquire select assets and assume certain liabilities comprising BPNA’s network of 20 California branches (the Branches). Subject to the terms of the Purchase Agreement, the Bank will pay approximately $5.4 million for the deposits assumed and loans acquired based on March 31, 2014 balances, which equates to an effective deposit premium of 0.5%.

At the closing of the transaction (the Closing), and subject to the terms of the Purchase Agreement, the Bank will acquire approximately

 

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$1.1 billion in loans and assume approximately $1.1 billion of deposit liabilities related to the Branches (based on March 31, 2014 balances). The Bank will also acquire certain other assets relating to the Branches, including, among others, owned and leased real property. In addition to certain deposits, the Bank will assume other liabilities pertaining to the operation of the Branches at the Closing.

The Bank will not acquire the assets or assume the liabilities related to certain business of the Branches to be retained by BPNA, including, among others, BPNA’s credit card, health care and direct banking businesses and residential mortgages. BPNA will also retain certain loans relating to the Branches, including nonperforming and nonaccrual loans, other real estate owned, home equity lines of credit with a combined loan-to-value ratio in excess of 80% or for which the ability to draw on the line has been frozen and loans relating to BPNA’s credit card business. Additionally, between the date of the Purchase Agreement and the Closing, the Bank may elect to exclude from the transaction certain loans or deposits in circumstances described in the Purchase Agreement.

The Purchase Agreement contains customary representations, warranties and covenants of the parties, including, among others, a covenant that requires BPNA to generally conduct the operations of the BPNA Branches in the ordinary course of business and to refrain from certain kinds of transactions. The Purchase Agreement also contains customary indemnification provisions and indemnification by BPNA for up to 1.5% of credit losses on loans acquired by the Bank for a period of two years following the Closing. The Purchase Agreement also includes a customary covenant by BPNA not to engage in certain banking businesses or operations conducted by the BPNA Branches in the Los Angeles metropolitan statistical area for a period of two years following the Closing, subject to certain customary exemptions.

The transaction is subject to customary conditions to closing, including the receipt of all required governmental approvals, the accuracy of both parties’ representations, the performance in all material respects of all covenants and other agreements required by the Purchase Agreement and the execution and delivery of related transaction documents. In addition, the obligation of the Bank to complete the transaction is subject to its receipt of financing necessary to complete the transaction on the terms set forth in the Purchase Agreement. The Bank is obligated to pay a fee of $2 million if the Purchase Agreement is terminated in certain circumstances, including, among others, if BPNA terminates the Purchase Agreement because the Bank fails to obtain acceptable financing to enable the Bank to consummate the transaction by September 30, 2014.

NOTE 3 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair Value Hierarchy: ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:

 

  Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

  Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

  Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities Available for Sale: The fair values of securities available for sale are generally determined by quoted market prices, if available (Level 1), or by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of the Company’s Level 3 securities are determined by the Company or an independent third-party provider using a discounted cash flow methodology. The methodology uses discount rates that are based upon observed market yields for similar securities. Prepayment speeds are estimated based upon the prepayment history of each bond and a detailed analysis of the underlying collateral. Gross weighted average coupon, geographic concentrations, loan to value, FICO and seasoning are among the different loan attributes that are factored into our prepayment curve. Default rates and severity are estimated based upon geography of the collateral, delinquency, modifications, loan to value ratios, FICO scores, and past performance.

Impaired Loans and Leases: The fair value of impaired loans and leases with specific allocations of the allowance for loan and lease losses or impairment based on collateral values is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The fair value of non-collateral dependent impaired loans and leases with specific allocations of the allowance for loan and lease losses or impairments is based on the present value of estimated cash flows, a Level 3 measurement.

 

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Loans Held for Sale: The fair value of loans held for sale is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics. Therefore, loans held for sale subjected to recurring fair value adjustments are classified as Level 2. The Company had $244.8 million and $192.6 million of loans held for sale at such fair values at June 30, 2014 and December 31, 2013, respectively. The Company also had $851.0 million and $524.1 million of non-conforming jumbo mortgage loans held for sale at the lower of cost or fair value at June 30, 2014 and December 31, 2013, respectively. The Company obtains quotes, bid or pricing indications on all or part of these loans directly from the buyers. Premiums and discounts received or to be received on the quotes, bids or pricing indications are indicative of the fact that the cost is lower or higher than fair value.

Derivative Assets and Liabilities: The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as freestanding derivatives. The Company has entered into pay-fixed, receive-variable interest rate swap contracts with institutional counterparties to hedge against variability in cash flow attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR-based variable rate deposits. The Company is accounting for the swaps as cash flow hedges under ASC 815. The other derivative assets are interest rate lock commitments (IRLCs) with prospective residential mortgage borrowers whereby the interest rate on the loan is locked by the borrower prior to funding. These IRLCs are determined to be derivative instruments in accordance with GAAP. Additional derivative assets and liabilities, typically mortgage-backed to-be-announced (TBA) securities, are used to hedge fair value changes, driven by changes in interest rates, on the Company’s mortgage assets. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date of the loan sale. The estimated fair value is based on current market prices for similar instruments. Given the meaningful level of secondary market activity for derivative contracts, active pricing is available for similar assets and accordingly, the Company classifies its derivative assets and liabilities as Level 2.

Mortgage Servicing Rights: The Company retains servicing on some of its mortgage loans sold and elected the fair value option for valuation of these mortgage servicing rights (MSRs). The value is based on a third party provider that calculates the present value of the expected net servicing income from the portfolio based on key factors that include interest rates, prepayment assumptions, discount rate and estimated cash flows. Because of the significance of unobservable inputs, these servicing rights are classified as Level 3.

Other Real Estate Owned Assets: Other real estate owned assets (OREO) are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of other real estate owned assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. The Company did not have valuation allowance expense for OREO for the three months ended June 30, 2014 and 2013 and recorded $0 and $79 thousand, respectively, for the six months ended June 30, 2014 and 2013 in valuation allowance expense for OREO.

 

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Assets and Liabilities Measured on a Recurring and Non-Recurring Basis

Available for sale securities, certain conforming mortgage loans held for sale, derivative assets and liabilities, and servicing rights—mortgage are measured at fair value on a recurring basis, whereas impaired loans and leases, non-conforming jumbo mortgage loans held for sale and other real estate owned are measured at fair value on a non-recurring basis.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:

 

            Fair Value Measurement Level  
     Carrying
Value
     Quoted Prices in
Active Markets
for Identical
Assets

(Level One)
     Significant
Other
Observable
Inputs

(Level Two)
     Significant
Unobservable
Inputs

(Level Three)
 
     (In thousands)  

June 30, 2014:

           

Assets

           

Available-for-sale securities:

           

SBA loan pools securities

   $ 1,755       $ —         $ 1,755       $ —     

U.S. government-sponsored entities and agency securities

     1,970         —           1,970         —     

Private label residential mortgage-backed securities

     4,109         —           4,109         —     

Agency mortgage-backed securities

     225,179         —           225,179         —     

Loans held for sale

     244,778         —           244,778         —     

Derivative assets (1)

     7,937         —           7,937         —     

Mortgage servicing rights (2)

     9,816         —           —           9,816   

Liabilities

           

Derivative liabilities (3)

     3,991         —           3,991         —     

December 31, 2013:

           

Assets

           

Available-for-sale securities:

           

SBA loan pools securities

   $ 1,736       $ —         $ 1,736       $ —     

U.S. government-sponsored entities and agency securities

     1,920         —           1,920         —     

Private label residential mortgage-backed securities

     14,752         —           14,752         —     

Agency mortgage-backed securities

     151,614         —           151,614         —     

Loans held for sale

     192,613         —           192,613         —     

Derivative assets (1)

     5,493         —           5,493         —     

Mortgage servicing rights (2)

     13,535         —           —           13,535   

Liabilities

           

Derivative liabilities (3)

     —           —           —           —     

 

(1)

Included in other assets on the consolidated statements of financial condition

(2)

Included in servicing rights, net and servicing rights held for sale on the consolidated statements of financial condition

(3)

Included in accrued expenses and other liabilities on the consolidated statements of financial condition

 

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The following table presents the Company’s financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:

 

            Fair Value Measurement Level  
     Carrying
Value
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

June 30, 2014:

           

Assets

           

Impaired loans:

           

Single family residential mortgage

   $ 26,413       $ —         $ —         $ 26,413   

Commercial and industrial

     4,507         —           —           4,507   

Commercial real estate

     3,148         —           —           3,148   

Multi-family

     1,651         —           —           1,651   

Other consumer

     211         —           —           211   

SBA

     6         —           —           6   

Other real estate owned:

           

Single family residential

     605         —           —           605   

December 31, 2013:

           

Assets

           

Impaired loans:

           

Single family residential mortgage

   $ 12,814       $ —         $ 8,769       $ 4,045   

Commercial real estate

     3,868         —           105         3,763   

Multi-family

     1,972         —           —           1,972   

Other consumer

     249         —           216         33   

Commercial and industrial

     33         —           —           33   

SBA

     10         —           —           10   

The Company did not have any other real estate owned at December 31, 2013.

The following table presents the gains and (losses) recognized on assets measured at fair value on a non-recurring basis for the periods indicated:

 

     Three months ended
June  30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  
     (In thousands)  

Impaired loans:

        

Single family residential mortgage

   $ (181   $ (308   $ (332   $ (432

Multi-family

     —          (169     —          (465

Other consumer

     —          —          (2     (2

Other real estate owned:

        

Single family residential

     —          37        —          (33

Commercial real estate

     —          —          —          105   

 

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The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated:

 

     Three Months Ended     Six Months Ended  
     Private Label
Residential
Mortgage Backed
Securities
    Mortgage
Servicing
Rights
    Total     Private Label
Residential
Mortgage
Backed Securities
    Mortgage
Servicing
Rights
    Total  
     (In thousands)  

June 30, 2014:

            

Balance at beginning of period

   $ —        $ 8,407      $ 8,407      $ —        $ 13,535      $ 13,535   

Transfers out of Level 3 (1)

     —          —          —          —          (9,185     (9,185

Total gains or losses (realized/unrealized):

            

Included in earnings—realized

     —          —          —          —          —          —     

Included in earnings—fair value adjustment

     —          (565     (565     —          (250     (250

Included in other comprehensive income

     —          —          —          —          —          —     

Amortization of premium (discount)

     —          —          —          —          —          —     

Additions

     —          5,996        5,996        —          10,322        10,322   

Sales and settlements

     —          (4,022     (4,022     —          (4,606     (4,606
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ —        $ 9,816      $ 9,816      $ —        $ 9,816      $ 9,816   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013:

            

Balance at beginning of period

   $ 1,919      $ 2,579      $ 4,498      $ 2,214      $ 1,739      $ 3,953   

Transfers out of Level 3 (1)

     —          —          —          —          —          —     

Total gains or losses (realized/unrealized):

            

Included in earnings—realized

     —          —          —          —          —          —     

Included in earnings—fair value adjustment

     —          305        305        —          330        330   

Included in other comprehensive income

     4        —          4        3        —          3   

Amortization of premium (discount)

     —          —          —          —          —          —     

Additions

     —          1,852        1,852        —          2,762        2,762   

Sales and settlements

     (217     (116     (333     (511     (211     (722
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,706      $ 4,620      $ 6,326      $ 1,706      $ 4,620      $ 6,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that cause the transfer.

The following table presents quantitative information about Level 3 fair value measurements on a recurring basis as of the dates indicated:

 

     Fair Value      Valuation Technique(s)      Unobservable Input(s)    Range (Weighted Average)

June 30, 2014:

           

Mortgage servicing rights

   $ 9,816         Discounted cash flow       Discount rate    10.00% to 16.42% (10.92%)
         Prepayment rate    4.34% to 36.13% (14.20%)

December 31, 2013:

           

Mortgage servicing rights

   $ 13,535         Discounted cash flow       Discount rate    10.00% to 17.94% (10.26%)
         Prepayment rate    4.19% to 34.54% (9.85%)

June 30, 2013:

           

Mortgage servicing rights

   $ 4,620         Discounted cash flow       Discount rate    10.50% to 17.87% (10.59%)
         Prepayment rate    6.04% to 36.08% (9.04%)

Private label residential mortgage backed securities

   $ 1,706         Discounted cash flow       Voluntary prepayment rate    1.37% to 4.92% (3.15%)
         Collateral default rate    6.23% to 6.26% (6.25%)
         Loss severity at default    55%

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights include the discount rate and estimated cash flows. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.

The significant unobservable inputs used in the fair value measurement of the Company’s private label and agency residential mortgage backed securities are prepayment rates, collateral default rates, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the collateral default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

 

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The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates indicated:

 

     Carrying      Fair Value Measurement Level  
   Amount      Level 1      Level 2      Level 3      Total  
     (In thousands)  

June 30, 2014:

              

Financial assets

              

Cash and cash equivalents

   $ 258,051       $ 258,051       $ —         $ —         $ 258,051   

Time deposits in financial institutions

     2,145         2,145         —           —           2,145   

Securities available-for-sale

     233,013         —           233,013         —           233,013   

FHLB and other bank stock

     34,392         —           34,392         —           34,392   

Loans held for sale

     1,095,741         —           1,101,569         —           1,101,569   

Loans and leases receivable, net of allowance

     2,579,586         —           —           2,633,738         2,633,738   

Accrued interest receivable

     11,170         11,170         —           —           11,170   

Derivative assets

     7,937         —           7,937         —           7,937   

Financial liabilities

              

Deposits

     3,347,355         —           3,321,428         —           3,321,428   

Advances from Federal Home Loan Bank

     450,000         —           450,053         —           450,053   

Notes payable

     96,481         86,648         16,041         —           102,689   

Derivative liabilities

     3,991         —           3,991         —           3,991   

Accrued interest payable

     1,733         1,733         —           —           1,733   

December 31, 2013:

              

Financial assets

              

Cash and cash equivalents

   $ 110,118       $ 110,118       $ —         $ —         $ 110,118   

Time deposits in financial institutions

     1,846         1,846         —           —           1,846   

Securities available-for-sale

     170,022         —           170,022         —           170,022   

FHLB and other bank stock

     22,600         —           22,600         —           22,600   

Loans held for sale

     716,733         —           719,496         —           719,496   

Loans and leases receivable, net of allowance

     2,427,306         —           —           2,460,953         2,460,953   

Accrued interest receivable

     10,866         10,866         —           —           10,866   

Derivative assets

     5,493         —           5,493         —           5,493   

Financial liabilities

              

Deposits

     2,918,644         —           2,877,650         —           2,877,650   

Advances from Federal Home Loan Bank

     250,000         —           250,090         —           250,090   

Notes payable

     82,320         85,564         —           —           85,564   

Derivative liabilities

     —           —           —           —           —     

Accrued interest payable

     1,646         1,646         —           —           1,646   

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, time deposits in financial institutions, and accrued interest receivable and payable. The methods for determining the fair values for securities available for sale, and derivatives assets and liabilities are described above. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The fair value of FHLB advances and long-term debt is based on current rates for similar financing, and therefore not indicative of an exit price. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. Notes payable consists of Senior Notes and Amortizing Notes (see note 10-Long Term Debt for additional information). The fair value of the Amortizing Notes is based on discounted cash flows using estimated current market rates. The fair value of off-balance-sheet items is not considered material (or is based on the current fees or costs that would be charged to enter into or terminate such arrangements) and is not presented.

 

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NOTE 4 – SECURITIES AVAILABLE FOR SALE

The following table presents the amortized cost and fair value of the available-for-sale investment securities portfolio and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In thousands)  

June 30, 2014:

          

Available for sale

          

SBA loan pools securities

   $ 1,749       $ 6       $ —        $ 1,755   

U.S. government-sponsored entities and agency securities

     1,934         36         —          1,970   

Private label residential mortgage-backed securities

     4,114         13         (18     4,109   

Agency mortgage-backed securities

     225,103         879         (803     225,179   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 232,900       $ 934       $ (821   $ 233,013   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013:

          

Available for sale

          

SBA loan pools securities

   $ 1,794       $ —         $ (58   $ 1,736   

U.S. government-sponsored entities and agency securities

     1,928         —           (8     1,920   

Private label residential mortgage-backed securities

     14,653         135         (36     14,752   

Agency mortgage-backed securities

     153,134         299         (1,819     151,614   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 171,509       $ 434       $ (1,921   $ 170,022   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents amortized cost and fair value of the available-for-sale investment securities portfolio by expected maturity. In the case of residential mortgage-backed securities and SBA loan pool securities, expected maturities may differ from contractual maturities because borrowers generally have the right to call or prepay obligations with or without call or prepayment penalties. For that reason, mortgage-backed securities and SBA loan pool securities are not included in the maturity categories.

 

     June 30, 2014  
   Amortized
Cost
     Fair Value  
     (In thousands)  

Maturity:

     

Available for sale

     

Within one year

   $ —         $ —     

One to five years

     —           —     

Five to ten years

     1,934         1,970   

Greater than ten years

     —           —     

SBA loan pools, private label residential mortgage backed and agency mortgage-backed securities

     230,966         231,043   
  

 

 

    

 

 

 

Total

   $ 232,900       $ 233,013   
  

 

 

    

 

 

 

At June 30, 2014 and December 31, 2013, there were no holdings of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10 percent of shareholders’ equity.

The following table presents proceeds from sales and calls of securities and the associated gross gains and losses realized through earnings upon the sale of available for sale securities for the periods indicated:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
   2014      2013      2014     2013  
     (In thousands)  

Gross realized gains on sales of securities available for sale

   $ 15       $ 1       $ 560      $ 309   

Gross realized losses on sales of securities available for sale

     —           —           (38     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net realized gains (losses) on sales of securities available for sale

   $ 15       $ 1       $ 522      $ 309   
  

 

 

    

 

 

    

 

 

   

 

 

 

Proceeds from sales of securities available for sale

   $ 1,272       $ 475       $ 52,245      $ 8,539   
  

 

 

    

 

 

    

 

 

   

 

 

 

Tax expense on sales of securities available for sale

   $ —         $ —         $ —        $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Securities available for sale with carrying values of $7.5 million and $63.0 million as of June 30, 2014 and December 31, 2013, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated:

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair Value      Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (In thousands)  

June 30, 2014:

               

Available for sale

               

SBA loan pools securities

   $ —         $ —        $ —         $ —        $ —         $ —     

U.S. government-sponsored entities and agency securities

     —           —          —           —          —           —     

Private label residential mortgage-backed securities

     556         (12     1,688         (6     2,244         (18

Agency mortgage-backed securities

     77,343         (486     17,919         (317     95,262         (803
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

   $ 77,899       $ (498   $ 19,607       $ (323   $ 97,506       $ (821
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2013:

               

Available for sale

               

SBA loan pools securities

   $ 1,736       $ (58   $ —         $ —        $ 1,736       $ (58

U.S. government-sponsored entities and agency securities

     1,920         (8     —           —          1,920         (8

Private label residential mortgage-backed securities

     2,064         (11     3,913         (25     5,977         (36

Agency mortgage-backed securities

     114,104         (1,790     1,821         (29     115,925         (1,819
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

   $ 119,824       $ (1,867   $ 5,734       $ (54   $ 125,558       $ (1,921
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company did not record other-than-temporary impairment (OTTI) for securities available for sale for the three and six months ended June 30, 2014 and 2013.

At June 30, 2014, the Company’s securities available for sale portfolio consisted of 86 securities, 47 of which were in an unrealized loss position. The unrealized losses are related to an overall increase in interest rates and a decrease in prepayment speeds of the agency mortgage-backed securities.

The Company’s private label residential mortgage-backed securities in unrealized loss positions had fair values of $2.2 million with unrealized losses of $18 thousand at June 30, 2014. The Company’s agency residential mortgage-backed securities in unrealized loss positions had fair values of $95.3 million with unrealized losses of $803 thousand at June 30, 2014. The Company’s private label residential mortgage-backed securities in unrealized loss positions had fair values of $6.0 million with unrealized losses of $36 thousand at December 31, 2013. The Company’s agency residential mortgage-backed securities in unrealized loss positions had fair values of $115.9 million with unrealized losses of $1.8 million at December 31, 2013.

The Company monitors to ensure it has adequate credit support and as of June 30, 2014, the Company did not have the intent to sell these securities and it is not likely that it will be required to sell the securities before their anticipated recoveries. Of the Company’s $233.0 million securities portfolio, $231.5 million were rated AAA, AA or A, and $1.5 million were rated BBB based on the most recent credit rating from the rating agencies as of June 30, 2014. The Company considers the lowest credit rating for identification of potential OTTI.

 

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Table of Contents

NOTE 5 – LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the balances in the Company’s loans and leases portfolio as of the dates indicated:

 

     Non-Traditional
Mortgages (NTM)
    Traditional
Loans
    Total NTM and
Traditional Loans
    Purchased Credit
Impaired
    Total Loans and
Leases Receivable
 
     ($ in thousands)  

June 30, 2014:

          

Commercial:

          

Commercial and industrial

   $ —        $ 367,111      $ 367,111      $ 1,429      $ 368,540   

Commercial real estate

     —          521,168        521,168        14,576        535,744   

Multi-family

     —          234,179        234,179        —          234,179   

SBA

     —          25,264        25,264        3,420        28,684   

Constructions

     —          30,761        30,761        —          30,761   

Lease financing

     —          57,754        57,754        —          57,754   

Consumer:

          

Single family residential mortgage

     182,509        612,235        794,744        284,083        1,078,827   

Green Loans (HELOC) - first liens

     133,986        —          133,986        —          133,986   

Green Loans (HELOC) - second liens

     4,962        —          4,962        —          4,962   

Other consumer

     113        127,114        127,227        1,549        128,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

   $ 321,570      $ 1,975,586      $ 2,297,156      $ 305,057      $ 2,602,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage to total gross loans

     12.4     75.9     88.3     11.7     100.0

Allowance for loan and lease losses

             (22,627
          

 

 

 

Loans and leases receivable, net

           $ 2,579,586   
          

 

 

 

December 31, 2013:

          

Commercial:

          

Commercial and industrial

   $ —        $ 283,743      $ 283,743      $ 4,028      $ 287,771   

Commercial real estate

     —          514,869        514,869        15,014        529,883   

Multi-family

     —          141,580        141,580        —          141,580   

SBA

     —          23,740        23,740        3,688        27,428   

Constructions

     —          24,933        24,933        —          24,933   

Lease financing

     —          31,949        31,949        —          31,949   

Consumer:

          

Single family residential mortgage

     156,490        667,526        824,016        314,820        1,138,836   

Green Loans (HELOC) - first liens

     147,705        —          147,705        —          147,705   

Green Loans (HELOC) - second liens

     5,289        —          5,289        —          5,289   

Other consumer

     113        108,888        109,001        1,736        110,737   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

   $ 309,597      $ 1,797,228      $ 2,106,825      $ 339,286      $ 2,446,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage to total gross loans

     12.7     73.4     86.1     13.9     100.0

Allowance for loan and lease losses

             (18,805
          

 

 

 

Loans and leases receivable, net

           $ 2,427,306   
          

 

 

 

Non Traditional Mortgage Loans

The Company’s non-traditional mortgage (NTM) portfolio is comprised of three interest only products: Green Account Loans (Green Loans), hybrid interest only fixed or adjustable rate mortgage (Interest Only) loans and a small number of additional loans with the potential for negative amortization. As of June 30, 2014 and December 31, 2013, the non-traditional mortgage loans totaled $321.6 million, or 12.4 percent of the total gross loan portfolio, and $309.6 million, or 12.7 percent of the total gross loan portfolio, respectively. The total NTM portfolio increased by $12.0 million, or 3.9 percent, during the six months ended June 30, 2014.

 

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Table of Contents

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

 

     June 30, 2014     December 31, 2013  
     Count      Amount     Percent     Count      Amount     Percent  
     ($ in thousand)  

Green Loans (HELOC) - first liens

     156       $ 133,986        41.7     173       $ 147,705        47.6

Interest-only - first liens

     210         168,141        52.2     244         139,867        45.2

Negative amortization

     33         14,368        4.5     37         16,623        5.4
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total NTM - first liens

     399         316,495        98.4     454         304,195        98.2
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Green Loans (HELOC) - second liens

     20         4,962        1.5     23         5,289        1.7

Interest-only - second liens

     1         113        0.1     1         113        0.1
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total NTM - second liens

     21         5,075        1.6     24         5,402        1.8
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total NTM loans

     420       $ 321,570        100.0     478       $ 309,597        100.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total gross loan portfolio

      $ 2,602,213           $ 2,446,111     

% of NTM to total gross loan portfolio

        12.4          12.7  

Green Loans

Green Loans are single family residential first and second mortgage lines of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. The loans are generally interest only with a 15 year balloon payment due at maturity. At June 30, 2014, Green Loans totaled $138.9 million, a decrease of $14.0 million, or 9.2 percent from $153.0 million at December 31, 2013, primarily due to reductions in principal balance and payoffs. As of June 30, 2014 and December 31, 2013, $15.1 million and $5.7 million, respectively, of the Company’s Green Loans were non-performing. As a result of their unique payment feature, Green Loans possess higher credit risk due to the potential of negative amortization; however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on loan-to-value ratios and the Company’s contractual ability to curtail loans when the value of underlying collateral declines. The Company discontinued origination of the Green Loan products in 2011.

Interest Only Loans

Interest only loans are primarily single family residential first mortgage loans with payment features that allow interest only payment in initial periods before converting to a fully amortizing loan. As of June 30, 2014, our interest only loans increased by $28.3 million, or 20.2 percent, to $168.3 million from $140.0 million at December 31, 2013, primarily due to originations of $68.5 million and transfers from loans held for sale of $14.8 million, partially offset by transfers to loans held for sale of $25.3 million and net amortization of $29.8 million. As of June 30, 2014 and December 31, 2013, $1.1 million and $752 thousand of the interest only loans were non-performing, respectively.

Loans with the Potential for Negative Amortization

Negative amortization loans decreased by $2.3 million, or 13.6 percent, to $14.4 million as of June 30, 2014 from $16.6 million as of December 31, 2013. The Company discontinued origination of negative amortization loans in 2007. As of June 30, 2014 and December 31, 2013, $983 thousand and $1.2 million of the loans that had the potential for negative amortization were non-performing, respectively. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization; however, management believes the risk is mitigated through the loan terms and underwriting standards, including the Company’s policies on loan-to-value ratios.

Risk Management of Non-Traditional Mortgages

The Company has determined that the most significant performance indicators for non-traditional mortgages are loan-to-value (LTV) and FICO scores. Accordingly, the Company manages credit risk in the NTM portfolio through semi-annual review of the loan portfolio that includes refreshing FICO scores on the Green Loans and home equity lines of credit, as needed in conjunction with portfolio management, and ordering third party automated valuation models. The loan review is designed to provide a method of identifying borrowers who may be experiencing financial difficulty before they actually fail to make a loan payment. Upon receipt of the updated FICO scores, an exception report is run to identify loans with a decrease in FICO of 10 percent or more and/or a resulting FICO of 620 or less. The loans are then further analyzed to determine if the risk rating should be downgraded which will increase the reserves the Company will establish for potential losses. A report of the semi-annual loan review is published and regularly monitored.

 

24


Table of Contents

As these loans are revolving lines of credit, the Company, based on the loan agreement and loan covenants of the particular loan, as well as applicable rules and regulations, could suspend the borrowing privileges or reduce the credit limit at any time the Company reasonably believes that the borrower will be unable to fulfill their repayment obligations under the agreement or certain other conditions are met. In many cases, the decrease in FICO is the first indication that the borrower may have difficulty in making their future payment obligations.

As a result, the Company proactively manages the portfolio by performing detailed analysis on its portfolio with emphasis on the NTM portfolio. The Company’s Internal Asset Review Committee (IARC) conducts meetings on at least quarterly basis to review the loans classified as special mention, substandard, or doubtful and determines whether suspension or reduction in credit limit is warranted. If the line has been suspended and the borrower would like to have their credit privileges reinstated, they would need to provide updated financials showing their ability to meet their payment obligations.

On the interest only loans, the Company projects future payment changes to determine if there will a material increase in required payment and then monitors the loans for possible delinquency. The individual loans are monitored for possible downgrading of risk rating, and trends within the portfolio are identified that could affect other interest only loans scheduled for payment changes in the near future.

Non Traditional Mortgage Performance Indicators

The following table presents the Company’s non-traditional single family residential mortgage Green Loans first lien portfolio at June 30, 2014 by FICO scores that were obtained during the second quarter of 2014, comparing to the FICO scores for those same loans that were obtained during the fourth quarter of 2013:

 

     June 30, 2014     December 31, 2013     Change  
     Count      Amount      Percent     Count      Amount      Percent     Count     Amount     Percent  
     ($ in thousand)  

FICO Score

                      

800+

     21       $ 13,057         9.7     13       $ 7,347         5.5     8      $ 5,710        4.2

700-799

     77         62,287         46.5     90         70,337         52.5     (13     (8,050     -6.0

600-699

     34         29,158         21.8     34         31,772         23.7     —          (2,614     -1.9

<600

     10         12,953         9.7     9         9,394         7.0     1        3,559        2.7

No FICO

     14         16,531         12.3     10         15,136         11.3     4        1,395        1.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals

     156       $ 133,986         100.0     156       $ 133,986         100.0     —        $ —          0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The Company updates FICO scores on a semi-annual basis, typically in second and fourth quarter or as needed in conjunction with proactive portfolio management.

Loan to Value

The table below represents the Company’s single family residential NTM first lien portfolio by loan-to-value (LTV) as of the dates indicated:

 

    Green     Interest Only     Negative Amortization     Total  
    Count     Amount     Percent     Count     Amount     Percent     Count     Amount     Percent     Count     Amount     Percent  
    ($ in thousand)  

June 30, 2014:

                       

LTV’s (1)

                       

< 61

    83      $ 80,922        60.4     67      $ 85,050        50.5     15      $ 7,459        51.9     165      $ 173,431        54.7

61-80

    46        35,886        26.8     41        46,669        27.8     10        4,152        28.9     97        86,707        27.4

81-100

    22        12,725        9.5     38        15,474        9.2     7        2,356        16.4     67        30,555        9.7

> 100

    5        4,453        3.3     64        20,948        12.5     1        401        2.8     70        25,802        8.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    156      $ 133,986        100.0     210      $ 168,141        100.0     33      $ 14,368        100.0     399      $ 316,495        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013:

                       

LTV’s (1)

                       

< 61

    90      $ 78,807        53.3     80      $ 65,181        46.6     13      $ 4,930        29.7     183      $ 148,918        49.0

61-80

    38        33,604        22.8     51        28,999        20.7     13        7,643        45.9     102        70,246        23.1

81-100

    26        14,917        10.1     43        21,474        15.4     8        3,277        19.7     77        39,668        13.0

> 100

    19        20,377        13.8     70        24,213        17.3     3        773        4.7     92        45,363        14.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    173      $ 147,705        100.0     244      $ 139,867        100.0     37      $ 16,623        100.0     454      $ 304,195        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) LTV represents estimated current loan to value ratio, determined by dividing current unpaid principal balance by latest estimated property value received per the Company policy.

 

25


Table of Contents

The decrease in Green Loans was due mainly to reductions in principal balance and payoffs and the increase in interest only was due to increased originations. During 2014, overall improvement on LTV of the Company’s single family residential NTM first lien portfolio was due to the improvement in the real estate market and the economy in Southern California. The Company updates LTV on a semi-annual basis, typically in second and fourth quarter or as needed in conjunction with proactive portfolio management.

Allowance for Loan and Lease Losses

The Company has an established credit risk management process that includes regular management review of the loan and lease portfolio to identify problem loans and leases. During the ordinary course of business, management becomes aware of borrowers and lessees that may not be able to meet the contractual requirements of the loan and lease agreements. Such loans and leases are subject to increased monitoring. Consideration is given to placing the loan or lease on non-accrual status, assessing the need for additional allowance for loan and lease losses, and partial or full charge-off. The Company maintains the allowance for loan and lease losses at a level that is considered adequate to cover the estimated and known inherent risks in the loan and lease portfolio.

The Company also maintains a reserve for unfunded loan commitments at a level that is considered adequate to cover the estimated and known inherent risks. The probability of usage of the unfunded loan commitments and credit risk factors determined based on outstanding loan balance of the same customer or outstanding loans that shares similar credit risk exposure are used to determine the adequacy of the reserve. As of June 30, 2014 and December 31, 2013, the reserve for unfunded loan commitments was $1.4 million.

The credit risk monitoring system is designed to identify impaired and potential problem loans, and to permit periodic evaluation of impairment and the adequacy of the allowance for credit losses in a timely manner. In addition, the Board of Directors of the Bank has adopted a credit policy that includes a credit review and control system which it believes should be effective in ensuring that the Company maintains an adequate allowance for credit losses. The Board of Directors provides oversight and guidance for management’s allowance evaluation process, including quarterly valuations, and consideration of management’s determination of whether the allowance is adequate to absorb losses in the loan and lease portfolio. The determination of the amount of the allowance for loan and lease losses and the provision for loan and lease losses is based on management’s current judgment about the credit quality of the loan and lease portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for loan and lease losses. At June 30, 2014, the Company extended the historical loss look back period from 12 quarters to 15 quarters for determining the level of its allowance for loan and leases losses to better reflect the economic cycle. Due to this change, the Company realized additional $1.8 million allowance for loans and leases than what it would have been using the 12 quarter historical loss look back period. The nature of the process by which the Company determines the appropriate allowance for loan and lease losses requires the exercise of considerable judgment. Additions to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses. Identified credit exposures that are determined to be uncollectible are charged against the allowance for loan and lease losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for loan and lease losses.

The following table presents a summary of activity in the allowance for loan and lease losses and ending balances of loans evaluated for impairment for the periods indicated:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
   2014     2013     2014     2013  
     (In thousands)  

Balance at beginning of period

   $ 20,003      $ 16,015      $ 18,805      $ 14,448   

Loans and leases charged off

     (383     (1,027     (586     (1,932

Recoveries of loans and leases previously charged off

     641        73        1,076        377   

Transfer of loans from (to) held-for-sale

     258        —          (705     —     

Provision for loan and lease losses

     2,108        1,918        4,037        4,086   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,627      $ 16,979      $ 22,627      $ 16,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents the activity and balance in the allowance for loan and lease losses and the recorded investment, excluding accrued interest, in loans and leases by portfolio segment and is based on the impairment method as of or for the three and six months ended June 30, 2014:

 

    Commercial
and
Industrial
    Commercial
Real Estate
    Multi-
family
    SBA     Construction     Lease
Financing
    Single
Family
Residential
Mortgage
    Other
Consumer
    Unallocated     Total  
    (In thousands)  

Allowance for loan and lease losses:

                   

Balance at March 31, 2014

  $ 2,367      $ 6,449      $ 2,720      $ 211      $ 352      $ 622      $ 6,147      $ 782      $ 353      $ 20,003   

Charge-offs

    —          —          (3     —