10-Q 1 d690249d10q.htm FORM 10-Q 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 March 31, 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 April 30, 2014, the registrant had outstanding 19,875,104 shares of voting common stock and 596,018 shares of Class B non-voting common stock.

 

 

 


Table of Contents

BANC OF CALIFORNIA, INC.

FORM 10-Q QUARTERLY REPORT

March 31, 2014

Table of Contents

 

          Page  

Part I – Financial Information

     5   

Item 1

   Financial Statements      5   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Result of Operations      52   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      75   

Item 4

   Controls and Procedures      77   

Part II – Other Information

     78   

Item 1

   Legal Proceedings      78   

Item 1A

   Risk Factors      78   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      80   

Item 3

   Defaults Upon Senior Securities      82   

Item 4

   Mine Safety Disclosure      82   

Item 5

   Other Information      82   

Item 6

   Exhibits      83   

SIGNATURES

     89   

 

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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”), is expected 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;

 

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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;

 

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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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)

 

     March 31,     December 31,  
     2014     2013  
ASSETS     

Cash and due from banks

   $ 5,733      $ 4,937   

Interest-bearing deposits

     327,906        105,181   
  

 

 

   

 

 

 

Total cash and cash equivalents

     333,639        110,118   

Time deposits in financial institutions

     1,745        1,846   

Securities available for sale, at fair value

     107,525        170,022   

Loans held for sale, carried at fair value

     169,197        192,613   

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

     831,197        524,120   

Loans and leases receivable, net of allowance of $20,003 at March 31, 2014 and $18,805 at December 31, 2013

     2,376,992        2,427,306   

Federal Home Loan Bank and other bank stock, at cost

     26,801        22,600   

Servicing rights, net ($8,407 measured at fair value at March 31, 2014 and $13,535 at December 31, 2013)

     8,734        13,883   

Servicing rights held for sale, carried at fair value

     10,146        —     

Accrued interest receivable

     10,962        10,866   

Other real estate owned, net

     150        —     

Premises, equipment, and capital leases, net

     67,278        66,260   

Bank-owned life insurance

     18,928        18,881   

Goodwill

     32,868        30,143   

Affordable housing fund investment

     5,454        5,628   

Income tax receivable

     2,769        2,995   

Other intangible assets, net

     11,213        12,152   

Other assets

     15,036        18,590   
  

 

 

   

 

 

 

Total assets

   $ 4,030,634      $ 3,628,023   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing deposits

   $ 430,925      $ 429,158   

Interest-bearing deposits

     2,678,221        2,489,486   
  

 

 

   

 

 

 

Total deposits

     3,109,146        2,918,644   

Advances from Federal Home Loan Bank

     395,000        250,000   

Federal funds purchased

     70,000        —     

Notes payable, net

     82,416        82,320   

Reserve for loss on repurchased loans

     5,866        5,427   

Accrued expenses and other liabilities

     42,880        46,763   
  

 

 

   

 

 

 

Total liabilities

     3,705,308        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 March 31, 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 March 31, 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 March 31, 2014 and December 31, 2013

     37,943        37,943   

Common stock, $0.01 par value per share, 446,863,844 shares authorized; 21,131,708 shares issued and 19,666,469 shares outstanding at March 31, 2014; 20,959,286 shares issued and 19,561,469 shares outstanding at December 31, 2013

     211        210   

Class B non-voting non-convertible Common stock, $.01 par value per share, 3,136,156 shares authorized; 590,068 shares issued and outstanding at March 31, 2014 and 584,674 shares issued and outstanding at December 31, 2013

     6        6   

Additional paid-in capital

     258,861        256,306   

Retained earnings

     14,398        16,981   

Treasury stock, at cost (1,465,239 shares at March 31, 2014 and 1,397,817 shares at December 31, 2013)

     (27,726     (27,911

Accumulated other comprehensive income (loss), net

     (301     (600
  

 

 

   

 

 

 

Total shareholders' equity

     325,326        324,869   
  

 

 

   

 

 

 

Total liabilities and shareholders' equity

   $ 4,030,634      $ 3,628,023   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Interest and dividend income

    

Loans, including fees

   $ 41,530      $ 18,537   

Securities

     924        498   

Dividends and other interest-earning assets

     322        133   
  

 

 

   

 

 

 

Total interest and dividend income

     42,776        19,168   

Interest expense

    

Deposits

     5,735        1,999   

Federal Home Loan Bank advances

     100        63   

Notes payable and other interest-bearing liabilities

     1,756        1,747   
  

 

 

   

 

 

 

Total interest expense

     7,591        3,809   
  

 

 

   

 

 

 

Net interest income

     35,185        15,359   

Provision for loan and lease losses

     1,929        2,168   
  

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     33,256        13,191   

Noninterest income

    

Customer service fees

     253        546   

Loan servicing income

     1,253        188   

Income from bank owned life insurance

     47        38   

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

     507        308   

Net gain on sale of loans

     2,603        312   

Net gain on mortgage banking activities

     17,324        16,370   

Other income

     3,291        166   
  

 

 

   

 

 

 

Total noninterest income

     25,278        17,928   

Noninterest expense

    

Salaries and employee benefits

     34,681        19,080   

Occupancy and equipment

     8,537        3,193   

Professional fees

     3,865        2,297   

Data processing

     791        910   

Advertising

     1,075        522   

Regulatory assessments

     941        381   

Loan servicing and foreclosure expense

     175        204   

Operating loss on equity investment

     174        159   

Valuation allowance for other real estate owned

     —          79   

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

     —          (114

Provision for loan repurchases

     571        256   

Amortization of intangible assets

     939        367   

All other expense

     6,019        2,224   
  

 

 

   

 

 

 

Total noninterest expense

     57,768        29,558   
  

 

 

   

 

 

 

Income before income taxes

     766        1,561   

Income tax expense

     9        632   
  

 

 

   

 

 

 

Net income

     757        929   

Preferred stock dividends

     910        288   
  

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ (153   $ 641   
  

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ (0.01   $ 0.05   

Diluted earnings (loss) per common share

   $ (0.01   $ 0.05   

Basic earnings (loss) per class B common share

   $ (0.01   $ 0.05   

Diluted earnings (loss) per class B common share

   $ (0.01   $ 0.05   

See accompanying notes to consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Net income

   $ 757      $ 929   

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

    

Unrealized gain (loss) arising during the period, net of tax (expense) benefit of none and none, respectively

     1,023        100   

Reclassification adjustment for (gain) loss included in net income, net of tax (expense) benefit of none and none, respectively

     (507     (308
  

 

 

   

 

 

 

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

     516        (208

Unrealized gain on cash flow hedge

    

Unrealized gain (loss) arising during the period, net of tax (expense) benefit of none and none, respectively

     (217     —     
  

 

 

   

 

 

 

Total change in unrealized gain on cash flow hedge

     (217     —     

Total other comprehensive (loss) income, net of tax

     299        (208
  

 

 

   

 

 

 

Comprehensive income

   $ 1,056      $ 721   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

(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 loss

    —          —          —          —          —          —          929        —          —          929   

Other comprehensive income, net

    —          —          —          —          —          —          —          —          (208     (208

Purchase of 5,973 shares of treasury stocks

    —          —          —          —          —          —          —          (32     —          (32

Stock option compensation expense

    —          —          —          —          —          93        —          —          —          93   

Restricted stock compensation expense

    —          —          —          —          —          428        —          —            428   

Issuance of stock awards

    —          —          —          —          —          55        —          —            55   

Dividends declared ($0.12 per common share)

    —          —          —          —          —          —          (1,436     —          —          (1,436

Preferred stock dividends

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

  $ 31,934      $ —        $ —        $ 120      $ 11      $ 155,139      $ 25,755      $ (25,850   $ 1,189      $ 188,298   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          —          —          757        —          —          757   

Other comprehensive income, net

    —          —          —          —          —          —          —          —          299        299   

Issuance of common stock

    —          —          —          1        —          999        —          —          —          1,000   

Capital raise cost

    —          —          —          —          —          (50     —          —          —          (50

Purchase of 7,562 shares of treasury stock

    —          —          —          —          —          —          —          (97     —          (97

Exercise of stock options

    —          —          —          —          —          757        —          —          —          757   

Stock option compensation expense

    —          —          —          —          —          99        —          —          —          99   

Restricted stock compensation expense

    —          —          —          —          —          824        —          —          —          824   

Issuance of stock awards

    —          —          —          —          —          —          —          —          —          —     

Issuance of stock awards from treasury stock

    —          —          —          —          —          (282     —          282        —          —     

Shares purchased under the Dividend Reinvestment Plan

    —          —          —          —          —          208        (202     —          —          6   

Dividends declared ($0.12 per common share)

    —          —          —          —          —          —          (2,228     —          —          (2,228

Preferred stock dividends

    —          —          —          —          —          —          (910     —          —          (910
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

  $ 31,934      $ 10,000      $ 37,943      $ 211      $ 6      $ 258,861      $ 14,398      $ (27,726   $ (301   $ 325,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 757      $ 929   

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

    

Provision for loan losses

     1,929        2,168   

Provision for loan repurchases

     571        256   

Net gain on mortgage banking activities

     (17,324     (16,370

Gain on sale of loans

     (2,603     (312

Net amortization (accretion) of securities

     229        572   

Depreciation on premises and equipment

     1,562        723   

Amortization of intangibles

     939        367   

Amortization of debt issuance cost

     96        96   

Stock option compensation expense

     99        93   

Stock award compensation expense

     824        428   

Bank owned life insurance income

     (47     (38

Operating loss on equity investment

     174        159   

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

     (507     (308

Loss on disposal of premises and equipment

     119        —     

Gain on sale of other real estate owned

     —          (114

Gain on sale of property and equipment

     —          (2

Increase in valuation allowances on other real estate owned

     —          79   

Originations of loans held for sale from mortgage banking

     (511,451     (332,808

Originations of other loans held for sale

     (373,002     —     

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

     548,284        341,863   

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

     93,407        —     

Change in deferred loan (costs) fees

     46        (207

Amortization of premiums and discounts on purchased loans

     (10,436     (2,573

Change in accrued interest receivable

     (96     (49

Change in other assets

     3,005        478   

Change in accrued interest payable and other liabilities

     (4,502     1,047   
  

 

 

   

 

 

 

Net cash used in operating activities

     (267,927     (3,523

Cash flows from investing activities:

    

Proceeds from sales of securities available-for-sale

     50,973        8,064   

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

     2,754        3,639   

Proceeds from principal repayments of securities available-for-sale

     10,741        19,485   

Purchases of securities available-for-sale

     (1,177     (9,881

Net cash used in acquisitions

     (1,000     —     

Loan originations and principal collections, net

     (16,352     (59,049

Purchase of loans

     (2,093     (332,343

Purchase of Federal Home Loan Bank and Other Bank Stocks

     (4,201     (2

Proceeds from sale of loans held for investment

     51,813        20,045   

Net change in time deposits in financial institutions

     101        1,392   

Proceeds from sale of other real estate owned

     —          3,283   

Additions to premises and equipment

     (2,853     (2,269

Payments of capital lease obligations

     (232     (43
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     88,474        (347,679

 

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

 

     Three months ended  
     March 31,  
     2014     2013  

Cash flows from financing activities:

    

Net increase in deposits

     190,502        392,456   

Net increase in Federal Home Loan Bank advances

     145,000        (25,000

Net increase in federal funds sold

     70,000        —     

Capital raise cost

     (50     —     

Purchase of treasury stock

     (97     (32

Proceeds from exercise of stock options

     757        —     

Issuance of stock awards

     —          55   

Dividends paid on preferred stock

     (910     (288

Dividends paid on common stock

     (2,228     (1,436
  

 

 

   

 

 

 

Net cash provided by financing activities

     402,974        365,755   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     223,521        14,553   

Cash and cash equivalents at beginning of year

     110,118        108,643   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 333,639      $ 123,196   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid on deposits and borrowed funds

   $ 7,609      $ 15,359   

Income taxes paid

     —          —     

Supplemental disclosure of noncash activities

    

Transfer from loans to other real estate owned, net

   $ 150      $ —     

Transfer of loans receivable to loans held for sale, net of transfer of $963 from allowance for loan and leases losses

     59,137        —     

Transfer of loans held for sale to loans receivable

     6,984     

Equipment acquired under capital leases

     989        714   

See accompanying notes to consolidated financial statements

 

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BANC OF CALIFORNIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 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 March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013, except that the accounts of the Palisades Group were not included for amounts for the three months ended March 31, 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 16 banking offices, serving San Diego, Los Angeles, and Orange counties, California and 53 producing loan production offices in California, Arizona, Oregon, Montana, Virginia, North Carolina, Maryland and Washington as of March 31, 2014. As of March 31, 2014, single family residential (SFR) mortgage loans and Green loans (SFR mortgage lines of credit) accounted for approximately 42.4 percent and 6.0 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 months ended March 31, 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.

 

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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. The Company had $17.0 million and $17.3 million of valuation allowance related to its deferred tax assets at March 31, 2014 and December 31, 2013, respectively (See further discussion in Note 11, Income Taxes).

Accounting Pronouncements: During the three months ended March 31, 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.

 

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NOTE 2 – BUSINESS COMBINATIONS AND BRANCH SALES

The Company completed the following acquisitions during the time period between January 1, 2013 and March 31, 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             The Palisades      Private Bank  
     Ready      CS Financial      Group, LLC      of California  
     January 31,      October 31,      September 10,      July 1,  
     2014      2013      2013      2013  
     ($ in thousands)  

Assets acquired:

           

Cash and due from banks

   $ —         $ 482       $ 900       $ 33,752   

Interest-bearing deposits

     —           —           5         —     

Federal funds sold

     —           —           —           —     

Securities available for sale

     —           —           —           219,298   

Loans held for sale

     —           4,982         —           —     

Loans and leases receivable

     —           —           —           385,256   

Federal Home Loan Bank and other bank stock, at cost

     —           —           —           —     

Servicing rights

     —           —           —           —     

Premises, equipment, and capital leases

     —           1,050         —           1,501   

Income tax receivable

     —           —           —           682   

Goodwill

     3,000         8,057         —           14,763   

Other intangible assets

     —           —           —           10,400   

Other assets

     —           621         364         6,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 3,000       $ 15,192       $ 1,269       $ 672,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities assumed:

           

Deposits

   $ —         $ —         $ —         $ 561,689   

Advances from Federal Home Loan Bank

     —           —           —           41,833   

Other liabilities

     1,000         7,270         1,219         2,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities assumed

   $ 1,000       $ 7,270       $ 1,219       $ 606,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

SBLF preferred stock assumed

   $ —         $ —         $ —         $ 10,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consideration paid

   $ 2,000       $ 7,922       $ 50       $ 56,227   
  

 

 

    

 

 

    

 

 

    

 

 

 

Summary of consideration

           

Cash paid

   $ 1,000       $ 1,500       $ 50       $ 27,915   

Common stock issued

   $ 1,000       $ 1,964       $ —         $ 28,282   

Replacement awards

   $ —         $ —         $ —         $ 30   

Stock warrants issued

   $ —         $ —         $ —         $ —     

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.

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 March 31, 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.

 

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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. Because of the short time period between the acquisition date and March 31, 2014, the Company used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The closing date valuations related to loans, premises, equipment, capital leases, other intangible assets, other assets, and assumed liabilities are preliminary and could differ significantly when finalized.

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) $25.3 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 the 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.

In accordance with GAAP guidance for business combinations, the Company has expensed approximately $2.6 million of direct acquisition costs and recorded $14.8 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.

 

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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 months ended March 31, 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  
     March 31,  
     2014 (Actual)     2013  
     (In thousands, except per share data)  

Net interest income

   $ 35,185      $ 20,527   

Provision for loan and lease losses

     1,929        2,517   

Noninterest income

     25,278        24,610   

Noninterest expense

     57,768        39,425   
  

 

 

   

 

 

 

Income (loss) before income taxes

     766        3,195   

Income tax expense (benefit)

     9        1,318   
  

 

 

   

 

 

 

Net income (loss)

   $ 757      $ 1,877   
  

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ (0.01   $ 0.11   

Diluted earnings (loss) per common share

   $ (0.01   $ 0.11   

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 $349 thousand for the three months ended March 31, 2013. No pro forma information for RenovationReady is presented for the three months ended March 31, 2014, as it is immaterial. The above pro forma financial information for the three months ended March 31, 2013 does not include cost saves or integration costs and may not be reflective of what the actual results would have been for such period had the transactions occurred at the beginning of such period.

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 $12.1 million from this transaction.

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 other 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.

 

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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 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.

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 $169.2 million and $192.6 million of loans held for sale at such fair values at March 31, 2014 and December 31, 2013, respectively. The Company also had $831.2 million and $524.1 million of non-conforming jumbo mortgage loans held for sale at the lower of cost or fair value at March 31, 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 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.

Servicing Rights – Mortgage. 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. For the three months ended March 31, 2014 and 2013, the Company experienced none and $79 thousand in valuation allowance expense for those assets, respectively.

 

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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 Measurements Level  
            Quoted Prices in      Significant         
            Active Markets      Other      Significant  
            for Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Value      (Level One)      (Level Two)      (Level Three)  
     (In thousands)  

March 31, 2014:

           

Assets

           

Available-for-sale securities:

           

SBA loan pools securities

   $ 1,702       $ —         $ 1,702       $ —     

U.S. government-sponsored entities and agency securities

     1,958         —           1,958         —     

Private label residential mortgage-backed securities

     5,067         —           5,067         —     

Agency mortgage-backed securities

     98,798         —           98,798         —     

Loans held for sale

     169,197         —           169,197         —     

Derivative assets (1)

     4,469         —           4,469         —     

Mortgage servicing rights (2)

     18,553         —           10,146         8,407   

Liabilities

           

Derivative liabilities (3)

     64         —           64         —     

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

During the three months ended March 31, 2014, the Company entered into an agreement with a third party to sell servicing rights on mortgage loans with $941.1 million of outstanding unpaid principal balance at March 31, 2014 for a fair value of $10.1 million. The sale closed on April 1, 2014. The fair values on the sold MSRs are carried at the closing price of the transaction at March 31, 2014, therefore, we transferred the amount to Level 2. The Company will continue to be the interim servicer until later in the second quarter.

 

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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 Measurements Level  
            Quoted Prices in      Significant         
            Active Markets      Other      Significant  
            for Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Value      (Level One)      (Level Two)      (Level Three)  
     (In thousands)  

March 31, 2014:

           

Assets

           

Impaired loans:

           

Real estate 1-4 family first mortgage

   $ 10,160       $ —         $ 3,094       $ 7,066   

Real estate mortgage

     3,218         —           —           3,218   

Multifamily

     1,674         —           —           1,674   

HELOC’s, home equity loans, and other consumer installment credit

     212         —           212         —     

Other real estate owned

           

Real estate 1-4 family first mortgage

     150         —           150         —     

December 31, 2013:

           

Assets

           

Impaired loans:

           

Real estate 1-4 family first mortgage

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

Real estate mortgage

     3,868         —           105         3,763   

Multifamily

     1,972         —           —           1,972   

HELOC’s, home equity loans, and other consumer installment credit

     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  
     March 31,  
     2014     2013  
     (In thousands)  

Impaired loans:

    

Real estate 1-4 family first mortgage

   $ (151   $ (124

Multifamily

     —          (296

HELOC’s, home equity loans, and other consumer installment credit

     (2     (2

Other real estate owned assets

     —          35   

 

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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:

 

     Private label              
     residential     Mortgage        
     mortgage-backed     Servicing        
     securities     Rights     Total  
     (In thousands)  

Balance of recurring Level 3 assets at December 31, 2013

   $ —        $ 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

     —          315        315   

Included in other comprehensive income

     —          —          —     

Amortization of premium (discount)

     —          —          —     

Additions

     —          4,326        4,326   

Sales and settlements

     —          (584     (584
  

 

 

   

 

 

   

 

 

 

Balance of recurring Level 3 assets at March 31, 2014

   $ —        $ 8,407      $ 8,407   
  

 

 

   

 

 

   

 

 

 

Balance of recurring Level 3 assets at December 31, 2012

   $ 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

     —          25        25   

Included in other comprehensive income

     (1     —          (1

Amortization of premium (discount)

     —          —          —     

Additions

     —          910        910   

Sales and settlements

     (294     (95     (389
  

 

 

   

 

 

   

 

 

 

Balance of recurring Level 3 assets at March 31, 2013

   $ 1,919      $ 2,579      $ 4,498   
  

 

 

   

 

 

   

 

 

 

 

(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)
     ($ in thousands)

March 31, 2014:

           

Mortgage servicing rights

   $ 8,407       Discounted cash flow    Discount rate    10.00% to 17.89% (10.81%)
         Prepayment rate    3.92% to 34.54% (13.17%)

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%)

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 Measurements Level  
     Amount      Level 1      Level 2      Level 3      Total  
     (In thousands)  

March 31, 2014:

  

Financial assets

              

Cash and cash equivalents

   $ 333,639       $ 333,639       $ —         $ —         $ 333,639   

Time deposits in financial institutions

     1,745         1,745         —           —           1,745   

Securities available-for-sale

     107,525         —           107,525         —           107,525   

FHLB and other bank stock

     26,801         —           26,801         —           26,801   

Loans held for sale

     1,000,394         —           1,000,394         —           1,000,394   

Loans and leases receivable, net of allowance

     2,376,992         —           —           2,414,917         2,414,917   

Accrued interest receivable

     10,962         10,962         —           —           10,962   

Derivative assets

     4,469         —           4,469         —           4,469   

Financial liabilities

              

Deposits

     3,109,146         —           3,074,457         —           3,074,457   

Advances from the FHLB

     395,000         —           395,074         —           395,074   

Federal funds purchased

     70,000         70,000         —           —           70,000   

Notes payable

     82,416         86,615         —           —           86,615   

Derivative liabilities

     64         —           64         —           64   

Accrued interest payable

     1,628         1,628         —           —           1,628   

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 the FHLB

     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. 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. Carrying amount of federal funds purchased is the estimated fair value due to the short-term nature of this liability, as all outstanding federal funds purchased were over-night borrowings at March 31, 2014. 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:

 

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

March 31, 2014:

          

Available-for-sale

          

SBA loan pools securities

   $ 1,749       $ —         $ (47   $ 1,702   

U.S. government-sponsored entities and agency securities

     1,930         28         —          1,958   

Private label residential mortgage-backed securities

     5,086         10         (29     5,067   

Agency mortgage-backed securities

     99,731         31         (964     98,798   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 108,496       $ 69       $ (1,040   $ 107,525   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 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.

 

     March 31, 2014  
     Amortized         
     Cost      Fair Value  
     (In thousands)  

Maturity:

     

Available-for-sale

     

Within one year

   $ —         $ —     

One to five years

     —           —     

Five to ten years

     1,930         1,958   

Greater than ten years

     —           —     

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

     106,566         105,567   
  

 

 

    

 

 

 

Total

   $ 108,496       $ 107,525   
  

 

 

    

 

 

 

At March 31, 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.

 

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The following table summarizes the investment securities with unrealized losses at March 31, 2014 and December 31, 2013, respectively, by security type and length of time in a continuous unrealized loss position:

 

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

March 31, 2014:

               

Available-for-sale

               

SBA loan pools securities

   $ 1,702       $ (47   $ —         $ —        $ 1,702       $ (47

U.S. government-sponsored entities and agency securities

     —           —          —           —          —           —     

Private label residential mortgage-backed securities

     1,219         (15     2,931         (14     4,150         (29

Agency mortgage-backed securities

     86,795         (950     1,798         (14     88,593         (964
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 89,716       $ (1,012   $ 4,729       $ (28   $ 94,445       $ (1,040
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 available-for-sale

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company recorded no other-than-temporary impairment (OTTI) for securities available for sale for the three months ended March 31, 2014 and 2013.

At March 31, 2014, the Company’s securities available for sale portfolio consisted of 80 securities, 67 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 $4.2 million with unrealized losses of $29 thousand at March 31, 2014. The Company’s agency residential mortgage-backed securities in unrealized loss positions had fair values of $88.6 million with unrealized losses of $964 thousand at March 31, 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 March 31, 2014, the Company does 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 $107.5 million securities portfolio, $107.3 million were rated AAA, AA or A, and $231 thousand were rated BBB based on the most recent credit rating from the rating agencies as of March 31, 2014. The Company considers the lowest credit rating for identification of potential OTTI.

 

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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)  

March 31, 2014:

         

Commercial:

         

Commercial and industrial

  $ —        $ 297,646      $ 297,646      $ 1,538      $ 299,184   

Real estate mortgage

    —          545,968        545,968        14,613        560,581   

Multi-family

    —          155,382        155,382        —          155,382   

SBA

    —          23,064        23,064        3,477        26,541   

Construction

    —          25,144        25,144        —          25,144   

Lease financing

    —          48,537        48,537        —          48,537   

Consumer:

         

Real estate 1-4 family first mortgage

    120,668        602,448        723,116        292,039        1,015,155   

Green Loans (HELOC) - First Liens

    143,708          143,708          143,708   

Green Loans (HELOC) - Second Liens

    4,921          4,921          4,921   

Other HELOC's, home equity loans, and other consumer installment credit

    113        115,973        116,086        1,756        117,842   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Loans

  $ 269,410      $ 1,814,162      $ 2,083,572      $ 313,423      $ 2,396,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage to total gross loans

    11.2     75.7     86.9     13.1     100.0

Allowance for loan losses

            (20,003
         

 

 

 

Loans and leases receivable, net

          $ 2,376,992   
         

 

 

 

December 31, 2013:

         

Commercial:

         

Commercial and industrial

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

Real estate mortgage

    —          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   

Construction

    —          24,933        24,933        —          24,933   

Lease financing

    —          31,949        31,949        —          31,949   

Consumer:

         

Real estate 1-4 family first 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 HELOC's, home equity loans, and other consumer installment credit

    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 losses

            (18,805
         

 

 

 

Loans and leases receivable, net

          $ 2,427,306   
         

 

 

 

 

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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 March 31, 2014 and December 31, 2013, the non-traditional mortgage loans totaled $269.4 million, or 11.2 percent of the total gross loan portfolio, and $309.6 million, or 12.7 percent of the total gross loan portfolio, respectively. Total NTM portfolio decreased by $40.2 million, or 13.0 percent, during the three months ended March 31, 2014.

 

     March 31, 2014     December 31, 2013  
     Count      Amount     Percent     Count      Amount     Percent  
     ($ in thousands)  

Green Loans (HELOC) - first liens

     167       $ 143,708        53.3     173       $ 147,705        47.6

Interest-only - first liens

     221         105,446        39.1     244         139,867        45.2

Negative amortization

     35         15,222        5.7     37         16,623        5.4
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total NTM - first liens

     423         264,376        98.1     454         304,195        98.2

Green Loans (HELOC) - second liens

     20       $ 4,921        1.8     23       $ 5,289        1.7

Interest-only - second liens

     1         113        0.1     1         113        0.1
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total NTM - second liens

     21         5,034        1.9     24         5,402        1.8
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total NTM loans

     444       $ 269,410        100.0     478       $ 309,597        100.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total gross loan portfolio

      $ 2,396,995           $ 2,446,111     

% of NTM to total gross loan portfolio

        11.2          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 March 31, 2014, Green Loans totaled $148.6 million, a decrease of $4.4 million, or 2.9 percent from $153.0 million at December 31, 2013, primarily due to reductions in principal balance and payoffs. As of March 31, 2014 and December 31, 2013, $5.6 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 March 31, 2014, our interest only loans decreased by $34.4 million, or 24.6 percent, to $105.6 million from $140.0 million at December 31, 2013, primarily due to transfers to loans held for sale of $23.9 million and net amortization of $10.5 million. As of March 31, 2014 and December 31, 2013, $843 thousand and $752 thousand of the interest only loans were non-performing, respectively.

Loans with the Potential for Negative Amortization

Negative amortization loans decreased by $1.4 million, or 8.4 percent, to $15.2 million as of March 31, 2014 from $16.6 million as of December 31, 2013. The Company discontinued origination of negative amortization loans in 2007. As of March 31, 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.

 

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Risk Management of Non-Traditional Mortgages

The Company has assessed 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.

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 red flag 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 a quarterly basis 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 one-to-four family residential mortgage Green Loans first lien portfolio at March 31, 2014 and December 31, 2013 by FICO scores:

 

     March 31, 2014     December 31, 2013     Changes  
     Count      Amount      Percent     Count      Amount      Percent     Count     Amount     Percent  
     ($ in thousands)  

FICO Score

                      

800+

     7       $ 1,178         0.8     7       $ 1,382         0.9     —        $ (204     -0.1

700-799

     91         71,894         50.0     94         74,876         50.8     (3     (2,982     -0.8

600-699

     43         41,985         29.2     44         42,739         28.9     (1     (754     0.3

<600

     13         11,907         8.3     14         11,965         8.1     (1     (58     0.2

No FICO

     13         16,744         11.7     14         16,743         11.3     (1     1        0.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals

     167       $ 143,708         100.0     173       $ 147,705         100.0     (6   $ (3,997     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. As such, the FICO scores did not materially change from December 31, 2013 to March 31, 2014, but the change during the quarter reflects loans that were paid off during the quarter.

 

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Loan to Value

The table below represents the Company’s one-to-four SFR non-traditional mortgage first lien portfolio by 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 thousands)  

March 31, 2014:

                       

LTV’s (1)

                       

< 61

    81      $ 82,430        57.4     75      $ 43,389        41.2     14      $ 5,670        37.2     170      $ 131,489        49.8

61-80

    49        37,055        25.8     39        18,777        17.8     14        7,181        47.2     102        63,013        23.8

81-100

    25        14,108        9.8     41        20,911        19.8     6        1,967        12.9     72        36,986        14.0

> 100

    12        10,115        7.0     66        22,369        21.2     1        404        2.7     79        32,888        12.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

    167      $ 143,708        100.0     221      $ 105,446        100.0     35      $ 15,222        100.0     423      $ 264,376        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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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’s policy

The decrease in interest only was primarily due to transfers to loans held for sales, and reductions in principal balance and payoffs. The Company updates LTV on a semi-annual basis, typically in second and fourth quarter or as needed in conjunction with proactive portfolio management. As such, the LTV did not materially change from December 31, 2013 to March 31, 2014, but the change during the quarter reflects loans that were paid off during the quarter.

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 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 same customer or outstanding loans that shares similar credit risk exposure are used to determine the adequacy of the reserve. As of March 31, 2014 and December 31, 2013, the reserve for unfunded loan commitments was $1.6 million and $1.4 million, respectively.

The credit risk monitoring system is designed to identify impaired and potential problem loans, and to permit periodic evaluation of impairment and the adequacy level 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. 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.

 

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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  
     March 31,  
     2014     2013  
     (In thousands)  

Balance at beginning of year

   $ 18,805      $ 14,448   

Loans and leases charged off

     (203     (906

Recoveries of loans and leases previously charged off

     435        305   

Transfer of loans to held-for-sale

     (963     —     

Provision for loan and lease losses

     1,929        2,168   
  

 

 

   

 

 

 

Balance at end of year

   $ 20,003      $ 16,015   
  

 

 

   

 

 

 

 

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The following table presents the activity and balance in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment and is based on the impairment method as of or for the periods ended dates indicated:

 

                                              HELOC’s,              
                                              Home Equity              
                                        Real Estate     Loans, and              
    Commercial     Commercial                             1-4 family     Other              
    and     Real Estate     Multi-                 Lease     First     Consumer              
    Industrial     Mortgage     Family     SBA     Construction     Financing     Mortgage     Credit     Unallocated     TOTAL  
    (In thousands)  

March 31, 2014:

                   

Allowance for loan and lease losses:

                   

Balance as of December 31, 2012

  $ 1,822      $ 5,484      $ 2,566      $ 235      $ 244      $ 428      $ 7,044      $ 532      $ 450      $ 18,805   

Charge-offs

    —          —          —          (17     —          —          (151     (35     —          (203

Recoveries

    26        316        —          92        —          —          —          1        —          435   

Transfer of loans to held-for-sale

    —          —          —          —          —          —          (963     —          —          (963

Provision

    519        649        154        (99     108        194        217        284        (97     1,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

  $ —        $ —        $ 37      $ —        $ —        $ —        $ 25      $ —        $ —        $ 62   

Collectively evaluated for impairment

    2,367        6,449        2,683        211        352        622        5,926        782        353        19,745   

Acquired with deteriorated credit quality

    —          —          —          —          —          —          196        —          —          196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                   

Individually evaluated for impairment

  $ —        $ 3,218      $ 1,674      $ —        $ —        $ —        $ 10,160      $ 212      $ —        $ 15,264   

Collectively evaluated for impairment

    297,646        542,750        153,708        23,064        25,144        48,537        856,664        120,795        —          2,068,308   

Acquired with deteriorated credit quality

    1,538        14,613        —          3,477        —          —          292,039        1,756        —          313,423   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balances

  $ 299,184      $ 560,581      $ 155,382      $ 26,541      $ 25,144      $ 48,537      $ 1,158,863      $ 122,763      $ —        $ 2,396,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2013:

                   

Allowance for loan and lease losses:

                   

Balance as of December 31, 2012

  $ 263      $ 3,178      $ 1,478      $ 118      $ 21      $ 261      $ 8,855      $ 274      $ —        $ 14,448   

Charge-offs

    —          (105     (384     (125     —          (23     (262     (7     —          (906

Recoveries

    —          —          88        125        —          2        90        —          —          305   

Provision

    218        625        362        15        273        23        529        (70     193        2,168   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2013

  $ 481      $ 3,698      $ 1,544      $ 133      $ 294      $ 263      $ 9,212      $ 197      $ 193      $ 16,015   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

  $ —        $ 38      $ 329      $ —        $ —        $ —        $ 1,095      $ —          $ 1,462   

Collectively evaluated for impairment

    481        3,636        1,215        133        294        263        7,902        197        193        14,314   

Acquired with deteriorated credit quality

      24                215            239   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 481      $ 3,698      $ 1,544      $ 133      $ 294      $ 263      $ 9,212      $ 197      $ 193      $ 16,015   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                   

Individually evaluated for impairment

  $ —        $ 2,511      $ 2,336      $ —        $ —        $ —        $ 17,062      $ —          $ 21,909   

Collectively evaluated for impairment

    74,564        307,338        123,329        30,329        6,831        16,418        806,197        21,901          1,386,907   

Acquired with deteriorated credit quality

    4,781        21,616        838        5,333        —          —          185,833    &nbs