BANC OF CALIFORNIA, INC. - Annual Report: 2015 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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 | 04-3639825 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
18500 Von Karman Ave, Suite 1100, Irvine, California | 92612 | |
(Address of principal executive offices) | (Zip Code) | |
(Registrant’s telephone number, including area code) (855) 361-2262
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Depositary Shares each representing a 1/40th Interest in a share of 8.00% Non-Cumulative Perpetual Preferred Stock, Series C | New York Stock Exchange | |
Depositary Shares each representing a 1/40th Interest in a share of 7.375% Non-Cumulative Perpetual Preferred Stock, Series D | New York Stock Exchange | |
Depositary Shares each representing a 1/40th Interest in a share of 7.00% Non-Cumulative Perpetual Preferred Stock, Series E | New York Stock Exchange | |
7.50% Senior Notes Due April 15, 2020 | New York Stock Exchange | |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO ý
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 ý 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 (§ 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 ý NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 definition of “large accelerated filer,” “accelerated filer,” “and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ý | |
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 Act). YES ¨ NO ý
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on the New York Stock Exchange as of June 30, 2015, was $490.2 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant). As of February 11, 2016, the registrant had outstanding 38,345,695 shares of voting common stock and 37,355 shares of Class B non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K—Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 2016.
BANC OF CALIFORNIA, INC.
FORM 10-K
December 31, 2015
Table of Contents
Page | ||
PART I | ||
Item 1. | Business | |
Item 1.A. | Risk Factors | |
Item 1.B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
Part II | ||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6. | Selected Financial Data | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7.A. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |
Item 9.A. | Controls and Procedures | |
Item 9.B. | Other Information | |
Part III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationship and Related Transactions and Director Independence | |
Item 14. | Principal Accountant Fees and Services | |
Part IV | ||
Item 15. | Exhibits and Financial Statement Schedules | |
SIGNATURES | ||
EXHIBIT INDEX | ||
2
Forward-looking Statements
When used in this report and in public stockholder 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. | risks that the Company’s merger and acquisition transactions 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 to the extent anticipated, within the anticipated timetables, or at all; |
ii. | risks that funds obtained from capital raising activities will not be utilized efficiently or effectively; |
iii. | a worsening of current economic conditions, as well as turmoil in the financial markets; |
iv. | 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; |
v. | the quality, credit and composition of our securities portfolio; |
vi. | changes in general economic conditions, either nationally or in our market areas, or in financial markets; |
vii. | continuation of or changes in the historically low short-term interest rate environment, changes in the levels of general interest rates, volatility in the interest rate environment, the relative differences between short- and long-term interest rates, deposit interest rates, and our net interest margin and funding sources; |
viii. | 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; |
ix. | results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values, or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, could adversely affect our liquidity and earnings; |
x. | legislative or regulatory changes that adversely affect our business, including changes in regulatory capital or other rules and changes that could result if we grow to over $10 billion in total assets; |
xi. | our ability to control operating costs and expenses; |
xii. | staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; |
xiii. | errors in estimates of the fair values of certain of our assets, which may result in significant declines in valuation; |
xiv. | the network and computer systems on which we depend could fail or experience a security breach; |
xv. | our ability to attract and retain key members of our senior management team; |
xvi. | costs and effects of litigation, including settlements and judgments; |
xvii. | increased competitive pressures among financial services companies; |
xviii. | changes in consumer spending, borrowing and saving habits; |
xix. | adverse changes in the securities markets; |
3
xx. | earthquake, fire or other natural disasters affecting the condition of real estate collateral; |
xxi. | the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions; |
xxii. | inability of key third-party providers to perform their obligations to us; |
xxiii. | changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board (FASB) or their application to our business, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; |
xxiv. | war or terrorist activities; and |
xxv. | 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.
4
PART I
Item 1. Business
General
Banc of California, Inc., a financial holding company regulated by the Federal Reserve Board, is focused on empowering California's diverse private business, entrepreneurs and communities. It is the parent company of Banc of California, National Association, a California based bank that is regulated by the Office of the Comptroller of the Currency (the Bank), and The Palisades Group, LLC, an SEC-registered investment advisor (The Palisades Group). The Bank has one wholly owned subsidiary, CS Financial, Inc. (CS Financial), a mortgage banking firm. Banc of California, Inc. was incorporated under Maryland law in March 2002, and was formerly known as "First PacTrust Bancorp, Inc.", and changed its name to “Banc of California, Inc.” in July 2013. Unless the context indicates otherwise, all references to “Banc of California, Inc.” refer to Banc of California, Inc. excluding its consolidated subsidiaries and all references to the “Company,” “we,” “us” or “our” refer to Banc of California, Inc. including its consolidated subsidiaries.
On November 1, 2010, the Company was recapitalized by outside investors with the goal of creating California's Bank: a full-service, bank focused on California and empowering the dreams of California’s diverse private businesses, entrepreneurs and communities.
Since that time, the Company has grown from less than $1 billion in total assets to more than $8 billion in total assets at December 31, 2015. This has resulted from both strong organic growth and opportunistic acquisitions. Over the previous five years, the Company completed seven acquisitions: three whole bank transactions (Gateway Bancorp, Beach Business Bank, and The Private Bank of California), the acquisitions of The Palisades Group, CS Financial, and Renovation Ready, and the acquisition of California branch locations from Banco Popular North America.
The Bank is headquartered in Irvine, California and at December 31, 2015, the Bank had 90 California banking locations including 35 full service branches in San Diego, Orange, Santa Barbara, and Los Angeles Counties.
The Company’s vision is to be California’s Bank. It pursues this vision through its mission of empowering California’s Diverse Private Businesses, Entrepreneurs and Communities. The Company focuses on three core values: operational excellence, superior analytics and entrepreneurialism.
Banc of California’ mission and vision guide its strategic plan. The Company is focused on California and core banking products and services designed to cater to the unique needs of California's diverse private businesses, entrepreneurs and communities. During 2015, the Bank was awarded an Outstanding rating for Community Reinvestment Act (CRA) activities by the Office of the Comptroller of the Currency (OCC). As of December 31, 2015, we were the largest independent public bank in California with an Outstanding CRA rating.
As part of delivering on our value proposition to clients, we offer a variety of financial products and services designed around our target client in order to serve all of their banking and financial needs. This includes both deposit products offered through the Company's multiple channels that include retail banking, business banking and private banking, as well as lending products including residential mortgage lending, commercial lending, commercial real estate lending, multifamily lending, and specialty lending including Small Business Administration (SBA) lending, commercial specialty finance and construction lending.
The Bank’s deposit and banking product and service offerings include checking, savings, money market, certificates of deposit, retirement accounts as well as online, telephone, and mobile banking, automated bill payment, cash and treasury management, master demand accounts, foreign exchange, interest rate swaps, trust services, card payment services, remote and mobile deposit capture, ACH origination, wire transfer, direct deposit, and safe deposit boxes. Bank customers also have the ability to access their accounts through a nationwide network of over 55,000 surcharge-free ATMs.
The Bank’s lending activities are focused on providing financing to California’s diverse private businesses, entrepreneurs, homeowners and are often secured against California commercial and residential real estate. In 2015, the Bank closed over $7 billion in new loans.
The principal executive offices of the Company are located at 18500 Von Karman Avenue, Suite 1100, Irvine, California, and its telephone number is (855) 361-2262.
The reports, proxy statements and other information that Banc of California, Inc. files with the SEC, as well as news releases, are available free of charge through the Company’s Internet site at http://www.bancofcal.com. This information can be found on the “News and Events” or “Investor relations” pages of our Internet site. Annual reports on Form 10-K, quarterly reports on
5
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed and furnished pursuant to Section 13(a) of the Exchange Act are available as soon as reasonably practicable after they have been filed or furnished to the SEC. Reference to the Company’s Internet address is not intended to incorporate any of the information contained on our Internet site into this document.
Operating Segments
Our operations are managed based on the operating results of four reportable segments: Commercial Banking, Mortgage Banking, Financial Advisory, and Corporate/Other. Our chief operating decision-maker uses financial information from our four reportable segments to make operating and strategic decisions. For financial information about our reportable segments, see Note 22 of the Notes to Consolidated Financial Statements in Item 8.
Business Units
The Commercial Banking segment includes ten business units: Retail Banking, Commercial Banking, Private Banking, Financial Institutions Banking, Residential Portfolio Lending, Commercial Real Estate and Multifamily Lending, Construction and Rehab Lending, SBA Lending, Commercial Specialty Finance, and Warehouse Lending.
• | Retail Banking. Retail Banking includes the Company’s 35 branch locations across Southern California and provides distribution points for gathering core deposit and lending relationships. Our retail branch locations are concentrated in Southern California's centers of economic activity and growth. |
• | Commercial Banking. Commercial Banking serves the needs of entrepreneurs and business owners through proactive advice, dedicated service and a full suite of deposit, treasury management and lending products and services. Commercial Banking is bifurcated into two teams, middle market Commercial Banking and Business Banking. Middle market Commercial Banking focuses on companies with annual revenues over $25 million, which generally have larger lending needs and more complex deposit and treasury management needs. Business Banking, which was launched during the fourth quarter of 2015, focuses on companies with annual revenues of less than $25 million and locally owned, growth oriented, generally lower lending needs, but represents an attractive deposit gathering opportunity. |
• | Private Banking. Private Banking caters primarily to high net worth individuals, entrepreneurs, and business owners, and their respective business managers and fiduciaries. The Private Banking unit was formed through the Company’s acquisition of The Private Bank of California in July 2013. Since the time of acquisition, deposit balances in the Private Banking unit have more than doubled to $1.1 billion as of December 31, 2015. The Company has announced that it plans to open two new Private Banking offices in Calabasas and Woodland Hills, California during 2016. |
• | Financial Institutions Banking. Financial Institutions Banking provides specialized deposit products and services to registered investment advisors, broker dealers, family offices, hedge funds, private equity funds and other financial services companies. Its products include a variety of escrow products, trust services, special use accounts and standard business accounts. Additionally, it offers lending products, which include securities-backed credit facilities, insurance-backed loans, alternative asset-backed lines of credit and term loans, and leverage to hedge funds and private equity funds. |
• | Residential Portfolio Lending. Residential Portfolio Lending provides jumbo residential mortgage loans for California’s entrepreneurs and homeowners. Loan programs are designed to meet the needs of Private Banking clients, business owners and entrepreneurs. Lending products offered are primarily jumbo balance, hybrid adjustable-rate mortgage (ARM) loans and are originated through partnerships with Private Banking, Retail Banking and the Company’s mortgage banking division, Banc Home Loans. |
• | Commercial Real Estate and Multifamily Lending. Commercial Real Estate and Multifamily Lending provides lending products catering to California’s entrepreneurial real estate investors. Its lending activities are focused on income-producing commercial real estate and multifamily properties for the California private entrepreneur who has experience in owning, managing and investing in commercial and multifamily properties. |
• | Construction and Rehabilitation Lending. Construction and Rehabilitation Lending provides construction and rehabilitation loans to California’s entrepreneurs and business owners. The Construction and Rehabilitation Lending unit was formed through the Company’s acquisition of RenovationReady in January 2014. It provides short term and permanent loan programs to builders, investors and homeowners to construct or renovate residential or commercial real estate. In addition to portfolio loan products, through Construction and Rehabilitation Lending, the Company offers Federal Housing Administration (FHA) 203(k) loans and Fannie Mae construction to permanent loans. |
6
• | SBA Lending. SBA Lending provides highly targeted SBA lending expertise, programs and advice to entrepreneurs seeking growth capital for acquisitions, working capital, or other capital investments. Although the Company offers all SBA lending programs, the unit’s primary goal is to be the leader in SBA 7(a) financing. |
• | Commercial Specialty Finance. Commercial Specialty Finance, launched in the third quarter of 2012, offers equipment financing, leasing and working capital solutions to support the growth of small and medium-sized businesses. Additionally, the unit offers a small commercial lending loan product, targeted at small businesses with credit needs less than $1 million, which is distributed through the Retail Banking locations. |
• | Warehouse Lending. Warehouse Lending provides warehouse lines of credit to mortgage and commercial multifamily lenders. |
The Mortgage Banking segment is comprised entirely of the Company’s mortgage banking business, operated under the trade name of Banc Home Loans, which originates primarily agency, government, and conforming mortgage loans.
The Financial Advisory segment is comprised entirely of The Palisades Group, which provides services related to the purchase, sale and management of single-family residential mortgage loans.
Recent Transactions
Branch Sales
On September 25, 2015, the Bank completed a branch sale transaction to Americas United Bank, a California banking corporation (AUB). In the transaction, the Bank sold two branches and certain related assets and deposit liabilities to AUB. The transaction included a transfer of $46.9 million of deposits to AUB. Additionally, as part of the transaction, the leases related to both locations were assumed by AUB. The Company recognized a gain of $163 thousand from this transaction, which is included in Other Income in the Consolidated Statements of Operations.
The Bank also sold certain loans of $40.2 million to AUB as part of the transaction. The Company recognized a gain of $644 thousand from the sale of these loans, which is included in Net Gain on Sale of Loans in the Consolidated Statements of Operations.
For additional information regarding this transaction, see Note 2 of the Notes to Consolidated Financial Statements in Item 8.
Banco Popular's California Network Acquisition
Effective November 8, 2014, the Bank acquired 20 full-service branches from Banco Popular North America (BPNA) in the Southern California banking market (the BPNA Branch Acquisition). The purchase price, net of deposit premiums received of $3.9 million, was $24.0 million. At the time of its completion, the transaction added $1.07 billion in loans and $1.08 billion in deposits to the Bank.
The Company recorded core deposit intangible assets of $15.8 million as part of the BPNA Branch Acquisition. Core deposit intangible assets were valued using a net cost savings method and was calculated as the present value of the estimated net cost savings attributable to the core deposit base over the expected remaining life of the deposits. The cost savings derived from the core deposit balance were calculated as the difference between the prevailing alternative cost of funds and the estimated cost of the core deposits. The core deposit intangible is being amortized over its estimated useful life of ten years using the sum of years-digits amortization methodology.
The fair value of loans acquired from BPNA was estimated by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of BPNA's allowance for loan losses associated with the acquired loans as the loans were initially recorded at fair value.
The fair value of savings and transaction deposit accounts acquired from BPNA was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting the expected cash flows based on the remaining contractual terms of the certificates of deposit. These cash flows were discounted based on market rates for certificates of deposit with corresponding remaining maturities.
Direct costs related to the BPNA Branch Acquisition were expensed as incurred and amounted to $4.3 million for the year ended December 31, 2014.
7
During the year ended December 31, 2015, the Company finalized its purchase accounting for the BPNA Branch Acquisition and recorded the measurement period adjustments. The measurement period adjustments included recording Goodwill of $7.7 million, an additional discount of $7.4 million to Loans and Leases Receivable, and an additional premium of $292 thousand to Deposits. Recorded in the Consolidated Statements of Operations, the cumulative life to date measurement period adjustments related to the loan discount and deposit premium amortization were a $33 thousand decrease in Interest and Dividend Income on Loans and a $110 thousand decrease in Interest Expense on Deposits, respectively.
For additional information regarding this transaction, see Note 2 of the Notes to Consolidated Financial Statements in Item 8.
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 U.S. generally accepted accounting principles (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. The Company recorded $2.2 million of goodwill and $761 thousand of other intangible assets. The other intangible assets are related to a customer relationship intangible.
For additional information regarding this transaction, see Note 2 of the Notes to Consolidated Financial Statements in Item 8.
Lending Activities
General
The Company offers a number of commercial and consumer loan products, including commercial and industrial loans, commercial real estate loans, multi-family loans, SBA guaranteed business loans, construction and renovation loans, lease financing, single family residential (SFR) mortgage loans, warehouse loans, asset-, insurance- or security-backed loans, home equity lines of credit (HELOCs), consumer and business lines of credit, and other consumer loans.
Legal lending limits are calculated in conformance with OCC regulations, which prohibit a national bank from lending to any one individual or entity or its related interests on any amount that exceeds 15 percent of the bank’s capital and surplus, plus an additional 10 percent of the bank’s capital and surplus, if the amount that exceeds the bank’s 15 percent general limit is fully secured by readily marketable collateral. At December 31, 2015, the Bank’s authorized legal lending limits for loans to one borrower were $114.5 million for unsecured loans plus an additional $76.4 million for specific secured loans.
At December 31, 2015, the Company's loans held-for-sale and total loans and leases held-for-investment were $668.8 million or 8.1 percent of total assets and $5.18 billion or 63.0 percent of total assets, respectively, compared to $1.19 billion or 19.9 percent of total assets $3.95 billion or 66.1 percent of total assets at December 31, 2014, respectively. For additional information concerning changes in loans and leases, see "Loans Held-for-Sale" and "Loans and Leases Receivable" in Item 7.
Governance
The Company conducts its lending activities under a system of risk governance controls. Key elements of our risk governance structure include our risk appetite framework and risk appetite statement. The risk appetite framework adopted by the Company and the Bank has been developed in conjunction with the Company’s strategic and capital plans. The strategic and capital plans articulate the Board-approved balance sheet and loan concentration targets and the appropriate level of capital to properly manage our risks.
The risk appetite framework provides the overall approach, including policies, processes, controls, and systems through which the risk appetite is established, communicated, and monitored. The risk appetite framework utilizes a risk assessment process to identify inherent risks across the Company, gauges the effectiveness of our internal controls, and establishes tolerances for residual risk in each of the regulatory risk categories: credit, market (interest rate and price risks), liquidity, operational, compliance, strategic, and reputational. Each risk category is assigned risk ratings with a target overall residual risk rating for the organization. The risk appetite framework includes a risk appetite statement, risk limits, and an outline of roles and responsibilities of those overseeing the implementation and monitoring of the framework. The risk appetite statement is an expression of the maximum level of residual risk that we are prepared to accept in order to achieve our business objectives. Defining, communicating, and monitoring risk appetite are fundamental to a safe and sound control environment and a risk-focused culture. The Board of Directors establishes the Company’s strategic objectives and approves the Company’s risk appetite statement, which is developed in collaboration with the chief executive officer, chief risk officer, general counsel, chief
8
financial officer, and other executive leadership. The executive team translates the Board-approved strategic objectives and the risk appetite statement into targets and constraints for business lines and legal entities to follow.
The risk appetite framework is supported by an enterprise risk management program. Enterprise risk management at the Company and Bank integrates all risk efforts under one common framework. Key elements of enterprise risk management that are intended to support prudent lending activities include:
• | Policies—The Bank's loan policy articulates the credit culture of our lending business and provides clarity around encouraged and discouraged lending activities. Additional policies cover key business segments of the portfolio (for example the Bank's Commercial Real Estate Policy) and other important aspects supporting the Bank's lending activities (for example policies relating to appraisals, risk ratings, fair lending, etc). |
• | Credit Approval Authorities—All material credit exposures of the Bank are approved by a credit risk management group that is independent of the business units. Above this threshold, credit approvals are made by the chief credit officer or an executive management credit committee of the Bank. The joint enterprise risk committee of the Company's Board of Directors and the Bank's Board of Directors reviews/approves material loan pool purchases/divestitures and any other transactions as appropriate. |
• | Concentration Risk Management Policy—To mitigate and manage the risk within the Bank's loan portfolio, the Board of Directors of the Bank adopted a concentration risk management policy, pursuant to which it expects to review and revise concentration risk to tolerance thresholds at least annually and otherwise from time to time as appropriate. It is anticipated that these concentration risk to tolerance thresholds may change at any time when the Board of Directors is considering material strategic initiatives such as acquisitions, new product launches and terminations of products or other factors as the Board of Directors believes appropriate. The Company has developed procedures relating to the appropriate actions to be taken should management seek to increase the concentration guidelines or exceed the guideline maximum based on various factors. Concentration risk to tolerance thresholds are not meant to be restrictive limits, but are intended to aid management and the Board to ensure that the Bank’s loan concentrations are consistent with the Board’s risk appetite. |
• | Stress Testing–The Bank has developed a stress test policy and stress testing methodology as a tool to evaluate our loan portfolio, capital levels and strategic plan with the objective of ensuring that our loan portfolio and balance sheet concentrations are consistent with the Board-approved risk appetite and strategic and capital plans. |
• | Loan Portfolio Management—The Bank has an internal asset review committee that formally reviews the loan portfolio on a regular basis. Risk rating trends, loan portfolio performance, including delinquency status, and the resolution of problem assets are reviewed and evaluated. |
• | Commercial Real Estate Loan Pricing, Multi-Family Loan Pricing and Residential Loan Pricing—Regular discussions occur between the areas of executive management, Treasury, Capital Markets, Credit and Risk Management and the business units with regard to the pricing of our loan products. These groups meet to ensure that the Bank is pricing its products appropriately to meet our strategic and capital plans while ensuring an appropriate return for stockholders. |
Commercial and Industrial Loans
Commercial and industrial loans are made to finance operations, provide working capital, or to finance the purchase of assets, equipment or inventory. A borrower’s cash flow from operations is generally the primary source of repayment. Accordingly, our policies provide specific guidelines regarding debt coverage and other financial ratios. Commercial and industrial loans include lines of credit and commercial term loans. Lines of credit are extended to businesses or individuals based on the financial strength and integrity of the borrower and guarantor(s) and generally are collateralized by short-term assets such as accounts receivable, inventory, equipment or real estate and have a maturity of one year or less. Commercial term loans are typically made to finance the acquisition of fixed assets or refinance short-term debt originally used to purchase fixed assets. Commercial term loans generally have terms of one to five years. They may be collateralized by the asset being acquired or other available assets.
Commercial and industrial loans include short-term secured and unsecured business and commercial loans with maturities typically ranging up to 5 years (up to 10 years if a SBA loan), accounts receivable financing typically for 1-5 years (up to 10 years if a SBA loan), and equipment leases up to 6 years. The interest rates on these loans generally are adjustable and usually are indexed to The Wall Street Journal’s prime rate or London Interbank Offering Rate (LIBOR) and will vary based on market conditions and be commensurate to the credit risk. Where it can be negotiated, loans are written with a floor rate of interest. Generally, lines of credit are granted for no more than a 12-month period.
9
Commercial and industrial loans, including accounts receivable and inventory financing, generally are made to businesses that have been in operation for at least 5 years (or less if a SBA loan), including start-ups. To qualify for such loans, prospective borrowers generally must have a conservative debt-to-net worth ratio, operating cash flow sufficient to demonstrate the ability to pay obligations as they become due, and good payment histories as evidenced by credit reports. We attempt to control our risk by generally requiring loan-to-value (LTV) ratios of not more than 80 percent and by closely and regularly monitoring the amount and value of the collateral in order to maintain that ratio.
The Company’s commercial and industrial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. In order to mitigate the risk of borrower default, we generally require collateral to support the credit or, in the case of loans made to businesses, personal guarantees from their owners, or both. In addition, all such loans must have well-defined primary and secondary sources of repayment.
Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). The Company’s commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. See “Loans and Leases Receivables - Asset Quality” in Item 7.
Commercial and industrial loan growth also assists in the growth of our deposits because many commercial loan borrowers establish noninterest-bearing and interest-bearing demand deposit accounts and banking services relationships with us. Those deposit accounts help us to reduce our overall cost of funds and those banking service relationships provide us with a source of non-interest income.
Commercial Real Estate Lending and Multi-Family Real Estate Lending
Commercial real estate and multi-family real estate loans are secured primarily by multi-family dwellings, industrial/warehouse buildings, anchored and non-anchored retail centers, office buildings and hospitality properties, on a limited basis, primarily located in the Company’s market area, and throughout the West Coast.
The Company’s loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on adjustable-rate loans is based on a variety of indices, generally determined through negotiation with the borrower. LTV ratios on these loans typically do not exceed 75 percent of the appraised value of the property securing the loan. These loans typically require monthly payments, may contain balloon payments and generally have maximum maturities of 30 years.
Loans secured by multi-family and commercial real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower/guarantor. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. The Company generally requires an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are performed by independent state licensed fee appraisers approved by management. See “Loans and Leases Receivable - Loan and Lease Originations, Purchases, Sales and Repayments” in Item 7. The Company may require the borrower to maintain a tax or insurance escrow account for loans secured by multi-family and commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is generally required to provide periodic financial information.
Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “Loans and Leases Receivable - Asset Quality” in Item 7.
Small Business Administration Loans
The Company provides numerous SBA loan products through the Bank. The Bank’s Preferred Lender Program (PLP) status generally gives it the authority to make the final credit decision and have most servicing and liquidation authority.
10
The Company provides the following SBA products:
• | 7(a)—These loans provide the Bank with a guarantee from the SBA of the United States Government for up to 85 percent of the loan amount for loans up to $150,000 and 75 percent of the loan amount for loans of more than $150,000, with a maximum loan amount of $5 million. These are term loans that can be used for a variety of purposes including expansion, renovation, new construction, and equipment purchases. Depending on collateral, these loans can have terms ranging from 7 to 25 years. The guaranteed portion of these loans is often sold into the secondary market. |
• | Cap Lines—In general, these lines are guaranteed up to 75 percent and are typically used for working capital purposes and secured by accounts receivable and/or inventory. These lines are generally allowed in amounts up to $5 million and can be issued with maturities of up to 5 years. |
• | 504 Loans—These are real estate loans in which the lender can advance up to 90 percent of the purchase price; retain 50 percent as a first trust deed; and, have a Certified Development Company (CDC) retain the 2nd position for 40 percent of the total cost. CDCs are licensed by the SBA. Required equity of the borrower is 10 percent. Terms of the first trust deed are typically similar to market rates for conventional real estate loans, while the CDC establishes rates and terms for the second trust deed loan. |
• | SBA Express—These loans offer a 50 percent guaranty by the SBA and are made in amounts up to a maximum of $350,000 (although the SBA temporarily increased the maximum limit to $1 million on October 8, 2010 for a period of one year). These loans are typically revolving lines and have maturities of up to 7 years. |
SBA lending is subject to federal legislation that can affect the availability and funding of the program. This dependence on legislative funding might cause future limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business.
The Company’s portfolio of SBA loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns on the Southern California economy; (ii) interest rate increases; (iii) deterioration of the value of the underlying collateral; and (iv) deterioration of a borrower’s or guarantor's financial capabilities. We attempt to reduce the exposure of these risks through: (i) reviewing each loan request and renewal individually; (ii) adhering to written loan policies; (iii) adhering to SBA policies and regulations; (iv) obtaining independent third party appraisals; and (v) obtaining external independent credit reviews. SBA loans normally require monthly installment payments of principal and interest and therefore are continually monitored for past due conditions. In general, the Company receives and reviews financial statements and other documents of borrowing customers on an ongoing basis during the term of the relationship and responds to any deterioration identified.
Commercial Lease Financing
Commercial equipment leasing and financing was introduced as a product in the third quarter of 2012 to meet the needs of small and medium-sized businesses for growth through investments in commercial equipment. The Company provides full payout capital leases and equipment finance agreements for essential use equipment to small and medium sized business nationally. The terms are 1 to 7 years in length and generally provide more flexibility to meet the equipment obsolescence needs of small and medium sized businesses than traditional business loans.
Commercial equipment leases are secured by the business assets being financed. The Company also obtains a commercial guaranty of the business and generally a personal guaranty of the owner(s) of the business.
Single Family Residential Mortgage Loans
The Company originates mortgage loans secured by a first deed of trust on single family residences throughout California and the United States. The Company offers a variety of loan products catering to the specific needs of borrowers, including fixed rate and adjustable rate mortgages with either 30-year or 15-year terms.
The Company’s residential lending activity includes both a direct-to-consumer retail residential lending business and a wholesale and correspondent mortgage business.
In the retail business, Company loan officers are located either in our call center in Irvine, Bank branches in San Diego, Orange, Santa Barbara and Los Angeles Counties, or loan production offices throughout California and in Arizona, Oregon, Virginia, Indiana, Colorado, Idaho, and Nevada, and originate mortgage loans directly to consumers. The wholesale mortgage business originates residential mortgage loans submitted to the Company by outside mortgage brokers for underwriting and funding. The correspondent mortgage business acquires residential mortgage loans originated by outside mortgage bankers. The Company does not originate loans defined as high cost by state or federal regulators.
11
The Company generally underwrites SFR mortgage loans based on the applicant’s income and credit history and the appraised value of the subject property. Properties securing our SFR mortgage loans are appraised by independent fee appraisers approved by management. The Company requires borrowers to obtain title insurance, hazard insurance, and flood insurance, if necessary.
A majority of residential mortgage loans originated by the Company are made to finance the purchase or the refinance of existing loans on owner-occupied homes with a smaller percentage used to finance non-owner occupied homes.
Conforming SFR Mortgage Loans: The Company offers conventional mortgages eligible for sale to Fannie Mae or Freddie Mac, government insured Federal Housing Administration (FHA) and Veteran Affairs (VA) mortgages eligible for sale to Ginnie Mae mainly through its Mortgage Banking segment. These loans are originated to sell into the secondary market on a whole loan basis.
Generally, the Company requires private mortgage insurance for conventional loans with a loan to value greater than 80 percent of the lesser of the appraised value or purchase price, and FHA insurance or a VA guaranty for government loans.
Non-Conforming SFR Mortgage Loans: The Company also offers non-conforming loans where the loan amount exceeds Fannie Mae or Freddie Mac limits, or the guidelines do not conform to Fannie Mae or Freddie Mac guidelines. A majority of the Company’s originations for non-conforming SFR mortgage loans are collateralized by real properties located in Southern California.
The Company currently originates non-conforming SFR mortgage loans on either a fixed or an adjustable rate basis, as consumer demand and the Bank’s risk management dictates. The Company’s pricing strategy for SFR mortgage loans includes setting interest rates that are competitive with other local financial institutions and mortgage originators.
The Company currently originates SFR mortgage loans on either a fixed or an adjustable rate basis, as consumer demand and the Bank’s risk management dictates. The Company’s pricing strategy for SFR mortgage loans includes setting interest rates that are competitive with other local financial institutions and mortgage originators.
ARM loans are offered with flexible initial repricing dates, ranging from one year to ten years, and periodic repricing dates through the life of the loan. The Company uses a variety of indices to reprice ARM loans. The Company originates non-conforming loans for sale in the secondary market, as well as for investment, depending upon market conditions and the Company's investment strategies. During the year ended December 31, 2015, the Company originated $523.8 million of held-for-investment SFR ARM loans with terms up to 30 years. Of total SFR mortgage loans at December 31, 2015, $269.7 million, or 12.0 percent, were fixed rate, and $1.99 billion, or 88.0 percent, were adjustable rate. Of total SFR mortgage loans at December 31, 2014, $272.6 million, or 23.3 percent, were fixed rate, and $899.1 million, or 76.7 percent, were adjustable rate.
The Company also offers interest only loans, which have payment features that allow interest only payments during the first five, seven, or ten years during which time the interest rate is fixed before converting to fully amortizing payments. Following the expiration of the fixed interest rate, the interest rate and payment begins to adjust on an annual basis, with fully amortizing payments that include principal and interest calculated over the remaining term of the loan. The loan can be secured by owner or non-owner occupied properties that include single family units and second homes. For additional information, see “Non-Traditional Mortgage Portfolio” and “Non-Traditional Mortgage Loan Credit Risk Management” under “Loans and Leases Receivable” in Item 7.
Seasoned SFR Mortgage Loans: The Company has also purchased pools of seasoned SFR mortgage loans, primarily through The Palisades Group. The Company has established a proprietary, multifaceted due diligence process for acquisitions of seasoned SFR mortgage loan pools. Prior to acquiring mortgage loans, the Company, sub-advisors or due diligence partners will review the loan portfolio and conduct certain due diligence on a loan by loan basis, preparing a customized version of its diligence plan for each mortgage loan pool being reviewed that is designed to address certain identified pool specific risks. The diligence plan generally reviews several factors, including but not limited to, obtaining and reconciling property value, reviewing chains of title, reviewing assignments, confirming lien position, reviewing regulatory compliance, updating borrower credit, certifying collateral, reviewing modification agreements and reviewing servicing notes. For additional information, see “Seasoned SFR mortgage Loan Acquisition” and “Seasoned SFR mortgage Loan Acquisition Due Diligence” under “Loans and Leases Receivable” in Item 7.
Construction Loans
Our construction loans primarily relates to single family residential properties. The Company may in the future originate or purchase loans or participations in construction, renovation and rehabilitation loans on residential, multi-family and/or commercial real estate properties.
12
Other Consumer Loans
The Company offers a variety of secured consumer loans, including second deed of trust home equity loans and HELOCs and loans secured by savings deposits. The Company also offers a limited amount of unsecured loans. The Company originates consumer and other real estate loans primarily in its market area. Consumer loans generally have shorter terms to maturity or variable interest rates, which reduce our exposure to changes in interest rates, and carry higher rates of interest than do conventional SFR mortgage loans. Management believes that offering consumer loan products helps to expand and create stronger ties to the Company’s existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Other HELOCs have a 7 or 10 year draw period and require the payment of 1.0 percent or 1.5 percent of the outstanding loan balance per month (depending on the terms) or interest only payment during the draw period. Following receipt of payments, the available credit includes amounts repaid up to the credit limit. HELOCs with a 10 year draw period have a balloon payment due at the end of the draw period or then fully amortize for the remaining term. For loans with shorter term draw periods, once the draw period has lapsed, generally the payment is fixed based on the loan balance and prevailing market interest rates at that time.
The Company proactively monitors changes in the market value of all home loans contained in its portfolio. The most recent valuations were effective as of October 31, 2015. The Company has the right to adjust, and has adjusted, existing lines of credit to address current market conditions subject to the terms of the loan agreement and covenants. At December 31, 2015, unfunded commitments totaled $86.6 million on other consumer lines of credit. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.
Off-Balance Sheet Commitments
As part of its service to the Bank’s customers, the Bank from time to time issues formal commitments and lines of credit. These commitments can be either secured or unsecured. They may be in the form of revolving lines of credit for seasonal working capital needs or may take the form of commercial letters of credit or standby letters of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
Loan and Lease Servicing
The Company generally retains the right to service ARM loans held-for-investment, as well as conventional loans sold to Fannie Mae and Freddie Mac and FHA and VA loans issued in Ginnie Mae securities. The Company generally does not retain the right to service loans sold to private investors after sale of the loans. Loans sold to investors are subject to certain indemnification provisions, including the repurchase of loans sold and the repayment of sales proceeds to investors under certain conditions. In addition, if a customer defaults on a mortgage payment within the first few payments after the loan is sold, the Company may be required to repurchase the loan at the full amount and reimburse any premium paid by the purchaser.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (ALLL) represents management’s best estimate of the probable losses inherent in the existing loan and lease portfolio. The ALLL is increased by the provision for loan losses charged to expense and reduced by loan and lease charge-offs, net of recoveries.
Management evaluates the Company’s ALLL on a quarterly basis, or more often if needed. Management believes the ALLL is a “critical accounting estimation” because it is based upon the assessment of various quantitative and qualitative factors affecting the collectability of loans and leases, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and leases.
The ALLL consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases, (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar characteristics and trends, adjusted, as necessary to reflect the impact of current conditions; and (iii) qualitative allowances based on environmental and other factors that may be internal or external to the Company.
During the year ended December 31, 2014, the Company enhanced its methodologies, processes and controls over the ALLL, due to the Company's organic and acquisitive growth and changing profile.
13
The following is a synopsis of the enhancements for each component of ALLL:
• | Expand the look-back period to 28 rolling quarters to capture a full economic cycle. |
• | Utilize net historical losses versus gross historical losses. |
• | Expand the peer group used to determine industry average loss history to include three industry groups; (i) all U.S. financial and bank holding companies, (ii) all California financial and bank holding companies, (iii) the peer group average from the Uniform Bank Performance Report. |
• | Apply a segment specific loss emergence period to each segment's loss rate. |
• | Determine qualitative reserves at each loan segment level based on a baseline risk weighting adjusted for current risks, trends and business conditions. |
• | Disaggregate certain qualitative factors to be determined on the portfolio segment level. |
A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. Impaired loans and leases are identified at each reporting date based on certain criteria and the majority of which are individually reviewed for impairment. Nonaccrual loans and leases and all performing restructured loans are reviewed individually for the amount of impairment, if any. We measure impairment of a loan based upon the fair value of the loan’s collateral if the loan is collateral-dependent, or the present value of cash flows, discounted at the loan’s effective interest rate, if the loan is not collateral-dependent. We measure impairment of a lease based upon the present value of the scheduled lease and residual cash flows, discounted at the lease’s effective interest rate. Increased charge-offs or additions to specific reserves generally result in increased provisions for credit losses.
Our loan and lease portfolio, excluding impaired loans and leases that are evaluated individually, is evaluated by segmentation. The segments we currently evaluate are:
• | Commercial and industrial |
• | Commercial real estate |
• | Construction |
• | SBA |
• | Leases |
• | Single family residence — 1st deeds of trust |
• | Single family residence, including HELOC — 2nd deeds of trust |
• | Other consumer |
Within these segments, we evaluate loans and leases not adversely classified, which we refer to as “pass” credits, separately from adversely classified loans and leases. The adversely classified loans and leases are further grouped into three credit risk rating categories: “special mention,” “substandard,” and “doubtful.” See “Loans and Leases Receivable - Asset Quality” in Item 7.
In addition, we may refer to the loans and leases classified as “substandard” and “doubtful” together as “classified” loans and leases.
Although management believes the level of the ALLL as of December 31, 2015 was adequate to absorb probable losses in the portfolio, declines in economic conditions in the Company’s primary markets or other factors could result in losses that cannot be reasonably predicted at this time.
Although we have established an ALLL that we consider appropriate, there can be no assurance that the established ALLL will be sufficient to offset losses on loans and leases in the future. Management also believes that the reserve for unfunded loan commitments is appropriate. In making this determination, we use the same methodology for the reserve for unfunded loan commitments as we do for the ALLL and consider the same quantitative and qualitative factors, as well as an estimate of the probability of advances of the commitments.
At December 31, 2015, our total ALLL was $35.5 million or 0.69 percent of total loans and leases, as compared to $29.5 million, or 0.75 percent of total loans and leases at December 31, 2014. The decrease in the percentage of ALLL to total loans and leases was mainly due to improving asset quality, which resulted in low charge-offs and declining quantitative loss rates and qualitative factors in line with the current economic and business environment. The ALLL for loans collectively evaluated
14
for impairment on originated loans and leases at December 31, 2015 was $32.7 million, which represented 1.05 percent of total originated loans and leases, as compared to $25.3 million, or 1.34 percent, of total originated loans and leases at December 31, 2014. Including the non-credit impaired loans acquired through the acquisitions, the ALLL for loans collectively evaluated for impairment was $35.0 million, which represents 0.82 percent of total of such loans and leases at December 31, 2015, as compared to $28.2 million, or 0.85 percent, or total of such loans and leases at December 31, 2014. The ALLL for loans individually evaluated for impairment was $369 thousand at December 31, 2015 compared to $1.3 million at December 31, 2014. The Company held no unallocated ALLL at December 31, 2015 and 2014. Assessing the ALLL is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans and leases that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, reflects estimated probable losses presently inherent in our loan and lease portfolios.
Investment Activities
The general objectives of our investment portfolio are to provide liquidity when loan and lease demand is high, to assist in maintaining earnings when loan and lease demand is low and to provide a relatively stable source of interest income while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. For additional information, see Item 7A.
The Company currently invests in SBA loan pool securities, debt and mortgage-backed securities issued by US-government sponsored entities, agency mortgage backed securities, commercial mortgage-backed securities, private label residential mortgage-backed securities, corporate bonds, and collateralized loan obligations.
Sources of Funds
General
The Company’s primary sources of funds are deposits, payments on and maturities of outstanding loans and leases and investment securities, and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and leases and mortgage-backed securities and maturing securities and short-term investments are relatively predictable sources of funds, deposit flows and loan and lease prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. The Company also generates cash through borrowings. The Company utilizes Federal Home Loan Bank (FHLB) advances to leverage its capital base, to provide funds for its lending activities, as a source of liquidity, and to enhance its interest rate risk management.
Deposits
The Bank offers a variety of deposit accounts to consumers, businesses, and institutional customers with a wide range of interest rates and terms. The Bank's deposits consist of savings accounts, money market deposit accounts, interest and non-interest bearing demand accounts, and certificates of deposit. The Bank solicits deposits primarily in our market area and from institutional investors. The Bank primarily relies on competitive pricing policies, marketing and customer service to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, prevailing interest rates and competition. The variety of deposit accounts the Bank offers has allowed the Bank to be competitive in obtaining funds and to respond with flexibility to changes in demand from actual and prospective consumer, business and institutional customers. The Bank tries to manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to market competitive factors. Based on our experience, the Bank believes that our deposits are relatively stable sources of funds. Despite this stability, the Bank's ability to attract and maintain these deposits and the rates paid on them has been and will continue to be significantly affected by market conditions.
Core deposits, which we define as noninterest-bearing deposits, interest-bearing demand deposits, money market, savings and certificates of deposit of $250,000 or less, excluding any brokered deposits, increased $1.16 billion during the year ended December 31, 2015 and totaled $5.02 billion at December 31, 2015 and represented 79.6 percent of total deposits. The Bank held brokered deposits of $992.9 million, or 15.8 percent of total deposits, at December 31, 2015.
In addition to gathering consumer deposits through our community banking activities, business banking, private banking and financial institutions banking activities are key sources of deposits.
15
Borrowings
Although deposits are our primary source of funds, the Bank may utilize borrowings when they are a less costly source of funds and can be invested at a positive interest rate spread, when the Bank desires additional capacity to fund loan and lease demand or when they meet our asset/liability management goals to diversify our funding sources and enhance our interest rate risk management. The Bank’s borrowings historically have included advances from the FHLB of San Francisco. The Bank also has the ability to borrow from the Federal Reserve Bank of San Francisco (Federal Reserve Bank), as well as through Federal Funds and reverse repurchase agreements. In addition, the Company has borrowed through the issuance of its Senior Notes and junior subordinated amortizing notes. See Note 12 of the Notes to Consolidated Financial Statements in Item 8.
The Bank may obtain advances from the FHLB by collateralizing the advances with certain of the Bank’s mortgage loans and mortgage-backed and other securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At December 31, 2015, the Bank had $930.0 million in FHLB advances outstanding and the ability to borrow an additional $1.29 billion. The Bank also had the ability to borrow $89.7 million from the Federal Reserve Bank as of that date. See Note 11 of the Notes to Consolidated Financial Statements in Item 8 for additional information regarding FHLB advances.
Competition and Market Area
The Company faces strong competition in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings institutions, credit unions and mortgage bankers. Other commercial banks, savings institutions, credit unions and finance companies provide vigorous competition in consumer lending.
The Company attracts deposits through its community banking branch network, its loan productions offices, its business banking teams, private banking teams, financial institution banking teams, its Treasury function, and through the internet. One of the ways the Company has been able to be competitive in this area is through its client focused community banking branch network, and its private banking, business banking and financial institutions banking teams. Consequently, the Company has the ability to service client needs with a variety of deposit accounts and products at competitive rates. Competition for deposits is principally from other commercial banks, savings institutions, and credit unions, as well as mutual funds, broker dealers, registered investment advisors, investment banks financial institutions, financial service companies, and other alternative investments. Based on the most recent branch deposit data as of June 30, 2015 provided by the Federal Deposit Insurance Corporation (FDIC), the share of deposits for the Bank in Los Angeles, Orange, San Diego, and Santa Barbara counties was as follows:
June 30, 2015 | ||
Los Angeles County | 0.61 | % |
Orange County | 2.60 | % |
San Diego County | 0.75 | % |
Santa Barbara County | 1.13 | % |
Employees
At December 31, 2015, we had a total of 1,679 full-time employees and 31 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be satisfactory.
Regulation and Supervision
General
The Company and the Bank are extensively regulated under federal laws.
As a financial holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended, and its primary regulator is the Federal Reserve Board. As a national bank, the Bank is subject to regulation primarily by the OCC. In addition, the Bank is also subject to backup regulation from the FDIC.
Regulation and supervision by the federal banking agencies are intended primarily for the protection of customers and depositors and the Deposit Insurance Fund administered by the FDIC and not for the benefit of stockholders. Set forth below is a brief description of material information regarding certain laws and regulations that are applicable to the Company and the Bank. This description, as well as other descriptions of laws and regulations in this Form 10-K, is not complete and is qualified in its entirety by reference to applicable laws and regulations.
16
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) enacted on July 1, 2010 is one of the most significant pieces of financial legislation since the 1930s.
The Dodd-Frank Act requires that bank holding companies, such as the Company, act as a source of financial and managerial strength for their insured depository institution subsidiaries, such as the Bank, particularly when such subsidiaries are in financial distress.
The Federal Reserve Board (FRB) has extensive enforcement authority over the Company and the OCC has extensive enforcement authority over the Bank under federal law. Enforcement authority generally includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely filing of reports. Except under certain circumstances, public disclosure of formal enforcement actions by the FRB and the OCC is required by law.
The Dodd-Frank Act made other significant changes to the regulation of bank holding companies and their subsidiary banks, including the regulation of the Company and the Bank, and other significant changes will continue to occur as rules are promulgated under the Dodd-Frank Act. These regulatory changes have had and will continue to have a material effect on the business and results of the Company and the Bank. The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), with the authority to promulgate regulations intended to protect consumers with respect to financial products and services, including those provided by the Bank, and to restrict unfair, deceptive or abusive conduct by providers of consumer financial products and services. The CFPB has issued rules under the Dodd-Frank Act affecting the Bank’s residential mortgage lending business, including ability-to-repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, appraisal and escrow standards and requirements for higher-priced mortgages. The activities of the Bank are also subject to regulation under numerous federal laws and state consumer protection statutes.
In addition to the Dodd-Frank Act, other legislative and regulatory proposals affecting banks have been made both domestically and internationally. Among other things, these proposals include significant additional capital and liquidity requirements and limitations on size or types of activity in which banks may engage.
Legislation is introduced from time to time in the United States Congress that may affect our operations. In addition, the regulations governing us may be amended from time to time. Any legislative or regulatory changes in the future, including those resulting from the Dodd-Frank Act, could adversely affect our operations and financial condition.
The Company
As a bank holding company that has elected to become a financial holding company pursuant to the Bank Holding Company Act (BHCA), the Company may engage in activities permitted for bank holding companies and may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. “Financial in nature” activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking. See “Volcker Rule” below.
The Company is required to register and file reports with, and is subject to regulation and examination by the FRB. The FRB’s approval is required for acquisition of another financial institution or holding company thereof, and, under certain circumstances, for the acquisition of other subsidiaries.
As a bank holding company, the Company is subject to the regulations of the FRB imposing capital requirements for a bank holding company, which establish a capital framework as described in “New Capital Requirements” below. As of December 31, 2015, the Company was considered well-capitalized, with capital ratios in excess of those required to qualify as such.
Under the FRB’s policy statement on the payment of cash dividends, a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition. A bank holding company must give the FRB prior notice of any purchase or redemption of its equity securities if the consideration for the purchase or redemption, when combined with the consideration for all such purchases or redemptions in the preceding 12 months, is equal to 10 percent or more of its consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would be an unsafe or unsound practice or would violate any law, regulation, FRB order, or condition imposed in writing by the FRB. This notification requirement does not apply to a bank holding company that qualifies as well
17
capitalized, received a composite rating and a rating for management of “1” or “2” in its last examination and is not subject to any unresolved supervisory issue. Regarding dividends, see "New Capital Requirements" below.
The Bank
The Bank is subject to a variety of requirements under federal law.
The Bank is required to maintain sufficient liquidity to ensure safe and sound operations. See "Liquidity" in Item 7.
The OCC has adopted guidelines establishing safety and soundness standards on such matters as loan and lease underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan.
The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, primarily checking, NOW and Super NOW checking accounts. At December 31, 2015, Bank was in compliance with these reserve requirements.
FDIC Insurance
The deposits of the Bank are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States. The basic deposit insurance limit is generally $250,000.
As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The Bank’s deposit insurance premiums for the year ended December 31, 2015 were $3.9 million. FDIC-insured institutions are required to pay an additional quarterly assessment called the FICO assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This assessment will continue until the bonds mature in the years 2017 through 2019. For the fiscal year ended December 31, 2015, the Bank paid $322 thousand in FICO assessments.
The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution based on annualized rates. Each institution under $10 billion in assets is assigned to one of four risk categories based on its capital, supervisory ratings and other factors, with higher risk institutions paying higher premiums. Its deposit insurance premiums are based on the rates applicable to its risk category, subject to certain adjustments, and as required by the Dodd-Frank Act, are assessed on the amount of an institution’s total assets minus its Tier 1 capital.
New Capital Requirements
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Company and the Bank became subject to new capital regulations adopted by the FRB and the OCC, which create a new required ratio for common equity Tier 1 (CET1) capital, increase the minimum leverage and Tier 1 capital ratios, change the risk-weightings of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital for purposes of meeting the capital requirements.
Under the new capital regulations, the minimum capital ratios are: (i) a CET1 capital ratio of 4.5 percent of total risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0 percent of total risk-weighted assets; (iii) a total capital ratio of 8.0 percent of total risk-weighted assets; and (iv) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0 percent.
CET1 capital generally consists of common stock, retained earnings, accumulated other comprehensive income (AOCI) except where an institution elects to exclude AOCI from regulatory capital, and certain minority interests, subject to applicable regulatory adjustments and deductions, including deduction of amounts of mortgage servicing assets and certain deferred tax assets that exceed specified thresholds. We elected to permanently opt out of including AOCI in regulatory capital. Tier 1 capital generally consists of CET1 capital plus noncumulative perpetual preferred stock and certain additional items less applicable regulatory adjustments and deductions. Tier 2 capital generally consists of subordinated debt; certain other preferred stock, and allowance for loan and lease losses up to 1.25 percent of risk-weighted assets, less applicable regulatory adjustments and deductions. Total capital is the sum of Tier 1 capital and Tier 2 capital.
Assets and certain off-balance sheet items are assigned risk weights ranging from 0 percent to 1250 percent, reflecting credit risk and other risk exposure, to determine total risk weighted assets for the risk-based capital ratios. For some items, risk weights have changed compared to their risk weights under rules in effect before January 1, 2015. These include a 150 percent risk weight (up from 100 percent ) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status, a 20 percent (up from 0 percent) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not
18
unconditionally cancellable (currently set at 0 percent ), and a 250 percent risk weight (up from 100 percent) for mortgage servicing and deferred tax assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5 percent of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The capital conservation buffer requirement is phased in beginning on January 1, 2016, when a buffer greater than 0.625 percent of risk-weighted assets is required, which amount will increase each year until the buffer requirement is fully implemented on January 1, 2019.
The OCC may establish an individual minimum capital requirement for a particular bank, based on its circumstances, which may vary from what would otherwise be required. The OCC has not imposed such a requirement on the Bank.
To be considered well capitalized, the Company must maintain on a consolidated basis a total risk-based capital ratio of 10.0 percent or more, a Tier 1 risk-based capital ratio of 6.0 percent or more and not be subject to any written agreement, capital directive or prompt corrective action directive issued by the FRB to meet and maintain a specific capital level for any capital measure. For the well-capitalized standard applicable to the Bank, see “Prompt Corrective Action” below.
The OCC’s prompt corrective action standards changed when these new capital regulations became effective. Under the new standards, in order to be considered well-capitalized, the Bank must have a ratio of CET1 capital to risk-weighted assets of 6.5 percent (new), a ratio of Tier 1 capital to risk-weighted assets of 8 percent (increased from 6 percent), a ratio of total capital to risk-weighted assets of 10 percent (unchanged), and a leverage ratio of 5 percent (unchanged), and in order to be considered adequately capitalized, it must have the minimum capital ratios described above.
Although we continue to evaluate the impact that the new capital rules will have on the Company and the Bank, we anticipate that the Company and the Bank will remain well-capitalized under the new capital rules, and will meet the capital conservation buffer requirement.
Prompt Corrective Action
The Bank is required to maintain specified levels of regulatory capital under the capital and prompt corrective action regulations of the OCC. Through December 31, 2014, to be adequately capitalized, a bank must have the minimum capital ratios discussed in “New Capital Requirements” above. To be well-capitalized, an institution must have a CET1 risk-based capital ratio of at least 6.5 percent, Tier 1 risk-based capital ratio of at least 8.0 percent, a total risk-based capital ratio of at least 10.0 percent and a leverage ratio of at least 5.0 percent. Institutions that are not well-capitalized are subject to certain restrictions on brokered deposits and interest rates on deposits.
The OCC is authorized and, under certain circumstances, required to take certain actions against an institution that is less than adequately capitalized. Such an institution must submit a capital restoration plan, including a specified guarantee by its holding company, and until the plan is approved by the OCC, the institution may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions.
For institutions that are not at least adequately capitalized, progressively more severe restrictions generally apply as capital ratios decrease, or if the OCC reclassifies an institution into a lower capital category due to unsafe or unsound practices or unsafe or unsound condition. Such restrictions may cover all aspects of operations and may include a forced merger or acquisition. An institution that becomes “critically undercapitalized” because it has a tangible equity ratio of 2.0 percent or less is generally subject to the appointment of the FDIC as receiver or conservator for the institution within 90 days after it becomes critically undercapitalized. The imposition by the OCC of any of these measures on the Bank may have a substantial adverse effect on its operations and profitability.
Anti-Money Laundering and Suspicious Activity
Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) require all financial institutions, including banks, to implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, and currency transaction reporting and due diligence on customers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank acquisition.
19
Community Reinvestment Act
The Bank is subject to the provisions of the CRA. Under the terms of the CRA, the Bank has a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs of its community, including providing credit to individuals residing in low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, and does not limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community in a manner consistent with the CRA.
The OCC regularly assesses the Bank on its record in meeting the credit needs of the community served by that institution, including low-income and moderate-income neighborhoods. The Bank received an outstanding rating in its most recent CRA evaluation. Of the uniform four-tier- rating system used by federal banking agencies in assessing CRA performance, an outstanding rating is the top tier rating available. This CRA rating deals strictly with how well an institution is meeting its responsibilities under the CRA and the OCC takes into account performance under the CRA when considering a bank’s application to establish or relocate a branch or main office or to merge with, acquire assets, or assume liabilities of another insured depository institution. The bank’s record may be the basis for denying the application.
Performance under the CRA also is considered when the FRB reviews applications to acquire, merge or consolidate with another banking institution or its holding company. In the case of a bank holding company applying for approval to acquire a bank, the Federal Reserve will assess the records of each subsidiary depository institution of the applicant bank holding company, and that records may be the basis for denying the application.
Financial Privacy Under the Requirements of the Gramm-Leach-Bliley Act (the GLBA)
The Company and its subsidiaries are required periodically to disclose to their retail customers the Company’s policies and practices with respect to the sharing of nonpublic customer information with its affiliates and others, and the confidentiality and security of that information. Under the GLBA, retail customers also must be given the opportunity to “opt out” of information-sharing arrangements with non-affiliates, subject to certain exceptions set forth in the GLBA.
Limitations on Transactions with Affiliates and Loans to Insiders
Transactions between the Bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is generally any company or entity which controls, is controlled by or is under common control with the bank but which is not a subsidiary of the bank. The Company and its subsidiaries are affiliates of the Bank. Generally, Section 23A limits the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0 percent of the Bank’s capital stock and surplus, and limits all such transactions with all affiliates to an amount equal to 20.0 percent of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable to the Bank, as those provided to a non-affiliate. The term “covered transaction” includes a loan by the Bank to an affiliate, the purchase of or investment in securities issued by an affiliate by the Bank, the purchase of assets by the Bank from an affiliate, the acceptance by the Bank of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance by the Bank of a guarantee, acceptance or letter of credit on behalf of an affiliate. Loans by the Bank to an affiliate must be collateralized.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders of the Bank and its affiliates. Under Section 22(h), aggregate loans to a director, executive officer or greater than 10.0 percent stockholder of the Bank or any of its affiliates, and certain related interests of such a person may generally not exceed, together with all other outstanding loans to such person and related interests, 15.0 percent of the Bank’s unimpaired capital and surplus, plus an additional 10.0 percent of unimpaired capital and surplus for loans that are fully secured by readily marketable collateral having a value at least equal to the amount of the loan. Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as those offered in comparable transactions to other persons, and not involve more than the normal risk of repayment or present other unfavorable features. There is an exception for loans that are made pursuant to a benefit or compensation program that (i) is widely available to employees of the Bank or its affiliate and (ii) does not give preference to any director, executive officer or principal stockholder or certain related interests over other employees of the Bank or its affiliate. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of all loans to all of the executive officers, directors and principal stockholders of the Bank or its affiliates and certain related interests may not exceed 100.0 percent of the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.
The Company and its affiliates, including the Bank, maintain programs to meet the limitations on transactions with affiliates and restrictions on loans to insiders and the Company believes it is currently in compliance with these requirements.
20
Identity Theft
Under the Fair and Accurate Credit Transactions Act (FACT Act), the Bank is required to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with the opening of certain accounts or certain existing accounts. Under the FACT Act, the Bank is required to adopt reasonable policies and procedures to (i) identify relevant red flags for covered accounts and incorporate those red flags into the program: (ii) detect red flags that have been incorporated into the program; (iii) respond appropriately to any red flags that are detected to prevent and mitigate identity theft; and (iv) ensure the program is updated periodically, to reflect changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft.
The Bank maintains a program to meet the requirements of the FACT Act and the Bank believes it is currently in compliance with these requirements.
Consumer Protection Laws and Regulations; Other Regulations
The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers, including but not limited to the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Secure and Fair Enforcement in Mortgage Licensing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement the foregoing. Among other things, these laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Bank fails to comply with these laws and regulations, it may be subject to various penalties.
The Dodd-Frank Act established the CFPB as a new independent bureau within the Federal Reserve System that is responsible for regulating consumer financial products and services under federal consumer financial laws. The CFPB has broad rulemaking authority with respect to these laws. The Company and the Bank are subject to CFPB’s regulations regarding consumer financial services and products. The CFPB has issued numerous regulations, and is expected to continue to do so in the next few years. For the Bank and its affiliates, the CFPB’s regulations are enforced by the federal banking regulators. The CFPB’s rulemaking, examination and enforcement authority is expected to significantly affect financial institutions involved in the provision of consumer financial products and services, including the Company and the Bank.
New restrictions on residential mortgages were also promulgated under the Dodd-Frank Act. The provisions include (i) a requirement that lenders make a determination that at the time a residential mortgage loan is consummated the consumer has a reasonable ability to repay the loan and related costs; (ii) a ban on loan originator compensation based on the interest rate or other terms of the loan (other than the amount of the principal); (iii) a ban on prepayment penalties for certain types of loans; (iv) bans on arbitration provisions in mortgage loans; and (v) requirements for enhanced disclosures in connection with the making of a loan. The Dodd-Frank Act also imposes a variety of requirements on entities that service mortgage loans.
The OCC must approve the Bank’s acquisition of other financial institutions and certain other acquisitions, and its establishment of branches. Generally, the Bank may branch de novo nationwide, but branching by acquisition may be restricted by applicable state law.
The Bank’s general limit on loans to one borrower is 15 percent of its capital and surplus, plus an additional 10 percent of its capital and surplus if the amount of loans greater than 15 percent of capital and surplus is fully secured by readily marketable collateral. Capital and surplus means Tier 1 and Tier 2 capital plus the amount of allowance for loan and lease losses not included in Tier 2 capital. The Bank has no loans in excess of its loans-to-one borrower limit.
OCC regulations impose various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other items. Generally, a bank may make capital distributions during any calendar year equal to up to 100 percent of net income for the year-to-date plus retained net income for the two preceding years without prior OCC approval. However, the OCC may restrict dividends by an institution deemed to be in need of more than normal supervision.
The Bank is a member of the FHLB, which makes loans or advances to members. All advances are required to be fully secured by sufficient collateral as determined by the FHLB, and all long-term advances are required to provide funds for residential
21
home financing. The Bank is required to purchase and maintain stock in the FHLB. At December 31, 2015, the Bank had $39.2 million in FHLB stock, which was in compliance with this requirement.
Volcker Rule
The federal banking agencies have adopted regulations to implement the provisions of the Dodd-Frank Act known as the Volcker Rule. Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates (collectively, banking entities), are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in a “covered fund.”
Trading in certain government obligations is not prohibited. These include, among others, obligations of or guaranteed by the United States or an agency or government-sponsored entity of the United States, obligations of a State of the United States or a political subdivision thereof, and municipal securities. Proprietary trading generally does not include transactions under repurchase and reverse repurchase agreements, securities lending transactions and purchases and sales for the purpose of liquidity management if the liquidity management plan meets specified criteria; nor does it generally include transactions undertaken in a fiduciary capacity.
The term “covered fund” can include, in addition to many private equity and hedge funds and other entities, certain collateralized mortgage obligations, collateralized debt obligations and collateralized loan obligations, and other items, but it does not include wholly owned subsidiaries, certain joint ventures, or loan securitizations generally, if the underlying assets are solely loans. The term “ownership interest” includes not only an equity interest or a partnership interest, but also an interest that has the right to participate in selection or removal of a general partner, managing member, director, trustee or investment manager or advisor; to receive a share of income, gains or profits of the fund; to receive underlying fund assets after all other interests have been redeemed; to receive all or a portion of excess spread; or to receive income on a pass-through basis or income determined by reference to the performance of fund assets. In addition, “ownership interest” includes an interest under which amounts payable can be reduced based on losses arising from underlying fund assets.
Activities eligible for exemptions include, among others, certain brokerage, underwriting and marketing activities, and risk-mitigating hedging activities with respect to specific risks and subject to specified conditions.
Future Legislation or Regulation
In light of recent conditions in the United States economy and the financial services industry, the Obama administration, Congress, the regulators and various states continue to focus attention on the financial services industry. Additional proposals that affect the industry have been and will likely continue to be introduced. We cannot predict whether any of these proposals will be enacted or adopted or, if they are, the effect they would have on our business, our operations or our financial condition.
22
Item 1A. Risk Factors
An investment in our securities is subject to certain risks. These risk factors should be considered by prospective and current investors in our securities when evaluating the disclosures in this Annual Report on Form 10-K. The risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event, the value of our securities could decline, and you may lose all or part of your investment.
Risks Relating to Our Business and Operating Environment
Our business strategy includes significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We have pursued and intend to continue to pursue organic and acquisitive growth strategies for our business. We regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions of financial institutions, branch acquisitions and other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.
There are risks associated with our growth strategy. To the extent that we grow through acquisitions, we cannot ensure that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or other assets, as well as other expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks or branches, the risk of loss of customers and/or employees of the acquired institution or branch, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing the transaction’s anticipated benefits. Our ability to address these matters successfully cannot be assured. There is also the risk that the requisite regulatory approvals might not be received and other conditions to consummation of a transaction might not be satisfied during the anticipated timeframes, or at all. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations, may require investment in integration and in development and enhancement of additional operational and reporting processes and controls, and may subject us to additional regulatory scrutiny. To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders.
Our growth initiatives may also require us to recruit experienced personnel to assist in such initiatives. Accordingly, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, to the extent we expand our lending beyond our current market areas, we could incur additional risks related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
If we do not successfully execute our acquisition growth plan, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which would adversely affect our results of operations. While we believe we will have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.
Our financial condition and results of operations are dependent on the economy, particularly in the Bank’s market areas. A deterioration in economic conditions in the market areas we serve may impact our earnings adversely and could increase the credit risk of our loan and lease portfolio.
Our primary market area is concentrated in the greater San Diego, Orange, Santa Barbara, and Los Angeles counties. Adverse economic conditions in any of these, market areas can reduce our rate of growth, affect our customers’ ability to repay loans and leases and adversely impact our financial condition and earnings. General economic conditions, including inflation, unemployment and money supply fluctuations, also may affect our profitability adversely.
A deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:
• | Demand for our products and services may decline; |
• | Loan and lease delinquencies, problem assets and foreclosures may increase; |
• | Collateral for our loans and leases may further decline in value; and |
23
• | The amount of our low-cost or non-interest-bearing deposits may decrease. |
We cannot accurately predict the effect of the weakness in the national economy on our future operating results.
The national economy in general and the financial services sector in particular continue to face significant challenges. We cannot accurately predict the possibility of the economy’s return to recessionary conditions or to a period of economic weakness, which would adversely impact the markets we serve. Any deterioration in national or local economic conditions would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and any economic weakness could present substantial risks for the banking industry and for us.
There are risks associated with our lending activities and our allowance for loan and lease losses may prove to be insufficient to absorb actual incurred losses in our loan and lease portfolio.
Lending money is a substantial part of our business. Every loan and lease carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
• | Cash flow of the borrower and/or the project being financed; |
• | In the case of a collateralized loan or lease, the changes and uncertainties as to the future value of the collateral; |
• | The credit history of a particular borrower; |
• | Changes in economic and industry conditions; and |
• | The duration of the loan or lease. |
We maintain an allowance for loan and lease losses which we believe is appropriate to provide for inherent losses in our loan and lease portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:
• | An ongoing review of the quality, size and diversity of the loan and lease portfolio; |
• | Evaluation of non-performing loans and leases; |
• | Historical default and loss experience; |
• | Historical recovery experience; |
• | Existing economic conditions; |
• | Risk characteristics of the various classifications of loans and leases; and |
• | The amount and quality of collateral, including guarantees, securing the loans and leases. |
If our loan and lease losses exceed our allowance for loan and lease losses, our business, financial condition and profitability may suffer.
The determination of the appropriate level of the allowance for loan and lease losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans and leases. In determining the amount of the allowance for loan and lease losses, we review our loans and leases and the loss and delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan and lease losses may not be sufficient to cover losses inherent in our loan and lease portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan and lease losses. Deterioration in economic conditions affecting borrowers, new information regarding existing loans and leases, identification of additional problem loans and leases and other factors, both within and outside of our control, may require an increase in the allowance for loan and lease losses. Our allowance for loan and lease losses was 0.69 percent of total loans and leases held-for-investment and 78.74 percent of nonperforming loans and leases at December 31, 2015. In addition, bank regulatory agencies periodically review our allowance for loan and lease losses and may require an increase in the provision for loan and lease losses or the recognition of further charge-offs, based on judgments different than that of management. If charge-offs in future periods exceed the allowance for loan and lease losses, we will need additional provisions to increase the allowance for loan and lease losses. Any increases in the provision for loan and lease losses will result in a decrease in net income and may have a material adverse effect on our financial condition and results of operations.
24
Our business may be adversely affected by credit risk associated with residential property and declining property values.
At December 31, 2015, $2.35 billion, or 45.2 percent of our total loans and leases held-for-investment, was secured by single family residential mortgage loans and home equity lines of credit, as compared with $1.30 billion, or 33.0 percent of our total loans and leases held-for-investment, at December 31, 2014. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the California housing markets has reduced the value of the real estate collateral securing these types of loans and increased the risk that we would incur losses if borrowers default on their loans. Residential loans with high combined loan-to-value ratios generally will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial condition and results of operations.
Our loan portfolio possesses increased risk due to our level of adjustable rate loans.
A substantial majority of our real estate secured loans held are adjustable-rate loans. Any rise in prevailing market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans, increasing the possibility of defaults that may adversely affect our profitability.
Our underwriting practices may not protect us against losses in our loan portfolio.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices, including: analyzing a borrower’s credit history, financial statements, tax returns and cash flow projections; valuing collateral based on reports of independent appraisers; and verifying liquid assets. Although we believe that our underwriting criteria are, and historically have been, appropriate for the various kinds of loans we make, we have incurred losses on loans that have met these criteria, and may continue to experience higher than expected losses depending on economic factors and consumer behavior. In addition, our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future behaviors. Finally, we may have higher credit risk, or experience higher credit losses, to the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. At December 31, 2015, 82.3 percent of our commercial real estate loans and 85.9 percent of our originated SFR mortgage loans were secured by collateral in Southern California. Deterioration in real estate values and underlying economic conditions in Southern California could result in significantly higher credit losses to our portfolio.
Our non-traditional and interest-only single-family residential loans expose us to increased lending risk.
Many of the residential mortgage loans we have originated for investment consist of non-traditional SFR mortgage loans that do not conform to Fannie Mae or Freddie Mac underwriting guidelines as a result of loan-to-value ratios or debt-to-income ratios, loan terms, loan size (exceeding agency limits) or other exceptions from agency underwriting guidelines.
Moreover, many of these loans do not meet the qualified mortgage definition established by the Consumer Financial Protection Bureau, and therefore contain additional regulatory and legal risks. See "Rulemaking changes by the CFPB in particular are expected to result in higher regulatory and compliance costs that may adversely affect our financial condition and results of operations.” In addition, the secondary market demand for nonconforming mortgage loans generally is limited, and consequently, we may have a difficult time selling the nonconforming loans in our portfolio were we to decide to do so.
In the case of interest-only loans, a borrower’s monthly payment is subject to change when the loan converts to fully-amortizing status. Since the borrower’s monthly payment may increase by a substantial amount, even without an increase in prevailing market interest rates, the borrower might not be able to afford the increased monthly payment. In addition, interest-only loans have a large, balloon payment at the end of the loan term, which the borrower may be unable to pay. Negative amortization involves a greater risk to us because credit risk exposure increases when the loan incurs negative amortization and the value of the home serving as collateral for the loan does not increase proportionally. Negative amortization is only permitted up to 110 percent of the original loan to value ratio during the first five years the loan is outstanding, with payments adjusting periodically as provided in the loan documents, potentially resulting in higher payments by the borrower. The adjustment of these loans to higher payment requirements can be a substantial factor in higher loan delinquency levels because the borrowers may not be able to make the higher payments. Also, real estate values may decline, and credit standards may tighten in concert with the higher payment requirement, making it difficult for borrowers to sell their homes or refinance their loans to pay off their mortgage obligations. For these reasons, interest-only loans and negative amortization loans are considered to have an increased risk of delinquency, default and foreclosure than conforming loans and may result in higher levels of realized losses. Our interest-only loans increased significantly during 2015, from $209.3 million, or 5.3 percent of our total loans and leases
25
held-for-investment, at December 31, 2014 to $664.5 million, or 12.8 percent of our total loans and leases held-for-investment, at December 31, 2015.
Our income property loans, consisting of commercial and multi-family real estate loans, involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers.
We originate commercial and multi-family real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. These loans typically involve higher principal amounts than other types of loans, and repayment is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained or renewed in a timely manner or at all, the borrower’s ability to repay the loan may be impaired. Commercial and multi-family real estate loans also expose us to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial and multi-family real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.
If we foreclose on a commercial or multi-family real estate loan, our holding period for the collateral typically is longer than for residential mortgage loans because there are fewer potential purchasers of the collateral. Additionally, commercial and multi-family real estate loans generally have relatively large balances to single borrowers or groups of related borrowers. Accordingly, if we make any errors in judgment in the collectability of our commercial and multi-family real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. As of December 31, 2015, our commercial and multi-family real estate loans totaled $1.63 billion, or 31.5 percent of our total loans and leases held-for-investment.
Our portfolio of Green Loans subjects us to greater risks of loss.
We have a portfolio of Green Account home equity loans which generally have a fifteen year draw period with interest-only payment requirements, and a balloon payment requirement at the end of the draw period. The Green Loans include an associated “clearing account” that allows all types of deposit and withdrawal transactions to be performed by the borrower during the term. We ceased originating new Green Loans in 2011; however, existing Green Loan borrowers are entitled to continue to draw on their Green Loans. At December 31, 2015, the balance of Green Loans in our portfolio totaled $109.8 million, or 2.1 percent of our total loans and leases held-for-investment.
In 2011, we implemented an information reporting system which allowed us to capture more detailed information than was previously possible, including transaction level data concerning our Green Loans. Although such transaction level data would have enabled us to more closely monitor trends in the credit quality of our Green Loans, we do not possess the enhanced transaction level data relating to the Green Loans for periods prior to the implementation of those enhanced systems. Although we do not believe that the absence of such historical data itself represents a material impediment to our current mechanisms for monitoring the credit quality of the Green Loans, until we compile sufficient transaction level data going forward we are limited in our ability to use historical information to monitor trends in the portfolio that might assist us in anticipating credit problems. Green Loans expose us to greater credit risk than other residential mortgage loans because they are non- amortizing and contain large balloon payments upon maturity. Although the loans require the borrower to make monthly interest payments, we are also subject to an increased risk of loss in connection with the Green Loans because payments due under the loans can be made by means of additional advances drawn by the borrower, up to the amount of the credit limit, thereby increasing our overall loss exposure due to negative amortization. The balloon payment due on maturity may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. Our ability to take remedial actions in response to these additional risks of loss is limited by the terms and conditions of the Green Loans and our alternatives consist primarily of the ability to curtail additional borrowing when we determine that either the collateral value of the underlying real property or the credit worthiness of the borrower no longer supports the level of credit originally extended. Additionally, many of our Green Loans have larger balances than traditional residential mortgage loans, and accordingly, if the loans go into default either during the draw period or at maturity, any resulting charge-offs may be larger on a per loan basis than those incurred with traditional residential loans.
26
If our investments in other real estate owned are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property is taken in as other real estate owned (OREO), and at certain other times during the asset’s holding period. Our net book value (NBV) in the loan at the time of foreclosure and thereafter is compared to the updated market value (fair value) of the foreclosed property less estimated selling costs. A charge-off is recorded for any excess in the asset’s NBV over its fair value. If our valuation process is incorrect, the fair value of our investments in OREO may not be sufficient to recover our NBV in such assets, resulting in the need for additional write-downs. Additional write-downs to our investments in OREO could have a material adverse effect on our financial condition and results of operations. Our bank regulators periodically review our OREO and may require us to recognize further write-downs. Any increase in our write-downs, as required by such regulator, may have a material adverse effect on our financial condition and results of operations. As of December 31, 2015, we had OREO of $1.1 million.
Our portfolio of “re-performing” loans subjects us to a greater risk of loss.
We have a portfolio of re-performing residential mortgage loans which we purchased in several large trades at a discount to the outstanding principal balance on the loans. These re-performing loans were discounted because either (i) the borrower was delinquent at the time of the loan purchase or had previously been delinquent and had become current prior to our purchase of the loan, or (ii) because the loan had been modified from its original terms. We purchased the loans because we believe that we can successfully service the loans and have the borrowers consistently meet their obligations under the loan, which will increase the value of the loans. However, re-performing loans expose us to greater credit risk than other residential mortgage loans because they have a higher risk of delinquency, default and foreclosure than other residential mortgage loans and may result in higher levels of realized losses. In addition, a majority of the loans in this portfolio were purchased by us in 2015 and, consequently, were made to borrowers who are new to us.
Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default.
We make our commercial and industrial loans primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Collateral securing commercial and industrial loans may depreciate over time, be difficult to appraise and fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from its customers. As of December 31, 2015, our commercial and industrial loans totaled $877.0 million, or 16.9 percent of our total loans and leases held-for-investment.
We are exposed to risk of environmental liabilities with respect to real properties which we may acquire.
In recent years, due to weakness of the U.S. economy and, more specifically, the California economy, including higher levels of unemployment than the nationwide average and declines in real estate values, many borrowers have been unable to meet their loan repayment obligations and, as a result, we have had to initiate foreclosure proceedings with respect to and take title to an increased number of real properties that had collateralized their loans. As an owner of such properties, we could become subject to environmental liabilities and incur substantial costs for any property damage, personal injury, investigation and clean-up that may be required due to any environmental contamination that may be found to exist at any of those properties, even though we did not engage in the activities that led to such contamination. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties seeking damages for environmental contamination emanating from the site. If we were to become subject to significant environmental liabilities or costs, our business, financial condition, results of operations and prospects could be adversely affected.
The expansion of our single family residential mortgage loan originations could adversely affect our business, financial condition and results of operations.
A significant portion of our loan originations business consists of providing purchase money loans to homebuyers and refinancing existing loans. The origination of purchase money mortgage loans is greatly influenced by independent third parties involved in the home buying process, such as realtors and builders. As a result, our ability to secure relationships with such independent third parties will affect our ability to grow our purchase money mortgage loan volume and, thus, our loan originations business. Our retail branches and retail call center also originate refinancings of existing mortgage loans, which are very sensitive to increases in interest rates, and may decrease significantly if interest rates rise.
Our wholesale originations business operates largely through third party mortgage brokers who are not contractually obligated to do business with us. Further, our competitors also have relationships with our brokers and actively compete with us in our
27
efforts to expand our broker networks. Accordingly, we may not be successful in maintaining our existing relationships or expanding our broker networks.
We have made substantial investments to grow our residential mortgage lending business in recent quarters, including adding experienced mortgage loan officers and administrators and management, leasing additional space at our headquarters, opening additional loan production offices, and investing in technology. Our residential mortgage lending business may not generate sufficient revenues to enable us to recover our substantial investment in our residential mortgage lending business, or may not grow sufficiently to contribute to earnings in relation to our investment. Moreover, we may be unable to sell the mortgage loans we originate into the secondary mortgage market at a profit due to changes in interest rates or a reduction in the demand for mortgage loans in the secondary mortgage market. Accordingly, our investment in and expansion of our residential mortgage lending business could adversely affect our business, financial condition and results of operations.
An increase in interest rates, change in the programs offered by governmental sponsored entities (GSEs) or our ability to qualify for such programs may reduce our mortgage revenues, which would negatively impact our non-interest income.
Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage revenues primarily from gains on the sale of single-family residential loans pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and other investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Any future changes in these programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations. Further, in a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.
Secondary mortgage market conditions could have a material adverse impact on our financial condition and earnings.
In addition to being affected by interest rates, the secondary mortgage markets are subject to investor demand for single-family residential loans and mortgage-backed securities and investor yield requirements for those loans and securities. These conditions may fluctuate or even worsen in the future. Our business strategy is to originate conforming conventional and government residential mortgage loans and a portion of our nonconforming jumbo conventional residential mortgage loans for sale in the secondary market. Originating loans for sale enables us to earn revenue from fees and gains on loan sales, while reducing our credit risk on the loans as well as our liquidity requirements. We also can use the loan sale proceeds to generate new loans.
We rely on government sponsored entities- Fannie Mae, Freddie Mac and Ginnie Mae - to purchase residential mortgage loans that meet their loan requirements and on other capital markets investors to purchase a portion of our residential mortgage loans that do not meet those requirements – referred to as “nonconforming” loans. Our ability to sell residential mortgage loans readily also is dependent upon our ability to remain eligible for the programs offered by GSEs and other market participants. Any significant impairment of our eligibility to participate in the programs offered by the GSEs and other market participants could materially and adversely affect us. Further, the criteria for loans to be accepted under such programs may be changed from time-to-time by the sponsoring entity which could result in a lower volume of corresponding loan originations or other administrative costs. Reduced demand in the capital markets could cause us to retain more nonconforming loans. In addition, no assurance can be given that GSEs will not materially limit their purchases of conforming loans, including because of capital constraints, or change their criteria for conforming loans (e.g., maximum loan amount or borrower eligibility). Each of the GSEs is currently in conservatorship, with its primary regulator, the Federal Housing Agency acting as conservator. We cannot predict if, when or how the conservatorship will end, or any associated changes to the GSEs business structure and operations that could result. In addition, there are various proposals to reform the role of the GSEs in the U.S. housing finance market. The extent and timing of any such regulatory reform regarding the housing finance market and the GSEs, including whether the GSEs will continue to exist in their current form, as well as any effect on the Company’s business and financial results, are uncertain.
Significant changes in the secondary mortgage market or a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse impact on our future earnings and financial condition.
28
In addition, the secondary market demand for nonconforming jumbo loans generally is not as strong as the demand for conventional loans and can be volatile, reducing the demand or pricing for those loans; consequently, we may have a more difficult time selling the nonconforming jumbo loans that we originate.
Changes in interest rates may change the value of our mortgage servicing rights, which may increase the volatility of our earnings.
As a result of our sales of mortgage loans to Fannie Mae, Freddie Mac and Ginnie Mae, we have a growing portfolio of mortgage servicing rights. A mortgage servicing right is the right to service a mortgage loan - collect principal, interest and escrow amounts - for a fee. Our mortgage servicing rights support our mortgage banking strategies and diversify revenue streams from our mortgage banking segment.
We measure and carry all of our residential mortgage servicing rights using the fair value measurement method. Fair value is determined as the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.
The primary risk associated with mortgage servicing rights is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than previously estimated. Although our mortgage servicing rights diversify the revenue streams from our mortgage banking segment, the increasing size of our mortgage servicing rights portfolio may increase our interest rate risk and correspondingly, the volatility of our earnings.
At December 31, 2015 and 2014, our mortgage servicing rights had fair values of $49.9 million and $19.1 million, respectively. Changes in fair value of our mortgage servicing rights are recorded to earnings in each period. Depending on the interest rate environment, it is possible that the fair value of our mortgage servicing rights may be reduced in the future. If such changes in fair value significantly reduce the carrying value of our mortgage servicing rights, our financial condition and results of operations would be negatively affected.
Certain hedging strategies that we use to manage investment in mortgage loans held-for-sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
We use derivative instruments to hedge the interest rate risks associated with the fair value of certain mortgage loans held-for-sale and interest rate lock commitments. Our hedging strategies are highly susceptible to basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings.
Any breach of representations and warranties made by us to our residential mortgage loan purchasers or credit default on our loan sales may require us to repurchase residential mortgage loans we have sold.
We sell a majority of the residential mortgage loans we originate in the secondary market pursuant to agreements that generally require us to repurchase loans in the event of a breach of a representation or warranty made by us to the loan purchaser. Any fraud or misrepresentation during the mortgage loan origination process, whether by us, the borrower, mortgage broker, or other party in the transaction, or, in some cases, upon any early payment default on such mortgage loans, may require us to repurchase such loans.
We believe that, as a result of the increased defaults and foreclosures during the past several years resulting in increased demand for repurchases and indemnification in the secondary market, many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify or repurchase loans and would benefit from enforcing any repurchase remedies they may have. We recognize our exposure to repurchases under our representations and warranties could include the current unpaid balance of all loans we have sold. During the years ended December 31, 2015, 2014 and 2013, we sold residential mortgage loans aggregating $4.30 billion, $2.75 billion and $1.86 billion, respectively.
To recognize the potential loan repurchase or indemnification losses, we recorded a total reserve of $9.7 million at December 31, 2015. Increases to this reserve reduce mortgage banking revenue. The determination of the appropriate level of the reserve inherently involves a high degree of subjectivity and requires us to make estimates of repurchase and indemnification risks and expected losses. The estimates used could be inaccurate, resulting in a level of reserve that is less than actual losses.
29
Deterioration in the economy, an increase in interest rates or a decrease in home values could increase customer defaults on loans that were sold and increase demand for repurchases and indemnification and increase our losses from loan repurchases and indemnification. If we are required to indemnify loan purchasers or repurchase loans and incur losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations. In addition, any claims asserted against us in the future by loan purchasers may result in liabilities or legal expenses that could have a material adverse effect on our results of operations and financial condition.
We may not be able to maintain a strong core deposit base or other low-cost funding sources.
We expect to depend on checking, savings and money market deposit account balances and other forms of deposits as the primary source of funding for our lending activities. Our future growth will largely depend on our ability to maintain a strong core deposit base, to provide a less costly and more stable source of funding. It may prove difficult to maintain our core deposit base. In addition, an increasingly important source of deposits for the Bank is the Financial Institutions Banking business unit. While deposits from the Financial Institutions Banking business unit are expected to remain at the Bank for an extended period of time, escrow triggers associated with its EB-5 escrow product may vary and can be directly influenced by the time associated with adjudication of the investor’s immigration petition. For more information, about this escrow product see “Non-compliance with the Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions or operating restrictions.” While the Financial Institutions Banking business unit mitigates this risk by opening post-escrow deposit accounts to continue to hold funds, there is no assurance that these deposits will remain. Further, there may be competitive pressures to pay higher interest rates on deposits, which would increase our funding costs. If deposit clients move money out of bank deposits and into other investments (or into similar products at other institutions that may provide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in reduced loan originations, which could materially negatively impact our growth strategy and results of operations.
Other-than-temporary impairment charges in our investment securities portfolio could result in losses and adversely affect our continuing operations.
The size of our investment securities portfolio has increased significantly during the past year. As of December 31, 2015, we had $833.6 million of securities classified as available-for-sale and $962.2 million of securities classified as held-to-maturity, as compared with $345.7 million of securities classified as available-for-sale and no securities classified as held to maturity as of December 31, 2014.
As of December 31, 2015, investment securities available-for-sale that were in a loss position had a total fair value of $705.4 million with unrealized losses of $5.4 million. They consisted of agency mortgage-backed securities of $606.6 million with unrealized losses of $4.6 million, corporate bonds of $26.2 million with unrealized losses of $505 thousand, collateralized loan obligation of $72.2 million with unrealized losses of $282 thousand, and private label residential mortgage-backed securities of $403 thousand with unrealized losses of $1 thousand.
As of December 31, 2015, investment securities held-to-maturity that were in a loss position had a total fair value of $878.9 million with unrealized losses of $30.2 million. They also included corporate bonds of $190.3 million with unrealized losses of $20.9 million, collateralized loan obligation of $411.2 million with unrealized loss of $5.1 million, and commercial mortgage-backed securities of $277.4 million with unrealized losses of $4.2 million.
As of December 31, 2014, investment securities available-for-sale were in a loss position had a fair value of $92.1 million and aggregate unrealized losses of $618 thousand.
The Company monitors to ensure it has adequate credit support and, as of December 31, 2015, the Company believes there is no other than temporary impairment (OTTI) and did not have the intent to sell any of its securities in an unrealized loss position and it is likely that it will not be required to sell the securities before their anticipated recovery. The portfolio is evaluated using either OTTI guidance provided by FASB Accounting Standards Codification (ASC) 320, Investments-Debt and Equity Securities, or ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC 320. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase below AA are evaluated using the model outlined in ASC 325. The non-agency residential mortgage-backed securities, commercial mortgage-backed securities and collateralized loan obligations in the Company’s portfolio referenced above were rated AA or above at purchase and are not within the scope of ASC 325. For more information about ASC 320 and ASC 325, see Note 1 of the Notes to Consolidated Financial Statements in Item 8.
30
We closely monitor our investment securities for changes in credit risk. The valuation of our investment securities also is influenced by external market and other factors, including implementation of SEC and FASB guidance on fair value accounting. Accordingly, if market conditions deteriorate further and we determine our holdings of other investment securities are OTTI, our future earnings, stockholders’ equity, regulatory capital and continuing operations could be materially adversely affected.
Our business is subject to interest rate risk and variations in interest rates may hurt our profits.
To be profitable, we have to earn more money in interest that we receive on loans and investments than we pay to our depositors and lenders in interest. If interest rates rise, our net interest income and the value of our assets could be reduced if interest paid on interest-bearing liabilities, such as deposits and borrowings, increases more quickly than interest received on interest-earning assets, such as loans, other mortgage-related investments and investment securities. This is most likely to occur if short-term interest rates increase at a faster rate than long-term interest rates, which would cause our net interest income to go down. In addition, rising interest rates may hurt our income, because that may reduce the demand for loans and the value of our securities. In a rapidly changing interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition and results of operations.
We face significant operational risks.
We operate many different financial service functions and rely on the ability of our employees, third-party vendors and systems to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems.
Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Our enterprise risk management framework seeks to mitigate risk and loss to us. We have established comprehensive policies and procedures and an internal control framework designed to provide a sound operational environment for the types of risk to which we are subject, including credit risk, market risk (interest rate and price risks), liquidity risk, operational risk, compliance risk, strategic risk, and reputational risk. However, as with any risk management framework, there are inherent limitations to our current and future risk management strategies, including risks that we have not appropriately anticipated or identified. In certain instances, we rely on models to measure, monitor and predict risks. However, these models are inherently limited because they involve techniques, including the use of historical data in some circumstances, and judgments that cannot anticipate every economic and financial outcome in the markets in which we operate, nor can they anticipate the specifics and timing of such outcomes. There is no assurance that these models will appropriately capture all relevant risks or accurately predict future events or exposures. Accurate and timely enterprise-wide risk information is necessary to enhance management’s decision-making in times of crisis. If our enterprise risk management framework proves ineffective or if our enterprise-wide management information is incomplete or inaccurate, we could suffer unexpected losses, which could materially adversely affect our results of operations or financial condition.
In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to fully understand the implications of changes in our businesses or the financial markets or fail to adequately or timely enhance our enterprise risk framework to address those changes. If our enterprise risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates.
An important aspect of our enterprise risk management framework is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions. We continue to enhance our enterprise risk management program to support our risk culture, ensuring that it is sustainable and appropriate to our role as a major financial institution. Nonetheless, if we fail to create the appropriate environment that sensitizes all of our employees to managing risk, our business could be adversely impacted. For more information on our risk management framework, see “Lending Activities - Governance” in Item 1.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies and questionable or fraudulent activities of our customers. We have policies and procedures in place to promote ethical conduct and protect our reputation. However, these policies and procedures may not be fully effective. Negative publicity regarding our
31
business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental oversight.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry.
The held-for-sale loan balance in our mortgage banking business represents mortgage loans that are in the process of being sold to various investors. Loan balances steadily accumulate and then decrease at the time of sale. We fund these balances through short term funding, primarily through FHLB advances, which require collateral. In the event we experience a significant increase in our held-for-sale loan balances, our liquidity could be negatively impacted as we increase our short term borrowings and therefore our required collateral. Although we have access to other sources of contingent liquidity, we could be materially and adversely affected if we fail to effectively manage this risk.
We depend on our key employees.
Our future prospects are and will remain highly dependent on our directors and executive officers. Our success will, to some extent, depend on the continued service of our directors and continued employment of the executive officers. The unexpected loss of the services of any of these individuals could have a detrimental effect on our business. Although we have entered into employment agreements with members of our senior management team, no assurance can be given that these individuals will continue to be employed by us. The loss of any of these individuals could negatively affect our ability to achieve our growth strategy and could have a material adverse effect on our results of operations and financial condition.
We currently hold a significant amount of bank-owned life insurance.
At December 31, 2015, we held $100.2 million of bank-owned life insurance (BOLI) on certain key and former employees and executives, with a cash surrender value of $100.2 million, as compared with $19.1 million of BOLI, with a cash surrender value of $19.1 million, at December 31, 2014. The eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to return the cash surrender value to us if needed for liquidity purposes. We continually monitor the financial strength of the various companies with whom we carry these policies. However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay benefits or return our cash surrender value. If we need to liquidate these policies for liquidity purposes, we would be subject to taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.
If our investment in the Federal Home Loan Bank of San Francisco becomes impaired, our earnings and stockholders’ equity could decrease.
At December 31, 2015, we owned $39.2 million in FHLB stock. We are required to own this stock to be a member of and to obtain advances from our FHLB. This stock is not marketable and can only be redeemed by our FHLB. Our FHLB’s financial condition is linked, in part, to the eleven other members of the FHLB System and to accounting rules and asset quality risks that could materially lower their capital, which would cause our FHLB stock to be deemed impaired, resulting in a decrease in our earnings and assets.
We rely on numerous external vendors.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less favorable to us.
32
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber attack or cyber theft.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability and significant damage to our reputation and our business.
Our security measures may not protect us from systems failures or interruptions.
While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including our online banking services and data processing systems. Any failure or interruption, or breaches in security, of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems and, therefore, could harm our business, operating results and financial condition. Additionally, interruptions in service and security breaches could lead existing customers to terminate their banking relationships with us and could make it more difficult for us to attract new banking customers.
We operate in a highly regulated environment and our operations and income may be affected adversely by changes in laws, rules and regulations governing our operations.
We are subject to extensive regulation and supervision by the Federal Reserve Board, the OCC and the FDIC. The Federal Reserve Board regulates the supply of money and credit in the United States. Its fiscal and monetary policies determine in a large part our cost of funds for lending and investing and the return that can be earned on those loans and investments, both of which affect our net interest margin. Federal Reserve Board policies can also materially affect the value of financial instruments that we hold, such as debt securities, certain mortgage loans held-for-sale and mortgage servicing rights (MSRs). Its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans or satisfy their obligations to us. Changes in policies of the Federal Reserve Board are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict.
The Company and the Bank are heavily regulated. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, and not stockholders. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify
33
assets, determine the adequacy of a bank’s allowance for loan and lease losses and determine the level of deposit insurance premiums assessed.
The federal banking regulatory agencies have adopted rules to implement a new global regulatory standard on bank capital adequacy referred to as Basel III, as well as to implement the capital requirements under the Dodd-Frank Act. The new rules increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, and change the risk-weightings of certain assets. The new rules became effective January 1, 2015, with some changes transitioned to full effectiveness over two to four years.
Congress and federal agencies continually review banking laws, regulations and policies for possible changes. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material adverse impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or growth prospects. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
The Dodd-Frank Act and supporting regulations could have a material adverse effect on us.
The Dodd-Frank Act provides for, among other things, new restrictions and an expanded framework of regulatory oversight for financial institutions and their holding companies. These changes may result in additional restrictions on investments and other activities.
Regulations under the Dodd-Frank Act significantly impact our operations, and we expect to continue to face increased regulation. These regulations may affect the manner in which we do business and the products and services that we provide, affect or restrict our ability to compete in our current businesses or our ability to enter into or acquire new businesses, reduce or limit our revenue or impose additional fees, assessments or taxes on us, intensify the regulatory supervision of us and the financial services industry, and adversely affect our business operations. The Dodd-Frank Act, among other things, established a Consumer Financial Protection Bureau (the CFPB) with broad authority to administer and enforce a new federal regulatory framework of consumer financial regulation. Many of the provisions of the Dodd-Frank Act have extended implementation periods and require extensive rulemaking, guidance and interpretation by various regulatory agencies. The Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to implement various parts of the legislation. While some rules have been finalized or issued in proposed form, some have yet to be proposed. It is impossible to predict when all such additional rules will be issued or finalized, and what the content of such rules will be. We will have to apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings. We expect that the Dodd-Frank Act, including current and future rules implementing its provisions and the interpretations of those rules, will reduce our revenues, increase our expenses, require us to change certain of our business practices, increase the regulatory supervision of us, increase our capital requirements and impose additional assessments and costs on us, and otherwise adversely affect our business.
Rulemaking changes implemented by the CFPB in particular are expected to result in higher regulatory and compliance costs that may adversely affect our financial condition and results of operations.
As indicated above, the Dodd-Frank Act created the CFPB, a new, independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. In the case of banks, such as the Bank, with total assets of less than $10 billion, this examination and enforcement authority is held by the institution’s primary federal banking regulator (the OCC, in the case of the Bank).
The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
The CFPB has finalized a number of significant rules which impact nearly every aspect of the lifecycle of a residential mortgage loan. Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to
34
ensure compliance with an “ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage,” in which case a rebuttable presumption exists that the creditor extending the loan has satisfied the ability to repay test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower's principal residence; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new disclosure requirements and standards for appraisals and certain financial products; and (v) maintain escrow accounts for higher-priced mortgage loans for a longer period of time. The new rules include the TILA-RESPA Integrated Disclosure (TRID) rules. The TRID rules contain new requirements and new disclosure forms that are required to be provided to borrowers.
In order to comply with the CFPB rules, we have made significant changes to our residential mortgage business, including investments in technology, training of our personnel, changes in the loan products we offer, changes in compensation of our loan originators and mortgage brokers that do business with us, and a reduction in fees that we charge, We are continuing to analyze the impact that such rules may have on our business. In addition to the exercise of its rulemaking authority, the CFPB’s supervisory powers entitle the CFPB to examine institutions for violations of consumer lending laws, even in the absence of consumer complaints or damages.
Compliance with the rules and policies adopted by the CFPB has limited the products we may permissibly offer to some or all of our customers, or limit the terms on which those products may be issued, or may adversely affect our ability to conduct our business as previously conducted, including our residential mortgage lending business. We may also be required to add compliance personnel or incur other significant compliance-related expenses. Our business, financial condition, results of operations and/or competitive position may be adversely affected as a result.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
In July 2013, the FRB and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with Basel III and certain provisions of the Dodd-Frank Act. The final rule applies to all banking organizations. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5 percent of risk-weighted assets) and a higher minimum Tier 1 risk-based capital requirement (6.0 percent of risk-weighted assets) and assigns higher risk weightings (150 percent) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5 percent of common equity tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016, and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities.
While our current capital levels exceed the new capital requirements, our capital levels could decrease in the future as a result of factors such as acquisitions, faster than anticipated growth, reduced earnings levels, operating losses and other factors. The application of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in our inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
35
Non-compliance with the Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions or operating restrictions.
The Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines, sanctions or restrictions that could have a material adverse effect on our strategic initiatives. Several banking institutions have received large fines, or suffered limitations on their operations, for non-compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
One aspect of our business in particular that we believe presents risks in this particular area is our specialized EB-5 escrow product offered by our Financial Institutions Banking business unit, which is intended to facilitate investment transactions under the EB-5 Immigrant Investor Program, which was created by Congress in 1990 to stimulate the U.S. economy through U.S. job creation and capital investment by non-resident foreign investors. This program, which is administered by the U.S. Citizen and Immigration Services (USCIS), provides non-resident alien investors with a method of obtaining conditional, and ultimately permanent, residence through an investment in a new commercial enterprise in the United States that creates at least ten jobs. Escrowing of investment proceeds is commonly offered to give non-resident alien investors comfort that their investment proceeds are being held by an independent third party pending approval of their EB-5 petition by the USCIS. The Bank began offering EB-5 escrow services in April, 2014 and its market share has steadily increased since that time. The Bank's EB-5 escrow deposits totaled $308.5 million and $51.8 million at December 31, 2015 and 2014, respectively.
Our EB-5 escrow services may pose a higher risk of money laundering or terrorist financing, as escrow arrangements such as these may facilitate a higher degree of anonymity or, in some cases, involve the handling of high volumes of currency. International wire transfers involving non-resident alien investors likewise may subject the Bank to a higher degree of risk and regulatory scrutiny in this area. While the Bank has procedures in place that are designed to specifically address the compliance-related risks of the EB-5 escrow product, no assurance can be given that these procedures will be effective.
Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
We may pay higher FDIC premiums in the future. The Dodd-Frank Act increased the minimum FDIC deposit insurance reserve ratio from 1.15 percent to 1.35 percent. The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of December 31, 2020. The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio on institutions with assets less than $10.0 billion. The FDIC has not published a final rule implementing this offset. In addition to the minimum reserve ratio, the FDIC must set a designated reserve ratio. The FDIC has set a designated reserve ratio of 2.0, which exceeds the minimum reserve ratio.
As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution’s total assets minus its Tier 1 capital instead of its deposits. Although our FDIC insurance premiums were initially reduced by these regulations, it is possible that our future insurance premiums will increase.
Our holding company relies on dividends from the Bank and The Palisades Group for substantially all of its income and the net proceeds of capital raising transactions are currently the primary source of funds for cash dividends to our preferred and common stockholders.
Our primary source of revenue at the holding company level is dividends from the Bank and The Palisades Group and we currently rely on the net proceeds of capital raising transactions as the primary source of funds for cash dividends to our preferred and common stockholders. To the extent we are limited in our ability to raise capital in the future, our ability to pay cash dividends to our stockholders could likewise be limited, especially if we are unable to increase the amount of dividends the Bank pays to us. The OCC regulates and, in some cases, must approve the amounts the Bank pays as dividends to us. If either the Bank or The Palisades Group is unable to pay dividends to us, then we may not be able to service our debt, including our Senior Notes and junior subordinated amortizing notes, pay our other obligations or pay cash dividends on our preferred and common stock. Our inability to service our debt, pay our other obligations or pay dividends to our stockholders could have a material adverse impact on our financial condition and the value of your investment in our securities.
36
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some point, we may need to raise additional capital to support continued growth, both organically and through acquisitions.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through organic growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected.
The Company has a significant deferred tax asset that may or may not be fully realized.
The Company has a significant deferred tax asset (DTA) and cannot assure that it will be fully realized. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities computed using enacted tax rates. If we determine that we will not achieve sufficient future taxable income to realize our net deferred tax asset, we are required under generally accepted accounting principles to establish a full or partial valuation allowance. If we determine that a valuation allowance is necessary, we are required to incur a charge to operations. We regularly assess available positive and negative evidence to determine whether it is more likely than not that our net deferred tax asset will be realized. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with certainty. At December 31, 2015, the Company had a net DTA of $11.3 million.
We may experience future goodwill impairment.
If our estimates of the fair value of our goodwill change as a result of changes in our business or other factors, we may determine that an impairment charge is necessary. Estimates of fair value are based on a complex model using, among other things, estimated cash flows and industry pricing multiples. The Company tests its goodwill for impairment annually as of August 31 (the Measurement Date). At each Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluates, based on the weight of evidence, the significance of all qualitative factors to determine whether it is more likely than not that the fair value of each of the reporting units is less than its carrying amount. The assessment of qualitative factors at the most recent Measurement Date (August 31, 2015) indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed. If the fair values of the three reporting units were less than their book value of total common stockholders' equity for an extended period of time, the Company would consider this and other factors, including the anticipated cash flows of each of the reporting units, to determine whether goodwill is impaired. No assurance can be given that the Company will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our results of operations and financial condition.
Changes in accounting standards may affect our performance.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we report and record our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a retrospective adjustment to prior financial statements.
New lines of business, new products and services, or strategic project initiatives may subject us to additional risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results. New lines of business and/or new products or services also could subject us to additional regulatory requirements, increased scrutiny by our regulators and other legal risks.
Additionally from time to time we undertake strategic project initiatives. Significant effort and resources are necessary to manage and oversee the successful completion of these initiatives. These initiatives often place significant demands on a limited number of employees with subject matter expertise and management and may involve significant costs to implement as well as
37
increase operational risk as employees learn to process transactions under new systems. The failure to properly execute on these strategic initiatives could adversely impact our business and results of operations.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater name recognition, resources and lending limits than we do and may offer certain services or prices for services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our markets. In addition, our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients.
Anti-takeover provisions could negatively impact our stockholders.
Provisions in our charter and bylaws, the corporate law of the State of Maryland and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities. These provisions include: a prohibition on voting shares of common stock beneficially owned in excess of 10 percent of total shares outstanding, supermajority voting requirements for certain business combinations with any person who beneficially owns more than 10 percent of our outstanding common stock; the election of directors to staggered terms of three years; advance notice requirements for nominations for election to our Board of Directors and for proposing matters that stockholders may act on at stockholder meetings, a requirement that only directors may fill a vacancy in our Board of Directors, supermajority voting requirements to remove any of our directors and the other provisions of our charter. Our charter also authorizes our Board of Directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal. In addition, pursuant to federal banking regulations, as a general matter, no person or company, acting individually or in concert with others, may acquire more than 10 percent of our common stock without prior approval from the our federal banking regulator.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our Board of Directors.
We may not be able to generate sufficient cash to service our debt obligations, including our obligations under the Senior Notes and junior subordinated amortizing notes.
Our ability to make payments on and to refinance our indebtedness, including the Senior Notes and junior subordinated amortizing notes, will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the Senior Notes and junior subordinated amortizing notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be unable to provide new loans, other products or to fund our obligations to existing customers and otherwise implement our business plans, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Senior Notes and junior subordinated amortizing notes. As a result, we may be unable to meet our scheduled debt service obligations. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions of assets or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
Our debt level may harm our financial condition and results of operations.
As of December 31, 2015, we had $930.0 million of FHLB advances, $254.3 million in Senior Notes and $7.5 million in junior subordinated amortizing notes. We also had 197,250 shares of preferred stock issued and outstanding with a liquidation preference of $1,000 per share. Subsequent to December 31, 2015, in connection with an underwritten public offering of related depositary shares, we issued an additional 125,000 shares of preferred stock, with a liquidation preference of $1,000 per share (with the possibility that an additional 18,750 shares of such preferred stock will be issued if the underwriters of the offering of
38
related depositary shares exercise their overallotment option). See Note 26 of the Notes to Consolidated Financial Statements in Item 8 for additional information. Our level of indebtedness could have important consequences to you, because:
• | It could affect our ability to satisfy our financial obligations, including those relating to the Senior Notes and junior subordinated amortizing notes; |
• | A portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; |
• | It may impair our ability to obtain additional financing in the future; |
• | It may limit our flexibility in planning for, or reacting to, changes in our business and industry; and |
• | It may make us more vulnerable to downturns in our business, our industry or the economy in general. |
Our business could be negatively affected as a result of actions of activist stockholders.
Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through various corporate actions. We have had activist investors acquire ownership positions in our common stock and initiate communications with us or others in order to pursue action we believe is designed to benefit them in a manner that may come at our expense or be to the detriment of other stockholders. Responding to actions by activist stockholders can disrupt our operations, adversely affect our profitability or business prospects, and divert the attention of management and our employees from executing our strategic plan discussed under “Item 1. Business-Strategy.” Any perceived uncertainties as to our future direction or strategy arising from activist stockholder initiatives could also cause increased reputational, operational, financial, regulatory and other risks, harm our ability to raise new capital, or adversely affect the market price or increase the volatility of our securities.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of December 31, 2015, the Company conducts its operations from its main and executive offices at 18500 Von Karman Avenue, Suite 1100, Irvine, California, 35 branch offices in Los Angeles, Orange, San Diego, Santa Barbara counties, and 68 loan production offices in California, Arizona, Oregon, Virginia, Indiana, Colorado, Idaho, and Nevada. See further discussion in Note 6 of the Notes to Consolidated Financial Statements in Item 8.
Item 3. Legal Proceedings
From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. We do not anticipate incurring any material liability as a result of such currently pending litigation.
On December 14, 2011, CMG Financial Services, Inc. (CMG) initiated a patent lawsuit against the Bank’s predecessor in the United States District Court for the Central District of California (the Court) alleging infringement of U.S. Patent No. 7,627,509 (the 509 Patent). The 509 Patent relates to the origination and servicing of loans with characteristics similar to the Bank’s Green Accounts, a product that the Bank no longer originates. On September 19, 2014, the Court entered final judgment in favor of the Bank, declaring CMG’s patent invalid and dismissing the suit against the Bank, with prejudice. On September 25, 2014, CMG filed a notice of appeal of the final judgment with the U.S. Court of Appeals for the Federal Circuit. After oral argument before a three judge panel for the Federal Circuit, the judgment in favor of the Bank was affirmed by the U.S. Court of Appeals on September 15, 2015. CMG failed to file a petition for a writ of certiorari with the United States Supreme Court to seek review of the U.S. Court of Appeal’s decision within the prescribed time period and the Company therefore considers this matter to have been fully resolved in the Company’s favor.
Item 4. Mine Safety Disclosures
Not applicable
39
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s voting common stock (symbol BANC) has been listed on the NYSE since May 29, 2014 and prior to that date was listed on the NASDAQ Global Market. The Company’s Class B non-voting common stock is not listed or traded on any national securities exchange or automated quotation system, and there currently is no established trading market for such stock. The approximate number of holders of record of the Company’s voting common stock as of December 31, 2015 was 1,497. Certain shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. There was one holder of record of the Company’s Class B non-voting common stock as of December 31, 2015. At December 31, 2015 there were 39,601,290 shares and 38,002,267 shares of voting common stock issued and outstanding, respectively, and 37,355 shares of Class B non-voting common stock issued and outstanding. The following table presents quarterly market price information for the Company’s voting common stock and quarterly per share cash dividend information for the Company's voting common stock and Class B non-voting common stock for the years ended December 31, 2015 and 2014. The per share cash dividends paid to holders of the Company's voting common stock and Class B non-voting common stock are identical.
Market Price Range | |||||||||||
High | Low | Dividends | |||||||||
Quarter ended December 31, 2015 | $ | 15.23 | $ | 12.12 | $ | 0.12 | |||||
Quarter ended September 30, 2015 | $ | 14.08 | $ | 11.78 | $ | 0.12 | |||||
Quarter ended June 30, 2015 | $ | 14.20 | $ | 12.19 | $ | 0.12 | |||||
Quarter ended March 31, 2015 | $ | 12.31 | $ | 10.25 | $ | 0.12 | |||||
Total | $ | 0.48 | |||||||||
Quarter ended December 31, 2014 | $ | 11.85 | $ | 10.47 | $ | 0.12 | |||||
Quarter ended September 30, 2014 | $ | 12.28 | $ | 10.64 | $ | 0.12 | |||||
Quarter ended June 30, 2014 | $ | 12.71 | $ | 9.78 | $ | 0.12 | |||||
Quarter ended March 31, 2014 | $ | 13.84 | $ | 12.00 | $ | 0.12 | |||||
Total | $ | 0.48 | |||||||||
Dividend Policy
The timing and amount of cash dividends paid to the Company’s preferred and common stockholders depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. The Company’s primary source of revenue at the holding company level is dividends from the Bank and The Palisades Group and the Company currently relies on the net proceeds of capital raising transactions as the primary source of funds for cash dividends to its preferred and common stockholders. To the extent the Company is limited in its ability to raise capital in the future, its ability to pay cash dividends to its stockholders could likewise be limited, especially if it is unable to increase the amount of dividends the Bank pays to the Company. See “Item 1A. Risk Factors - Our holding company relies on dividends from the Bank and The Palisades Group for substantially all of its income and the net proceeds of capital raising transactions are currently the primary source of funds for cash dividends to our preferred and common stockholders.” The Palisades Group paid dividends of $8.5 million to Banc of California, Inc. during the year ended December 31, 2015 and the Bank paid no dividends to Banc of California, Inc. during the year ended December 31, 2015. For a description of the regulatory restriction on the ability of the Bank to pay dividends to Banc of California, Inc., and on the ability of Banc of California, Inc. to pay dividends to its stockholders, see “Regulation and Supervision” in Item 1.
As of December 31, 2015, the Company had 197,250 shares of preferred stock issued and outstanding, consisting of 32,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share (Series A Preferred Stock), 10,000 shares of Non-Cumulative Perpetual Preferred Stock, Series B, liquidation amount $1,000 per share (Series B Preferred Stock), 40,250 shares of 8.00 percent Non-Cumulative Perpetual Preferred Stock, Series C, liquidation amount $1,000 per share (Series C Preferred Stock), 115,000 shares of 7.375 percent Non-Cumulative Perpetual Preferred Stock, Series D, liquidation amount $1,000 per share (Series D Preferred Stock). Subsequent to December 31, 2015, the aggregate shares of preferred stock outstanding increased to 322,250 shares following the issuance and sale on February 8, 2016 of 125,000 shares of 7.00 percent Non-Cumulative Perpetual Preferred Stock, Series E, liquidation amount $1,000 per share (Series E Preferred Stock and together with the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D
40
Preferred Stock, the Preferred Stock), in connection with an underwritten public offering of depositary shares, each representing a 1/40th interest in a share of Series E Preferred Stock. If the underwriters of that offering exercise their 30-day overallotment option in full, an additional 18,750 shares of Series E Preferred Stock will be issued and sold. See Note 26 of the Notes to Consolidated Financial Statements in Item 8 for additional information. Each series of the Preferred Stock ranks equally (pari passu) with each other series of the Preferred Stock and senior to our common stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of Banc of California, Inc.
Issuer Purchases of Equity Securities
The following table presents information for the three months ended December 31, 2015 with respect to repurchases by the Company of its common stock:
Purchases of Equity Securities by the Issuer | ||||||||||||
Period | Total Number of Shares Purchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Total Number of Shares That May Yet be Purchased Under the Plan | ||||||||
From October 1, 2015 to October 31, 2015 | — | $ | — | — | — | |||||||
From November 1, 2015 to November 30, 2015 | — | $ | — | — | — | |||||||
From December 1, 2015 to December 31, 2015 | — | $ | — | — | — | |||||||
Total | — | $ | — | — | ||||||||
During the three months ended December 31, 2015, the Company did not have any stock buyback program in place. The Company has a practice of buying back stock for tax purposes pertaining to employee benefit plans, and does not count these purchases toward the allotment of the shares. The Company did not purchase any shares during the three months ended December 31, 2015 related to tax liability sales for employee stock benefit plans.
Issuance of Shares Related to CS Financial Acquisition
Effective October 31, 2013, the Company acquired CS Financial, a California corporation and Southern California-based mortgage banking firm controlled by former Company director and current Bank executive Jeffrey T. Seabold and in which certain relatives and entities affiliated with the Company’s Chairman and Chief Executive Officer Steven A. Sugarman also owned certain minority, non-controlling interests. As part of the acquisition consideration, upon achievement of certain performance targets by the Bank’s lending activities following the acquisition of CS Financial, the Company is obligated to issue up to 92,781 shares (Performance Shares). On November 2, 2015, the Company issued an aggregate of 30,925 of the Performance Shares. The issuance and sale of the 30,925 shares was exempt from registration under the Securities Act of 1933, as amended (the Securities Act), pursuant to Section 4(a)(2) of the Securities Act as a transaction not involving any public offering. For additional information regarding this transaction and the individuals who received the 30,925 Performance Shares on November 2, 2015, see Note 25 of the Notes to Consolidated Financial Statements in Item 8.
41
Stock Performance Graph
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that the Company specifically incorporates it by reference into a filing.
The following graph shows a comparison of stockholder return on Banc of California, Inc.’s voting common stock with the cumulative total returns for: (i) the NYSE Composite Index; (ii) the Standard and Poor’s (S&P) 500 Financials Index; and (iii) the KBW Bank Index. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance.
Period Ending | |||||||||||||||||
Index | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | |||||||||||
Banc of California, Inc. | 100.00 | 79.88 | 99.58 | 112.96 | 100.64 | 133.13 | |||||||||||
NYSE Composite | 100.00 | 93.89 | 106.02 | 130.59 | 136.10 | 127.37 | |||||||||||
S&P 500 Financials | 100.00 | 82.94 | 106.84 | 144.91 | 166.93 | 164.39 | |||||||||||
KBW Bank Index | 100.00 | 75.43 | 98.22 | 132.66 | 142.23 | 139.97 | |||||||||||
42
Annual Rate of Stockholders Return
The following graph shows a comparison of stockholder return on Banc of California, Inc.’s voting common stock with the annual rate of return for: (i) the NYSE Composite Index; (ii) the Standard and Poor’s (S&P) 500 Financials Index; and (iii) the KBW Bank Index. The graph is historical only and may not be indicative of possible future performance.
Year Ended December 31, | ||||||||
Index | 2013 | 2014 | 2015 | |||||
Banc of California, Inc. | 13 | % | (11 | )% | 32 | % | ||
NYSE Composite | 23 | % | 4 | % | (6 | )% | ||
S&P 500 Financials | 36 | % | 15 | % | (2 | )% | ||
KBW Bank Index | 35 | % | 7 | % | (2 | )% | ||
43
Item 6. Selected Financial Data
The following table sets forth certain consolidated financial and other data of the Company at the dates and for the periods indicated. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein at Item 7 and the Consolidated Financial Statements and Notes thereto included herein at Item 8.
As of or For the Year Ended December 31, | |||||||||||||||||||
2015 | 2014 (7) | 2013 (8) | 2012 (9) | 2011 | |||||||||||||||
($ in thousands, except per share data) | |||||||||||||||||||
Selected financial condition data: | |||||||||||||||||||
Total assets | $ | 8,235,555 | $ | 5,971,297 | $ | 3,627,862 | $ | 1,682,704 | $ | 999,062 | |||||||||
Cash and cash equivalents | 156,124 | 231,199 | 110,118 | 108,643 | 44,475 | ||||||||||||||
Loans and leases receivable, net | 5,148,861 | 3,919,642 | 2,427,306 | 1,234,023 | 775,609 | ||||||||||||||
Loans held-for-sale | 668,841 | 1,187,090 | 716,733 | 113,158 | — | ||||||||||||||
Other real estate owned, net | 1,097 | 423 | — | 4,527 | 14,692 | ||||||||||||||
Securities available-for-sale | 833,596 | 345,695 | 170,022 | 121,419 | 101,616 | ||||||||||||||
Securities held-to-maturity | 962,203 | — | — | — | — | ||||||||||||||
Bank owned life insurance | 100,171 | 19,095 | 18,881 | 18,704 | 18,451 | ||||||||||||||
Time deposits in financial institutions | 1,500 | 1,900 | 1,846 | 5,027 | — | ||||||||||||||
FHLB and other bank stock | 59,069 | 42,241 | 22,600 | 8,842 | 6,972 | ||||||||||||||
Deposits | 6,303,085 | 4,671,831 | 2,918,644 | 1,306,342 | 786,334 | ||||||||||||||
Total borrowings | 1,191,876 | 726,569 | 332,320 | 156,935 | 20,000 | ||||||||||||||
Total stockholders' equity | 652,405 | 503,315 | 324,708 | 188,759 | 184,516 | ||||||||||||||
Selected operations data: | |||||||||||||||||||
Total interest income | $ | 266,338 | $ | 188,139 | $ | 120,511 | $ | 55,031 | $ | 35,177 | |||||||||
Total interest expense | 42,621 | 32,862 | 23,282 | 8,479 | 6,037 | ||||||||||||||
Net interest income | 223,717 | 155,277 | 97,229 | 46,552 | 29,140 | ||||||||||||||
Provision for loan and lease losses | 7,469 | 10,976 | 7,963 | 5,500 | 5,388 | ||||||||||||||
Net interest income after provision for loan and lease losses | 216,248 | 144,301 | 89,266 | 41,052 | 23,752 | ||||||||||||||
Total non-interest income | 220,219 | 145,637 | 96,743 | 36,619 | 4,913 | ||||||||||||||
Total non-interest expense | 332,201 | 263,472 | 178,101 | 71,196 | 31,376 | ||||||||||||||
Income/(loss) before income taxes | 104,266 | 26,466 | 7,908 | 6,475 | (2,711 | ) | |||||||||||||
Income tax (benefit)/expense | 42,194 | (3,739 | ) | 7,992 | 498 | 87 | |||||||||||||
Net income/(loss) | 62,072 | 30,205 | (84 | ) | 5,977 | (2,798 | ) | ||||||||||||
Dividends paid on preferred stock | 9,823 | 3,640 | 2,185 | 1,359 | 534 | ||||||||||||||
Net income/(loss) available to common stockholders | 52,249 | 26,565 | (2,269 | ) | 4,618 | (3,332 | ) | ||||||||||||
Basic earnings/(loss) per total common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | $ | 0.39 | $ | (0.31 | ) | |||||||
Diluted earnings/(loss) per total common share | $ | 1.34 | $ | 0.90 | $ | (0.15 | ) | $ | 0.39 | $ | (0.31 | ) | |||||||
Performance ratios: | |||||||||||||||||||
Return on average assets | 0.94 | % | 0.69 | % | — | % | 0.45 | % | (0.31 | )% | |||||||||
Return on average equity | 10.14 | % | 7.31 | % | (0.03 | )% | 3.16 | % | (1.75 | )% | |||||||||
Dividend payout ratio (1) | 35.29 | % | 52.75 | % | — | % | 123.08 | % | — | % | |||||||||
Net interest spread | 3.35 | % | 3.54 | % | 3.49 | % | 3.49 | % | 3.31 | % | |||||||||
Net interest margin (2) | 3.52 | % | 3.72 | % | 3.67 | % | 3.69 | % | 3.48 | % | |||||||||
Non-interest expense to average total assets | 5.02 | % | 6.06 | % | 6.42 | % | 5.30 | % | 3.51 | % | |||||||||
Efficiency ratio (3) | 74.83 | % | 87.56 | % | 91.82 | % | 85.60 | % | 92.14 | % | |||||||||
Average interest-earning assets to average interest-bearing liabilities | 125.29 | % | 122.06 | % | 121.07 | % | 127.14 | % | 124.20 | % | |||||||||
44
Asset quality ratios: | |||||||||||||||||||
Allowance for loan and lease losses | $ | 35,533 | $ | 29,480 | $ | 18,805 | $ | 14,448 | $ | 12,780 | |||||||||
Nonperforming loans and leases | 45,129 | 38,381 | 31,648 | 22,993 | 19,254 | ||||||||||||||
Nonperforming assets | 46,226 | 38,804 | 31,648 | 27,520 | 33,946 | ||||||||||||||
Nonperforming assets to total assets | 0.56 | % | 0.65 | % | 0.87 | % | 1.64 | % | 3.40 | % | |||||||||
ALLL to nonperforming loans and leases | 78.74 | % | 76.81 | % | 59.42 | % | 62.84 | % | 66.38 | % | |||||||||
ALLL to total loans and leases | 0.69 | % | 0.75 | % | 0.77 | % | 1.16 | % | 1.62 | % | |||||||||
Capital Ratios: | |||||||||||||||||||
Total stockholders' equity to total assets | 7.92 | % | 8.43 | % | 8.95 | % | 11.22 | % | 18.47 | % | |||||||||
Average equity to average assets | 9.25 | % | 9.51 | % | 9.55 | % | 14.11 | % | 17.89 | % | |||||||||
Banc of California, Inc. (4) | |||||||||||||||||||
Total risk-based capital ratio | 11.18 | % | 11.28 | % | 12.45 | % | 15.50 | % | N/A | ||||||||||
Tier 1 risk-based capital ratio | 10.71 | % | 10.54 | % | 11.41 | % | 14.25 | % | N/A | ||||||||||
Common equity tier 1 capital ratio (5) | 7.36 | % | N/A | N/A | N/A | N/A | |||||||||||||
Tier 1 leverage ratio | 8.07 | % | 8.57 | % | 8.02 | % | 10.15 | % | N/A | ||||||||||
Banc of California, NA (6) | |||||||||||||||||||
Total risk-based capital ratio | 13.45 | % | 12.04 | % | 14.65 | % | 17.59 | % | 18.56 | % | |||||||||
Tier 1 risk-based capital ratio | 12.79 | % | 11.29 | % | 13.60 | % | 16.34 | % | 17.34 | % | |||||||||
Common equity tier 1 capital ratio (5) | 12.79 | % | N/A | N/A | N/A | N/A | |||||||||||||
Tier 1 leverage ratio | 9.64 | % | 9.17 | % | 9.58 | % | 11.16 | % | 13.08 | % | |||||||||
Beach Business Bank (6) | |||||||||||||||||||
Total risk-based capital ratio | N/A | N/A | N/A | 15.09 | % | N/A | |||||||||||||
Tier 1 risk-based capital ratio | N/A | N/A | N/A | 14.72 | % | N/A | |||||||||||||
Common equity tier 1 capital ratio (5) | N/A | N/A | N/A | — | % | N/A | |||||||||||||
Tier 1 leverage ratio | N/A | N/A | N/A | 11.96 | % | N/A | |||||||||||||
(1) | Ratio of dividends declared per common shares to basic earnings per common share. Not applicable for the years ended December 31, 2013 and 2011 due to the net loss attributable to common stockholders for the years. |
(2) | Net interest income divided by average interest-earning assets. |
(3) | Efficiency ratio represents noninterest expense as a percentage of net interest income plus noninterest income. |
(4) | At December 31, 2011, Banc of California, Inc. (then known as First PacTrust Bancorp) was a savings and loan holding company and was not subject to regulatory capital requirements. |
(5) | Common equity tier 1 capital ratio became required from 2015 |
(6) | At December 31, 2012, the Company had two bank subsidiaries, the Bank (then known as Pacific Trust Bank) and Beach Business Bank. During the year ended December 31, 2013, all bank subsidiaries were merged to form the Bank. |
(7) | The Company completed its acquisition of RenovationReady and the BPNA Branch Acquisition on January 31, 2014 and November 8, 2014, respectively. |
(8) | The Company completed its acquisitions of The Private Bank of California, The Palisades Group and CS Financial on July 1, 2013, September 10, 2013 and October 31, 2013, respectively. |
(9) | The Company completed its acquisitions of Beach Business Bank and Gateway Bancorp on July 1, 2012 and August 18, 2012, respectively. |
45
Non-GAAP Financial Measures
Return on Average Tangible Common Equity
Return on average tangible common equity is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in its analysis of the Company's performance. Average tangible common equity is calculated by subtracting average preferred stock, average goodwill, and average other intangible assets from average stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of the Company, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.
The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
Year Ended December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Average total stockholders' equity | $ | 612,393 | $ | 413,454 | $ | 264,818 | $ | 189,411 | $ | 159,959 | |||||||||
Less average preferred stock | (161,288 | ) | (79,877 | ) | (56,284 | ) | (31,934 | ) | (10,849 | ) | |||||||||
Less average goodwill | (33,541 | ) | (32,326 | ) | (15,872 | ) | (3,517 | ) | — | ||||||||||
Less average other intangible assets | (22,222 | ) | (11,739 | ) | (9,580 | ) | (2,723 | ) | — | ||||||||||
Average tangible common equity | $ | 395,342 | $ | 289,512 | $ | 183,082 | $ | 151,237 | $ | 149,110 | |||||||||
Net income (loss) | $ | 62,072 | $ | 30,205 | $ | (84 | ) | $ | 5,977 | $ | (2,798 | ) | |||||||
Less preferred stock dividends | (9,823 | ) | (3,640 | ) | (2,185 | ) | (1,359 | ) | (534 | ) | |||||||||
Add amortization of intangible assets, net of tax (1) | 3,793 | 2,651 | 1,723 | 452 | — | ||||||||||||||
Add impairment on intangible assets, net of tax (1) | 168 | 31 | 690 | — | — | ||||||||||||||
Adjusted net income (loss) | $ | 56,210 | $ | 29,247 | $ | 144 | $ | 5,070 | $ | (3,332 | ) | ||||||||
Return on average equity | 10.14 | % | 7.31 | % | (0.03 | )% | 3.16 | % | (1.75 | )% | |||||||||
Return on average tangible common equity | 14.22 | % | 10.10 | % | 0.08 | % | 3.35 | % | (2.23 | )% | |||||||||
(1) Utilized a 35 percent tax rate
46
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The Company follows accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 of the Notes to Consolidated Financial Statements in Item 8. The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses in the Consolidated Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to significant change. Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management has identified the Company's most critical accounting policies and accounting estimates, which have been discussed with the appropriate committees of the Board of Directors, as follows:
Securities
Under ASC 320, Investments-Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income (loss) and do not affect earnings until realized unless a decline in fair value below amortized cost is considered to be other than temporarily impaired (OTTI).
The fair values of the Company’s securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company’s fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.
The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if OTTI exists pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.
47
The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Purchased Credit-Impaired Loans
The Company purchases loans with and without evidence of credit quality deterioration since origination. Evidence of credit quality deterioration as of the purchase date may include statistics such as prior loan modification history, updated borrower credit scores and updated LTV ratios, some of which are not immediately available as of the purchase date. Purchased loans with evidence of credit quality deterioration where the Company estimates that it will not receive all contractual payments are accounted for as PCI loans. The excess of the cash flows expected to be collected on PCI loans, measured as of the acquisition date, over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan or lease using a level yield methodology. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the non-accretable difference. PCI loans that have similar risk characteristics, primarily credit risk, collateral type and interest rate risk, are pooled and accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
The Company estimates cash flows expected to be collected over the life of the loan or lease using management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds. If, upon subsequent evaluation, the Company determines it is probable that the present value of the expected cash flows have decreased as a result of further credit deterioration, the PCI loan is considered further impaired which will result in a charge to the provision for loan and lease losses and a corresponding increase to a valuation allowance included in the allowance for loan and lease losses. If, upon subsequent evaluation, it is probable that there is an increase in the present value of the expected cash flows, the Company will reduce any remaining valuation allowance. If there is no remaining valuation allowance, the Company will recalculate the amount of accretable yield as the excess of the revised expected cash flows over the current carrying value resulting in a reclassification from nonaccretable difference to accretable yield. The present value of the expected cash flows for PCI purchased loan pools is determined using the PCI loans’ effective interest rate, adjusted for changes in the PCI loans’ interest rate indexes. The present value of the expected cash flows for PCI loans acquired through mergers with other banks includes, in addition to the above, an evaluation of the credit worthiness of the borrower. Loan and lease dispositions, which may include sales of loans and leases, receipt of payments in full from the borrower or foreclosure, result in removal of the loan or lease from the PCI loan pool. Write-downs are not recorded on the PCI loan pool until actual losses exceed the remaining nonaccretable difference.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is a reserve established through a provision for loan and lease losses charged to expense, and represents management’s best estimate of probable losses that may be incurred within the existing loan and lease portfolio as of the balance sheet date. Subsequent recoveries, if any, are credited to the allowance. The Company performs an analysis of the adequacy of the allowance at least on a quarterly basis. Management estimates the allowance balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for loan and lease losses is dependent upon a variety of factors beyond the Company’s control, including performance of the Company’s loan portfolio, the economy, changes in interest rates, and regulatory authorities altering their loan classification guidance.
The allowance consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases, (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar characteristics and trends, adjusted, as necessary to reflect the impact of current conditions; and (iii) qualitative allowances based on environmental and other factors that may be internal or external to the Company.
During the year ended December 31, 2014, the Company enhanced its methodologies, processes and controls over the allowance for loan and lease losses (ALLL), due to the Company's organic and acquisitive growth and changing profile.
The following is a synopsis of the enhancements for each component of ALLL:
• | Expand the look-back period to 28 rolling quarters to capture a full economic cycle. |
• | Utilize net historical losses versus gross historical losses. |
• | Expand the peer group used to determine industry average loss history to include three industry groups; (i) all U.S. financial and bank holding companies, (ii) all California financial and bank holding companies, (iii) the peer group average from the Uniform Bank Performance Report. |
48
• | Apply a segment specific loss emergence period to each segment's loss rate. |
• | Determine qualitative reserves at each loan segment level based on a baseline risk weighting adjusted for current risks, trends and business conditions. |
• | Disaggregate certain qualitative factors to be determined on the portfolio segment level. |
Mortgage Loan Repurchase Obligations and Reserve for Loss on Repurchased Loans
In the ordinary course of business, as loans held-for-sale are sold, the Bank makes standard industry representations and warranties about the loans. The Bank may have to subsequently repurchase certain loans or reimburse certain investor losses due to defects that occurred in the origination of the loans. Such defects include documentation or underwriting errors. In addition, certain investor contracts require the Bank to repurchase loans from previous whole loan sales transactions that experience early payment defaults. If there are no such defects or early payment defaults, the Bank has no commitment to repurchase loans that it has sold. The level of reserve for loss on repurchased loans is an estimate that requires considerable management judgment. The Bank’s reserve is based upon the expected future repurchase trends for loans already sold in whole loan sale transactions and the expected valuation of such loans when repurchased, and include first and second trust deed loans. At the point when loss reimbursements are made directly to the investor, the reserve for loss on repurchased loans is charged for the losses incurred.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are periodically evaluated for impairment at the reporting unit level. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.
In accordance with FASB Accounting Standard Update (ASU) 2011-08 Intangibles—Goodwill and Other (Topic 350), an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. In other words, before the first step of the existing guidance, the entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among others: a significant change in legal factors or in the general business climate; significant change in the Company’s stock price and market capitalization; unanticipated competition; and an action or assessment by a regulator. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step process is unnecessary. The entity has the option to bypass the qualitative assessment step for any reporting unit in any period and proceed directly to the first step of the exiting two-step process. The entity can resume performing the qualitative assessment in any subsequent period.
The first step of the goodwill impairment test is performed, when considered necessary, by comparing the reporting unit’s aggregate fair value to its carrying value. Absent other indicators of impairment, if the aggregate fair value exceeds the carrying value, goodwill is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value, a second step would be performed to measure the amount of impairment loss, if any. To measure any impairment loss the implied fair value would be determined in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be recorded for the difference.
The Company tests its goodwill for impairment annually as of August 31 (the Measurement Date). At the Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluated, based on the weight of evidence, the significance of all qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The assessment of qualitative factors at the Measurement Date indicated that it is not more likely than not that impairment existed; as a result no further testing was performed.
The Company realigned its management reporting structure at December 31, 2014 and, accordingly, its segment reporting structure and goodwill reporting units. In connection with the realignment, management reallocated goodwill to the new reporting unit using a relative fair value approach. The carrying value of goodwill allocated to the reportable segments was $37.1 million and $2.1 million to Commercial Banking segment and Mortgage Banking segment, respectively, at December 31, 2015.
49
Determining the fair value of a reporting unit involves several management estimates, including developing a discounted cash flow valuation model which utilizes variables such as revenue growth rates, expense trends, discount rates, and terminal values. Based upon an evaluation of key data and market factors, management selects from a range, the specific variables to be incorporated into the valuation model. Projected future cash flows are discounted using estimated rates based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and unsystematic risk and size premium adjustments specific to the reporting unit. The Company utilizes both an income approach and a market approach to arrive at an indicated fair value range for the reporting unit. The comparable company method and transaction method is used to corroborate the income approach, giving an indication of the fair value of equity of the reporting units, by including banks with significant geographic or product line overlap to the Company and its reporting units.
Even though there was no goodwill impairment at December 31, 2015, adverse events may impact the recoverability of goodwill and could result in a future impairment charge which could have a material impact on the Company’s consolidated financial statements.
Other intangible assets consist of core deposit intangibles, customer relationship intangibles, and trade name intangibles arising from whole bank and their subsidiaries acquisitions, and are generally amortized on an accelerated method over their estimated useful lives of 2 to 10 years and 1 to 20 years, respectively. Trade name intangibles are indefinite lived and evaluated for impairment on an annual basis or more if necessary.
Deferred Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Accounting guidance requires that companies assess whether a valuation allowance should be established against the deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income and tax planning strategies.
At December 31, 2015 and 2014, the Company had no valuation allowance and had a net deferred tax asset of $11.3 million and $16.4 million, respectively.
50
Executive Overview
Banc of California, Inc., a financial holding company regulated by the Federal Reserve Board, is focused on empowering California’s diverse private businesses, entrepreneurs and communities. It is the parent company of Banc of California, National Association, a California based bank that is regulated by the Office of the Comptroller of the Currency, and The Palisades Group, LLC, an SEC-registered investment advisor. The Bank has one wholly owned subsidiary, CS Financial, Inc., a mortgage banking firm. Banc of California, Inc. was incorporated under Maryland law in March 2002, and was formerly known as "First PacTrust Bancorp, Inc.", and changed its name to “Banc of California, Inc.” in July 2013.
On November 1, 2010, the Company was recapitalized by outside investors with the goal of creating California's Bank: a full-service, bank focused on California and, empowering the dreams of California’s diverse private businesses, entrepreneurs and communities.
The Bank is headquartered in Irvine, California and at December 31, 2015, the Bank had 90 California banking locations including 35 full service branches in San Diego, Orange, Santa Barbara, and Los Angeles Counties.
The Company’s vision is to be California’s Bank. It pursues this vision through its mission of empowering California’s Diverse Private Businesses, Entrepreneurs and Communities. The Company focuses on three core values: operational excellence, superior analytics and entrepreneurialism.
Banc of California’ mission and vision guide its strategic plan. The Company is focused on California and core products and services designed to cater to the unique needs of California's diverse private businesses, entrepreneurs and communities During 2015, the Bank was awarded an Outstanding rating for CRA activities by the OCC. As of December 31, 2015, we were the largest independent public bank in California with an Outstanding CRA rating.
As part of delivering on our value proposition to clients, we offer a variety of financial products and services designed around our target client in order to serve all of their banking and financial needs. This includes both deposit products offered through the Company's multiple channels that include retail banking, business banking and private banking, as well as lending products including residential mortgage lending, commercial lending, commercial real estate lending, multifamily lending, and specialty lending including Small Business Administration (SBA) lending, commercial specialty finance and construction lending.
The Bank’s deposit and banking product and service offerings include checking, savings, money market, certificates of deposit, retirement accounts as well as online, telephone, and mobile banking, automated bill payment, cash and treasury management, master demand accounts, foreign exchange, interest rate swaps, trust services, card payment services, remote and mobile deposit capture, ACH origination, wire transfer, direct deposit, and safe deposit boxes. Bank customers also have the ability to access their accounts through a nationwide network of over 55,000 surcharge-free ATMs.
The Bank’s lending activities are focused on providing financing to California’s private businesses and entrepreneurs that is often secured against California commercial and residential real estate. In 2015 the Bank closed over $7 billion in new loan production.
51
2015 Highlights
• | Ranked number 56, and ranked number 1 for total stockholder return of all west coast banks, on the Forbes Magazine list of America's top 100 banks. |
• | Awarded an Outstanding rating for Community Reinvestment Act activities by the Officer of the Comptroller of the Currency. |
• | Completed the issuance and sale of $175.0 million aggregate principal amount of its 5.25 percent Senior Notes on April 6, 2015. |
• | Completed the issuance and sale of depositary shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series D, for gross proceeds of $111.4 million on April 8, 2015, including $14.5 million from the exercise in full of the underwriters' over-allotment option. |
• | Net income before income taxes was $104.3 million for the year ended December 31, 2015, an increase of $77.8 million, or 294.0 percent, from $26.5 million for the year ended December 31, 2014. Net income was $62.1 million for the year ended December 31, 2015, an increase of $31.9 million, or 105.5 percent, from $30.2 million for the year ended December 31, 2014. Return on average assets was 0.94 percent and 0.69 percent, respectively, and return on average tangible common equity was 14.22 percent and 10.10 percent, respectively, for the years ended December 31, 2015 and 2014. |
• | Net interest income was $223.7 million for the year ended December 31, 2015, an increase of $68.4 million, or 44.1 percent, from $155.3 million for the year ended December 31, 2014. The increase was mainly due to a higher interest income from the increased interest-earning assets, partially offset by a higher interest expense from increased interest-bearing liabilities and a lower yield on loans and leases. Net interest margin was 3.52 percent and 3.72 percent for the years ended December 31, 2015 and 2014, respectively. |
• | Noninterest income was $220.2 million for the year ended December 31, 2015, an increase of $74.6 million, or 51.2 percent, from $145.6 million for the year ended December 31, 2014. The increase was mainly due to increases in net revenue on mortgage banking activities, net gains on sales of loans and securities available-for-sale, and the gain on sale of building in 2015. |
• | Noninterest expense was $332.2 million for the year ended December 31, 2015, an increase of $68.7 million, or 26.1 percent, from $263.5 million for the year ended December 31, 2014. The increase was mainly due to the continued expansion of the Company's business footprint. |
• | Efficiency ratio was 74.83 percent for the year ended December 31, 2015, an improvement of 12.73 percent, from 87.56 percent for the year ended December 31, 2014. The improvement was mainly due to higher increases in net interest income and noninterest income than the increase in noninterest expense. |
• | Total assets were $8.24 billion at December 31, 2015, an increase of $2.26 billion, or 37.9 percent, from $5.97 billion at December 31, 2014. Average total assets were $6.62 billion for the year ended December 31, 2015, an increase of $2.27 billion, or 52.2 percent, from $4.35 billion for the year ended December 31, 2014. The increase was mainly due to increases in investment securities and loans and leases from the excess cash generated from the preferred stock and Senior Notes offerings as well as higher utilization of FHLB advances. |
• | Loans and leases receivable, net of allowance for loan and lease losses, were $5.15 billion at December 31, 2015, an increase of $1.23 billion, or 31.4 percent, from $3.92 billion at December 31, 2014. Loans held-for-sale were $668.8 million at December 31, 2015, a decreased of $518.2 million, or 43.7 percent, from $1.19 billion at December 31, 2014. Average total loans and leases was $5.30 billion for the year ended December 31, 2015, an increase of $1.49 billion, or 39.3 percent, from $3.81 billion for the year ended December 31, 2014. The increase was due mainly to increased originations and purchases of loans and leases during the year ended December 31, 2015. |
• | Total deposits were $6.30 billion at December 31, 2015, an increase of $1.63 billion, or 34.9 percent, from $4.67 billion at December 31, 2014. Average total deposits were $5.17 billion for the year ended December 31, 2015, an increase of $1.64 billion, or 46.6 percent, from $3.53 billion for the year ended December 31, 2014. The increase was mainly due to strong deposit growth across the Company's business units, including strong growth from the private banking business, as well as an increased average balance per account as the Company continues to build stronger relationship with its clients. |
52
RESULTS OF OPERATIONS
The following table presents condensed statements of operations for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands, except per share data) | |||||||||||
Interest and dividend income | $ | 266,338 | $ | 188,139 | $ | 120,511 | |||||
Interest expense | 42,621 | 32,862 | 23,282 | ||||||||
Net interest income | 223,717 | 155,277 | 97,229 | ||||||||
Provision for loan and lease losses | 7,469 | 10,976 | 7,963 | ||||||||
Noninterest income | 220,219 | 145,637 | 96,743 | ||||||||
Noninterest expense | 332,201 | 263,472 | 178,101 | ||||||||
Income before income taxes | 104,266 | 26,466 | 7,908 | ||||||||
Income tax expense (benefit) | 42,194 | (3,739 | ) | 7,992 | |||||||
Net income (loss) | 62,072 | 30,205 | (84 | ) | |||||||
Preferred stock dividends | 9,823 | 3,640 | 2,185 | ||||||||
Net income (loss) available to common stockholders | $ | 52,249 | $ | 26,565 | $ | (2,269 | ) | ||||
Basic earnings (loss) per common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | ||||
Diluted earnings (loss) per common share | $ | 1.34 | $ | 0.90 | $ | (0.15 | ) | ||||
Basic earnings (loss) per class B common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | ||||
Diluted earnings (loss) per class B common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | ||||
For the year ended December 31, 2015, net income was $62.1 million, an increase of $31.9 million from net income of $30.2 million for the year ended December 31, 2014 and an increase of $62.2 million from net loss of $84 thousand for the year ended December 31, 2013. Preferred stock dividends were $9.8 million, $3.6 million and $2.2 million for the years ended December 31, 2015, 2014 and 2013, respectively, and net income (loss) available to common stockholders was $52.2 million, $26.6 million and $(2.3) million for the years ended December 31, 2015, 2014 and 2013, respectively.
53
Net Interest Income
The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their correspondent yields and costs expressed both in dollars and rates for the years indicated:
Year Ended December 31, | ||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost | ||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Total loans and leases (1) | $ | 5,300,237 | $ | 241,556 | 4.56 | % | $ | 3,805,239 | $ | 180,761 | 4.75 | % | $ | 2,217,421 | $ | 116,673 | 5.26 | % | ||||||||||||||
Securities | 776,256 | 20,263 | 2.61 | % | 225,182 | 5,158 | 2.29 | % | 153,229 | 2,632 | 1.72 | % | ||||||||||||||||||||
Other interest-earning assets (2) | 276,823 | 4,519 | 1.63 | % | 146,097 | 2,220 | 1.52 | % | 276,420 | 1,206 | 0.44 | % | ||||||||||||||||||||
Total interest-earning assets | 6,353,316 | 266,338 | 4.19 | % | 4,176,518 | 188,139 | 4.50 | % | 2,647,070 | 120,511 | 4.55 | % | ||||||||||||||||||||
Allowance for loan and lease losses | (32,467 | ) | (22,354 | ) | (17,332 | ) | ||||||||||||||||||||||||||
BOLI and non-interest earning assets (3) | 298,168 | 194,462 | 143,538 | |||||||||||||||||||||||||||||
Total assets | $ | 6,619,017 | $ | 4,348,626 | $ | 2,773,276 | ||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Savings | $ | 862,160 | 6,467 | 0.75 | % | $ | 967,803 | 9,121 | 0.94 | % | $ | 756,625 | 7,994 | 1.06 | % | |||||||||||||||||
Interest-bearing checking | 1,204,560 | 8,973 | 0.74 | % | 735,156 | 7,629 | 1.04 | % | 339,731 | 2,041 | 0.60 | % | ||||||||||||||||||||
Money market | 1,219,416 | 4,590 | 0.38 | % | 692,464 | 2,788 | 0.40 | % | 371,058 | 1,901 | 0.51 | % | ||||||||||||||||||||
Certificates of deposit | 1,006,493 | 5,753 | 0.57 | % | 662,183 | 4,873 | 0.74 | % | 558,994 | 4,115 | 0.74 | % | ||||||||||||||||||||
FHLB advances | 553,162 | 2,120 | 0.38 | % | 267,816 | 527 | 0.20 | % | 74,712 | 269 | 0.36 | % | ||||||||||||||||||||
Long term debt and other interest-bearing liabilities | 225,020 | 14,718 | 6.54 | % | 96,279 | 7,924 | 8.23 | % | 85,333 | 6,962 | 8.16 | % | ||||||||||||||||||||
Total interest-bearing liabilities | 5,070,811 | 42,621 | 0.84 | % | 3,421,701 | 32,862 | 0.96 | % | 2,186,453 | 23,282 | 1.06 | % | ||||||||||||||||||||
Noninterest-bearing deposits | 875,227 | 468,077 | 287,325 | |||||||||||||||||||||||||||||
Noninterest-bearing liabilities | 60,586 | 45,394 | 34,680 | |||||||||||||||||||||||||||||
Total liabilities | 6,006,624 | 3,935,172 | 2,508,458 | |||||||||||||||||||||||||||||
Total stockholders’ equity | 612,393 | 413,454 | 264,818 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 6,619,017 | $ | 4,348,626 | $ | 2,773,276 | ||||||||||||||||||||||||||
Net interest income/spread | $ | 223,717 | 3.35 | % | $ | 155,277 | 3.54 | % | $ | 97,229 | 3.49 | % | ||||||||||||||||||||
Net interest margin (4) | 3.52 | % | 3.72 | % | 3.67 | % | ||||||||||||||||||||||||||
(1) | Total loans and leases are net of deferred fees, related direct cost and discounts, but exclude the allowance for loan and lease losses. Non-accrual loans and leases are included in the average balance. Loan (costs) fees of $(512) thousand, $71 thousand and $1.7 million and accretion of discount on purchased loans of $30.9 million, $34.8 million and $20.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, are included in the interest income. |
(2) | Includes average balance of FHLB stock at cost and average time deposits with other financial institutions. |
(3) | Includes average balance of BOLI of $51.6 million, $19.0 million and $18.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. |
(4) | Net interest income divided by average interest-earning assets. |
54
Rate/Volume Analysis
The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to (i) changes in volume multiplied by the prior rate, and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2015 vs. 2014 | Year Ended December 31, 2014 vs. 2013 | ||||||||||||||||||||||
Increase (Decrease) Due to | Net Increase | Increase (Decrease) Due to | Net Increase | ||||||||||||||||||||
Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||
Total loans and leases | $ | 68,404 | $ | (7,609 | ) | $ | 60,795 | $ | 76,396 | $ | (12,308 | ) | $ | 64,088 | |||||||||
Securities | 14,290 | 815 | 15,105 | 1,477 | 1,049 | 2,526 | |||||||||||||||||
Other interest-earning assets | 2,123 | 176 | 2,299 | (794 | ) | 1,808 | 1,014 | ||||||||||||||||
Total interest-earning assets | 84,817 | (6,618 | ) | 78,199 | 77,079 | (9,451 | ) | 67,628 | |||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||
Savings | (925 | ) | (1,729 | ) | (2,654 | ) | 2,057 | (930 | ) | 1,127 | |||||||||||||
Interest-bearing checking | 3,918 | (2,574 | ) | 1,344 | 3,439 | 2,149 | 5,588 | ||||||||||||||||
Money market | 1,994 | (192 | ) | 1,802 | 1,364 | (477 | ) | 887 | |||||||||||||||
Certificates of deposit | 2,138 | (1,258 | ) | 880 | 759 | (1 | ) | 758 | |||||||||||||||
FHLB advances | 843 | 750 | 1,593 | 427 | (169 | ) | 258 | ||||||||||||||||
Long term debt and other interest-bearing liabilities | 8,711 | (1,917 | ) | 6,794 | 900 | 62 | 962 | ||||||||||||||||
Total interest-bearing liabilities | 16,679 | (6,920 | ) | 9,759 | 8,946 | 634 | 9,580 | ||||||||||||||||
Net interest income | $ | 68,138 | $ | 302 | $ | 68,440 | $ | 68,133 | $ | (10,085 | ) | $ | 58,048 | ||||||||||
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net interest income was $223.7 million for the year ended December 31, 2015, an increase of $68.4 million, or 44.1 percent, from $155.3 million for the year ended December 31, 2014. The increase in net interest income was due to a higher interest income from the increased interest-earning assets, partially offset by a higher interest expense on increased interest-bearing liabilities and a lower earning yield on loans and leases.
Interest income on total loans and leases was $241.6 million for the year ended December 31, 2015, an increase of $60.8 million, or 33.6 percent, from $180.8 million for the year ended December 31, 2014. The increase in interest income on total loans and leases was due to a $1.49 billion increase in average total loans and leases, partially offset by a 19 bps decrease in average yield. The increase in average balance was due mainly to increased originations and purchases of loans and leases during the year ended December 31, 2015. The decrease in average yield was mainly due to the lower yields on new loans and leases during the year ended December 31, 2015 and a decrease in the proportion of seasoned SFR mortgage loan pools to total loans and leases where discounts on these pools generate additional interest income. Such discount accretion totaled $30.9 million and $34.8 million for the years ended December 31, 2015 and 2014, respectively.
Interest income on securities was $20.3 million for the year ended December 31, 2015, an increase of $15.1 million, or 292.8 percent, from $5.2 million for the year ended December 31, 2014. The increase in interest income on securities was due to a $551.1 million increase in average balance and a 32 bps increase in average yield. The increases were mainly due to purchases of $2.55 billion of investment securities available-for-sale and held-to-maturity to reduce excess liquidity from the preferred stock and Senior Notes offerings, partially offset by principal payments, paydowns, calls and sales of $1.10 billion during the year ended December 31, 2015. The increase in average yield was due to higher yields on newly purchased investment securities.
Dividends and interest income on other interest-earning assets was $4.5 million for the year ended December 31, 2015, an increase of $2.3 million, or 103.6 percent, from $2.2 million for the year ended December 31, 2014. The increase in dividends and interest income on other interest-earning assets was due to a $130.7 million increase in average balance and a 11 bps increase in average yield. The increase in average balance was mainly due to the excess cash from the preferred stock and
55
Senior Notes offerings and higher utilization of FHLB advances. The increase in average yield was mainly due to a $2.0 million increase in dividend income on FHLB and other bank stocks, which included a special dividend from FHLB of $1.1 million.
Interest expense on interest-bearing deposits was $25.8 million for the year ended December 31, 2015, an increase of $1.4 million, or 5.6 percent, from $24.4 million for the year ended December 31, 2014. The increase in interest expense on interest-bearing deposits was the result of a $1.24 billion increase in average balance, partially offset by a 20 bps decrease in average cost. The increase in average balance was mainly due to strong deposit growth across the Company's business units, including strong growth from the private banking business, as well as an increase in the average balance per account as the Company continues to build stronger relationship with its clients. The decrease in average cost was due mainly to the Company's strategy to increase core deposit accounts which bear lower interest rates than certificates of deposit and other wholesale deposits.
Interest expense on FHLB advances was $2.1 million for the year ended December 31, 2015, an increase of $1.6 million, or 302.3 percent, from $527 thousand for the year ended December 31, 2014. The increase in interest expense on FHLB advances was due mainly to a $285.3 million increase in average balance and a 18 bps increase in average cost. The increase in average balance was due to an increase in operating liquidity to support the Company's growth throughout the year. The increase in average cost resulted from extending out matured short-term advances utilizing long-term advances, with a higher rate due to the longer term to maturity to economically hedge future interest rate risk.
Interest expense on long term debt and other interest-bearing liabilities was $14.7 million for the year ended December 31, 2015, an increase of $6.8 million, or 85.7 percent, from $7.9 million for the year ended December 31, 2014. The increase was due mainly to the additional interest expense incurred on the Senior Notes issued in the second quarter of 2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net interest income was $155.3 million for the year ended December 31, 2014, an increase of $58.0 million, or 59.7 percent, from $97.2 million for the year ended December 31, 2013. The growth in net interest income from prior periods was largely due to higher interest income from loans and leases partially offset by higher interest expense on deposits, and long term debt and other interest-bearing liabilities.
Interest income on total loans and leases was $180.8 million for the year ended December 31, 2014, an increase of $64.1 million, or 54.9 percent, from $116.7 million for the year ended December 31, 2013. The increase in interest income on total loans and leases was mainly due to a $1.59 billion increase in average balance, partially offset a 51 bps decrease in average yield. The increase in average balance was due mainly to acquired loans from the BPNA Branch Acquisition and increases in originations during the year ended December 31, 2014. The decrease in average yield was mainly due to the lower yields on originated loans and leases during the year ended December 31, 2014 and a decrease in the proportion of seasoned SFR mortgage loan pools to total loans and leases where discounts on these pools generate additional interest income. Such discount accretion totaled $34.8 million and $20.3 million for the years ended December 31, 2014 and 2013, respectively.
Interest income on securities was $5.2 million for the year ended December 31, 2014, an increase of $2.5 million, or 96.0 percent, from $2.6 million for the year ended December 31, 2013. The increase in interest income on securities was due mainly to a $72.0 million increase in average balance and 57 bps increase in average yield. The increases were mainly due to purchases of $327.1 million of securities to reduce excess liquidity from the common stock and tangible equity units offerings, partially offset by principal payments, paydowns, calls and sales of $153.0 million during the year ended December 31, 2014.
Dividends and interest income on other interest-earning assets was $2.2 million for the year ended December 31, 2014, an increase of $1.0 million, or 84.1 percent, from $1.2 million for the year ended December 31, 2013. The increase in dividends and interest income on other interest-earning assets was due to a 108 bps increase in average yield, partially offset by a $130.3 million decrease in average balance. The increase in average yield was mainly due to a $1.3 million increase in dividend income on FHLB and other bank stocks. The decrease in average balance was mainly due to the usage of excess cash to support the growth in loans and leases and to fund the BPNA Branch Acquisition.
Interest expense on interest-bearing deposits was $24.4 million for the year ended December 31, 2014, an increase of $8.4 million, or 52.1 percent, from $16.1 million for the year ended December 31, 2013. The increase in interest expense on interest-bearing deposits was due to a $1.03 billion increase in average balance and a 1 bp increase in average cost. The increase in average balance was mainly due to interest-bearing deposits assumed in the BPNA Branch Acquisition and deposits generated through strategic plans aiming to increase core deposits by launching interest-bearing core deposit products with enhanced features to attract high net worth depositors. The increase in average cost was due mainly to the higher interest rates on those deposits generated through strategic plans.
Interest expense on FHLB advances was $527 thousand for the year ended December 31, 2014, an increase of $258 thousand, or 95.9 percent, from $269 thousand for the year ended December 31, 2013. The increase in interest expense on FHLB
56
advances was due mainly to a $193.1 million increase in average balance, partially offset by a 16 bps decrease in average cost. The decrease in average cost resulted from the replacement of matured long-term advances with short-term advances at lower rates.
Interest expense on long term debt and other interest-bearing liabilities was $7.9 million for the year ended December 31, 2014, an increase of $962 thousand, or 13.8 percent, from $7.0 million for the year ended December 31, 2013. The increase was due mainly to the utilization of federal funds sold and repurchase agreements and additional interest expense incurred on the junior subordinated amortizing notes issued in the second quarter of 2014 as part of the tangible equity units.
Provision for Loan and Lease Losses
Provisions for loan and lease losses are charged to operations at a level required to reflect inherent credit losses in the loan and lease portfolio. The Company recorded $7.5 million, $11.0 million and $8.0 million, respectively, for the years ended December 31, 2015, 2014 and 2013 to its provision for loan and lease losses.
On a quarterly basis, the Company evaluates the PCI loans and the loan pools for potential impairment. The provision for losses on PCI loans is the result of changes in expected cash flows, both in amount and timing, due to loan payments and the Company’s revised loss forecasts. The revisions of the loss forecasts were based on the results of management’s review of the credit quality of the outstanding loans/loan pools and the analysis of the loan performance data since the acquisition of these loans. On a quarterly basis, the Company evaluates whether a reforecast of cash flow projections is necessary. Due to the uncertainty in the future performance of the PCI loans, additional impairments may be recognized in the future.
See further discussion in "Allowance for Loan and Lease Losses."
Noninterest Income
The following table presents the breakdown of non-interest income for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Customer service fees | $ | 4,057 | $ | 1,490 | $ | 1,942 | |||||
Loan servicing income | 2,974 | 4,199 | 2,049 | ||||||||
Income from bank owned life insurance | 1,076 | 224 | 177 | ||||||||
Net gain on sale of securities available-for-sale | 3,258 | 1,183 | 331 | ||||||||
Net gain on sale of loans | 37,211 | 19,828 | 8,700 | ||||||||
Net revenue on mortgage banking activities | 144,685 | 95,430 | 67,890 | ||||||||
Advisory service fees | 9,868 | 12,904 | 377 | ||||||||
Loan brokerage income | 3,140 | 8,674 | 1,356 | ||||||||
Gain on sale of building | 9,919 | — | — | ||||||||
Gain on sale of branches | 163 | 456 | 12,104 | ||||||||
Other income | 3,868 | 1,249 | 1,817 | ||||||||
Total noninterest income | $ | 220,219 | $ | 145,637 | $ | 96,743 | |||||
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Noninterest income was $220.2 million for the year ended December 31, 2015, an increase of $74.6 million, or 51.2 percent, from $145.6 million for the year ended December 31, 2014. The increase in noninterest income related predominantly to increases in net revenue on mortgage banking activities, net gain on sale of loans, customer service fees, net gain on sale of securities available-for-sale, and other income, partially offset by lower loan brokerage income, advisory service fees, and loan servicing income.
Customer service fees were $4.1 million for the year ended December 31, 2015, an increase of $2.6 million, or 172.3 percent, from $1.5 million for the year ended December 31, 2014. The increase was due mainly to the higher average number of customer deposit accounts as a result of the increase in deposits.
57
Loan servicing income was $3.0 million for the year ended December 31, 2015, a decrease of $1.2 million, or 29.2 percent, from $4.2 million for the year ended December 31, 2014. The decrease was mainly due to an increase in losses on the fair value of mortgage servicing rights, partially offset by an increase in servicing fees from the increased volume of loans sold with servicing retained. Losses on the fair value of $8.8 million and $1.6 million for the years ended December 31, 2015 and 2014, respectively, were due to generally lower interest rates. Servicing fees were $11.7 million and $5.8 million for the years ended December 31, 2015 and 2014, respectively, and unpaid principal balances of loans sold with servicing retained were $4.77 billion and $1.92 billion at December 31, 2015 and 2014, respectively.
Net gain on the sale of securities available-for-sale was $3.3 million for the year ended December 31, 2015, an increase of $2.1 million, or 175.4 percent, from $1.2 million for the year ended December 31, 2014. During the year ended December 31, 2015, the Company restructured its investment securities portfolio in order to reduce extension risk and residential real estate concentration, and to increase yield. The Company sold investment securities of $986.5 million and $110.6 million during the years ended December 31, 2015 and 2014, respectively.
Net gain on the sale of loans was $37.2 million for the year ended December 31, 2015, an increase of $17.4 million, or 87.7 percent, from $19.8 million for the year ended December 31, 2014. During the year ended December 31, 2015, the Company sold SFR mortgage loans of $829.0 million with a gain of $11.7 million, seasoned SFR mortgage loan pools of $198.6 million with a gain of $17.9 million, multi-family loans of $242.6 million with a gain of $4.6 million, SBA loans of $26.9 million with a gain of $2.3 million, and certain loans as part of the AUB branch sale transaction of $40.2 million with a gain of $644 thousand. During the year ended December 31, 2014, the Company sold SFR mortgage loans of $916.4 million with a gain of $10.3 million, seasoned SFR mortgage loan pools of $82.6 million with a gain of $8.6 million, and SBA loans of $11.4 million with a gain of $874 thousand.
Net revenue on mortgage banking activities was $144.7 million for the year ended December 31, 2015, an increase of $49.3 million, or 51.6 percent, from $95.4 million for the year ended December 31, 2014. During the year ended December 31, 2015, the Bank originated $4.39 billion and sold $4.30 billion of conforming SFR mortgage loans in the secondary market. The net gain and margin were $128.7 million and 2.93 percent, respectively, and loan origination fees were $15.9 million for the year ended December 31, 2015. Included in the net gain was the initial capitalized value of our MSRs, which totaled $44.3 million on loans sold to Fannie Mae, Freddie Mac and Ginnie Mae for the year ended December 31, 2015. During the year ended December 31, 2014, the Bank originated $2.82 billion and sold $2.75 billion of of conforming SFR mortgage loans in the secondary market. The net gain and margin were $84.1 million and 2.98 percent, respectively, and loan origination fees were $11.3 million for the year ended December 31, 2014. Included in the net gain was the initial capitalized value of our MSRs, which totaled $25.2 million, on loans sold to Fannie Mae, Freddie Mac and Ginnie Mae for the year ended December 31, 2014.
Advisory service fees were $9.9 million for the year ended December 31, 2015, a decrease of $3.0 million, or 23.5 percent, from $12.9 million for the year ended December 31, 2014. The decrease was mainly due to lower transaction fees recognized during the year ended December 31, 2015.
Loan brokerage income was $3.1 million for the year ended December 31, 2015, a decrease of $5.5 million, or 63.8 percent, from $8.7 million for the year ended December 31, 2014. The decrease was mainly due to a decrease in the volume of brokered loans.
Gain on sale of building of $9.9 million was recognized for the year ended December 31, 2015. The Company sold an improved real property office complex located at 1588 South Coast Drive, Costa Mesa, California. The property had a book value of $42.3 million at the sale date.
Gain on sale of branches of $163 thousand and $456 thousand was recognized for the years ended December 31, 2015 and 2014, respectively. The Company sold two branches to AUB during the year ended December 31, 2015 and prior year's income related to branch sales transaction with American West Bank (AWB) in 2013.
Other income was $3.9 million for the year ended December 31, 2015, an increase of $2.6 million, or 209.7 percent, from $1.2 million for the year ended December 31, 2014. The increase was mainly due to income of $1.6 million from sales of investment products, and $366 thousand of rental income from the newly purchased building.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Noninterest income was $145.6 million for the year ended December 31, 2014, an increase of $48.9 million, or 50.5 percent, from $96.7 million for the year ended December 31, 2013. The increase in noninterest income related predominantly to increases in net revenue on mortgage banking activities, net gain on sale of loans, net gain on sale of securities available for sale, advisory service fees, loan brokerage income, and loan servicing income, partially offset by lower customer service fees and lower other income in 2014 and gain on sale of branches in 2013.
58
Customer service fees were $1.5 million for the year ended December 31, 2014, a decrease of $452 thousand, or 23.3 percent, from $1.9 million for the year ended December 31, 2013. The decrease was due mainly to the lower average number of customer deposit accounts as a result of the AWB branch sale in the fourth quarter of 2013, partially offset by an increase in number of deposit accounts from the BPNA Branch Acquisition in the fourth quarter of 2014.
Loan servicing income was $4.2 million for the year ended December 31, 2014, an increase of $2.2 million, or 104.9 percent, from $2.0 million for the year ended December 31, 2013. The increase was due mainly to a larger unpaid aggregate principal balance of loans being serviced as well as a sale of mortgage servicing rights of $17.8 million with a gain on sale of $2.3 million, partially offset by a loss of $1.6 million from change of fair value on mortgage servicing rights during the year ended December 31, 2014.
Net gain on sales of securities available-for-sale was $1.2 million for the year ended December 31, 2014, an increase of $852 thousand, or 257.4 percent, from $331 thousand for the year ended December 31, 2013. During the year ended December 31, 2014, the Company was able to recognize higher realized gains during the period due to the current low interest rate environment, while the Company sold more undesirable investment securities to reduce risk within its investment portfolio by adjusting the mix of the portfolio to reduce private label mortgage-backed securities and increase agency mortgage-backed securities during the year ended December 31, 2013. The Company sold investment securities of $110.6 million and $127.0 million during the years ended December 31, 2014 and 2013, respectively.
Net gain on the sale of loans was $19.8 million for the year ended December 31, 2014, an increase of $11.1 million, or 127.9 percent, from $8.7 million for the year ended December 31, 2013. During the year ended December 31, 2014, the Company sold SFR mortgage loans of $916.4 million with a gain of $10.3 million, seasoned SFR mortgage loan pools of $82.6 million with a gain of $8.6 million, and SBA loans of $11.4 million with a gain of $874 thousand. During the year ended December 31, 2013, the Company sold SFR mortgage loans of $260.3 million with a gain of $2.7 million, seasoned SFR mortgage loan pools of $113.0 million with a gain of $3.4 million, and SBA loans of $2.5 million with a gain of $120 thousand, and other loans of $733 thousand with a gain of $2.5 million.
Net revenue on mortgage banking activities was $95.4 million for the year ended December 31, 2014, an increase of $27.5 million, or 40.6 percent, from $67.9 million for the year ended December 31, 2013. During the year ended December 31, 2014, the Bank originated $2.82 billion and sold $2.75 billion of conforming SFR mortgage loans in the secondary market. The net gain and margin were $84.1 million and 2.98 percent, respectively, and loan origination fees were $11.3 million for the year ended December 31, 2014. Included in the net gain was the initial capitalized value of our MSRs, which totaled $25.2 million, on loans sold to Fannie Mae, Freddie Mac and Ginnie Mae for the year ended December 31, 2014. During the year ended December 31, 2013, the Bank originated $1.94 billion and sold $1.86 billion of conforming SFR mortgage loans in the secondary market. The net gain and margin were $58.0 million and 2.99 percent, respectively, and loan origination fees were $9.9 million for the year ended December 31, 2013. Included in the net gain was the initial capitalized value of our MSRs, which totaled $10.9 million, on loans sold to Fannie Mae for the year ended December 31, 2013.
Advisory service fees were $12.9 million for the year ended December 31, 2014, an increase of $12.5 million, from $377 thousand for the year ended December 31, 2013. The income was generated from The Palisades Group, which was acquired during the third quarter of 2013.
Loan brokerage income was $8.7 million for the year ended December 31, 2014, an increase of $7.3 million, or 539.7 percent, from $1.4 million for the year ended December 31, 2013. The income was generated from CS Financial, which was acquired by the Bank during the fourth quarter of 2013.
Gain on sale of branches of $456 thousand and $12.1 million was recognized for the years ended December 31, 2014 and 2013, respectively. On October 4, 2013, the Bank completed a branch sale transaction to 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.
Other income was $1.2 million for the years ended December 31, 2014, a decrease of $568 thousand, or 31.3 percent, from $1.8 million for the year ended December 31, 2013.
59
Noninterest Expense
The following table presents the breakdown of non-interest expense for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Salaries and employee benefits, excluding commissions | $ | 162,305 | $ | 127,223 | $ | 87,239 | |||||
Commissions for mortgage banking activities | 50,809 | 35,656 | 23,448 | ||||||||
Salaries and employee benefits | 213,114 | 162,879 | 110,687 | ||||||||
Occupancy and equipment | 41,405 | 33,443 | 19,662 | ||||||||
Professional fees | 20,193 | 19,247 | 13,864 | ||||||||
Data processing | 8,184 | 5,231 | 4,710 | ||||||||
Advertising | 6,156 | 5,016 | 4,361 | ||||||||
Regulatory assessments | 5,644 | 4,182 | 2,535 | ||||||||
Loan servicing and foreclosure expense | 1,005 | 1,066 | 905 | ||||||||
Valuation allowance for other real estate owned | 38 | 32 | 97 | ||||||||
Net gain on sales of other real estate owned | (23 | ) | (66 | ) | (464 | ) | |||||
Provision for loan repurchases | 2,326 | 2,808 | 2,383 | ||||||||
Amortization of intangible assets | 5,836 | 4,079 | 2,651 | ||||||||
Impairment on intangible assets | 258 | 48 | 1,061 | ||||||||
All other expense | 28,065 | 25,507 | 15,649 | ||||||||
Total noninterest expense | $ | 332,201 | $ | 263,472 | $ | 178,101 | |||||
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Noninterest expense was $332.2 million for the year ended December 31, 2015, an increase of $68.7 million, or 26.1 percent, from $263.5 million for the year ended December 31, 2014. The increase was mainly due to the continued expansion of our business footprint.
Total salaries and employee benefits including commissions was $213.1 million for the year ended December 31, 2015, an increase of $50.2 million, or 30.8 percent, from $162.9 million for the year ended December 31, 2014. The increase was due mainly to additional compensation expense from an increase in the number of full-time employees resulting from the expansion of commercial banking operations, an increase in share-based compensation expense, as well as expansion in mortgage banking activities. Commission expense, which is a loan origination variable expense, related to mortgage banking activities, totaled $50.8 million and $35.7 million for the years ended December 31, 2015 and 2014, respectively. Total originations of conforming SFR mortgage loans for the years ended December 31, 2015 and 2014 totaled $4.39 billion and $2.82 billion, respectively.
Occupancy and equipment expenses were $41.4 million for the year ended December 31, 2015, an increase of $8.0 million, or 23.8 percent, from $33.4 million for the year ended December 31, 2014. The increase was due mainly to increased building and maintenance costs associated with additional facilities resulting from the purchase of a new building, the BPNA Branch Acquisition and new mortgage banking loan production offices.
Professional fees were $20.2 million for the year ended December 31, 2015, an increase of $946 thousand, or 4.9 percent, from $19.2 million for the year ended December 31, 2014. The increase was mainly due to legal and consulting costs associated with the building sale and purchase.
Data processing expenses were $8.2 million for the year ended December 31, 2015, an increase of $3.0 million, or 56.5 percent, from $5.2 million for the year ended December 31, 2014. The increases were mainly due to a higher volume of transactions related to loan and deposit growth.
Advertising costs were $6.2 million for the year ended December 31, 2015, an increase of $1.1 million, or 22.7 percent, from $5.0 million for the year ended December 31, 2014. The increase was mainly due to the Company's higher overall marketing cost associated with the continued expansion of its business footprint.
Regulatory assessment was $5.6 million for the year ended December 31, 2015, an increase of $1.5 million, or 35.0 percent, from $4.2 million for the year ended December 31, 2014. The increase was due to year-over-year balance sheet growth.
60
Provision for loan repurchases was $2.3 million and $2.8 million for the years ended December 31, 2015 and 2014, respectively. Additionally, the Company recorded an initial provision for loan repurchases of $2.0 million and $1.4 million against net revenue on mortgage banking activities during the years ended December 31, 2015 and 2014, respectively. Total provision for loan repurchase provided to reserve for loss on repurchased loans totaled $4.4 million and $4.2 million for the years ended December 31, 2015 and 2014, respectively. The increase was mainly due to increased volume of mortgage loan originations and sales.
Amortization of intangible assets was $5.8 million for the year ended December 31, 2015, an increase of $1.8 million, or 43.1 percent, from $4.1 million for the year ended December 31, 2014. The increase was mainly due to additional intangible assets acquired in the BPNA Branch Acquisition in the fourth quarter of 2014.
Impairment of intangible assets of $258 thousand and $48 thousand was recognized for the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, the Company wrote off a portion of core deposit intangibles on non-interest bearing demand deposits and money market accounts acquired through the BPNA Branch Acquisition of $258 thousand, as these deposits were transferred in connection with the sale of two branches to AUB. During the year ended December 31, 2014, the Company wrote off a portion of core deposit intangibles related to the Beach Business Bank acquisition of $48 thousand due to lower remaining deposit balances than forecasted.
Other expenses were $28.1 million for the year ended December 31, 2015, an increase of $2.6 million, or 10.0 percent, from $25.5 million for the year ended December 31, 2014. The increase was mainly due to costs associated with the growth in mortgage banking activities and an increase in loan sub-servicing expenses due to the growth in the loan portfolio.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Noninterest expense was $263.5 million for the year ended December 31, 2014, an increase of $85.4 million, or 47.9 percent, from $178.1 million for the year ended December 31, 2013. The increase in noninterest expense relates predominantly to the bank and non-bank acquisitions by the Company along with growth related to the mortgage banking strategy.
Total salaries and employee benefits including commissions was $162.9 million for the year ended December 31, 2014, an increase of $52.2 million, or 47.2 percent, from $110.7 million for the year ended December 31, 2013. The increase was due mainly to additional compensation expense from an increase in the number of full-time employees resulting from the RenovationReady acquisition and BPNA Branch Acquisition, an increase in share-based compensation expense, as well as expansion in mortgage banking activities. Commission expense, which is a loan origination variable expense related to mortgage banking activities, totaled $35.7 million and $23.4 million for the years ended December 31, 2014 and 2013, respectively. Total originations of conforming SFR mortgage loans for the years ended December 31, 2014 and 2013 were $2.82 billion and $1.94 billion, respectively.
Occupancy and equipment expenses were $33.4 million for the year ended December 31, 2014, an increase of $13.8 million, or 70.1 percent, from $19.7 million for the year ended December 31, 2013. The increase was due mainly to increased building and maintenance costs resulting from a full year of branch costs associated with the 2013 acquisitions of The Private Bank of California, The Palisades Group and CS Financial, and new branch locations associated with the BPNA Branch Acquisition and new loan production offices.
Professional fees were $19.2 million for the year ended December 31, 2014, an increase of $5.4 million, or 38.8 percent, from $13.9 million for the year ended December 31, 2013. The increases were mainly due to higher accounting, legal and consulting costs associated with the Company’s recent acquisitions and growth.
Data processing expenses were $5.2 million for the year ended December 31, 2014, an increase of $521 thousand, or 11.1 percent, from $4.7 million for the year ended December 31, 2013. The increases were mainly due to a higher volume of transactions related to loan and deposit growth.
Advertising costs were $5.0 million for the year ended December 31, 2014, an increase of $655 thousand, or 15.0 percent, from $4.4 million for the year ended December 31, 2013. The increase was mainly due to the Company's higher overall marketing cost associated with the continued expansion of its business footprint.
Regulatory assessment was $4.2 million for the year ended December 31, 2014, an increase of $1.6 million, or 65.0 percent, from $2.5 million for the year ended December 31, 2013. The increase was due to year-over-year balance sheet growth.
Provision for loan repurchases was $2.8 million for the year ended December 31, 2014, an increase of $425 thousand, or 17.8 percent, from $2.4 million for the year ended December 31, 2013. Additionally, the Company recorded initial provision for loan
61
repurchases of $1.4 million against net revenue on mortgage banking activities during the year ended December 31, 2014. The increase was mainly due to increased volume of mortgage loan originations and sales.
Amortization of intangible assets was $4.1 million for the year ended December 31, 2014, an increase of $1.4 million, or 53.9 percent, from $2.7 million for the year ended December 31, 2013. The increase was due to the acquisitions in 2014 and 2013.
Impairment of intangible assets of $48 thousand and $1.1 million was recognized for the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, the Company wrote off a portion of core deposit intangibles related to the Beach Business Bank acquisition of $48 thousand due to lower remaining deposit balances than forecasted. During the year ended December 31, 2013, the Company wrote off all remaining trade name intangibles of Beach Business Bank, Gateway Bancorp and The Private Bank of California of $976 thousand due to the merger of the Company's two banking subsidiaries into a single bank and a portion of core deposit intangibles on deposits acquired from Gateway Bancorp of $85 thousand due to the lower remaining balance than projected.
Other expenses were $25.5 million for the year ended December 31, 2014, an increase of $9.9 million, or 63.0 percent, from $15.6 million for the year ended December 31, 2013. The increase was mainly due to costs associated with the growth in mortgage banking activity and an increase in loan sub-servicing expenses due to the increase in the size of the loan portfolio.
Income Tax Expense
For the years ended December 31, 2015, 2014 and 2013, income tax (benefit) expense was $42.2 million, $(3.7) million and $8.0 million, respectively, and the effective tax rate was 40.5 percent, (14.1) percent and 101.1 percent, respectively. The Company’s effective tax rate increased for the year ended December 31, 2015 due to the release of the valuation allowance for the year ended December 31, 2014.
The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, future taxable income and tax planning strategies. Based on this analysis, management determined that it was more likely than not that all of the deferred tax assets would be realized. Therefore, no valuation allowance was provided against the deferred tax assets of $11.3 million and $16.4 million at December 31, 2015 and 2014, respectively.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10-25 prescribes a threshold and a measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had unrecognized tax benefits of $0 and $5.4 million at December 31, 2015 and 2014, respectively. The Company has changed its tax accounting method for various items and filed amended state income tax returns to reflect audit adjustments. As a result, the total amount of unrecognized tax benefits has decreased by $5.4 million during the year ended December 31, 2015. The Company does not believe that the unrecognized tax benefits will change within the next twelve months. As of December 31, 2015, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $0. At December 31, 2015 and 2014, the Company had $0 and $23 thousand accrued for interest or penalties, respectively. In the event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income tax expense.
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax in multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2012 (with the exception of Gateway Bancorp, a predecessor entity, which is currently under exam by the Internal Revenue Service for the 2008 and 2009 tax years).The statute of limitations for the assessment of California Franchise taxes has expired for tax years before 2011 (other state income and franchise tax statutes of limitations vary by state).
ASU 2014-01 was adopted effective January 1, 2015. Under this standard, amortization of investments in Qualified Affordable Housing Projects is reported within income tax expense.
62
Operating Segment Results
The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall. The Company has identified four operating segments for purposes of management reporting: (i) Commercial Banking; (ii) Mortgage Banking; (iii) Financial Advisory; and (iv) Corporate/Other. Each of these four business divisions meets the criteria of an operating segment, as each segment engages in business activities from which it earns revenues and incurs expenses and its operating results are regularly reviewed by the Company’s chief operating decision-maker, the Company's President and Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available.
The principal business of the Commercial Banking segment consists of attracting deposits and investing these funds primarily in commercial, consumer and real estate secured loans. The principal business of the Mortgage Banking segment is originating conforming SFR loans and selling these loans in the secondary market. The principal business of the Financial Advisory segment is operated by The Palisades Group and provides services of purchase, sale and management of SFR mortgage loans. The Corporate/Other segment includes the holding company. The Corporate/Other segment engages in business activities through the sale of other real estate owned and loans held at the holding company and incurs interest expense on debt as well as non-interest expense for corporate related activities. During the fourth quarter of 2015, the Company developed a measurement method to allocate centrally incurred costs to its operating segments. The Company allocates shared service costs within Commercial Banking noninterest expense, as well as Corporate/Other noninterest expense, to the respective operating segments. These allocations of centrally incurred costs resulted in a reduction of noninterest expense for Commercial Banking and Corporate/Other, in the amount of $7.1 million and $13.8 million, respectively. Additionally, these allocations resulted in an increase of noninterest expense for Mortgage Banking and Financial Advisory, in the amount of $19.3 million and $1.6 million, respectively.
The Company did not change the measurement method of prior period operating segment information, as it was not deemed practicable to do so. The following table represents the operating segments’ financial results and other key financial measures as of or for the years ended December 31, 2015, 2014, and 2013:
As of or For the Year Ended | |||||||||||||||||||||||
Commercial Banking | Mortgage Banking | Financial Advisory | Corporate/ Other | Inter-segment Elimination | Consolidated | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||
Net interest income | $ | 225,869 | $ | 12,502 | $ | — | $ | (14,654 | ) | $ | — | $ | 223,717 | ||||||||||
Provision for loan and lease losses | 7,469 | — | — | — | — | 7,469 | |||||||||||||||||
Noninterest income | 65,829 | 144,522 | 15,960 | — | (6,092 | ) | 220,219 | ||||||||||||||||
Noninterest expense | 183,918 | 143,912 | 10,463 | — | (6,092 | ) | 332,201 | ||||||||||||||||
Income (loss) before income taxes | $ | 100,311 | $ | 13,112 | $ | 5,497 | $ | (14,654 | ) | $ | — | $ | 104,266 | ||||||||||
Total assets | $ | 7,785,887 | $ | 445,509 | $ | 11,865 | $ | 157,944 | $ | (165,650 | ) | $ | 8,235,555 | ||||||||||
December 31, 2014 | |||||||||||||||||||||||
Net interest income | $ | 154,322 | $ | 8,455 | $ | — | $ | (7,500 | ) | $ | — | $ | 155,277 | ||||||||||
Provision for loan and lease losses | 10,976 | — | — | — | — | 10,976 | |||||||||||||||||
Noninterest income | 34,122 | 98,322 | 19,697 | 217 | (6,721 | ) | 145,637 | ||||||||||||||||
Noninterest expense | 150,539 | 96,103 | 11,071 | 12,480 | (6,721 | ) | 263,472 | ||||||||||||||||
Income (loss) before income taxes | $ | 26,929 | $ | 10,674 | $ | 8,626 | $ | (19,763 | ) | $ | — | $ | 26,466 | ||||||||||
Total assets | $ | 5,648,986 | $ | 309,241 | $ | 14,957 | $ | 60,593 | $ | (62,480 | ) | $ | 5,971,297 | ||||||||||
December 31, 2013 | |||||||||||||||||||||||
Net interest income | $ | 96,222 | $ | 7,792 | $ | — | $ | (6,785 | ) | $ | — | $ | 97,229 | ||||||||||
Provision for loan and lease losses | 7,963 | — | — | — | — | 7,963 | |||||||||||||||||
Noninterest income | 26,740 | 69,687 | 2,832 | 5 | (2,521 | ) | 96,743 | ||||||||||||||||
Noninterest expense | 88,449 | 76,210 | 2,339 | 13,624 | (2,521 | ) | 178,101 | ||||||||||||||||
Income (loss) before income taxes | $ | 26,550 | $ | 1,269 | $ | 493 | $ | (20,404 | ) | $ | — | $ | 7,908 | ||||||||||
Total assets | $ | 3,395,793 | $ | 222,269 | $ | 2,876 | $ | 33,974 | $ | (27,050 | ) | $ | 3,627,862 | ||||||||||
63
Commercial Banking Segment
Income before income taxes from the Commercial Banking segment was $100.3 million, $26.9 million, and $26.6 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increase for the year ended December 31, 2015 was due to increases in net interest income and noninterest income, and a decrease in provision for loan and lease losses, partially offset by an increase in noninterest expense. The increase for the year ended December 31, 2014 was due to higher net interest income and noninterest income, partially offset by increases in provision for loan and leases losses and noninterest expense.
Net interest income was $225.9 million, $154.3 million, and $96.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increases were mainly due to an increase in average balance of total interest-earning assets, partially offset by an increase in the average balance of interest-bearing liabilities and a decrease in yield.
Provision for loan and lease losses was $7.5 million, $11.0 million, and $8.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. The decrease for the year ended December 31, 2015 was due mainly to improved asset quality. The increase for the year ended December 31, 2014 was mainly due to the increases in total loans and leases. Total ALLL to non-performing loans and leases was 78.74 percent, 76.81 percent, and 59.42 percent at December 31, 2015, 2014 and 2013, respectively.
Noninterest income was $65.8 million, $34.1 million, and $26.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increase for the year ended December 31, 2015 was mainly due to increases in net gain on sale of loans and securities, customer services fees, income from bank owned life insurance, and gain on sale of building, partially offset by a decrease in loan servicing income. The increase for the year ended December 31, 2014 was mainly due to increases in net gain on sale of loans and securities, loan brokerage income, and servicing fee income, partially offset by a gain on sale of branches of $12.1 million in 2013.
Noninterest expense was $183.9 million, $150.5 million, and $88.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increases were mainly due to acquisitions and expansion of the business footprint.
Mortgage Banking Segment
Income before income taxes from the Mortgage Banking segment was $13.1 million, $10.7 million, and $1.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increases for the years ended December 31, 2015 and 2014 were mainly due to increases in originations and sales during the periods.
Net interest income was $12.5 million, $8.5 million, and $7.8 million, and noninterest income was $144.5 million, $98.3 million, and $69.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increases in net interest income and noninterest income were the result of increases in origination and sales of conforming SFR mortgage loans during the years ended December 31, 2015 and 2014.
Noninterest expense was $143.9 million, $96.1 million, $76.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increases were mainly due to expansion of the Mortgage Banking segment, which incurred additional compensation expense related to an increase in the number of full-time employees, and a loan origination variable commission expense, and occupancy cost related to an increase in number of loan production offices.
Financial Advisory Segment
Income before income taxes on the Financial Advisory segment was $5.5 million, $8.6 million, $493 thousand and for the years ended December 31, 2015, 2014 and 2013, respectively. The Palisades Group was acquired during the third quarter of 2013.
Noninterest income, which was mainly advisory service fees, was $16.0 million, $19.7 million, and $2.8 million, and noninterest expense was $10.5 million, $11.1 million, and $2.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Corporate/Other Segment
Loss before income taxes on the Corporate/Other segment was $14.7 million, $19.8 million, and $20.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. Expenses in the Corporate/Other segment were related to interest expense on the Senior Notes and junior subordinated amortizing notes, compensation expense relating to the Banc of California, Inc. employees and directors and professional expense relating to bank and non-bank acquisitions.
64
FINANCIAL CONDITION
Investment Securities
Investment securities are classified as held-to-maturity or available-for-sale in accordance with GAAP. Investment securities that the Company has the ability and the intent to hold to maturity are classified as held-to-maturity. All other securities are classified as available-for-sale. Investment securities classified as held-to-maturity are carried at cost. Investment securities classified as available-for-sale are carried at their estimated fair values with the changes in fair values recorded in accumulated other comprehensive income, as a component of stockholders’ equity.
The primary goal of our investment securities portfolio is to provide a relatively stable source of interest income while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. Certain investment securities provide a source of liquidity as collateral for FHLB Advances, repurchase agreements and for certain public funds deposits.
Total investment securities available-for-sale increased by $487.9 million, or 141.1 percent, to $833.6 million at December 31, 2015, from $345.7 million at December 31, 2014, due to purchases of $1.59 billion, partially offset by sales of $986.5 million, principal payments of $109.0 million, and calls and pay-offs of $687 thousand. Investment securities had a net unrealized loss of $5.2 million at December 31, 2015, compared to a net unrealized gain of $817 thousand at December 31, 2014. The Company also purchased investment securities held-to-maturity of $962.1 million during the year ended December 31, 2015. The increases were mainly due to purchases of investment securities available-for-sale and held-to-maturity to reduce excess liquidity from the preferred stock and Senior Notes offerings.
The following table presents the amortized cost and fair value of the investment securities portfolio and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
December 31, 2015 | |||||||||||||||
Held-to-maturity | |||||||||||||||
Corporate bonds | $ | 239,274 | $ | 255 | $ | (20,946 | ) | $ | 218,583 | ||||||
Collateralized loan obligation | 416,284 | — | (5,077 | ) | 411,207 | ||||||||||
Commercial mortgage-backed securities | 306,645 | 41 | (4,191 | ) | 302,495 | ||||||||||
Total securities held-to-maturity | $ | 962,203 | $ | 296 | $ | (30,214 | ) | $ | 932,285 | ||||||
Available-for-sale | |||||||||||||||
SBA loan pool securities | $ | 1,485 | $ | 19 | $ | — | $ | 1,504 | |||||||
Private label residential mortgage-backed securities | 1,755 | 14 | (1 | ) | 1,768 | ||||||||||
Corporate bonds | 26,657 | — | (505 | ) | 26,152 | ||||||||||
Collateralized loan obligation | 111,719 | 31 | (282 | ) | 111,468 | ||||||||||
Agency mortgage-backed securities | 697,152 | 134 | (4,582 | ) | 692,704 | ||||||||||
Total securities available-for-sale | $ | 838,768 | $ | 198 | $ | (5,370 | ) | $ | 833,596 | ||||||
December 31, 2014 | |||||||||||||||
Available-for-sale | |||||||||||||||
SBA loan pool securities | $ | 1,697 | $ | 18 | $ | — | $ | 1,715 | |||||||
U.S. government-sponsored entities and agency securities | 1,940 | 42 | — | 1,982 | |||||||||||
Private label residential mortgage-backed securities | 3,169 | 12 | (13 | ) | 3,168 | ||||||||||
Agency mortgage-backed securities | 338,072 | 1,363 | (605 | ) | 338,830 | ||||||||||
Total securities available-for-sale | $ | 344,878 | $ | 1,435 | $ | (618 | ) | $ | 345,695 | ||||||
December 31, 2013 | |||||||||||||||
Available-for-sale | |||||||||||||||
SBA loan pool 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 | ||||||
65
The following table presents the composition and the repricing and yield information of the investment securities portfolio as of December 31, 2015:
One year or less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||||||
Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Fair Value | Weighted Average Yield | ||||||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||||||
Held-to-maturity | ||||||||||||||||||||||||||||||||||||||
Corporate bonds | $ | — | — | % | $ | — | — | % | $ | 212,219 | 5.15 | % | $ | 27,055 | 4.32 | % | $ | 239,274 | $ | 218,583 | 5.06 | % | ||||||||||||||||
Collateralized loan obligation | 416,284 | 2.36 | % | — | — | % | — | — | % | — | — | % | 416,284 | 411,207 | 2.36 | % | ||||||||||||||||||||||
Commercial mortgage-backed securities | — | — | % | — | — | % | — | — | % | 306,645 | 3.93 | % | 306,645 | 302,495 | 3.93 | % | ||||||||||||||||||||||
Total securities held-to-maturity | $ | 416,284 | 2.36 | % | $ | — | — | % | $ | 212,219 | 5.15 | % | $ | 333,700 | 3.96 | % | $ | 962,203 | $ | 932,285 | 3.53 | % | ||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||||||||||||||||
SBA loan pools securities | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 1,485 | 2.72 | % | $ | 1,485 | $ | 1,504 | 2.72 | % | ||||||||||||||||
Private label residential mortgage-backed securities | 146 | 2.74 | % | 928 | 3.88 | % | — | — | % | 681 | 5.14 | % | 1,755 | 1,768 | 4.27 | % | ||||||||||||||||||||||
Corporate bonds | — | — | % | — | — | % | 26,657 | 4.97 | % | — | — | % | 26,657 | 26,152 | 4.97 | % | ||||||||||||||||||||||
Collateralized loan obligation | 111,719 | 1.99 | % | — | — | % | — | — | % | — | — | % | 111,719 | 111,468 | 1.99 | % | ||||||||||||||||||||||
Agency mortgage-backed securities | 658 | 1.06 | % | 21,991 | 1.71 | % | 52,774 | 2.48 | % | 621,729 | 2.58 | % | 697,152 | 692,704 | 2.55 | % | ||||||||||||||||||||||
Total securities available-for-sale | $ | 112,523 | 1.98 | % | $ | 22,919 | 1.8 | % | $ | 79,431 | 3.31 | % | $ | 623,895 | 2.59 | % | $ | 838,768 | $ | 833,596 | 2.55 | % | ||||||||||||||||
66
At December 31, 2015 and 2014, 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 stockholders’ equity.
The following table presents proceeds from sales and calls of securities and the associated gross gains and losses realized through earnings upon the sale of available-for-sale securities for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Gross realized gains on sales of securities available-for-sale | $ | 3,260 | $ | 1,221 | $ | 438 | |||||
Gross realized losses on sales of securities available-for-sale | (2 | ) | (38 | ) | (107 | ) | |||||
Net realized gains on sales of securities available-for-sale | $ | 3,258 | $ | 1,183 | $ | 331 | |||||
Proceeds from sales of securities available-for-sale | $ | 989,786 | $ | 111,764 | $ | 127,298 | |||||
Tax expense on sales of securities available-for-sale | $ | 1,368 | $ | 498 | $ | — | |||||
Investment securities with carrying values of $47.9 million and $27.1 million as of December 31, 2015 and 2014, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated:
Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||
Held-to-maturity | |||||||||||||||||||||||
Corporate bonds | $ | 190,332 | $ | (20,946 | ) | $ | — | $ | — | $ | 190,332 | $ | (20,946 | ) | |||||||||
Collateralized loan obligations | 411,207 | (5,077 | ) | — | — | 411,207 | (5,077 | ) | |||||||||||||||
Commercial mortgage-backed securities | 277,351 | (4,191 | ) | — | — | 277,351 | (4,191 | ) | |||||||||||||||
Total securities held-to-maturity | $ | 878,890 | $ | (30,214 | ) | $ | — | $ | — | $ | 878,890 | $ | (30,214 | ) | |||||||||
Available-for-sale | |||||||||||||||||||||||
Private label residential mortgage-backed securities | $ | — | $ | — | $ | 403 | $ | (1 | ) | $ | 403 | $ | (1 | ) | |||||||||
Corporate bonds | 26,152 | (505 | ) | — | — | 26,152 | (505 | ) | |||||||||||||||
Collateralized loan obligations | 72,204 | (282 | ) | — | — | 72,204 | (282 | ) | |||||||||||||||
Agency mortgage-backed securities | 599,814 | (4,459 | ) | 6,832 | (123 | ) | 606,646 | (4,582 | ) | ||||||||||||||
Total securities available-for-sale | $ | 698,170 | $ | (5,246 | ) | $ | 7,235 | $ | (124 | ) | $ | 705,405 | $ | (5,370 | ) | ||||||||
December 31, 2014 | |||||||||||||||||||||||
Available-for-sale | |||||||||||||||||||||||
Private label residential mortgage-backed securities | 372 | (9 | ) | 1,355 | (4 | ) | 1,727 | (13 | ) | ||||||||||||||
Agency mortgage-backed securities | 68,200 | (332 | ) | 22,212 | (273 | ) | 90,412 | (605 | ) | ||||||||||||||
Total securities available-for-sale | $ | 68,572 | $ | (341 | ) | $ | 23,567 | $ | (277 | ) | $ | 92,139 | $ | (618 | ) | ||||||||
The Company did not record other-than-temporary impairment (OTTI) for securities available-for-sale for the years ended December 31, 2015, 2014 and 2013.
At December 31, 2015, the Company’s securities available-for-sale portfolio consisted of 95 securities, 70 of which were in an unrealized loss position and securities held-to-maturity consisted of 93 securities, 87 of which were in an unrealized loss position. The unrealized losses were attributable to higher market interest rates at December 31, 2015 which negatively impacted the fair value of fixed rate agency mortgage backed securities, wider pricing spreads for corporate bonds and wider pricing spreads for collateralized loan obligations.
The Company monitors to ensure it has adequate credit support and as of December 31, 2015, the Company believes there was no OTTI and did not have the intent to sell these securities and it is not likely that it will be required to sell the securities before
67
their anticipated recovery. The Company considers the lowest credit rating for identification of potential OTTI. As of December 31, 2015, all of the Company's investment securities in an unrealized loss position received an investment grade credit rating.
Loans Held-for-Sale
Loans held-for-sale totaled $668.8 million at December 31, 2015, a decrease of $518.2 million, or 43.7 percent, from $1.19 billion at December 31, 2014. The loans held-for-sale consisted of $379.2 million and $278.7 million carried at fair value, and $289.7 million and $908.3 million carried at lower of cost or fair value at December 31, 2015 and 2014, respectively.
The loans carried at fair value represent conforming SFR mortgage loans originated by the Bank that are sold into the secondary market on a whole loan basis. Some of these loans are expected to be sold to Fannie Mae, Freddie Mac and Ginnie Mae on a servicing retained basis. The servicing of these loans is performed by a third party sub-servicer. These loans totaled $379.2 million at December 31, 2015, an increase of $100.4 million, or 36.0 percent, from $278.7 million at December 31, 2014. The increase was due mainly to originations of $4.50 billion, partially offset by sales of $4.42 billion.
Loans held-for-sale carried at the lower of cost or fair value are mainly non-conforming jumbo mortgage loans that are originated to sell in pools, unlike the loans individually originated to sell into the secondary market on a whole loan basis. These loans totaled $289.7 million at December 31, 2015, a decrease of $618.7 million, or 68.1 percent, from $908.3 million at December 31, 2014. The decrease was due mainly to originations of $693.5 million, loans transferred from loans and leases held-for-investment of $48.8 million, and partially offset by sales of $776.4 million and other net amortizations and loans transferred back to loans and leases held-for-investment of $584.5 million.
68
Loans and Leases Receivable
The following table presents the composition of the Company’s loan and lease portfolio as of the dates indicated:
December 31, | ||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 876,999 | 16.9 | % | $ | 490,900 | 12.4 | % | $ | 287,771 | 11.8 | % | $ | 80,387 | 6.4 | % | $ | 9,019 | 1.1 | % | ||||||||||||||
Commercial real estate | 727,707 | 14.0 | % | 999,857 | 25.3 | % | 529,883 | 21.7 | % | 338,900 | 27.1 | % | 125,830 | 16.0 | % | |||||||||||||||||||
Multi-family | 904,300 | 17.5 | % | 955,683 | 24.2 | % | 141,580 | 5.8 | % | 115,082 | 9.2 | % | 87,196 | 11.1 | % | |||||||||||||||||||
SBA | 57,706 | 1.1 | % | 36,155 | 0.9 | % | 27,428 | 1.1 | % | 36,076 | 2.9 | % | — | — | % | |||||||||||||||||||
Construction | 55,289 | 1.1 | % | 42,198 | 1.1 | % | 24,933 | 1.0 | % | 6,623 | 0.5 | % | — | — | % | |||||||||||||||||||
Lease financing | 192,424 | 3.7 | % | 85,749 | 2.2 | % | 31,949 | 1.3 | % | 11,203 | 0.9 | % | — | — | % | |||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||
Single family residential mortgage | 2,255,584 | 43.5 | % | 1,171,662 | 29.7 | % | 1,286,541 | 52.6 | % | 638,667 | 51.3 | % | 548,522 | 69.5 | % | |||||||||||||||||||
Other consumer | 114,385 | 2.2 | % | 166,918 | 4.2 | % | 116,026 | 4.7 | % | 21,533 | 1.7 | % | 17,822 | 2.3 | % | |||||||||||||||||||
Total loans and leases | 5,184,394 | 100.0 | % | 3,949,122 | 100.0 | % | 2,446,111 | 100.0 | % | 1,248,471 | 100.0 | % | 788,389 | 100.0 | % | |||||||||||||||||||
Allowance for loan and lease losses | (35,533 | ) | (29,480 | ) | (18,805 | ) | (14,448 | ) | (12,780 | ) | ||||||||||||||||||||||||
Total loans and leases receivable, net | $ | 5,148,861 | $ | 3,919,642 | $ | 2,427,306 | $ | 1,234,023 | $ | 775,609 | ||||||||||||||||||||||||
Total loans and leases were $5.18 billion at December 31, 2015, an increase of $1.24 billion, or 31.3 percent, from $3.95 billion at December 31, 2014. The increase was mainly due to increases in SFR mortgage loans, commercial and industrial loans, lease financing, SBA loans, and construction loans, partially offset by decreases in commercial real estate loans, multi-family loans, and other consumer loans. The increase in commercial and industrial loans was mainly due to a $83.6 million increase in warehouse lines of credit, increased origination, and a reclassification from commercial real estate loans related to the finalization of accounting adjustment for the BPNA Branch Acquisition. The decrease in multi-family loans was mainly due to sales of $242.6 million, partially offset by an increase in originations. The increase in lease financing was mainly due to purchases of $127.0 million. The increase in SFR mortgage loans was mainly due to purchases of seasoned SFR mortgage loans pools of $578.7 million, loans transferred from loans held-for-sale of $479.1 million as well as increased originations, partially offset by sales of seasoned SFR mortgage loans pools of $198.4 million. See "Loan and Lease Originations, Purchases and Repayments" for the origination detail per loan and lease segment.
69
The following table presents the repricing and yield information with the weighted average contractual yield of the loan and lease portfolio as of December 31, 2015:
One Year or Less | More Than One Year Through Five Years | More than Five Years through Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||
Amount | Weighted Average Yield | Amount | Weighted Average Yield | Amount | Weighted Average Yield | Amount | Weighted Average Yield | Amount | Weighted Average Yield | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 588,469 | 4.18 | % | $ | 166,814 | 4.56 | % | $ | 112,938 | 4.63 | % | $ | 8,778 | 4.63 | % | $ | 876,999 | 4.32 | % | ||||||||||||||
Commercial real estate | 181,727 | 4.49 | % | 328,654 | 4.53 | % | 183,505 | 4.66 | % | 33,821 | 4.78 | % | 727,707 | 4.56 | % | |||||||||||||||||||
Multi-family | 104,756 | 4.64 | % | 569,874 | 3.94 | % | 219,586 | 4.42 | % | 10,084 | 4.45 | % | 904,300 | 4.14 | % | |||||||||||||||||||
SBA | 28,425 | 5.39 | % | 21,287 | 4.37 | % | 5,537 | 4.75 | % | 2,457 | 5.99 | % | 57,706 | 4.98 | % | |||||||||||||||||||
Construction | 55,115 | 5.18 | % | 167 | 6.25 | % | — | — | % | 7 | 4.13 | % | 55,289 | 5.18 | % | |||||||||||||||||||
Lease financing | 3,196 | 7.57 | % | 162,360 | 6.15 | % | 26,868 | 5.54 | % | — | — | % | 192,424 | 6.09 | % | |||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||
Single family residential mortgage | 644,025 | 3.20 | % | 534,380 | 3.39 | % | 759,693 | 4.05 | % | 317,486 | 4.98 | % | 2,255,584 | 3.78 | % | |||||||||||||||||||
Other consumer | 112,321 | 4.05 | % | 691 | 5.33 | % | 927 | 9.28 | % | 446 | 6.43 | % | 114,385 | 4.11 | % | |||||||||||||||||||
Total | $ | 1,718,034 | 3.92 | % | $ | 1,784,227 | 4.15 | % | $ | 1,309,054 | 4.29 | % | $ | 373,079 | 4.94 | % | $ | 5,184,394 | 4.17 | % | ||||||||||||||
70
The following table presents the interest rate profile of the loan and lease portfolio due after one year at December 31, 2015:
Due After One Year | |||||||||||
Fixed Rate | Floating Rate | Total | |||||||||
(In thousands) | |||||||||||
Commercial: | |||||||||||
Commercial and industrial | $ | 149,401 | $ | 361,378 | $ | 510,779 | |||||
Commercial real estate | 377,570 | 277,616 | 655,186 | ||||||||
Multi-family | 114,866 | 784,575 | 899,441 | ||||||||
SBA | 5,612 | 49,438 | 55,050 | ||||||||
Construction | 173 | 24,359 | 24,532 | ||||||||
Lease financing | 189,228 | — | 189,228 | ||||||||
Consumer: | |||||||||||
Single family residential mortgage | 269,113 | 1,985,952 | 2,255,065 | ||||||||
Other consumer | 2,065 | 86,185 | 88,250 | ||||||||
Total | $ | 1,108,028 | $ | 3,569,503 | $ | 4,677,531 | |||||
Loan and Lease Originations, Purchases and Repayments
The Company originates real estate secured loans primarily through its retail channel under its DBA Banc Home Loans and under the Bank’s name, and through its wholesale and correspondent channels through other mortgage brokers and banking relationships. Loans originated are either: eligible for sale to Fannie Mae and Freddie Mac, government insured FHA or VA, held by the Company, or sold to private investors.
The Company also originates consumer and real estate loans on a direct basis through our marketing efforts and our existing and walk-in customers. The Company originates both adjustable and fixed-rate loans; however, the ability to originate loans is dependent upon customer demand for loans in our market areas. Demand is affected by competition and the interest rate environment. During the last few years, the Company has significantly increased origination of ARM loans. The Company has also purchased ARM loans secured by single family residences and participations in construction and commercial real estate loans in the past. Loans and participations purchased must conform to the Company’s underwriting guidelines or guidelines acceptable to the management loan committee.
71
The following table presents loan and lease originations, purchases, sales, and repayment activities excluding the loans originated for sale, for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Origination by rate type: | |||||||||||
Floating rate: | |||||||||||
Commercial and industrial | $ | 180,728 | $ | 80,119 | $ | 81,048 | |||||
Commercial real estate and multi family | 300,068 | 397,271 | 120,631 | ||||||||
SBA | 33,435 | 12,223 | 1,474 | ||||||||
Construction | 23,819 | 1,167 | 6,226 | ||||||||
Lease financing | — | 1,091 | — | ||||||||
Single family residential mortgage | 523,789 | 130,251 | 390,499 | ||||||||
Other consumer | 23,628 | 46,407 | 21,282 | ||||||||
Total floating rate | 1,085,467 | 668,529 | 621,160 | ||||||||
Fixed rate: | |||||||||||
Commercial and industrial | 25,052 | 51,949 | 10,962 | ||||||||
Commercial real estate and multi family | 169,518 | 61,145 | 117,666 | ||||||||
SBA | — | 3,691 | 772 | ||||||||
Construction | 3 | — | 1,136 | ||||||||
Lease financing | 26,748 | 44,590 | 16,952 | ||||||||
Single family residential mortgage | — | — | 3,464 | ||||||||
Other consumer | 25 | 8,414 | 307 | ||||||||
Total fixed rate | 221,346 | 169,789 | 151,259 | ||||||||
Total loans and leases originated | 1,306,813 | 838,318 | 772,419 | ||||||||
Purchases: | |||||||||||
Single family residential mortgage | 578,666 | — | 849,883 | ||||||||
Commercial real estate and multi-family | — | — | — | ||||||||
Lease financing | 127,043 | 38,572 | 7,850 | ||||||||
Total loans and leases purchased | 705,709 | 38,572 | 857,733 | ||||||||
Acquired in business combinations | — | 1,072,449 | 385,256 | ||||||||
Transferred to loans held-for-sale | (48,757 | ) | (66,334 | ) | (182,803 | ) | |||||
Repayments: | |||||||||||
Principal repayments | (3,777,566 | ) | (1,885,128 | ) | (461,223 | ) | |||||
Sales | (444,578 | ) | (90,390 | ) | (263,554 | ) | |||||
Increase in other items, net | 3,493,651 | 1,595,524 | 89,812 | ||||||||
Net increase | $ | 1,235,272 | $ | 1,503,011 | $ | 1,197,640 | |||||
The increases in changes from principal repayments and other items were mainly due to increased advances and repayments in commercial lines of credit and warehouse lines of credit during the year ended December 31, 2015 and 2014.
72
Seasoned SFR Mortgage Loan Acquisitions
During the year ended December 31, 2015, the Company completed seven seasoned SFR mortgage loan pool acquisitions with unpaid principal balances and fair values of $622.1 million and $578.7 million, respectively, at the respective acquisition dates. These loan pools generally consist of re-performing residential mortgage loans whose characteristics and payment history were consistent with borrowers that demonstrated a willingness and ability to remain in the residence pursuant to the current terms of the mortgage loan agreement. The Company acquired these loans at a discount to both current property value at acquisition and note balance.
The Company determined that certain loans in these seasoned SFR mortgage loan acquisitions reflect credit quality deterioration since origination and it was probable, at acquisition, that all contractually required payments would not be collected (PCI loans). The unpaid principal balances and fair values of PCI loans in these transactions, at the respective acquisition dates, were $571.2 million and $529.2 million, respectively. At December 31, 2015, the unpaid principal balances and carrying values of these PCI loans were $564.1 million and $523.1 million, respectively.
For each acquisition, the Company utilized its background in mortgage credit analysis to re-underwrite the borrower’s credit to arrive at what it believes to be an attractive risk adjusted return for a highly collateralized investment in performing mortgage loans. The acquisition program implemented and executed by the Company involved a multifaceted due diligence process discussed in more detail below, which included compliance reviews, title analyses, review of modification agreements, updated property valuation assessments, collateral inventory and other undertakings related to the scope of due diligence.
In the aggregate, the weighted average purchase price of the loans was 58.0 percent of current property value at the time of acquisition based on a third party broker price opinion, and less than 93.7 percent of note balance at the time of acquisition. At the time of acquisition, approximately 85.2 percent of the mortgage loans by current principal balance (excluding any forbearance amounts) had the original terms modified at some point since origination by a prior owner or servicer. The mortgage loans had a current weighted average contractual interest rate of 3.12 percent, determined by current principal balance. The weighted average credit score of the borrowers comprising the mortgage loans at or near the time of acquisition determined by current principal balance and excluding those with no credit score on file was 669. The average property value determined by a broker price opinion obtained by third party licensed real estate professionals at or around the time of acquisition was $394 thousand. Approximately 96.1 percent of the borrowers by current principal balance had made at least 12 monthly payments in the 12 months preceding the trade date and 97.5 percent had made at least six monthly payments in the six months preceding the trade date. The mortgage loans are secured by residences located in 50 states and the District of Columbia with California being the largest state concentration representing 44.7 percent of the note balance, and with no other state concentration exceeding 10 percent based upon the current note balance.
The Company did not acquire any seasoned SFR mortgage loan pool in 2014.
The total unpaid principal balance and carrying value of the seasoned SFR mortgage loan pools, which included pools the Company acquired in 2015 as well as 2013 and 2012, were $972.2 million and $894.1 million, respectively at December 31, 2015 and $677.3 million and $595.4 million, respectively, at December 31, 2014. The total unpaid principal balance and carrying value of PCI loans included in these pools were $764.6 million and $699.1 million, respectively at December 31, 2015 and $282.7 million and $230.8 million, respectively, at December 31, 2014.
At December 31, 2015 and 2014, approximately 2.26 percent and 3.46 percent of unpaid principal balance of the seasoned SFR mortgage loan pools were delinquent 60 or more days, respectively, and 0.62 percent and 0.76 percent were in bankruptcy or foreclosure, respectively.
As part of the acquisition program, the Company may sell from time to time seasoned SFR mortgage loans that do not meet the Company’s investment standards. The Company also sells seasoned SFR mortgage loans opportunistically and to appropriately match asset and liability maturities. The Company sold seasoned SFR mortgage loans with an aggregate unpaid principal balance and aggregate carrying value of $232.4 million and $198.4 million during the year ended December 31, 2015. The Company sold seasoned SFR mortgage loans with an aggregate unpaid principal balance and aggregate carrying value of $119.8 million and $82.6 million, respectively, during the year ended December 31, 2014.
Seasoned SFR Mortgage Loan Acquisition Due Diligence
The acquisition program implemented and executed by the Company involves a multifaceted due diligence process that includes compliance reviews, title analyses, review of modification agreements, updated property valuation assessments, collateral inventory and other undertakings related to the scope of due diligence. Prior to acquiring mortgage loans, the Company, its affiliates, sub-advisors or due diligence partners typically will review the loan portfolio and conduct certain due diligence on a loan by loan basis according to its proprietary diligence plan. This due diligence encompasses analyzing the title,
73
subordinate liens and judgments as well as a comprehensive reconciliation of current property value. The Company, its affiliates, and its sub-advisors prepare a customized version of its diligence plan for each mortgage loan pool being reviewed that is designed to address certain identified pool specific risks. The diligence plan generally reviews several factors, including but not limited to, obtaining and reconciling property value, confirming chain of titles, reviewing assignments, confirming lien position, confirming regulatory compliance, updating borrower credit, certifying collateral, and reviewing servicing notes. In certain transactions, a portion of the diligence may be provided by the seller. In those instances, the Company reviews the mortgage loan portfolio to confirm the accuracy of the provided diligence information and supplements as appropriate.
As part of the confirmation of property values in the diligence process, the Company conducts independent due diligence on the individual properties and borrowers prior to the acquisition of the mortgage loans. In addition, market conditions, regional mortgage loan information and local trends in home values, coupled with market knowledge, are used by the Company in calculating the appropriate additional risk discount to compensate for potential property declines, foreclosures, defaults or other risks associated with the mortgage loan portfolio to be acquired. Typically, the Company may enter into one or more agreements with affiliates or third parties to perform certain of these due diligence tasks with respect to acquiring potential mortgage loans.
74
Non-Traditional Mortgage Portfolio
The Company’s NTM portfolio is comprised of three interest only products: Green Loans, Interest Only loans and a small number of additional loans with the potential for negative amortization. As of December 31, 2015 and 2014, the NTM loans totaled $785.9 million, or 15.2 percent of total loans and leases, and $350.6 million, or 8.9 percent of total loans and leases, respectively. The total NTM portfolio increased by $435.3 million, or 124.2 percent during the period. The following table presents the composition of the NTM portfolio as of the dates indicated:
December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||||||||||||||||
Count | Amount | Percent | Count | Amount | Percent | Count | Amount | Percent | Count | Amount | Percent | Count | Amount | Percent | |||||||||||||||||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||
Green Loans (HELOC) - first liens | 121 | $ | 105,131 | 13.4 | % | 148 | $ | 123,177 | 35.1 | % | 173 | $ | 147,705 | 47.7 | % | 212 | $ | 198,720 | 53.9 | % | 245 | $ | 219,502 | 58.9 | % | ||||||||||||||||||||||||
Interest only - first liens | 521 | 664,358 | 84.4 | % | 207 | 209,207 | 59.7 | % | 244 | 139,867 | 45.2 | % | 187 | 142,426 | 38.7 | % | 199 | 123,134 | 33.0 | % | |||||||||||||||||||||||||||||
Negative amortization | 30 | 11,602 | 1.5 | % | 32 | 13,099 | 3.7 | % | 37 | 16,623 | 5.4 | % | 40 | 19,341 | 5.3 | % | 45 | 21,525 | 5.8 | % | |||||||||||||||||||||||||||||
Total NTM - first liens | 672 | 781,091 | 99.3 | % | 387 | 345,483 | 98.5 | % | 454 | 304,195 | 98.3 | % | 439 | 360,487 | 97.9 | % | 489 | 364,161 | 97.7 | % | |||||||||||||||||||||||||||||
Green Loans (HELOC) - second liens | 16 | 4,704 | 0.6 | % | 19 | 4,979 | 1.4 | % | 23 | 5,289 | 1.7 | % | 27 | 7,659 | 2.1 | % | 32 | 8,703 | 2.3 | % | |||||||||||||||||||||||||||||
Interest only - second liens | 1 | 113 | 0.1 | % | 1 | 113 | 0.1 | % | 1 | 113 | — | % | 1 | 114 | — | % | 1 | 114 | — | % | |||||||||||||||||||||||||||||
Total NTM - second liens | 17 | 4,817 | 0.7 | % | 20 | 5,092 | 1.5 | % | 24 | 5,402 | 1.7 | % | 28 | 7,773 | 2.1 | % | 33 | 8,817 | 2.3 | % | |||||||||||||||||||||||||||||
Total NTM loans | 689 | $ | 785,908 | 100.0 | % | 407 | $ | 350,575 | 100.0 | % | 478 | $ | 309,597 | 100.0 | % | 467 | $ | 368,260 | 100.0 | % | 522 | $ | 372,978 | 100.0 | % | ||||||||||||||||||||||||
% of NTM to total loans and leases | 15.2 | % | 8.9 | % | 12.7 | % | 29.5 | % | 47.3 | % | |||||||||||||||||||||||||||||||||||||||
The initial credit guidelines for the NTM portfolio were established based on borrower FICO score, LTV ratio, property type, occupancy type, loan amount, and geography. Additionally, from an ongoing credit risk management perspective, the Company has determined the most significant performance indicators for NTMs to be LTV ratios and FICO scores. On a semi-annual basis, the Company performs loan reviews of the NTM loan portfolio, which includes refreshing FICO scores on the Green Loans and HELOCs and ordering third party AVM to confirm collateral values.
75
LTV ratio represents estimated current loan to value ratio, determined by dividing current unpaid principal balance by latest estimated property value received per the Company policy. The table below represents the Company’s NTM first lien portfolio by LTV ratios 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) | |||||||||||||||||||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||||||||||||||||
< 61 | 70 | $ | 51,221 | 48.7 | % | 141 | $ | 208,120 | 31.3 | % | 17 | $ | 5,271 | 45.4 | % | 228 | $ | 264,612 | 33.9 | % | |||||||||||||||||||
61-80 | 33 | 42,075 | 40.0 | % | 291 | 408,662 | 61.6 | % | 12 | 6,106 | 52.7 | % | 336 | 456,843 | 58.4 | % | |||||||||||||||||||||||
81-100 | 12 | 6,836 | 6.5 | % | 37 | 30,167 | 4.5 | % | 1 | 225 | 1.9 | % | 50 | 37,228 | 4.8 | % | |||||||||||||||||||||||
> 100 | 6 | 4,999 | 4.8 | % | 52 | 17,409 | 2.6 | % | — | — | — | % | 58 | 22,408 | 2.9 | % | |||||||||||||||||||||||
Total | 121 | $ | 105,131 | 100.0 | % | 521 | $ | 664,358 | 100.0 | % | 30 | $ | 11,602 | 100.0 | % | 672 | $ | 781,091 | 100.0 | % | |||||||||||||||||||
December 31, 2014 | |||||||||||||||||||||||||||||||||||||||
< 61 | 77 | $ | 58,856 | 47.8 | % | 60 | $ | 93,254 | 44.7 | % | 15 | $ | 6,023 | 46.0 | % | 152 | $ | 158,133 | 45.8 | % | |||||||||||||||||||
61-80 | 45 | 46,177 | 37.5 | % | 54 | 81,472 | 38.9 | % | 12 | 5,901 | 45.0 | % | 111 | 133,550 | 38.6 | % | |||||||||||||||||||||||
81-100 | 18 | 11,846 | 9.6 | % | 33 | 14,927 | 7.1 | % | 4 | 781 | 6.0 | % | 55 | 27,554 | 8.0 | % | |||||||||||||||||||||||
> 100 | 8 | 6,298 | 5.1 | % | 60 | 19,554 | 9.3 | % | 1 | 394 | 3.0 | % | 69 | 26,246 | 7.6 | % | |||||||||||||||||||||||
Total | 148 | $ | 123,177 | 100.0 | % | 207 | $ | 209,207 | 100.0 | % | 32 | $ | 13,099 | 100.0 | % | 387 | $ | 345,483 | 100.0 | % | |||||||||||||||||||
The decrease in Green Loans and negative amortization was due to reductions in principal balance and payoffs and the increase in interest only was due to increased originations. The Company updates LTV ratios on a semi-annual basis, typically in the second and fourth quarters or as needed in conjunction with proactive portfolio management.
76
The following table presents the contractual maturity with number of loans of the NTM portfolio as of December 31, 2015:
One Year or Less | More Than One Year Through Five Years | More than Five Years through Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||
Amount | Count | Amount | Count | Amount | Count | Amount | Count | Amount | Count | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Green Loans (HELOC) - first liens (1) | $ | — | — | $ | 2,244 | 4 | $ | 97,966 | 116 | $ | 4,921 | 1 | $ | 105,131 | 121 | |||||||||||||||||||
Interest only - first liens (2) | — | — | 379 | 2 | 195 | 1 | 663,784 | 518 | 664,358 | 521 | ||||||||||||||||||||||||
Negative amortization | — | — | — | — | — | — | 11,602 | 30 | 11,602 | 30 | ||||||||||||||||||||||||
Total NTM - first liens | — | — | 2,623 | 6 | 98,161 | 117 | 680,307 | 549 | 781,091 | 672 | ||||||||||||||||||||||||
Green Loans (HELOC) - second liens (1) | — | — | — | — | 4,704 | 16 | — | — | 4,704 | 16 | ||||||||||||||||||||||||
Interest only - second liens (2) | — | — | — | — | 113 | 1 | — | — | 113 | 1 | ||||||||||||||||||||||||
Total NTM - second liens | — | — | — | — | 4,817 | 17 | — | — | 4,817 | 17 | ||||||||||||||||||||||||
Total NTM loans | $ | — | — | $ | 2,623 | 6 | $ | 102,978 | 134 | $ | 680,307 | 549 | $ | 785,908 | 689 | |||||||||||||||||||
(1) | Green Loans typically have a 15 year balloon maturity |
(2) | Interest Only loans typically switch to an amortizing basis after 5, 7, or 10 years |
At December 31, 2015, all negative amortization loans had outstanding balances less than their original principal balances.
77
Green Loans
The Company discontinued origination of Green Loans in 2011. Green Loans are SFR 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. The Company initiated the Green Loan products in 2005 and proactively refined underwriting and credit management practices and credit guidelines in response to changing economic environments, competitive conditions and portfolio performance. The Company continues to manage credit risk, to the extent possible, throughout the borrower’s credit cycle.
At December 31, 2015, Green Loans totaled $109.8 million, a decrease of $18.3 million, or 14.3 percent from $128.2 million at December 31, 2014, primarily due to reductions in principal balance and payoffs. As of December 31, 2015 and 2014, $10.1 million and $12.5 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 LTV ratios and the Company’s contractual ability to curtail loans when the value of underlying collateral declines.
The Green Loans are similar to HELOCs in that they are collateralized primarily by the borrower's equity in the borrower's home. However, some Green Loans are subject to differences from HELOCs relating to certain characteristics including one-action laws. Similar to Green Loans, HELOCs allow the borrower to draw down on the credit line based on an established loan amount for a period of time, typically 10 years, requiring an interest only payment with an option to pay principal at any time. A typical HELOC provides that at the end of the term the borrower can continue to make monthly principal and interest payments based on loan balance until the maturity date. The Green Loan is an interest only loan with a maturity of 15 years at which time the loan comes due and payable with a balloon payment due at maturity. The unique payment structure also differs from a traditional HELOC in that payments are made through the direct linkage of a personal checking account to the loan through a nightly sweep of funds into the Green Loan Account. This reduces any outstanding balance on the loan by the total amount deposited into the checking account. As a result, every time a deposit is made, effectively a payment to the Green Loan is made. HELOCs typically do not cause the loan to be paid down by a borrower’s depositing of funds into their checking account at the same bank.
Credit guidelines for Green Loans were established based on borrower FICO scores, property type, occupancy type, loan amount, and geography. Property types include single family residences and second trust deeds where the Company owned the first liens, owner occupied as well as non-owner occupied properties. The Company utilized its underwriting guidelines for first liens to underwrite the Green Loan secured by second trust deeds as if the combined loans were a single Green Loan. For all Green Loans, the loan income was underwritten using either full income documentation or alternative income documentation.
The following table presents the Company’s NTM Green Loans first lien portfolio at December 31, 2015 by FICO scores that were obtained during the quarter ended December 31, 2015, compared to the FICO scores for those same loans that were obtained during the quarter ended December 31, 2014:
December 31, 2015 | |||||||||||||||||||||||||||||
By FICO Scores Obtained During the Quarter Ended December 31, 2015 | By FICO Scores Obtained During the Quarter Ended December 31, 2014 | Change | |||||||||||||||||||||||||||
Count | Amount | Percent | Count | Amount | Percent | Count | Amount | Percent | |||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||||
FICO Score | |||||||||||||||||||||||||||||
800+ | 22 | $ | 14,438 | 13.7 | % | 24 | $ | 16,587 | 15.8 | % | (2 | ) | $ | (2,149 | ) | (2.1 | )% | ||||||||||||
700-799 | 60 | 48,775 | 46.5 | % | 58 | 44,678 | 42.5 | % | 2 | 4,097 | 4.0 | % | |||||||||||||||||
600-699 | 23 | 23,600 | 22.4 | % | 24 | 26,768 | 25.5 | % | (1 | ) | (3,168 | ) | (3.1 | )% | |||||||||||||||
<600 | 5 | 4,030 | 3.8 | % | 8 | 11,817 | 11.2 | % | (3 | ) | (7,787 | ) | (7.4 | )% | |||||||||||||||
No FICO score | 11 | 14,288 | 13.6 | % | 7 | 5,281 | 5.0 | % | 4 | 9,007 | 8.6 | % | |||||||||||||||||
Totals | 121 | $ | 105,131 | 100.0 | % | 121 | $ | 105,131 | 100.0 | % | — | $ | — | — | % | ||||||||||||||
The Company updates FICO scores on a periodic basis and generally at least twice a year or as needed in conjunction with proactive portfolio management.
78
Interest Only Loans
Interest only loans are primarily SFR mortgage loans with payment features that allow interest only payment in initial periods before converting to a fully amortizing loan. As of December 31, 2015, our interest only loans increased by $455.2 million, or 217.4 percent, to $664.5 million from $209.3 million at December 31, 2014, primarily due to originations of $258.6 million and transfers from loans held-for-sale of $277.5 million, partially offset by transfers to loans held-for-sale of $2.3 million and net amortization of $83.2 million. As of December 31, 2015 and 2014, $4.6 million and $2.0 million of the interest only loans were non-performing, respectively.
Loans with the Potential for Negative Amortization
Negative amortization loans decreased by $1.5 million, or 11.4 percent, to $11.6 million as of December 31, 2015 from $13.1 million as of December 31, 2014. The Company discontinued origination of negative amortization loans in 2007. At December 31, 2015 and 2014, no loans that had the potential for negative amortization were non-performing. 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 LTV ratios.
Non-Traditional Mortgage Loan Credit Risk Management
The Company performs detailed reviews of collateral values on loans collateralized by residential real property including its NTM portfolio based on appraisals or estimates from third partyAVMs to analyze property value trends on a semi-annual basis or as needed. AVMs are used to identify loans that have experienced potential collateral deterioration. Once a loan has been identified that may have experienced collateral deterioration, the Company will obtain updated drive by or full appraisals in order to confirm the valuation. This information is used to update key monitoring metrics such as LTV ratios. Additionally, FICO scores are obtained in conjunction with the collateral analysis. In addition to LTV ratios and FICO scores, the Company evaluates the portfolio on a specific loan basis through delinquency and portfolio charge-offs to determine whether any risk mitigation or portfolio management actions are warranted. The borrowers may be contacted as necessary to discuss material changes in loan performance or credit metrics.
The Company’s risk management policy and credit monitoring includes reviewing delinquency, FICO scores, and collateral values on the NTM loan portfolio. We also continuously monitor market conditions for our geographic lending areas. The Company has determined that the most significant performance indicators for NTM to be LTV ratios and FICO scores. The loan review provides an effective method of identifying borrowers who may be experiencing financial difficulty before they 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 score of 10 percent or more and a resulting FICO score of 620 or less. The loans are then further analyzed to determine if the risk rating should be downgraded that will increase the ALLL the Company will establish for potential losses. A report is prepared and regularly monitored.
On the interest only loans, the Company projects future payment changes to determine if there will be an increase in payment of 3.50 percent or greater and then monitors the loans for possible delinquencies. 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.
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 score 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 a detailed analysis with emphasis on the non-traditional mortgage portfolio. The Company’s Internal Asset Review Committee (IARC) conducts regular meetings to review the loans classified as special mention, substandard, or doubtful and determines whether suspension or reduction in credit limit is warranted. If the line has been suspended and the borrower would like to have their credit privileges reinstated, they would need to provide updated financials showing their ability to meet their payment obligations. From the most recent review completed in the fourth quarter of 2015, the Company reduced $800 thousand in available commitments on Green Loans.
Consumer and NTM loans may entail greater risk than do traditional SFR mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as automobiles and recreational vehicles. In these cases, any repossessed collateral for a consumer and NTM loan are more dependent on the borrower‘s continued financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.
79
Asset Quality
Past Due Loans and Lease
The following table presents a summary of loans and leases, excluding PCI loans, that were past due at least 30 days but less than 90 days past due as of the dates indicated:
December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 5,007 | $ | 116 | $ | 287 | $ | 255 | $ | — | |||||||||
Commercial real estate | — | 2,237 | 5,748 | 775 | 291 | ||||||||||||||
Multi-family | 223 | 1,280 | 602 | — | — | ||||||||||||||
SBA | 162 | 82 | 62 | 136 | — | ||||||||||||||
Construction | — | — | — | — | — | ||||||||||||||
Lease financing | 3,046 | 1,091 | 363 | 118 | — | ||||||||||||||
Consumer: | |||||||||||||||||||
Single family residential mortgage | 31,497 | 35,496 | 30,318 | 7,797 | 10,669 | ||||||||||||||
Other consumer | 11 | 392 | 319 | 27 | 4 | ||||||||||||||
Total | $ | 39,946 | $ | 40,694 | $ | 37,699 | $ | 9,108 | $ | 10,964 | |||||||||
The loans and leases, excluding PCI loans, that were past due at least 30 days but less than 90 days past due totaled $39.9 million at December 31, 2015, a decrease of $748 thousand, or 1.8 percent, from $40.7 million at December 31, 2014. The changes in SFR mortgage loan delinquencies in 2015 and 2014 was due mainly to a delinquency increase in portfolio SFR mortgage loans, partially offset by a delinquency decrease in seasoned SFR mortgage loan pools. The increase in SFR mortgage loan delinquencies in 2013 was due mainly to a delinquency increase in seasoned SFR mortgage loan pools. The total amount that were past due at least 30 days but less than 90 days past due in seasoned SFR mortgage loan pools was $12.2 million, $22.9 million and $28.1 million at December 31, 2015, 2014 and 2013, respectively.
The following table presents a summary of NTM loans that were past due at least 30 days but less than 90 days past due as of the dates indicated:
December 31, | |||||||||||||
2015 | 2014 | ||||||||||||
Count | Amount | Count | Amount | ||||||||||
($ in thousands) | |||||||||||||
Green Loans (HELOC) - first liens | 1 | $ | 7,913 | 2 | $ | 8,853 | |||||||
Interest only - first liens | 6 | 3,935 | 8 | 1,580 | |||||||||
Negative amortization | — | — | — | — | |||||||||
Total NTM - first liens | 7 | 11,848 | 10 | 10,433 | |||||||||
Green Loans (HELOC) - second liens | — | — | 1 | 294 | |||||||||
Interest only - second liens | — | — | — | — | |||||||||
Total NTM - second liens | — | — | 1 | 294 | |||||||||
Total NTM loans | 7 | $ | 11,848 | 11 | $ | 10,727 | |||||||
The NTM loans that were past due at least 30 days but less than 90 days past due totaled $11.8 million at December 31, 2015, an increase of $1.1 million, or 10.5 percent, from $10.7 million at December 31, 2014.
80
The following table presents a summary of PCI loans that were past due at least 30 days but less than 90 days past due as of the dates indicated:
December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Commercial real estate | — | — | — | 1,457 | — | ||||||||||||||
Multi-family | — | — | — | — | — | ||||||||||||||
SBA | 549 | 878 | 46 | 380 | — | ||||||||||||||
Construction | — | — | — | — | — | ||||||||||||||
Lease financing | — | — | — | — | — | ||||||||||||||
Consumer: | |||||||||||||||||||
Single family residential mortgage | 39,742 | 16,763 | 30,468 | 2,090 | — | ||||||||||||||
Other consumer | — | — | — | — | — | ||||||||||||||
Total | $ | 40,291 | $ | 17,641 | $ | 30,514 | $ | 3,927 | $ | — | |||||||||
The PCI loans that were past due at least 30 days but less than 90 days past due totaled $40.3 million at December 31, 2015, an increase of $22.7 million, or 128.4 percent, from $17.6 million at December 31, 2014. The increase in SFR mortgage loans was due mainly to a $21.5 million delinquency increase from the seasoned SFR mortgage loans that were purchased during 2015 and the transfer of servicing during the fourth quarter of 2015. A servicing transfer often causes a temporary increase in delinquencies due to confusion of borrowers concerning where to send their payments and a disruption in the normal collection efforts of the loan servicer.
Non-Performing Assets
Non-performing assets consist of (i) loans on non-accrual status which are loans on which the accrual of interest has been discontinued and include restructured loans when there has not been a history of past performance on debt service in accordance with the contractual terms of the restructured loans, (ii) loans 90 days or more past due and still accruing interest, and (iii) other real estate owned, or OREO, which consists of real properties which have been acquired by foreclosure or similar means and which the Company holds for sale.
Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless the Company believes the loan is adequately collateralized and the loan is in the process of collection. However, in certain instances, the Company may place a particular loan on non-accrual status earlier, depending upon the individual circumstances involved in the loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of unpaid amounts on such a loan are applied to reduce principal when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status if and when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual treatment.
81
The following table presents a summary of non-performing assets as of the dates indicated:
December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 4,383 | $ | 7,143 | $ | 33 | $ | — | $ | — | |||||||||
Commercial real estate | 1,552 | 1,017 | 3,868 | 2,906 | 1,887 | ||||||||||||||
Multi-family | 642 | 1,834 | 1,972 | 5,442 | 3,090 | ||||||||||||||
SBA | 422 | 285 | 10 | 141 | — | ||||||||||||||
Construction | — | — | — | — | — | ||||||||||||||
Lease financing | 598 | 100 | — | — | — | ||||||||||||||
Consumer: | |||||||||||||||||||
Single family residential mortgage | 37,318 | 27,753 | 25,514 | 14,503 | 14,272 | ||||||||||||||
Other consumer | 214 | 249 | 251 | 1 | 5 | ||||||||||||||
Total non-accrual loans and leases | 45,129 | 38,381 | 31,648 | 22,993 | 19,254 | ||||||||||||||
Loans past due over 90 days or more and still on accrual | — | — | — | — | — | ||||||||||||||
Other real estate owned | 1,097 | 423 | — | 4,527 | 14,692 | ||||||||||||||
Total non-performing assets | $ | 46,226 | $ | 38,804 | $ | 31,648 | $ | 27,520 | $ | 33,946 | |||||||||
Performing troubled debt restructured loans | $ | 7,842 | $ | 6,346 | $ | 6,117 | $ | 6,646 | $ | 5,417 | |||||||||
The increases in non-accrual loans and leases in 2015 and 2014 was mainly due to increases in total loans and leases. The percentage of total non-accrual loans and leases to total loans and leases was 0.87 percent at December 31, 2015 and 0.97 percent at December 31, 2014, compared to 1.29 percent at December 31, 2013.
With respect to loans that were on non-accrual status as of December 31, 2015, the gross interest income that would have been recorded during the year ended December 31, 2015 had such loans and leases been current in accordance with their original terms and been outstanding throughout the year ended December 31, 2015 (or since origination, if held for part of the year ended December 31, 2015), was $2.1 million. The amount of interest income on such loans that was included in net income for the year ended December 31, 2015 was $197 thousand.
The following table presents a summary of non-accrual NTM loans as of the dates indicated:
December 31, | |||||||||||||
2015 | 2014 | ||||||||||||
Count | Amount | Count | Amount | ||||||||||
($ in thousands) | |||||||||||||
Green Loans (HELOC) - first liens | 2 | $ | 10,088 | 5 | $ | 12,334 | |||||||
Interest only - first liens | 6 | 4,615 | 7 | 2,049 | |||||||||
Negative amortization | — | — | — | — | |||||||||
Total NTM - first liens | 8 | 14,703 | 12 | 14,383 | |||||||||
Green Loans (HELOC) - second liens | — | — | 1 | 209 | |||||||||
Interest only - second liens | — | — | — | — | |||||||||
Total NTM - second liens | — | — | 1 | 209 | |||||||||
Total NTM loans | 8 | $ | 14,703 | 13 | $ | 14,592 | |||||||
82
Troubled Debt Restructured Loans (TDRs)
Loans that the Company modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances are classified as troubled debt restructurings (TDRs). TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. A workout plan between a borrower and the Company is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated.
At December 31, 2015 and 2014, the Company had 29 and 18 loans, respectively, with an aggregate balance of $9.8 million and $8.0 million, respectively, classified as TDRs. When a loan becomes a TDR the Company ceases accruing interest, and classifies it as non-accrual until the borrower demonstrates that the loan is again performing.
At December 31, 2015, of the 29 loans classified as TDRs, 23 loans totaling $7.8 million were making payments according to their modified terms and were less than 90-days delinquent under the modified terms. Of the aforementioned $7.8 million in TDRs, $7.3 million were SFR mortgage loans and $553 thousand were other consumer loans. At December 31, 2014, of the 18 loans classified as TDRs, 14 loans totaling $6.3 million were making payments according to their modified terms and were less than 90-days delinquent under the modified terms. Of the aforementioned $6.3 million in TDRs, $6.1 million were SFR mortgage loans and $294 thousand were other consumer loans. At December 31, 2015 and 2014, there were 4 and 2 TDR loans, respectively, with an aggregate balance of $914 thousand and $492 thousand, respectively, that were over 90 days delinquent.
The following table presents the composition of TDRs as of the dates indicated:
December 31, | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
NTM Loans | Traditional Loans | Total | NTM Loans | Traditional Loans | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
SBA | — | 3 | 3 | — | 6 | 6 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 1,015 | 5,841 | 6,856 | — | 4,269 | 4,269 | |||||||||||||||||
Green Loans (HELOC) - first liens | 2,400 | — | 2,400 | 3,442 | — | 3,442 | |||||||||||||||||
Green Loans (HELOC) - second liens | 553 | — | 553 | 294 | — | 294 | |||||||||||||||||
Total | $ | 3,968 | $ | 5,844 | $ | 9,812 | $ | 3,736 | $ | 4,275 | $ | 8,011 | |||||||||||
83
Risk Ratings
Federal regulations provide for the classification of loans and leases and other assets, such as debt and equity securities considered to be of lesser quality, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve or charge-off is not warranted.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allocation allowances for loan and lease losses in an amount deemed prudent by management and approved by the Board of Directors. General allocation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allocation allowance for losses equal to 100 percent of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its specific allocation allowances is subject to review by the OCC, which may order the establishment of additional general or specific loss allocation allowances.
In connection with the filing of the Bank’s periodic reports with the OCC and in accordance with policies for our classification of assets, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of assets, at December 31, 2015, the Company had classified assets (including OREO) totaling $66.7 million, all of which were classified as substandard. The total amount classified represented 0.81 percent of the Company’s total assets at December 31, 2015.
When accrual of income on a pool of PCI loans with common risk characteristics is appropriate in accordance with ASC 310-30, individual loans in those pools are not risk-rated. The credit criteria evaluated are LTV ratios, delinquency, and actual cash flows versus expected cash flows of the loan pools.
84
The following table presents the Company’s risk categories as of December 31, 2015:
December 31, 2015 | |||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Not-Rate | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
NTM loans: | |||||||||||||||||||||||
Single family residential mortgage | $ | 660,683 | $ | 11,731 | $ | 3,546 | $ | — | $ | — | $ | 675,960 | |||||||||||
Green Loans (HELOC) - first liens | 87,967 | 2,329 | 14,835 | — | — | 105,131 | |||||||||||||||||
Green Loans (HELOC) - second liens | 4,704 | — | — | — | — | 4,704 | |||||||||||||||||
Other consumer | 113 | — | — | — | — | 113 | |||||||||||||||||
Total NTM loans | 753,467 | 14,060 | 18,381 | — | — | 785,908 | |||||||||||||||||
Traditional loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 860,993 | 3,175 | 11,978 | — | — | 876,146 | |||||||||||||||||
Commercial real estate | 707,238 | 4,788 | 6,082 | — | — | 718,108 | |||||||||||||||||
Multi-family | 901,578 | 403 | 2,319 | — | — | 904,300 | |||||||||||||||||
SBA | 53,078 | 1,132 | 447 | — | — | 54,657 | |||||||||||||||||
Construction | 55,289 | — | — | — | — | 55,289 | |||||||||||||||||
Lease financing | 190,976 | — | 1,448 | — | — | 192,424 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 738,196 | 12,301 | 24,766 | — | — | 775,263 | |||||||||||||||||
Other consumer | 109,206 | 148 | 214 | — | — | 109,568 | |||||||||||||||||
Total traditional loans | 3,616,554 | 21,947 | 47,254 | — | — | 3,685,755 | |||||||||||||||||
PCI loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 54 | — | 799 | — | — | 853 | |||||||||||||||||
Commercial real estate | 5,621 | 523 | 3,455 | — | — | 9,599 | |||||||||||||||||
SBA | 988 | — | 2,061 | — | — | 3,049 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | — | — | 139 | — | 699,091 | 699,230 | |||||||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||||||
Total PCI loans | 6,663 | 523 | 6,454 | — | 699,091 | 712,731 | |||||||||||||||||
Total | $ | 4,376,684 | $ | 36,530 | $ | 72,089 | $ | — | $ | 699,091 | $ | 5,184,394 | |||||||||||
85
The following table presents the Company’s risk categories as of December 31, 2014:
December 31, 2014 | |||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Not-Rate | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
NTM loans: | |||||||||||||||||||||||
Single family residential mortgage | $ | 219,747 | $ | 279 | $ | 2,280 | $ | — | $ | — | $ | 222,306 | |||||||||||
Green Loans (HELOC) - first liens | 104,640 | 399 | 18,138 | — | — | 123,177 | |||||||||||||||||
Green Loans (HELOC) - second liens | 4,770 | — | 209 | — | — | 4,979 | |||||||||||||||||
Other consumer | 113 | — | — | — | — | 113 | |||||||||||||||||
Total NTM loans | 329,270 | 678 | 20,627 | — | — | 350,575 | |||||||||||||||||
Traditional loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 477,319 | 117 | 12,330 | — | — | 489,766 | |||||||||||||||||
Commercial real estate | 943,645 | 14,281 | 30,404 | — | — | 988,330 | |||||||||||||||||
Multi-family | 932,438 | 6,684 | 16,561 | — | — | 955,683 | |||||||||||||||||
SBA | 32,171 | — | 827 | — | — | 32,998 | |||||||||||||||||
Construction | 42,198 | — | — | — | — | 42,198 | |||||||||||||||||
Lease financing | 85,613 | 36 | 100 | — | — | 85,749 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 569,871 | 10,395 | 14,834 | — | — | 595,100 | |||||||||||||||||
Other consumer | 161,701 | 85 | 40 | — | — | 161,826 | |||||||||||||||||
Total traditional loans | 3,244,956 | 31,598 | 75,096 | — | — | 3,351,650 | |||||||||||||||||
PCI loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 104 | — | 1,030 | — | — | 1,134 | |||||||||||||||||
Commercial real estate | 6,676 | 985 | 3,866 | — | — | 11,527 | |||||||||||||||||
SBA | 677 | 351 | 2,129 | — | — | 3,157 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | — | — | 268 | — | 230,811 | 231,079 | |||||||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||||||
Total PCI loans | 7,457 | 1,336 | 7,293 | — | 230,811 | 246,897 | |||||||||||||||||
Total | $ | 3,581,683 | $ | 33,612 | $ | 103,016 | $ | — | $ | 230,811 | $ | 3,949,122 | |||||||||||
86
Allowance for Loan and Lease Losses
The Company maintains an ALLL to absorb probable incurred losses inherent in the loan and lease portfolio at the balance sheet date. The ALLL is based on ongoing assessment of the estimated probable losses presently inherent in the loan portfolio. In evaluating the level of the ALLL, management considers the types of loans and leases and the amount of loans and leases in the portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This methodology takes into account many factors, including the Company’s own historical and peer loss trends, loan and lease-level credit quality ratings, loan and lease specific attributes along with a review of various credit metrics and trends. The process involves subjective as well as complex judgments. The Company generally uses a 20-quarter loss experience of the Company and 8-quarter industry average loss experience in analyzing an appropriate reserve factor for loans. In addition, the Company uses a 28-quarter industry average loss experience in analyzing an appropriate reserve factor for portfolio segments that do not have adequate internal loss history. In addition, the Company uses adjustments for numerous factors including those found in the Interagency Guidance on ALLL, which include current economic conditions, loan and lease seasoning, underwriting experience, and collateral value changes among others. The Company evaluates all impaired loans and leases individually using guidance from ASC 310 primarily through the evaluation of cash flows or collateral values.
The Company acquired the BPNA branches in 2014, The Private Bank of California in 2013, and Beach Business Bank and Gateway Bancorp in 2012, and their loans and leases were treated under ASC 805, accounting for acquisitions. The acquired loans and leases include loans that are accounted for under ASC 310-30, accounting for PCI loans. In addition, the Company acquired three pools of credit impaired re-performing seasoned SFR mortgage loan pools during the year ended December 31, 2012, five pools of seasoned SFR mortgage loan pools, which were partially PCI loans, during the year ended December 31, 2013, and seven pools of seasoned SFR mortgage loan pools, which were partially PCI loans, during the year ended December 31, 2015. The Company may recognize provision for loan and lease losses in the future should there be further deterioration in these loans after the purchase date should the impairment exceed the non-accretable yield and purchased discount. On a quarterly basis, the Company re-forecasts its expected cash flows for the PCI loans relating to the The Private Bank of California, Beach Business Bank and Gateway Bancorp acquisitions, and the loan pools acquired to be evaluated for potential impairment. The provision for PCI loans reflected a decrease in expected cash flows on PCI loans compared to those previously estimated. The impairment reserve for PCI loans at December 31, 2015 and 2014 was $206 thousand and $23 thousand, respectively.
The ALLL for loans collectively evaluated for impairment on originated loans and leases at December 31, 2015 was $32.7 million, which represented 1.05 percent of total originated loans and leases, as compared to $25.3 million, or 1.34 percent, of total originated loans and leases at December 31, 2014. Including the non-credit impaired loans acquired through acquisitions, ALLL for loans collectively evaluated for impairment was $35.0 million as of December 31, 2015, which represents 0.82 percent of total of such loans and leases, as compared to $28.2 million, or 0.85 percent, or total of such loans and leases at December 31, 2014. The ALLL for loans individually evaluated for impairment was $369 thousand at December 31, 2015 compared to $1.3 million at December 31, 2014. The Company held no unallocated ALLL at December 31, 2015 and 2014. The ALLL plus market discount for originated and acquired non-credit impaired loans and leases to the total amount of such loans and leases was 1.33 percent at December 31, 2015 versus 1.42 percent at December 31, 2014. The Company provided $7.5 million to its provision for loan and lease losses during the year ended December 31, 2015, related primarily to new lease financing and SFR mortgage loan production. The decrease in the percentage of ALLL to total loans and leases was mainly due to improving asset quality, which resulted in lower charge-offs and declining quantitative loss rates and qualitative factors in line with the current economic and business environment.
87
The following table presents information regarding activity in the ALLL for the periods indicated:
December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Loans past due over 90 days or more still on accrual | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Non-accrual loans and leases | 45,129 | 38,381 | 31,648 | 22,993 | 19,254 | ||||||||||||||
Total non-performing loans and leases | 45,129 | 38,381 | 31,648 | 22,993 | 19,254 | ||||||||||||||
Other real estate owned | 1,097 | 423 | — | 4,527 | 14,692 | ||||||||||||||
Total non-performing loans and leases | $ | 46,226 | $ | 38,804 | $ | 31,648 | $ | 27,520 | $ | 33,946 | |||||||||
Allowance for loan and lease losses (ALLL) | |||||||||||||||||||
Balance at beginning of year | $ | 29,480 | $ | 18,805 | $ | 14,448 | $ | 12,780 | $ | 14,637 | |||||||||
Charge-offs | (1,942 | ) | (923 | ) | (3,013 | ) | (4,071 | ) | (7,512 | ) | |||||||||
Recoveries | 526 | 1,235 | 850 | 239 | 267 | ||||||||||||||
Transfer of loans to held-for-sale | — | (613 | ) | (1,443 | ) | — | — | ||||||||||||
Provision for loan and lease losses | 7,469 | 10,976 | 7,963 | 5,500 | 5,388 | ||||||||||||||
Balance at end of year | $ | 35,533 | $ | 29,480 | $ | 18,805 | $ | 14,448 | $ | 12,780 | |||||||||
Non-performing loans and leases to total loans and leases | 0.87 | % | 0.97 | % | 1.29 | % | 1.84 | % | 2.44 | % | |||||||||
Non-performing assets to total assets | 0.56 | % | 0.65 | % | 0.87 | % | 1.64 | % | 3.40 | % | |||||||||
Non-performing loans and leases to ALLL | 127.01 | % | 130.19 | % | 168.30 | % | 159.14 | % | 150.66 | % | |||||||||
ALLL to non-performing loans and leases | 78.74 | % | 76.81 | % | 59.42 | % | 62.84 | % | 66.38 | % | |||||||||
ALLL to total loans and leases | 0.69 | % | 0.75 | % | 0.77 | % | 1.16 | % | 1.62 | % | |||||||||
Net charge-offs to average total loans and leases | 0.03 | % | (0.01 | )% | 0.09 | % | 0.31 | % | 0.92 | % | |||||||||
88
The following table presents the ALLL allocation among loans and leases portfolio as of the dates indicated:
December 31, | ||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
ALLL Amount | % of Loans to Total Loans | ALLL Amount | % of Loans to Total Loans | ALLL Amount | % of Loans to Total Loans | ALLL Amount | % of Loans to Total Loans | ALLL Amount | % of Loans to Total Loans | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 5,850 | 16.9 | % | $ | 6,910 | 12.4 | % | $ | 1,822 | 11.8 | % | $ | 263 | 6.4 | % | $ | 128 | 1.1 | % | ||||||||||||||
Commercial real estate | 4,252 | 14.0 | % | 3,840 | 25.3 | % | 5,484 | 21.7 | % | 3,178 | 27.1 | % | 2,234 | 16.0 | % | |||||||||||||||||||
Multi-family | 6,012 | 17.5 | % | 7,179 | 24.2 | % | 2,566 | 5.8 | % | 1,478 | 9.2 | % | 1,541 | 11.1 | % | |||||||||||||||||||
SBA | 683 | 1.1 | % | 335 | 0.9 | % | 235 | 1.1 | % | 118 | 2.9 | % | — | — | % | |||||||||||||||||||
Construction | 1,530 | 1.1 | % | 846 | 1.1 | % | 244 | 1.0 | % | 21 | 0.5 | % | — | — | % | |||||||||||||||||||
Lease financing | 2,195 | 3.7 | % | 873 | 2.2 | % | 428 | 1.3 | % | 261 | 0.9 | % | — | — | % | |||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||
Single family residential mortgage | 13,854 | 43.5 | % | 7,192 | 29.7 | % | 7,044 | 52.6 | % | 8,855 | 51.3 | % | 8,635 | 69.5 | % | |||||||||||||||||||
Other consumer | 1,157 | 2.2 | % | 2,305 | 4.2 | % | 532 | 4.7 | % | 274 | 1.7 | % | 242 | 2.3 | % | |||||||||||||||||||
Unallocated | — | — | 450 | — | — | |||||||||||||||||||||||||||||
Total | $ | 35,533 | 100.0 | % | $ | 29,480 | 100.0 | % | $ | 18,805 | 100.0 | % | $ | 14,448 | 100.0 | % | $ | 12,780 | 100.0 | % | ||||||||||||||
89
The following table presents the ALLL allocation among loan and lease origination types as of the dates indicated:
December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Loan breakdown by ALLL evaluation type: | |||||||||||||||||||
Originated loans and leases | |||||||||||||||||||
Individually evaluated for impairment | $ | 30,654 | $ | 29,287 | $ | 16,704 | $ | 28,859 | $ | 27,538 | |||||||||
Collectively evaluated for impairment | 3,117,528 | 1,892,240 | 1,168,195 | 894,952 | 760,851 | ||||||||||||||
Acquired loans through business acquisitions - non-impaired | |||||||||||||||||||
Individually evaluated for impairment | 3,629 | 4,191 | 2,243 | 4,669 | — | ||||||||||||||
Collectively evaluated for impairment | 1,124,874 | 1,411,927 | 469,916 | 219,771 | — | ||||||||||||||
Seasoned SFR mortgage loan pools - non-impaired | 194,978 | 364,580 | 449,767 | — | — | ||||||||||||||
Acquired with deteriorated credit quality | 712,731 | 246,897 | 339,286 | 100,220 | — | ||||||||||||||
Total loans | $ | 5,184,394 | $ | 3,949,122 | $ | 2,446,111 | $ | 1,248,471 | $ | 788,389 | |||||||||
ALLL breakdown: | |||||||||||||||||||
Originated loans and leases | |||||||||||||||||||
Individually evaluated for impairment | $ | 369 | $ | 1,288 | $ | 96 | $ | 1,187 | $ | 3,714 | |||||||||
Collectively evaluated for impairment | 32,713 | 25,263 | 17,103 | 13,208 | 9,066 | ||||||||||||||
Acquired loans through business acquisitions - non-impaired | |||||||||||||||||||
Individually evaluated for impairment | — | — | — | 53 | — | ||||||||||||||
Collectively evaluated for impairment | 2,245 | 2,906 | 1,410 | — | — | ||||||||||||||
Seasoned SFR mortgage loan pools - non-impaired | — | — | — | — | — | ||||||||||||||
Acquired with deteriorated credit quality | 206 | 23 | 196 | — | — | ||||||||||||||
Total ALLL | $ | 35,533 | $ | 29,480 | $ | 18,805 | $ | 14,448 | $ | 12,780 | |||||||||
Discount on purchased/acquired Loans: | |||||||||||||||||||
Acquired loans through business acquisitions - non-impaired | $ | 21,366 | $ | 17,866 | $ | 8,354 | $ | 3,019 | $ | — | |||||||||
Seasoned SFR mortgage loan pools - non-impaired | 12,545 | 29,955 | 38,240 | — | — | ||||||||||||||
Acquired with deteriorated credit quality | 68,372 | 55,865 | 105,650 | 51,572 | — | ||||||||||||||
Total discount | $ | 102,283 | $ | 103,686 | $ | 152,244 | $ | 54,591 | $ | — | |||||||||
Ratios: | |||||||||||||||||||
To originated loans and leases: | |||||||||||||||||||
Individually evaluated for impairment | 1.20 | % | 4.40 | % | 0.57 | % | 4.11 | % | 13.49 | % | |||||||||
Collectively evaluated for impairment | 1.05 | % | 1.34 | % | 1.46 | % | 1.48 | % | 1.19 | % | |||||||||
Total ALLL | 1.05 | % | 1.38 | % | 1.45 | % | 1.56 | % | 1.62 | % | |||||||||
To originated loans and leases and acquired not impaired at acquisition | |||||||||||||||||||
Individually evaluated for impairment | 1.08 | % | 3.85 | % | 0.51 | % | 3.70 | % | 13.49 | % | |||||||||
Collectively evaluated for impairment | 0.82 | % | 0.85 | % | 1.13 | % | 1.18 | % | 1.19 | % | |||||||||
Total ALLL | 0.83 | % | 0.88 | % | 1.12 | % | 1.26 | % | 1.62 | % | |||||||||
Total ALLL and discount (1) | 1.33 | % | 1.42 | % | 1.63 | % | 1.52 | % | 1.62 | % | |||||||||
To total loans and leases: | |||||||||||||||||||
Individually evaluated for impairment | 1.08 | % | 3.85 | % | 0.51 | % | 3.70 | % | 13.49 | % | |||||||||
Collectively evaluated for impairment | 0.79 | % | 0.77 | % | 0.89 | % | 1.18 | % | 1.19 | % | |||||||||
Total ALLL | 0.69 | % | 0.75 | % | 0.77 | % | 1.16 | % | 1.62 | % | |||||||||
Total ALLL and discount (1) | 2.66 | % | 3.37 | % | 6.99 | % | 5.53 | % | 1.62 | % | |||||||||
(1) The ratios were calculated by dividing the sum of ALLL and discounts by carrying value of loans
90
Servicing Rights
Total mortgage and SBA servicing rights were $50.7 million and $19.6 million at December 31, 2015 and 2014, respectively. The fair value of the mortgage servicing rights (MSRs) amounted to $49.9 million and $19.1 million and the amortized cost of the SBA servicing rights was $788 thousand and $484 thousand at December 31, 2015 and 2014, respectively. The Company retains servicing rights from certain of its sales of SFR mortgage loans and SBA loans. The principal balance of the loans underlying our total MSRs and SBA servicing rights was $4.77 billion and $36.5 million, respectively, at December 31, 2015 and $1.92 billion and $22.2 million, respectively, at December 31, 2014. The recorded amount of the MSR and SBA servicing rights as a percentage of the unpaid principal balance of the loans we are servicing was 1.05 percent and 2.16 percent, respectively, at December 31, 2015 as compared to 0.99 percent and 2.18 percent, respectively, at December 31, 2014.
Other Real Estate Owned
Other real estate owned (OREO) totaled $1.1 million at December 31, 2015, an increase of $674 thousand, or 159.3 percent, from $423 thousand at December 31, 2014. The increase in OREO relates to new foreclosures of $1.6 million, partially offset by OREO property sales of $886 thousand and a $38 thousand increase in the OREO valuation allowance.
Premises and equipment, net
Premises and equipment, net of accumulated depreciation totaled $111.5 million at December 31, 2015, an increase of $32.9 million, or 41.8 percent, from $78.7 million at December 31, 2014. The increase was primarily due to a purchase of a certain real property at a purchase price of $77.0 million, partially offset by a sale of a real property at a book value of $42.3 million. The Company recognized depreciation expense of $9.2 million, $6.8 million and $4.3 million for years ended December 31, 2015, 2014, and 2013, respectively.
Goodwill and other intangible assets
The Company had goodwill of $39.2 million and $31.6 million at December 31, 2015 and 2014, respectively. The increase in goodwill relates to finalization of purchase accounting for the BPNA Branch Acquisition, as discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8.
The Company tests its goodwill for impairment annually as of August 31 (the Measurement Date). At the Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluated, based on the weight of evidence, the significance of all qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The assessment of qualitative factors at the Measurement Date indicated that it is not more likely than not that impairment exists, as a result no further testing was performed.
The Company had core deposit intangibles of $18.0 million, customer relationship intangibles of $413 thousand, and trade name intangibles of $780 thousand at December 31, 2015. Core deposit intangibles are amortized over their useful lives ranging from 4 to 10 years. As of December 31, 2015, the weighted average remaining amortization period for core deposit intangibles was approximately 7.4 years. Customer relationship intangible, related to the RenovationReady acquisition, is amortized over its useful life of 5.0 years. As of December 31, 2015, the remaining amortization period for customer relationship intangible was approximately 3.1 years. Trade name intangibles, related to the RenovationReady and CS Financial acquisitions, have indefinite useful lives.During the year ended December 31, 2015, the Company wrote off a portion of core deposit intangibles on non-interest bearing demand deposits and money market accounts acquired through the BPNA Branch Acquisition of $258 thousand, as these deposits were transferred in connection with the sale of two branches to AUB. During the year ended December 31, 2014, the Company wrote off a portion of core deposit intangibles related to the Beach Business Bank acquisition of $48 thousand due to lower remaining deposit balances than forecasted. During the year ended December 31, 2013, the Company wrote off all remaining trade name intangible assets of Beach Business Bank, Gateway Bancorp and The Private Bank of California of $976 thousand due to the merger of the Company’s two banking subsidiaries into a single bank and a portion of core deposit intangibles related to the Gateway Bancorp acquisition of $85 thousand due to lower remaining deposit balances than forecasted.
91
Deposits
Total deposits were $6.30 billion at December 31, 2015, an increase of $1.63 billion, or 34.9 percent, from $4.67 billion at December 31, 2014. The increase was mainly due to strong deposit growth across the Company's business units, including strong growth from the private banking business, as well as increased average balance per account as the Company continues to build stronger relationship with its clients.
As of December 31, 2015, the Bank had brokered deposits of $992.9 million, which represented 12.1 percent of total assets. The following table presents the composition of deposits as of December 31, 2015 and 2014:
December 31, | Change | |||||||||||||
2015 | 2014 | Amount | Percentage | |||||||||||
(In thousands) | ||||||||||||||
Noninterest-bearing deposits | $ | 1,121,124 | $ | 662,295 | $ | 458,829 | 69.3 | % | ||||||
Interest-bearing demand deposits | 1,697,055 | 1,054,828 | 642,227 | 60.9 | % | |||||||||
Money market accounts | 1,479,931 | 1,074,432 | 405,499 | 37.7 | % | |||||||||
Savings accounts | 823,618 | 985,646 | (162,028 | ) | (16.4 | )% | ||||||||
Certificates of deposits of under $100,000 | 633,372 | 449,580 | 183,792 | 40.9 | % | |||||||||
Certificates of deposits of $100,000 through $250,000 | 250,868 | 392,899 | (142,031 | ) | (36.1 | )% | ||||||||
Certificates of deposits of more than $250,000 | 297,117 | 52,151 | 244,966 | 469.7 | % | |||||||||
Total deposits | $ | 6,303,085 | $ | 4,671,831 | $ | 1,631,254 | 34.9 | % | ||||||
The following table presents the scheduled maturities of certificates of deposit as of December 31, 2015:
Three Months or Less | Over Three Months Through Six Months | Over Six Months Through Twelve Months | Over One Year | Total | |||||||||||||||
(In thousands) | |||||||||||||||||||
Certificates of deposits of under $100,000 | $ | 532,772 | $ | 49,590 | $ | 27,366 | $ | 23,644 | $ | 633,372 | |||||||||
Certificates of deposits of $100,000 through $250,000 | 29,400 | 26,495 | 98,567 | 96,406 | 250,868 | ||||||||||||||
Certificates of deposits of more than $250,000 | 84,982 | 170,009 | 35,493 | 6,633 | 297,117 | ||||||||||||||
Total certificates of deposit | $ | 647,154 | $ | 246,094 | $ | 161,426 | $ | 126,683 | $ | 1,181,357 | |||||||||
92
Federal Home Loan Bank Advances
FHLB advances totaled $930.0 million at December 31, 2015, an increase of $297.0 million, or 46.9 percent, from $633.0 million at December 31, 2014. At December 31, 2015, the Bank had fixed-rate advances of $200.0 million at a weighted average interest rate of 0.89 percent and variable-rate advances of $730.0 million at a weighted average interest rate of 0.27 percent from the FHLB. At December 31, 2014, $400.0 million of the Bank’s advances from the FHLB were fixed-rate and had interest rates ranging from 0.19 percent to 0.82 percent with a weighted average interest rate of 0.31 percent, and $233.0 million of the Bank’s advances from the FHLB were variable-rate and had a weighted average interest rate of 0.27 percent. The following table presents contractual maturities by year of the Bank's advances as of December 31, 2015:
2016 | 2017 | 2018 | 2019 | 2020 and After | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Fixed rate | $ | 50,000 | $ | 100,000 | $ | 25,000 | $ | 25,000 | $ | — | $ | 200,000 | |||||||||||
Variable rate | 730,000 | — | — | — | — | 730,000 | |||||||||||||||||
Total | $ | 780,000 | $ | 100,000 | $ | 25,000 | $ | 25,000 | $ | — | $ | 930,000 | |||||||||||
Each advance is payable at its maturity date. Advances paid early may be subject to a prepayment penalty. At December 31, 2015 and 2014, the Bank’s advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid principal balance of $3.38 billion and $1.84 billion, respectively. The Bank’s investment in capital stock of the FHLB of San Francisco totaled $39.2 million and $29.8 million, respectively, at December 31, 2015 and 2014. Based on this collateral and the Bank’s holdings of FHLB stock, the Bank was eligible to borrow an additional $1.29 billion at December 31, 2015. In addition, the Bank had available lines of credit with the Federal Reserve Bank totaling $89.7 million at December 31, 2015.
The following table presents financial data of FHLB advances as of the dates or for the periods indicated:
As of or For the Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
($ in thousands) | |||||||||||
Weighted-average interest rate at end of year | 0.40 | % | 0.29 | % | 0.13 | % | |||||
Average interest rate during the year | 0.38 | % | 0.20 | % | 0.36 | % | |||||
Average balance | $ | 553,162 | $ | 267,816 | $ | 74,712 | |||||
Maximum amount outstanding at any month-end | $ | 1,355,000 | $ | 633,000 | $ | 250,000 | |||||
Balance at end of year | $ | 930,000 | $ | 633,000 | $ | 250,000 | |||||
93
Long Term Debt
Senior Notes
On April 23, 2012, the Company completed the public offering of $33.0 million aggregate principal amount of its 7.50 percent Senior Notes due April 15, 2020 (the Senior Notes I) at a price to the public of $25.00 per Senior Note I. Net proceeds after discounts were approximately $31.7 million. On December 6, 2012, the Company completed the issuance and sale of an additional $45.0 million aggregate principal amount of the Senior Notes I at a price to the public of $25.00 per Senior Note I, plus accrued interest from October 15, 2012. Net proceeds after discounts, including a full exercise of the $6.8 million underwriters’ overallotment option on December 7, 2012, were approximately $50.1 million.
On April 6, 2015, the Company completed the issuance and sale of $175.0 million aggregate principal amount of its 5.25 percent Senior Notes due April 15, 2025 (the Senior Notes II, together with the Senior Notes I, the Senior Notes). Net proceeds after discounts were approximately $172.8 million.
The Senior Notes were issued under the Senior Debt Securities Indenture, dated as of April 23, 2012 (the Base Indenture), as supplemented by the First Supplemental Indenture dated as of April 23, 2012 for the Senior Notes I, and the Second Supplemental Indenture dated as of April 6, 2015 for the Senior Notes II (the Supplemental Indentures and together with the Base Indenture, the Indenture), between the Company and U.S. Bank National Association, as trustee.
The Senior Notes are the Company’s senior unsecured debt obligations and rank equally with all of the Company’s other present and future unsecured unsubordinated obligations. The Senior Notes I and II bear interest at a per-annum rate of 7.50 percent and 5.25 percent, respectively. The Company makes interest payments on the Senior Notes I quarterly in arrears and on the Senior Notes II semi-annually in arrears.
The Senior Notes I and II will mature on April 15, 2020 and April 15, 2025, respectively. The Company may, at its option, on any scheduled interest payment date for the Senior Notes I (beginning with April 15, 2015) redeem the Senior Notes I in whole or in part, and on or after January 15, 2025 for the Senior Note II redeem the Senior Notes II in whole at any time or in part from time to time, in each case on not less than 30 nor more than 60 days’ prior notice. The Senior Notes will be redeemable at a redemption price equal to 100 percent of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to the date of redemption.
The Indenture contains several covenants which, among other things, restrict the Company’s ability and the ability of the Company’s subsidiaries to dispose of or incur liens on the voting stock of certain subsidiaries and also contains customary events of default.
Tangible Equity Units – Amortizing Notes
On May 21, 2014, the Company issued $69.0 million of 8.00 percent tangible equity units (TEUs) in an underwritten public offering. A total of 1,380,000 TEUs were issued, including 180,000 TEUs issued to the underwriter upon exercise of its overallotment option, with each TEU having a stated amount of $50.00. Each TEU is comprised of (i) a prepaid stock purchase contract (each a Purchase Contract) that will be settled by delivery of a specified number of shares of Company Common Stock and (ii) a junior subordinated amortizing note due May 15, 2017 (each an Amortizing Note) that has an initial principal amount of $10.604556 per Amortizing Note, bears interest at a rate of 7.50 percent per annum and has a scheduled final installment payment date of May 15, 2017. The Company has the right to defer installment payments on the Amortizing Notes at any time and from time to time, subject to certain restrictions, so long as such deferral period does not extend beyond May 15, 2019.
The Purchase Contracts and Amortizing Notes are accounted for separately. The Purchase Contract component of the TEUs is recorded in Additional Paid in Capital on the Consolidated Statements of Financial Condition. The Amortizing Note component is recorded in Long Term Debt on the Consolidated Statements of Financial Condition. The relative fair values of the Amortizing Notes and Purchase Contracts were estimated to be approximately $14.6 million and $54.4 million, respectively. Total issuance costs associated with the TEUs were $4.0 million (including the underwriter discount of $3.3 million), of which $857 thousand was allocated to the liability component and $3.2 million was allocated to the equity component of the TEUs. The portion of the issuance costs allocated to the debt component of the TEUs is being amortized over the term of the Amortizing Notes. Net proceeds of $65.0 million from the issuance of the TEUs were designated to partially finance the BPNA Branch Acquisition and for general corporate purposes.Additional information regarding the TEUs is provided under the heading “Tangible Equity Units” in Note 18 of the Notes to Consolidated Financial Statements in Item 8.
94
Reserve for Unfunded Loan Commitments
Reserve for unfunded loan commitments totaled $2.1 million at December 31, 2015, an increase of $198 thousand, or 10.6 percent, from $1.9 million at December 31, 2014.
The Company 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.
Reserve for Loss on Repurchased Loans
Reserve for loss on repurchased loans totaled $9.7 million at December 31, 2015, an increase of $1.4 million, or 16.8 percent, from $8.3 million at December 31, 2014.
This reserve relates to our single family residential mortgage business. We sell most of the residential mortgage loans that we originate into the secondary mortgage market. When we sell mortgage loans, we make customary representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. Typically, these representations and warranties are in place for the life of the loan. If a defect in the origination process is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, generally we have no liability to the purchaser for losses it may incur on such loan. In addition, we have the option to buy out severely delinquent loans at par from Ginnie Mae pools for which we are the servicer and issuer of the pool. We maintain a reserve for loss on repurchased loans to account for the expected losses related to loans we might be required to repurchase (or the indemnity payments we may have to make to purchasers). The reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments to our previous estimates of expected losses on loans sold. In each case, these estimates are based on the most recent data available to us, including data from third parties, regarding demand for loan repurchases, actual loan repurchases, and actual credit losses on repurchased loans, among other factors.
Provisions added to the reserve for loss on repurchased loans are initially recorded against net revenue on mortgage banking activities at the time of sale, and any subsequent increase or decrease in the provision is then recorded under non-interest expense in the Consolidated Statements of Operations as an increase or decrease to provision for loan repurchases.
The following table presents a summary of activity in the reserve for loss on repurchased loans for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 8,303 | $ | 5,427 | $ | 3,485 | |||||
Acquired in business combination | — | — | 314 | ||||||||
Provision for loan repurchases | 4,352 | 4,243 | 2,383 | ||||||||
Change in estimates | 846 | — | — | ||||||||
Utilization of reserve for loan repurchases | (3,801 | ) | (1,367 | ) | (755 | ) | |||||
Balance at end of year | $ | 9,700 | $ | 8,303 | $ | 5,427 | |||||
Stockholders’ Equity
Total stockholders’ equity totaled $652.4 million at December 31, 2015, an increase of $149.1 million, or 29.6 percent, from $503.3 million at December 31, 2014. The increase was due mainly to the issuance of preferred stock of $110.9 million and net income of $62.1 million, partially offset by cash dividends for common stock of $17.4 million and cash dividends for preferred stock of $9.8 million. For additional information, see Note 18 of the Notes to Consolidated Financial Statements in Item 8.
95
Liquidity
The Bank is required to have enough liquid assets in order to maintain sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained.
The Bank’s liquidity, represented by cash and cash equivalents and securities available-for-sale, is a product of its operating, investing, and financing activities. The Bank’s primary sources of funds are deposits, payments and maturities of outstanding loans and investment securities; and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Bank invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. The Bank also generates cash through borrowings. The Bank utilizes FHLB advances to leverage its capital base, to provide funds for its lending activities, as a source of liquidity, and to enhance its interest rate risk management. The Bank also has the ability to obtain brokered certificates of deposit. Liquidity management is both a daily and long-term function of business management. Any excess liquidity would be invested in federal funds or authorized investments such as mortgage-backed or U.S. agency securities. On a longer-term basis, the Bank maintains a strategy of investing in various lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments, and to maintain its portfolio of mortgage-backed securities and investment securities.
At December 31, 2015, there were $139.3 million of approved loan origination commitments, $514.3 million of unused lines of credit and $13.9 million of outstanding letters of credit. Certificates of deposit maturing in the next twelve months totaled $1.05 billion and $780.0 million of FHLB advances had maturities of less than twelve months at December 31, 2015.
Based on the competitive deposit rates offered and on historical experience, management believes that a significant portion of maturing deposits will remain with the Bank, although no assurance can be given in this regard. At December 31, 2015, the Company maintained $156.1 million of cash and cash equivalents that was 1.9 percent to total assets. The Company also maintains $102.6 million unpledged mortgage-backed securities issued by Government National Mortgage Association at December 31, 2015, which the Company considers in its assessment of cash and cash equivalents as they are highly liquid. These securities and cash and cash equivalents together represented 3.1 percent of total assets as of December 31, 2015. In addition, the Bank had the ability at December 31, 2015 to borrow an additional $1.29 billion from the FHLB and $89.7 million from the Federal Reserve Bank.
Commitments
The following table presents information as of December 31, 2015 regarding the Company’s commitments and contractual obligations:
Commitments and Contractual Obligations | |||||||||||||||||||
Total Amount Committed | Less Than One Year | One to Three Years | Three to Five Years | More than Five Years | |||||||||||||||
(In thousands) | |||||||||||||||||||
Commitments to extend credit | $ | 139,338 | $ | 63,137 | $ | 57,605 | $ | 6,222 | $ | 12,374 | |||||||||
Unused lines of credit | 514,339 | 358,280 | 47,783 | 23,757 | 84,519 | ||||||||||||||
Standby letters of credit | 13,889 | 12,361 | 750 | 758 | 20 | ||||||||||||||
Total commitments | $ | 667,566 | $ | 433,778 | $ | 106,138 | $ | 30,737 | $ | 96,913 | |||||||||
FHLB advances | $ | 930,000 | $ | 780,000 | $ | 125,000 | $ | 25,000 | $ | — | |||||||||
Long-term debt | 380,676 | 21,064 | 33,848 | 31,088 | 294,676 | ||||||||||||||
Operating and capital lease obligations | 44,411 | 13,943 | 18,224 | 7,892 | 4,352 | ||||||||||||||
Certificates of deposit | 1,181,357 | 1,054,674 | 114,848 | 11,212 | 623 | ||||||||||||||
Total contractual obligations | $ | 2,536,444 | $ | 1,869,681 | $ | 291,920 | $ | 75,192 | $ | 299,651 | |||||||||
96
Regulatory Capital
The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
Amount | Minimum Capital Requirements | Minimum Required to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
($ in thousands) | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Banc of California, Inc. | ||||||||||||||||||||
Total risk-based capital ratio | $ | 635,291 | 11.18 | % | $ | 454,515 | 8.00 | % | N/A | N/A | ||||||||||
Tier 1 risk-based capital ratio | 608,644 | 10.71 | % | 340,887 | 6.00 | % | N/A | N/A | ||||||||||||
Common equity tier 1 capital ratio | 417,894 | 7.36 | % | 255,665 | 4.50 | % | N/A | N/A | ||||||||||||
Tier 1 leverage ratio | 608,644 | 8.07 | % | 301,761 | 4.00 | % | N/A | N/A | ||||||||||||
Banc of California, NA | ||||||||||||||||||||
Total risk-based capital ratio | $ | 763,522 | 13.45 | % | $ | 454,192 | 8.00 | % | $ | 567,739 | 10.00 | % | ||||||||
Tier 1 risk-based capital ratio | 725,922 | 12.79 | % | 340,644 | 6.00 | % | 454,192 | 8.00 | % | |||||||||||
Common equity tier 1 capital ratio | 725,922 | 12.79 | % | 255,483 | 4.50 | % | 369,031 | 6.50 | % | |||||||||||
Tier 1 leverage ratio | 725,922 | 9.64 | % | 301,232 | 4.00 | % | 376,540 | 5.00 | % | |||||||||||
December 31, 2014 | ||||||||||||||||||||
Banc of California, Inc. | ||||||||||||||||||||
Total risk-based capital ratio | $ | 473,656 | 11.28 | % | $ | 335,829 | 8.00 | % | N/A | N/A | ||||||||||
Tier 1 risk-based capital ratio | 442,307 | 10.54 | % | 167,914 | 4.00 | % | N/A | N/A | ||||||||||||
Tier 1 leverage ratio | 442,307 | 8.57 | % | 206,502 | 4.00 | % | N/A | N/A | ||||||||||||
Banc of California, NA | ||||||||||||||||||||
Total risk-based capital ratio | $ | 503,727 | 12.04 | % | $ | 334,834 | 8.00 | % | $ | 418,543 | 10.00 | % | ||||||||
Tier 1 risk-based capital ratio | 472,378 | 11.29 | % | 167,417 | 4.00 | % | 251,126 | 6.00 | % | |||||||||||
Tier 1 leverage ratio | 472,378 | 9.17 | % | 206,095 | 4.00 | % | 257,619 | 5.00 | % | |||||||||||
Recent Accounting Pronouncements
Please see Note 1 of the Notes to Consolidated Financial Statements in Item 8.
97
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.
In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. These policies are implemented by the asset and liability management committee. The asset and liability management committee is chaired by the treasurer and is comprised of members of our senior management. Asset and liability management policies establish guidelines for the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs, while the asset liability management committee monitors adherence to these guidelines. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals. The asset and liability management committee meets periodically to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to our net present value of equity analysis. At each meeting, the asset and liability management committee recommends appropriate strategy changes based on this review. The treasurer or his/her designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors on a regular basis.
In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we evaluate various strategies including:
• | Originating and purchasing adjustable-rate mortgage loans, |
• | Originating shorter-term consumer loans, |
• | Managing the duration of investment securities, |
• | Managing our deposits to establish stable deposit relationships, |
• | Using FHLB advances and/or certain derivatives such as swaps to align maturities and repricing terms, and |
• | Managing the percentage of fixed-rate loans in our portfolio. |
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the asset and liability management committee may determine to increase the Company’s interest rate risk position within the asset liability tolerance set by the Bank’s policies.
As part of its procedures, the asset and liability management committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the Board of Directors of the Company.
98
Interest Rate Sensitivity of Economic Value of Equity and Net Interest Income
The following table presents the projected change in the Bank’s net portfolio value at December 31, 2015 that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change:
December 31, 2015 | |||||||||||||||||||||
Change in Interest Rates in Basis Points (bp) (1) | Economic Value of Equity | Net Interest Income | |||||||||||||||||||
Amount | Amount Change | Percentage Change | Amount | Amount Change | Percentage Change | ||||||||||||||||
($ in thousands) | |||||||||||||||||||||
+200 bp | $ | 916,453 | $ | (159,509 | ) | (14.8 | )% | $ | 268,027 | $ | (14,487 | ) | (5.1 | )% | |||||||
+100 bp | 997,980 | (77,982 | ) | (7.2 | )% | 275,462 | (7,052 | ) | (2.5 | )% | |||||||||||
0 bp | 1,075,962 | 282,514 | |||||||||||||||||||
-100 bp | 1,140,778 | 64,816 | 6.0 | % | 287,255 | 4,741 | 1.7 | % | |||||||||||||
(1) | Assumes an instantaneous uniform change in interest rates at all maturities |
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.
At December 31, 2015, the Company did not maintain any securities for trading purposes or engage in trading activities. The Company does use derivative instruments to hedge its mortgage banking risks. In addition, interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.
99
Item 8. Financial Statements and Supplementary Data
BANC OF CALIFORNIA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014, and 2013
Contents
CONSOLIDATED FINANCIAL STATEMENTS | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |
100
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Banc of California, Inc.:
We have audited the accompanying consolidated statements of financial condition of Banc of California, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banc of California, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Banc of California, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 18, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP KPMG LLP | |
Irvine, California
February 18, 2016
101
ITEM 1 – FINANCIAL STATEMENTS
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share and per share data)
December 31, | |||||||
2015 | 2014 | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 15,051 | $ | 14,364 | |||
Interest-bearing deposits | 141,073 | 216,835 | |||||
Total cash and cash equivalents | 156,124 | 231,199 | |||||
Time deposits in financial institutions | 1,500 | 1,900 | |||||
Securities available-for-sale, carried at fair value | 833,596 | 345,695 | |||||
Securities held-to-maturity, at amortized cost (fair value of $932,285 at December 31, 2015) | 962,203 | — | |||||
Loans held-for-sale, carried at fair value | 379,155 | 278,749 | |||||
Loans held-for-sale, carried at lower of cost or fair value | 289,686 | 908,341 | |||||
Loans and leases receivable, net of allowance of $35,533 and $29,480 at December 31, 2015 and 2014, respectively | 5,148,861 | 3,919,642 | |||||
Federal Home Loan Bank and other bank stock, at cost | 59,069 | 42,241 | |||||
Servicing rights, net ($49,939 and $13,135 measured at fair value at December 31, 2015 and 2014, respectively) | 50,727 | 13,619 | |||||
Servicing rights held-for-sale, carried at fair value | — | 5,947 | |||||
Accrued interest receivable | 22,800 | 15,113 | |||||
Other real estate owned, net | 1,097 | 423 | |||||
Premises, equipment, and capital leases, net | 111,539 | 78,685 | |||||
Bank-owned life insurance | 100,171 | 19,095 | |||||
Goodwill | 39,244 | 31,591 | |||||
Affordable housing fund investment | 4,011 | 4,737 | |||||
Deferred income tax | 11,341 | 16,373 | |||||
Income tax receivable | 604 | — | |||||
Other intangible assets, net | 19,158 | 25,252 | |||||
Other assets | 44,669 | 32,695 | |||||
Total Assets | $ | 8,235,555 | $ | 5,971,297 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Noninterest-bearing deposits | $ | 1,121,124 | $ | 662,295 | |||
Interest-bearing deposits | 5,181,961 | 4,009,536 | |||||
Total deposits | 6,303,085 | 4,671,831 | |||||
Advances from Federal Home Loan Bank | 930,000 | 633,000 | |||||
Long term debt, net | 261,876 | 93,569 | |||||
Reserve for loss on repurchased loans | 9,700 | 8,303 | |||||
Income taxes payable | 1,241 | 56 | |||||
Accrued expenses and other liabilities | 77,248 | 61,223 | |||||
Total liabilities | 7,583,150 | 5,467,982 | |||||
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 December 31, 2015 and 2014 | 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 December 31, 2015 and 2014 | 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 December 31, 2015 and 2014 | 37,943 | 37,943 | |||||
Series D, 7.375% non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 115,000 shares authorized, 115,000 shares issued and outstanding at December 31, 2015 and 0 shares issued and outstanding at December 31, 2014 | 110,873 | — | |||||
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 39,601,290 shares issued and 38,002,267 shares outstanding at December 31, 2015; 35,829,763 shares issued and 34,190,740 shares outstanding at December 31, 2014 | 395 | 358 | |||||
Class B non-voting non-convertible common stock, $0.01 par value per share, 3,136,156 shares authorized; 37,355 shares issued and outstanding at December 31, 2015 and 609,195 shares issued and outstanding at December 31, 2014 | 1 | 6 | |||||
Additional paid-in capital | 429,790 | 422,910 | |||||
Retained earnings | 63,534 | 29,589 | |||||
Treasury stock, at cost (1,599,023 shares at December 31, 2015 and 1,639,023 shares at December 31, 2014) | (29,070 | ) | (29,798 | ) | |||
Accumulated other comprehensive (loss) income, net | (2,995 | ) | 373 | ||||
Total stockholders’ equity | 652,405 | 503,315 | |||||
Total liabilities and stockholders’ equity | $ | 8,235,555 | $ | 5,971,297 | |||
See accompanying notes to consolidated financial statements.
102
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Interest and dividend income | |||||||||||
Loans, including fees | $ | 241,556 | $ | 180,761 | $ | 116,673 | |||||
Securities | 20,263 | 5,158 | 2,632 | ||||||||
Dividends and other interest-earning assets | 4,519 | 2,220 | 1,206 | ||||||||
Total interest and dividend income | 266,338 | 188,139 | 120,511 | ||||||||
Interest expense | |||||||||||
Deposits | 25,783 | 24,411 | 16,051 | ||||||||
Federal Home Loan Bank advances | 2,120 | 527 | 269 | ||||||||
Notes payable and other interest-bearing liabilities | 14,718 | 7,924 | 6,962 | ||||||||
Total interest expense | 42,621 | 32,862 | 23,282 | ||||||||
Net interest income | 223,717 | 155,277 | 97,229 | ||||||||
Provision for loan and lease losses | 7,469 | 10,976 | 7,963 | ||||||||
Net interest income after provision for loan and lease losses | 216,248 | 144,301 | 89,266 | ||||||||
Noninterest income | |||||||||||
Customer service fees | 4,057 | 1,490 | 1,942 | ||||||||
Loan servicing income | 2,974 | 4,199 | 2,049 | ||||||||
Income from bank owned life insurance | 1,076 | 224 | 177 | ||||||||
Net gain on sale of securities available-for-sale | 3,258 | 1,183 | 331 | ||||||||
Net gain on sale of loans | 37,211 | 19,828 | 8,700 | ||||||||
Net revenue on mortgage banking activities | 144,685 | 95,430 | 67,890 | ||||||||
Advisory service fees | 9,868 | 12,904 | 377 | ||||||||
Loan brokerage income | 3,140 | 8,674 | 1,356 | ||||||||
Gain on sale of building | 9,919 | — | — | ||||||||
Gain on sale of branches | 163 | 456 | 12,104 | ||||||||
Other income | 3,868 | 1,249 | 1,817 | ||||||||
Total noninterest income | 220,219 | 145,637 | 96,743 | ||||||||
Noninterest expense | |||||||||||
Salaries and employee benefits | 213,114 | 162,879 | 110,687 | ||||||||
Occupancy and equipment | 41,405 | 33,443 | 19,662 | ||||||||
Professional fees | 20,193 | 19,247 | 13,864 | ||||||||
Data processing | 8,184 | 5,231 | 4,710 | ||||||||
Advertising | 6,156 | 5,016 | 4,361 | ||||||||
Regulatory assessments | 5,644 | 4,182 | 2,535 | ||||||||
Loan servicing and foreclosure expense | 1,005 | 1,066 | 905 | ||||||||
Valuation allowance for other real estate owned | 38 | 32 | 97 | ||||||||
Net gain on sales of other real estate owned | (23 | ) | (66 | ) | (464 | ) | |||||
Provision for loan repurchases | 2,326 | 2,808 | 2,383 | ||||||||
Amortization of intangible assets | 5,836 | 4,079 | 2,651 | ||||||||
Impairment on intangible assets | 258 | 48 | 1,061 | ||||||||
All other expense | 28,065 | 25,507 | 15,649 | ||||||||
Total noninterest expense | 332,201 | 263,472 | 178,101 | ||||||||
Income before income taxes | 104,266 | 26,466 | 7,908 | ||||||||
Income tax expense (benefit) | 42,194 | (3,739 | ) | 7,992 | |||||||
Net income (loss) | 62,072 | 30,205 | (84 | ) | |||||||
Preferred stock dividends | 9,823 | 3,640 | 2,185 | ||||||||
Net income (loss) available to common stockholders | $ | 52,249 | $ | 26,565 | $ | (2,269 | ) | ||||
Basic earnings (loss) per common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | ||||
Diluted earnings (loss) per common share | $ | 1.34 | $ | 0.90 | $ | (0.15 | ) | ||||
Basic earnings (loss) per class B common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | ||||
Diluted earnings (loss) per class B common share | $ | 1.36 | $ | 0.91 | $ | (0.15 | ) | ||||
See accompanying notes to consolidated financial statements.
103
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Net income (loss) | $ | 62,072 | $ | 30,205 | $ | (84 | ) | ||||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized (loss) gain on securities available-for-sale: | |||||||||||
Unrealized (loss) gain arising during the period | (1,614 | ) | 2,020 | (1,892 | ) | ||||||
Reclassification adjustment for gain included in net income | (1,890 | ) | (685 | ) | (331 | ) | |||||
Total change in unrealized loss (gain) on securities available-for-sale | (3,504 | ) | 1,335 | (2,223 | ) | ||||||
Unrealized gain (loss) on cash flow hedge: | |||||||||||
Unrealized (loss) gain arising during the period | (396 | ) | (362 | ) | 226 | ||||||
Reclassification adjustment for loss included in net income | 532 | — | — | ||||||||
Total change in unrealized gain (loss) on cash flow hedge | 136 | (362 | ) | 226 | |||||||
Total other comprehensive (loss) income | (3,368 | ) | 973 | (1,997 | ) | ||||||
Comprehensive income (loss) | $ | 58,704 | $ | 31,178 | $ | (2,081 | ) | ||||
See accompanying notes to consolidated financial statements.
104
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share and per share data)
Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earning | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series C | Series D | Class A | Class B Non-Voting | Total | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2012 | $ | 31,934 | $ | — | $ | — | $ | — | $ | 120 | $ | 11 | $ | 154,563 | $ | 26,552 | $ | (25,818 | ) | $ | 1,397 | $ | 188,759 | ||||||||||||||||||||
Comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (84 | ) | — | — | (84 | ) | ||||||||||||||||||||||||||||||
Other comprehensive loss, net | — | — | — | — | — | — | — | — | — | (1,997 | ) | (1,997 | ) | ||||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | — | 90 | (5 | ) | 99,261 | — | — | — | 99,346 | |||||||||||||||||||||||||||||||
Issuance of preferred stock | — | — | 37,943 | — | — | — | — | — | — | — | 37,943 | ||||||||||||||||||||||||||||||||
Preferred stock assumed through business acquisition | — | 10,000 | — | — | — | — | — | — | — | 10,000 | |||||||||||||||||||||||||||||||||
Stock options converted through business acquisition | — | — | — | — | — | — | 9 | — | — | — | 9 | ||||||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | — | 540 | — | — | — | 540 | ||||||||||||||||||||||||||||||||
Forfeiture and retirement of common stock | — | — | — | — | — | — | 311 | — | (270 | ) | — | 41 | |||||||||||||||||||||||||||||||
Purchase of 377,517 shares of treasury stock | — | — | — | — | — | — | — | — | (5,046 | ) | — | (5,046 | ) | ||||||||||||||||||||||||||||||
Issuance of stock awards from treasury stock | — | — | — | — | — | — | (3,223 | ) | — | 3,223 | — | — | |||||||||||||||||||||||||||||||
Shares purchased under the Dividend Reinvestment Plan | — | — | — | — | — | — | 519 | (727 | ) | — | — | (208 | ) | ||||||||||||||||||||||||||||||
Stock option compensation expense | — | — | — | — | — | — | 582 | — | — | — | 582 | ||||||||||||||||||||||||||||||||
Restricted stock compensation expense | — | — | — | — | — | — | 2,311 | — | — | — | 2,311 | ||||||||||||||||||||||||||||||||
Conversion of stock appreciation rights to stock options | — | — | — | — | — | — | 1,433 | — | — | — | 1,433 | ||||||||||||||||||||||||||||||||
Dividends declared ($0.48 per common share) | — | — | — | — | — | — | — | (6,736 | ) | — | — | (6,736 | ) | ||||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | — | — | — | (2,185 | ) | — | — | (2,185 | ) | ||||||||||||||||||||||||||||||
Balance at December 31, 2013 | $ | 31,934 | $ | 10,000 | $ | 37,943 | $ | — | $ | 210 | $ | 6 | $ | 256,306 | $ | 16,820 | $ | (27,911 | ) | $ | (600 | ) | $ | 324,708 | |||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 30,205 | — | — | 30,205 | ||||||||||||||||||||||||||||||||
Other comprehensive income, net | — | — | — | — | — | — | — | — | — | 973 | 973 | ||||||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | — | 148 | — | 104,508 | — | — | — | 104,656 | ||||||||||||||||||||||||||||||||
Issuance of tangible equity units | — | — | — | — | — | — | 51,182 | — | — | — | 51,182 | ||||||||||||||||||||||||||||||||
Purchase of 23,502 shares of treasury stock | — | — | — | — | — | — | — | — | (280 | ) | — | (280 | ) | ||||||||||||||||||||||||||||||
Reclassification adjustment for awards issued from treasury stock | — | — | — | — | — | — | 1,926 | — | (1,926 | ) | — | — | |||||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | — | 993 | — | — | — | 993 | ||||||||||||||||||||||||||||||||
Stock option compensation expense | — | — | — | — | — | — | 480 | — | — | — | 480 | ||||||||||||||||||||||||||||||||
Restricted stock compensation expense | — | — | — | — | — | — | 5,838 | — | — | — | 5,838 | ||||||||||||||||||||||||||||||||
Stock appreciation right expense | — | — | — | — | — | — | 1,889 | — | — | — | 1,889 | ||||||||||||||||||||||||||||||||
Issuance of stock awards from treasury stock | — | — | — | — | — | — | (319 | ) | — | 319 | — | — | |||||||||||||||||||||||||||||||
Tax effect from stock compensation plan | — | — | — | — | — | — | 85 | — | — | — | 85 | ||||||||||||||||||||||||||||||||
Shares purchased under the Dividend Reinvestment Plan | — | — | — | — | — | — | 624 | (848 | ) | — | — | (224 | ) | ||||||||||||||||||||||||||||||
Restricted stock surrendered due to employee tax liability | — | — | — | — | — | — | (602 | ) | — | — | — | (602 | ) | ||||||||||||||||||||||||||||||
Stock appreciation right dividends | — | — | — | — | — | — | — | (543 | ) | — | — | (543 | ) | ||||||||||||||||||||||||||||||
Dividends declared ($0.48 per common share) | — | — | — | — | — | — | — | (12,405 | ) | — | — | (12,405 | ) | ||||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | — | — | — | (3,640 | ) | — | — | (3,640 | ) | ||||||||||||||||||||||||||||||
105
Balance at December 31, 2014 | $ | 31,934 | $ | 10,000 | $ | 37,943 | $ | — | $ | 358 | $ | 6 | $ | 422,910 | $ | 29,589 | $ | (29,798 | ) | $ | 373 | $ | 503,315 | ||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 62,072 | — | — | 62,072 | ||||||||||||||||||||||||||||||||
Other comprehensive loss, net | — | — | — | — | — | — | — | — | — | (3,368 | ) | (3,368 | ) | ||||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | — | 40 | (5 | ) | (35 | ) | — | — | — | — | ||||||||||||||||||||||||||||||
Issuance of preferred stock | — | — | — | 110,873 | — | — | — | — | — | — | 110,873 | ||||||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | — | (227 | ) | — | 728 | — | 501 | |||||||||||||||||||||||||||||||
Stock option compensation expense | — | — | — | — | — | — | 528 | — | — | — | 528 | ||||||||||||||||||||||||||||||||
Restricted stock compensation expense | — | — | — | — | — | — | 8,598 | — | — | — | 8,598 | ||||||||||||||||||||||||||||||||
Stock appreciation right expense | — | — | — | — | — | — | 202 | — | — | — | 202 | ||||||||||||||||||||||||||||||||
Restricted stock surrendered due to employee tax liability | — | — | — | — | (3 | ) | — | (2,251 | ) | — | — | — | (2,254 | ) | |||||||||||||||||||||||||||||
Tax effect from stock compensation plan | — | — | — | — | — | — | (137 | ) | — | — | — | (137 | ) | ||||||||||||||||||||||||||||||
Shares purchased under the Dividend Reinvestment Plan | — | — | — | — | — | — | 202 | (208 | ) | — | — | (6 | ) | ||||||||||||||||||||||||||||||
Stock appreciation right dividends | — | — | — | — | — | — | — | (713 | ) | — | — | (713 | ) | ||||||||||||||||||||||||||||||
Dividends declared ($0.48 per common share) | — | — | — | — | — | — | — | (17,383 | ) | — | — | (17,383 | ) | ||||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | — | — | — | (9,823 | ) | — | — | (9,823 | ) | ||||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 31,934 | $ | 10,000 | $ | 37,943 | $ | 110,873 | $ | 395 | $ | 1 | $ | 429,790 | $ | 63,534 | $ | (29,070 | ) | $ | (2,995 | ) | $ | 652,405 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
106
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 62,072 | $ | 30,205 | $ | (84 | ) | ||||
Adjustments to reconcile net income to net cash used in operating activities | |||||||||||
Provision for loan and lease losses | 7,469 | 10,976 | 7,963 | ||||||||
Provision for loan repurchases | 2,326 | 2,808 | 2,383 | ||||||||
Net revenue on mortgage banking activities | (144,685 | ) | (95,430 | ) | (67,890 | ) | |||||
Net gain on sale of loans | (37,211 | ) | (19,828 | ) | (8,700 | ) | |||||
Net amortization of securities | 1,602 | 746 | 1,742 | ||||||||
Depreciation on premises and equipment | 9,154 | 6,834 | 4,283 | ||||||||
Amortization of intangibles | 5,836 | 4,079 | 2,651 | ||||||||
Amortization of debt issuance cost | 727 | 686 | 385 | ||||||||
Stock option compensation expense | 528 | 480 | 582 | ||||||||
Stock award compensation expense | 8,598 | 5,838 | 2,311 | ||||||||
Change in fair value of converted stock options related to business acquisition | — | — | 9 | ||||||||
Stock appreciation right expense | 202 | 1,889 | 1,072 | ||||||||
Bank owned life insurance income | (1,076 | ) | (224 | ) | (177 | ) | |||||
Impairment on intangible assets | 258 | 48 | 1,061 | ||||||||
Net gain on sale of securities available-for-sale | (3,258 | ) | (1,183 | ) | (331 | ) | |||||
Gain on sale of mortgage servicing rights | — | (2,318 | ) | — | |||||||
Gain on sale of other real estate owned | (23 | ) | (66 | ) | (464 | ) | |||||
Gain on sale of building | (9,919 | ) | — | — | |||||||
Gain on sale of branches | (163 | ) | (456 | ) | (12,104 | ) | |||||
Loss on sale or disposal of property and equipment | 80 | 942 | — | ||||||||
Loss (gain) from change of fair value on mortgage servicing rights | 8,765 | 1,564 | (298 | ) | |||||||
Deferred income tax (benefit) expense | 7,279 | (17,157 | ) | 7,573 | |||||||
Increase in valuation allowances on other real estate owned | 38 | 32 | 97 | ||||||||
Repurchase of mortgage loans | (19,387 | ) | (3,343 | ) | — | ||||||
Originations of loans held-for-sale from mortgage banking | (4,388,042 | ) | (2,822,406 | ) | (1,942,622 | ) | |||||
Originations of other loans held-for-sale | (803,936 | ) | (1,439,700 | ) | (441,969 | ) | |||||
Proceeds from sales of and principal collected on loans held-for-sale from mortgage banking | 4,406,924 | 2,838,771 | 1,916,746 | ||||||||
Proceeds from sales of and principal collected on other loans held-for-sale | 882,288 | 923,494 | 107,222 | ||||||||
Change in deferred loan fees (costs) | 512 | (1,296 | ) | (248 | ) | ||||||
Amortization of premiums and discounts on purchased loans | (30,933 | ) | (34,776 | ) | (20,304 | ) | |||||
Change in accrued interest receivable | (7,687 | ) | (4,247 | ) | (5,865 | ) | |||||
Change in other assets | (15,935 | ) | (5,875 | ) | 4,140 | ||||||
Change in accrued interest payable and other liabilities | 12,354 | (8,603 | ) | 5,347 | |||||||
Net cash used in operating activities | (45,243 | ) | (627,516 | ) | (435,489 | ) | |||||
Cash flows from investing activities: | |||||||||||
Proceeds from sales of securities available-for-sale | 989,786 | 111,764 | 127,298 | ||||||||
Proceeds from maturities and calls of securities available-for-sale | 687 | 1,231 | 12,606 | ||||||||
Proceeds from principal repayments of securities available-for-sale | 109,026 | 41,142 | 98,287 | ||||||||
Purchases of securities available-for-sale | (1,591,883 | ) | (327,069 | ) | (71,129 | ) | |||||
Purchases of securities held-to-maturity | (962,052 | ) | — | — | |||||||
Purchases of bank owned life insurance | (80,000 | ) | — | — | |||||||
Net cash (used) acquired in acquisitions | — | (23,409 | ) | 5,644 | |||||||
Net cash used in branch sale | (46,731 | ) | — | (448,891 | ) | ||||||
Loan originations and principal collections, net | (501,927 | ) | (376,771 | ) | (385,272 | ) | |||||
Purchase of loans | (705,709 | ) | (38,572 | ) | (857,733 | ) | |||||
Redemption of Federal Home Loan Bank stocks | 18,459 | 559 | 25 | ||||||||
Purchase of Federal Home Loan Bank and other bank stocks | (35,287 | ) | (20,200 | ) | (13,783 | ) | |||||
Proceeds from sale of loans held-for-investment | 575,477 | 161,638 | 276,516 | ||||||||
Net change in time deposits in financial institutions | 400 | (54 | ) | 3,181 | |||||||
Proceeds from sale of other real estate owned | 909 | 264 | 5,123 | ||||||||
Proceeds from sale of mortgage servicing rights | 5,862 | 18,808 | — | ||||||||
Proceeds from sale of premises and equipment | 50,639 | 79 | — | ||||||||
Additions to premises and equipment | (83,259 | ) | (11,663 | ) | (54,965 | ) | |||||
Payments of capital lease obligations | (947 | ) | (901 | ) | (389 | ) | |||||
Net cash used in investing activities | (2,256,550 | ) | (463,154 | ) | (1,303,482 | ) | |||||
Cash flows from financing activities: | |||||||||||
Net increase in deposits | 1,677,855 | 676,372 | 1,514,930 | ||||||||
Net increase in short-term Federal Home Loan Bank advances | 362,000 | 143,000 | 133,167 | ||||||||
Repayment of long-term Federal Home Loan Bank advances | (465,000 | ) | (10,000 | ) | — | ||||||
Proceeds from long-term Federal Home Loan Bank advances | 400,000 | 250,000 | — | ||||||||
Net proceeds from issuance of common stock | — | 103,656 | 67,792 | ||||||||
Net proceeds from issuance of preferred stock | 110,873 | — | 37,943 | ||||||||
Net proceeds from issuance of long term debt | 172,304 | — | — | ||||||||
Net proceeds from issuance of tangible equity units | — | 64,959 | — | ||||||||
Payment of Amortizing Debt | (4,715 | ) | (2,157 | ) | — | ||||||
Purchase of treasury stock | — | (280 | ) | (5,005 | ) | ||||||
Proceeds from exercise of stock options | 501 | 993 | 540 | ||||||||
Dividends paid on stock appreciation rights | (699 | ) | (471 | ) | — | ||||||
Dividends paid on preferred stock | (9,446 | ) | (3,652 | ) | (2,185 | ) | |||||
Dividends paid on common stock | (16,955 | ) | (10,669 | ) | (6,736 | ) | |||||
Net cash provided by financing activities | 2,226,718 | 1,211,751 | 1,740,446 | ||||||||
Net change in cash and cash equivalents | (75,075 | ) | 121,081 | 1,475 | |||||||
Cash and cash equivalents at beginning of year | 231,199 | 110,118 | 108,643 | ||||||||
Cash and cash equivalents at end of year | $ | 156,124 | $ | 231,199 | $ | 110,118 | |||||
Supplemental cash flow information | |||||||||||
Interest paid on deposits and borrowed funds | $ | 44,810 | $ | 32,592 | $ | 23,277 | |||||
Income taxes paid | 33,429 | 9,855 | — | ||||||||
Income taxes refunds received | 19 | 263 | — | ||||||||
Supplemental disclosure of non-cash activities | |||||||||||
Transfer from loans to other real estate owned, net | 1,598 | 653 | — | ||||||||
Transfer of loans receivable to loans held for sale, net of transfer of $0, $613 and $1,443 from allowance for loan and lease losses for the year ended December 31, 2015, 2014 and 2013, respectively | — | 66,334 | 181,360 | ||||||||
Transfer of loans held-for-sale to loans held-for-investment | 482,851 | 117,116 | — | ||||||||
Equipment acquired under capital leases | 112 | 1,313 | 2,675 | ||||||||
Conversion of stock appreciation rights to stock options | — | — | 1,433 | ||||||||
See accompanying notes to consolidated financial statements.
107
BANC OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014 and 2013
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Banc of California, Inc. is a financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Orange County, California and incorporated under the laws of Maryland. Banc of California, Inc.'s assets primarily consist of the outstanding stock of the Bank, as well as the outstanding membership interests of the Palisades Group.
Banc of California, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System and the Bank operates under a national bank charter issued by the Office of the Comptroller of the Currency, its primary regulator. The Bank is a member of the Federal Home Loan Bank system, and maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation.
The Bank offers a variety of financial services to meet the banking and financial needs of the communities we serve, with operations conducted through 35 banking offices, serving San Diego, Los Angeles, and Orange counties, California and 68 loan production offices in California, Arizona, Oregon, Virginia, Indiana, Colorado, Idaho, North Carolina, and Nevada as of December 31, 2015. The Palisades Group provides services related to the purchase, sale and management of single-family residential mortgage loans.
Basis of Presentation: The consolidated financial statements include the accounts of the Company and all other entities in which it has a controlling financial interest. All 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. The accounting and reporting polices of the Company are based upon GAAP and conform to predominant practices within the financial services industry. Significant accounting policies followed by the Company are presented below.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash or cash equivalents.
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, realization of deferred tax assets, the valuation of goodwill and other intangible assets, mortgage banking derivatives, purchased credit impaired loan discount accretion, fair value of assets and liabilities acquired in business combinations, and the fair value measurement of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.
Cash and cash equivalents: Cash and cash equivalents include cash on hand, interest-bearing deposits with other financial institutions with original maturities under 90 days, and daily federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased, including overnight borrowings with the Federal Home Loan Bank.
Cash flows from loans, either originated or acquired, are classified at that time according to management's original intent to either sell or hold the loan for the foreseeable future. When management's intent at origination or purchase is to sell the loan, the cash flows of that loan are presented as operating cash flows. When management's intent is to hold the loan for the foreseeable future, the cash flows of that loan are presented as investing cash flows.
Time Deposits in Financial Institutions: Time deposits in financial institutions have original maturities over 90 days and are carried at cost.
Investment Securities: Investment securities are classified at the time of purchase as available-for-sale or held-to-maturity. Debt securities classified as held-to-maturity are recorded at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when management intends that they might be sold before maturity. Equity securities with readily determinable fair values are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized holding gains and losses. Unrealized holding gains and losses, net of taxes, are reported in Accumulated Other Comprehensive Income or Loss (AOCI) on the Consolidated Statements of Financial Condition.
108
Accreted discounts and amortized premiums are included in interest income using the level yield method, and realized gains or losses from sales of securities are calculated using the specific identification method.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic conditions warrant such an evaluation. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC 320, Accounting for Certain Investments in Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.
In determining OTTI under the ASC 320 model, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also considers whether the market decline was affected by macroeconomic conditions, and assesses whether the Company intends to sell, or it is more likely than not it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by ASC 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the ASC 325 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When OTTI occurs in either model, the amount of the impairment recognized in earnings depends on the Company’s intent to sell the security or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (i) OTTI related to credit loss, which must be recognized in the income statement and (ii) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities the entire amount of impairment is recognized through earnings.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock: The Bank is a member of the FHLB and FRB system. Members are required to own a certain amount of FHLB and FRB stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB and FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Conforming SFR Mortgage Loans Held-for-Sale: Conforming SFR mortgage loans originated and intended for sale in the secondary market are carried at the fair value as of each balance sheet date, as determined by outstanding commitments from investors or what secondary markets are currently offering for portfolios with similar characteristics. The fair value includes the servicing value of the loans as well as any accrued interest. Conforming SFR mortgage loans held-for-sale are generally sold with servicing rights retained. Origination fees and costs are recognized in earnings at the time of origination for newly originated loans held-for-sale. Gains and losses on sales of conforming SFR mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
The Company’s conforming SFR mortgage loans held-for-sale at fair value were Government-sponsored enterprise (GSE) or Government-eligible at December 31, 2015. These loans are considered to have reliable market price information and the fair value of these loans was based on quoted market prices of similar assets and included the value of loan servicing.
In scenarios of market disruptions, the current secondary market prices that are generally relied on to value GSE or Government-eligible mortgage loans may not be readily available. In these circumstances, the Company may consider other factors, including: (i) quoted market prices for to-be-announced securities (for agency-eligible loans); (ii) recent transaction settlements or trades but unsettled transactions for similar assets; (iii) recent third party market transactions for similar assets; and (iv) modeled valuations using assumptions that the Bank believes would be used by market participants in estimating fair value (assumptions may include prepayment rates, interest rates, volatilities, mortgage spreads and projected loss rates).
Adjustments to reflect unrealized gains and losses resulting from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as part of Net Revenue on Mortgage Banking Activities on the Consolidated Statements of Operations.
109
Non-Conforming SFR Mortgage Loans Held-for-Sale: Non-conforming SFR mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value on an aggregate basis. A decline in the aggregate fair value of the loans below their aggregate carrying amount is recognized through a charge to earnings in the period of such a decline. Unearned income on the loans is taken into earnings when they are sold. Gains and losses on sales of non-conforming SFR mortgage loans are included in Net Gain on Sale of Loans on the Consolidated Statements of Operations.
SBA Loans Held-for-Sale: SBA loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains or losses realized on the sales of SBA loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Gains and losses on sales of SBA loans are included in Net Gain on Sale of Loans on the Consolidated Statements of Operations.
Loans and Leases: Loans and leases (other than PCI loans) that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff are recorded at the principal balance outstanding, net of charge-offs, unamortized purchase premiums and discounts, and deferred loan fees and costs. The deferred loan fees and costs, and purchase premiums and discounts are recognized in interest income as an adjustment to yield over the term of loans and leases using the effective interest method. Interest on loans and leases is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Interest income is accrued on the unpaid principal balance and is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of principal or interest becomes doubtful, regardless of the length of past due status. Generally loans and leases are placed on nonaccrual status when their payments are past due for 90 days or more. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Interest received on such loans and leases is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. A charge-off is generally recorded at 180 days past due if the unpaid principal balance exceeds the fair value of the collateral less costs to sell. Commercial and industrial and commercial real estate loans and equipment finance leases are subject to a detailed review when 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is made to put a loan or lease on non-accrual status. Consumer loans, other than those secured by real estate, are typically charged off no later than 180 days past due. Loans and leases are returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan or lease.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses (ALLL) is a reserve established through a provision for loan and lease loses charged to expense, and represents management’s best estimate of probable losses that may be incurred within the existing loan and lease portfolio as of the balance sheet date. Subsequent recoveries, if any, are credited to the allowance. The Company performs an analysis of the adequacy of the ALLL at least on a quarterly basis. Management estimates the ALLL balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
The ALLL consists of three elements; (i) specific valuation allowances established for probable losses on impaired loans and leases, (ii) quantitative valuation allowances calculated using loss experience for loans and leases with similar characteristics and trends, adjusted as necessary to reflect the impact of current conditions; and (iii) qualitative allowances determined based on environmental and other factors that may be internal or external to the Company.
A loan or lease is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. The Company evaluates all impaired loans and leases individually under the guidance of ASC 310, Receivables, primarily through the evaluation of collateral values and estimated cash flows. Loans for which the terms have been modified by granting a concession that normally would not be provided and where the borrower is experiencing financial difficulties are considered troubled debt restructurings (TDR) and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The impairment amount on a collateral dependent loan is charged-off to the ALLL and the impairment amount on a loan that is not collateral dependent is set-up as a specific reserve. TDRs are also measured at the present value of estimated future cash flows using the loan’s effective rate at inception or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the ALLL.
110
During the year ended December 31, 2014, the Company enhanced the current methodologies, processes and controls over the ALLL, due to the Company's organic and acquisitive growth and changing profile.
The following is a synopsis of the enhancements for each component of ALLL:
• | Expand the look-back period to 28 rolling quarters to capture a full economic cycle. |
• | Utilize net historical losses versus gross historical losses. |
• | Expand the peer group used to determine industry average loss history to include three industry groups; (i) all U.S. financial and bank holding companies, (ii) all California financial and bank holding companies, (iii) the peer group average from the Uniform Bank Performance Report. |
• | Apply a segment specific loss emergence period to each segment's loss. |
• | Determine qualitative reserves at each loan segment level based on a baseline risk weighting adjusted for current risks, trends and business conditions. |
• | Disaggregate certain qualitative factors to be determined on the portfolio segment level. |
At December 31, 2015, the following loan and lease portfolio segments have been identified: commercial and industrial - secured; commercial and industrial - unsecured; commercial real estate - retail; commercial real estate - office; commercial real estate - industrial; commercial real estate - hospitality; commercial real estate - acquisition and development; commercial real estate - condo conversion; commercial real estate - other; construction; SBA; leases; single family residence -1st trust deed (amortizing, interest only now amortizing, interest only, negative amortization, and Green Loans); single family residence -2nd trust deeds; other consumer. The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers and lessees (also referred to as borrowers) to service their obligations such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes all loans and leases delinquent over 60 days and non-homogeneous loans and leases such as commercial and commercial real estate loans. Classification of problem SFR mortgage loans is performed on a monthly basis while analysis of non-homogeneous loans is performed on a quarterly basis.
Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than SFR mortgage loans. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. Commercial business loans are also considered to have a greater degree of credit risk than SFR mortgage loans due to the fact commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). SBA loans are similar to commercial business loans, but have additional credit enhancement provided by the U.S. Small Business Administration, for up to 85 percent of the loan amount for loans up to $150 thousand and 75 percent of the loan amount for loans of more than $150 thousand. Commercial equipment leases are also similar to commercial business loans in that the leases are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial equipment leases may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). Consumer and other real estate loans may entail greater risk than do SFR mortgage loans given that collection of these loans is dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Green Loans are also considered to carry a higher degree of credit risk due to their unique cash flows. Credit risk on this asset class is also managed through the completion of regular re-appraisals of the underlying collateral and monitoring of the borrower’s usage of this account to determine if the borrower is making monthly payments from external sources or “drawdowns” on their line. In cases where the property values have declined to levels less than the original LTV ratios, or other levels deemed prudent by the Company, the Company may curtail the line and/or require monthly payments or principal reductions to bring the loan in balance.
Classified Assets: Federal regulations provide for the classification of loans, leases, and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those
111
considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When an insured institution classifies problem assets as “loss,” it is required to charge off such amount. The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by its primary regulator, which may order the establishment of additional general or specific loss allowances.
Troubled Debt Restructurings (TDR): A loan is identified as a TDR when a borrower is experiencing financial difficulties and for economic or legal reasons related to these difficulties, the Company grants a concession to the borrower in the restructuring that it would not otherwise consider. The Company has granted a concession when, as a result of the restructuring to a troubled borrower, it does not expect to collect all amounts due, including principal and/or interest accrued at the original terms of the loan. The concessions may be granted in various forms, including a below-market change in the stated interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a note split with principal forgiveness. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs, impaired at the date of discharge, and charged down to the fair value of collateral less cost to sell. A restructuring executed at an interest rate that is at market interest rates based on the current credit characteristics of the borrower is not a TDR.
The Company’s policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual status for a minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to place on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of 6 months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and reported as TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of 6 months and through one fiscal year-end and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.
Concentration of Credit Risk: Most of the Company’s lending activity is with customers located within San Diego, Los Angeles, Orange and Riverside Counties, California. Therefore, the Company’s exposure to credit risk is significantly affected by economic conditions in those areas. Our loans are concentrated geographically in the Southern California market place.
Purchased Credit-Impaired Loans: The Company purchases loans with and without evidence of credit quality deterioration since origination. Evidence of credit quality deterioration as of the purchase date may include statistics such as prior loan modification history, updated borrower credit scores and updated LTV ratios, some of which may not be immediately available as of the purchase date. Purchased loans with evidence of credit quality deterioration where the Company estimates that it will not receive all contractual payments are accounted for as PCI loans. The excess of the cash flows expected to be collected on PCI loans, measured as of the acquisition date, over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan or lease using a level yield methodology. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the non-accretable difference. PCI loans that have similar risk characteristics, primarily credit risk, collateral type and interest rate risk, are pooled and accounted for as a single unit with a single composite interest rate and an aggregate expectation of cash flows.
Loans that were acquired during the year ended December 31, 2012 in connection with the Beach Business Bank and Gateway Bancorp acquisitions and during the year ended December 31, 2013 in connection with the The Private Bank of California acquisition that were considered credit impaired were recorded at fair value at the acquisition date and the related ALLL was not carried over to the Company’s ALLL. Any losses on such loans are charged against the non-accretable difference established in purchase accounting and are not reported as charge-offs until such non-accretable difference is fully utilized. These loans were evaluated individually and were not part of the aforementioned pools.
The Company estimates cash flows expected to be collected over the life of the loan using management’s best estimate which is derived using current key assumptions such as default rates, loss severity and payment speeds. If, upon subsequent evaluation, the Company determines it is probable that the present value of the expected cash flows have decreased due to a deterioration of credit, the PCI loan is considered further impaired which will result in a charge to the provision for loan and lease losses and a corresponding increase to the ALLL. If, upon subsequent evaluation, it is probable that there is an increase in the present value of the expected cash flows, the Company will reduce any remaining allowance. If there is no remaining allowance, the Company will recalculate the amount of accretable yield as the excess of the revised expected cash flows over the current carrying value resulting in a reclassification from non-accretable difference to accretable yield. The present value of the expected cash flows for PCI purchased loan pools is determined using the PCI loans’ effective interest rate, adjusted for changes in the PCI loans’ interest rate indexes. Adjustments in interest rate assumptions and prepayment behavior do not impact the Company’s assessment of credit impairment. The present value of the expected cash flows for PCI loans and leases acquired
112
through mergers with other banks includes, in addition to the above, an evaluation of the credit worthiness of the borrower. Loan dispositions may include sales of loans, receipt of payments in full from the borrower or foreclosure. Write-downs are not recorded on the PCI loan pool until actual losses exceed the remaining non-accretable difference. To date, no write-downs have been recorded for the PCI loans held by the Company.
Other Real Estate Owned: Other real estate owned (OREO), which represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans, is initially recorded at fair value less estimated selling costs of the real estate, based on current independent appraisals obtained at the time of acquisition, less costs to sell when acquired, establishing a new cost basis. Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged to the ALLL. Gains and losses on the sale of OREO are included in Net Gain on Sales of Other Real Estate Owned, reductions in fair value subsequent to foreclosure are included in Valuation Allowance for Other Real Estate Owned and any subsequent operating expenses or income of such properties are included in All Other Expense on the Consolidated Statements of Operations.
Premises, Equipment, and Capital Leases: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method with the following estimated useful lives: building - 40 years and leasehold improvements - life of lease, and furniture, fixtures, and equipment - 3 to 7 years. Maintenance and repairs are charged to expense as incurred, and improvements that extend the useful lives of assets are capitalized.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key current and former executives. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Servicing Rights - Mortgage (Carried at Fair Value): A servicing asset or liability is recognized when undertaking an obligation to service a financial asset under a mortgage servicing contract, including a transfer of the servicer’s financial assets that meet the requirements for sale accounting. Such servicing asset or liability is initially measured at fair value based on either market prices for comparable servicing contracts or alternatively is based on a valuation model that is based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on the related note rate and is recorded on the Consolidated Statements of Operations.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and are included with Net Revenue on Mortgage Banking Activities on the Consolidated Statements of Operations. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimates and actual prepayment speeds and default rates and losses. Currently the Company does not hedge the income statement effects of changes in fair value of the servicing assets.
Servicing fee income, which is reported in Loan Servicing Income on the Consolidated Statements of Operations, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material.
Servicing Rights - SBA Loans (Carried at Lower of Cost or Fair Value): As a general course of business, the Bank originates and sells the guaranteed portion of its SBA loans. To calculate the gain (loss) on sales of SBA loans, the Bank’s investment in the loan is allocated among the retained portion of the loan, the servicing retained, the interest-only strip and the sold portion of the loan, based on the relative fair market value of each portion. The gain (loss) on the sold portion of the loan is recognized at the time of sale based on the difference between sale proceeds and the amount of the allocated investment to the sold portion of the loan.
The portion of the servicing fees that represent contractually specified servicing fees (contractual servicing) is reflected as a servicing asset and is amortized over the estimated life of the servicing; in the event future prepayments exceed management’s estimates and future expected cash flows are inadequate to cover the servicing asset, impairment is recognized. The portion of servicing fees in excess of contractual servicing fees are reflected as interest-only (I/O) strips receivable, which is included in Other Assets on the Consolidated Statements of Financial Condition. The I/O strips receivable are carried at fair value, with unrealized gains and losses recorded in the Consolidated Statements of Operations. The Company did not have any I/O strip receivable at December 31, 2015 and 2014.
Goodwill and Other Intangible Assets: Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired and is assigned to specific reporting units. Goodwill is not subject to amortization and is evaluated for impairment annually, during the third fiscal quarter, or more frequently in the interim if events occur or circumstances change indicating it would more likely than not result in a reduction of the fair value of a reporting unit below its
113
carrying value. Goodwill is evaluated for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Discounted cash flow estimates, which include significant management assumptions relating to revenue growth rates, net interest margins, weighted average cost of capital, and future economic and market conditions, are used to determine fair value under the two-step quantitative test. In Step 1, the fair value of a reporting unit is compared to its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and it is not necessary to continue to Step 2 of the impairment process. Otherwise, Step 2 is performed where the implied fair value of goodwill is compared to the carrying value of goodwill in the reporting unit. If a reporting unit's carrying value exceeds fair value, the difference is charged to noninterest expense.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights, or because the asset is capable of being sold or exchanged either separately or in combination with a related contract, asset or liability. Other intangible assets with finite useful lives are amortized to noninterest expense over their estimated useful lives and are evaluated for impairment whenever events occur or circumstances change indicating the carrying amount of the asset may not be recoverable.
Affordable Housing Fund Investment: The Company has invested in two limited partnerships that were formed to develop and operate several apartment complexes designed as high-quality affordable housing for lower income tenants throughout the State of California and other states. The Company accounts for these investments under the proportional amortization method. The Company’s ownership in each limited partnership varies from 8 percent to 14 percent. At December 31, 2015 and 2014, the gross investments in these limited partnerships amounted to $9.2 million and $9.0 million, respectively, with original committed investment amount to be $9.5 million. The unfunded portion was $439 thousand at December 31, 2015. Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest.
The approximate future federal and state tax credits to be generated over a multiple-year period are $3.1 million and $3.8 million at December 31, 2015 and 2014, respectively. The Company had no unused tax credit carryforward. Investment amortization amounted to $727 thousand and $802 thousand for the years ended December 31, 2015 and 2014, respectively.
Reserve for Unfunded Commitments: The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to available to lend. The unfunded reserve calculation includes factors that are consistent with ALLL methodology for funded loans using the expected loss factors and a draw down factor applied to the underlying borrower risk and facility grades. Changes in the reserve for unfunded credit commitments, within Accrued Expenses and Other Liabilities, is reported as a component of All Other Expense on the Consolidated Statements of Operations.
Reserve for Loss on Repurchased Loans: In the ordinary course of business, as loans held-for-sale are sold, the Bank makes standard industry representations and warranties about the loans. The Bank may have to subsequently repurchase certain loans or reimburse certain investor losses due to defects that may have occurred in the origination of the loans. Such defects include documentation or underwriting errors. In addition, certain investor contracts require the Bank to repurchase loans from previous whole loan sales transactions that experience early payment defaults. If there are no such defects or early payment defaults, the Bank has no commitment to repurchase loans that it has sold. In addition, we have the option to buy out severely delinquent loans at par from Ginnie Mae pools for which we are the servicer and issuer of the pool. The level of reserve for loss on repurchased loans is an estimate that requires considerable management judgment. The Bank’s reserve is based upon the expected future repurchase trends for loans already sold in whole loan sale transactions and the expected valuation of such loans when repurchased, which include first and second trust deed loans. At the point when loss reimbursements are made directly to the investor, the reserve for loss reimbursements on sold loans is charged for the losses incurred.
Business Combinations: Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. The Company applied this guidance to the RenovationReady and BPNA Branch acquisitions that were consummated in 2014, The Private Bank of California, The
114
Palisades Group, and CS Financial acquisitions that were consummated in 2013, and the Gateway Bancorp and Beach Business Bank acquisitions that were consummated in 2012.
Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Deferred Financing Costs: Deferred financing costs associated with the Company’s senior notes and junior subordinated amortizing notes are included in Notes Payable on the Consolidated Statements of Financial Condition. The deferred financing costs are being amortized on a basis that approximates a level yield method over the 8 year term of the senior notes and the 5 year term of the junior subordinated amortizing notes.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation: Compensation cost is recognized for stock appreciation rights, stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options and stock appreciation rights, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance is established when necessary to reduce deferred tax assets when it is more-likely-than-not that a portion or all of the net deferred tax assets will not be realized. As of December 31, 2015, the Company had a net deferred tax asset of $11.3 million, net of no valuation allowance and the Company had a net deferred tax asset of $16.4 million, net of no valuation allowance as of December 31, 2014.
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax in multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2012, with the exception of Gateway Bancorp, a predecessor entity, which is currently under exam by the Internal Revenue Service for the 2008 and 2009 tax years. The statute of limitations for the assessment of California Franchise taxes has expired for tax years before 2011; other state income and franchise tax statutes of limitations vary by state.
Tax positions that are uncertain but meet a more likely than not recognition threshold are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management's judgment. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had $0 and $23 thousand accrued for interest and penalties at December 31, 2015 and 2014, respectively.
Earnings Per Common Share: Earnings per common share is computed under the two-class method. Basic earnings per common share (EPS) is computed by dividing net income allocated to common stockholders by the weighted average number of shares outstanding, including the minimum number of shares issuable under purchase contracts relating to the tangible equity units (see the discussion of the tangible equity units in Note 18). Diluted EPS is computed by dividing net income allocated to common stockholders by the weighted average number of shares outstanding, adjusted for the dilutive effect of the restricted stock units, the potentially issuable shares in excess of the minimum under purchase contracts relating to the tangible equity units, outstanding stock options, and warrants to purchase common stock. Net income allocated to common stockholders is computed by subtracting income allocated to participating securities, participating securities dividends and preferred stock dividend from net income. Participating securities are instruments granted in share-based payment transactions that contain rights to receive nonforfeitable dividends or dividend equivalents, which includes the Stock Appreciation Rights to the extent they confer dividend equivalent rights, as described under “Stock Appreciation Rights” in Note 16.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available-for-sale and interest rate swap, net of tax, which are recognized as a separate component of stockholders’ equity.
115
Accounting for Derivative Instruments and Hedging Activities: The Company records its derivative instruments at fair value as either assets or liabilities on the Consolidated Statements of Financial Condition in Other Assets and Accrued Expenses and Other Liabilities, respectively. For hedged derivatives, the Company records changes in fair value in Accumulated Other Comprehensive Income (AOCI) in the Consolidated Statements of Financial Condition and records any hedge ineffectiveness in Other Income in the Consolidated Statements of Operations. For non-hedged derivatives, the Company records changes in fair value in Net Revenue on Mortgage Banking Activities or Other Income in the Consolidated Statements of Operations.
Derivative Instruments Related to Mortgage Banking Activities. The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is set prior to funding (interest rate lock commitments, or IRLCs). The Company hedges the risk of the overall change in the fair value of loan commitments to borrowers by selling forward contracts on securities of GSEs. The Company has not formally designated these derivatives as a qualifying hedge relationship and accordingly, accounts for such IRLCs and forward contracts as non-hedged derivatives with changes in fair value recorded to earnings each period. The changes in fair value on these instruments are recorded in Net Revenue on Mortgage Banking Activities on the Consolidated Statements of Operations. The estimated fair value is based on current market prices for similar instruments.
Interest Rate Swaps and Caps. The Company has entered into pay-fixed, receive-variable interest rate swap contracts with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR-based variable rate deposits and other borrowings. The Company also offers interest rate swaps and caps products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. In addition, the Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an identical offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The Company accounts for these derivative instruments as non-hedged derivatives with changes in fair value recorded to earnings each period. The changes in fair value on these instruments are recorded in Other Income on the Consolidated Statements of Operations.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements that are not currently accrued for.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to stockholders.
Fair Values of Financial Instruments: The Company measures certain assets and liabilities on a fair value basis, in accordance with ASC Topic 820, "Fair Value Measurement". Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Examples of these include derivative instruments and available-for-sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment in accordance with ASC Topic 825, "Financial Instruments". Examples of these include impaired loans, long-lived assets, OREO, goodwill, and core deposit intangible assets as well as loans held-for-sale accounted for at the lower of cost or fair value.
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. When observable market prices are not available, fair value is estimated using modeling techniques such as discounted cash flow analysis. These modeling techniques utilize assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating the instrument’s fair value. Considerable judgment may be involved in determining the amount that is most representative of fair value.
To increase consistency and comparability of fair value measures, ASC Topic 820, "Fair Value Measurement" established a three-level hierarchy to prioritize the inputs used in valuation techniques between observable inputs among (i) observable inputs that reflect quoted prices in active markets, (ii) inputs other than quoted prices with observable market data, and (iii) unobservable data such as the Company’s own data or single dealer non-binding pricing quotes. The Company assesses the valuation hierarchy for each asset or liability measured at the end of each quarter, as a result assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Further information regarding the Company's policies and methodology used to measure fair value is presented in Note 3.
116
Transfer of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when (i) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee or provide more than a trivial benefit to the Company, and (iii) the Company does not maintain an obligation or the unilateral ability to reclaim or repurchase the assets.
The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales primarily to government-sponsored enterprises through established programs and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets and the consideration received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by the Company are carried at the lower of cost or fair value.
Fee Revenue: Generally, fee revenue from deposit service charges and loans is recognized when earned, except where ultimate collection is uncertain, in which case revenue is recognized when received.
Marketing Costs: Marketing costs are expensed as incurred.
Investment Advisory Performance Fees: The Company’s SEC-registered investment advisor, The Palisades Group, receives investment advisory performance fees from actively managed investment funds. Certain performance fees are not finalized until the end of a period of time specified in the contracts. Such fees are recognized only to the extent that the amounts will not be reversed due to clawback provisions.
Recently Issued Accounting Standards
In January 2014, the FASB issued guidance within ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects," which amends ASC 323-720 to permit 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. The Company invests in qualified affordable housing projects (affordable housing fund investments) and previously accounted for them under the equity method of accounting. The Company recognized its share of partnership losses in noninterest expense with the tax benefit recognized in the income tax provision. 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.
The Company elected the proportional amortization method retrospectively for all periods presented. This accounting change in the amortization methodology resulted in changes to account for amortization recognized in prior periods, which impacted the balance of tax credit investments and related tax accounts. The investment amortization expense is presented as a component of the income tax expense (benefit). The cumulative effect of the retrospective application of this accounting principle was $274 thousand at December 31, 2014. Net income decreased by $113 thousand for the year ended December 31, 2014 and decreased by $163 thousand for the year ended December 31, 2013, due to the change in accounting principle.
117
The following tables present the effect of the retrospective application of this change in accounting principle on the Company’s Consolidated Statement of Financial Condition as of December 31, 2014, and Consolidated Statements of Operations and Cash Flows for the periods indicated:
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
December 31, 2014 | |||||||||||
As Previously Reported | Effect of Change in Accounting Principle | As Adjusted | |||||||||
(In thousands) | |||||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | 231,199 | $ | — | $ | 231,199 | |||||
Time deposits in financial institutions | 1,900 | — | 1,900 | ||||||||
Securities available-for-sale | 345,695 | — | 345,695 | ||||||||
Loans held-for-sale | 1,187,090 | — | 1,187,090 | ||||||||
Loans and leases receivable | 3,919,642 | — | 3,919,642 | ||||||||
Deferred income tax | 16,445 | (72 | ) | 16,373 | |||||||
Other assets | 269,600 | (202 | ) | 269,398 | |||||||
Total assets | $ | 5,971,571 | $ | (274 | ) | $ | 5,971,297 | ||||
Liabilities and stockholders' equity | |||||||||||
Liabilities | $ | 5,467,982 | $ | — | $ | 5,467,982 | |||||
Stockholders' equity | 503,589 | (274 | ) | 503,315 | |||||||
Total liabilities and stockholders' equity | $ | 5,971,571 | $ | (274 | ) | $ | 5,971,297 | ||||
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Year Ended December 31, | |||||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||||
As Previously Reported | Effect of Change in Accounting Principle | As Adjusted | As Previously Reported | Effect of Change in Accounting Principle | As Adjusted | ||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||
Interest and dividend income | $ | 188,139 | $ | — | $ | 188,139 | $ | 120,511 | $ | — | $ | 120,511 | |||||||||||
Interest expense | 32,862 | — | 32,862 | 23,282 | — | 23,282 | |||||||||||||||||
Net interest income | 155,277 | — | 155,277 | 97,229 | — | 97,229 | |||||||||||||||||
Provision for loan and lease losses | 10,976 | — | 10,976 | 7,963 | — | 7,963 | |||||||||||||||||
Noninterest income | 145,637 | — | 145,637 | 96,743 | — | 96,743 | |||||||||||||||||
Noninterest expense | 264,161 | (689 | ) | 263,472 | 178,670 | (569 | ) | 178,101 | |||||||||||||||
Income before income taxes | 25,777 | 689 | 26,466 | 7,339 | 569 | 7,908 | |||||||||||||||||
Income tax expense | (4,541 | ) | 802 | (3,739 | ) | 7,260 | 732 | 7,992 | |||||||||||||||
Net income | 30,318 | (113 | ) | 30,205 | 79 | (163 | ) | (84 | ) | ||||||||||||||
Preferred stock dividends | 3,640 | — | 3,640 | 2,185 | — | 2,185 | |||||||||||||||||
Net income available for common stockholders | $ | 26,678 | $ | (113 | ) | $ | 26,565 | $ | (2,106 | ) | $ | (163 | ) | $ | (2,269 | ) | |||||||
Basic earnings per total common share | $ | 0.91 | $ | — | $ | 0.91 | $ | (0.14 | ) | $ | (0.01 | ) | $ | (0.15 | ) | ||||||||
Diluted earnings per total common share | $ | 0.91 | $ | (0.01 | ) | $ | 0.90 | $ | (0.14 | ) | $ | (0.01 | ) | $ | (0.15 | ) | |||||||
118
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Year Ended December 31, | |||||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||||
As Previously Reported | Effect of Change in Accounting Principle | As Adjusted | As Previously Reported | Effect of Change in Accounting Principle | As Adjusted | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Cash flow from operating activities | |||||||||||||||||||||||
Net income | $ | 30,318 | $ | (113 | ) | $ | 30,205 | $ | 79 | $ | (163 | ) | $ | (84 | ) | ||||||||
Total adjustment in net income | (657,834 | ) | 113 | (657,721 | ) | (435,568 | ) | 163 | (435,405 | ) | |||||||||||||
Net cash used in operating activities | (627,516 | ) | — | (627,516 | ) | (435,489 | ) | — | (435,489 | ) | |||||||||||||
Cash flow from investing activities | |||||||||||||||||||||||
Net cash used in investing activities | (463,154 | ) | — | (463,154 | ) | (1,303,482 | ) | — | (1,303,482 | ) | |||||||||||||
Cash flow from financing activities | |||||||||||||||||||||||
Net cash provided by financing activities | 1,211,751 | — | 1,211,751 | 1,740,446 | — | 1,740,446 | |||||||||||||||||
Net increase in cash and cash equivalents | 121,081 | — | 121,081 | 1,475 | — | 1,475 | |||||||||||||||||
Cash and cash equivalents at beginning of period | 110,118 | — | 110,118 | 108,643 | — | 108,643 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 231,199 | $ | — | $ | 231,199 | $ | 110,118 | $ | — | $ | 110,118 | |||||||||||
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. Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The ASU changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. In addition, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The ASU also requires disclosures for certain transactions comprising (i) a transfer of a financial asset accounted for as a sale and (ii) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. There are additional disclosure requirements for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-14, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” Under ASU 2014-14, a mortgage loan should be derecognized and a separate receivable based on the principal and interest expected to be recovered from the governmental guarantor should be recognized upon foreclosure when all of the following conditions exist: a government guarantee exists that is not separable from the loan prior to the foreclosure; as of the date of the foreclosure the creditor has the intent to convey the real estate to the governmental agency that issued the guarantee, to make a claim on the guarantee and the creditor has the ability to recover amounts due from the governmental entity as a result of the claim; and, as of the time of the foreclosure, the claim amount that is based on the fair value of the real estate is fixed. ASU 2014-14 is effective using either the
119
modified retrospective transition method or a prospective transition method for fiscal years and interim periods within those years, beginning after December 15, 2014. Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which significantly changes the consolidation analysis required under U.S. GAAP. The new consolidation guidance maintains two models: one for assessing most corporate entities based on the notion that majority voting rights indicate control (the voting model) and another for assessing entities that may be controlled through other means, such as management contracts or subordinated financial support (the variable interest model). Under the new guidance, limited partnerships will be variable interest entities, unless the limited partners have either substantive kick-out or participating rights. There is no longer a presumption that a general partner should consolidate a limited partnership. The ASU also changes the effect that fees paid to a decision maker or service provider have on the consolidation analysis. For entities other than limited partnerships, the ASU clarifies how to determine whether the equity holders (as a group) have power over the entity. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is allowed for all entities, but the guidance must be applied as of the beginning of the annual period containing the adoption date. Entities have the option of using either a full or modified retrospective approach for adoption. The Company early adopted the amendments of this update during the current quarterly reporting period. Adoption of the new guidance did not have a significant impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The amendments in this ASU are to be applied on a retrospective basis. In August 2015, the FASB issued ASU 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements," which allows guidance in ASU 2015-03 to be applied to line of credit arrangements. Adoption of the new guidance did not have a significant impact on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments.” This Update simplifies the accounting for adjustments made to provisional amounts recognized in a business combination, and eliminates the requirement to retrospectively account for those adjustments. The amendments to this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The Updates require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments to this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. The Company early adopted the amendments to this Update during the current reporting period ended December 31, 2015.
The following are recently issued accounting pronouncements also applicable to the Company:
In May 2014, the FASB issued ASU No. 2014-09, “Revenue From Contracts With Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606),” which deferred the effective date of this ASU by one year. Therefore, ASU 2014-09 becomes effective for the Company for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.
120
In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.
NOTE 2 – BUSINESS COMBINATIONS AND BRANCH SALES
The Company completed the following acquisitions between January 1, 2013 and December 31, 2015 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 | |||||||||||||||||||
Banco Popular Branches | Renovation Ready | CS Financial | The Palisades Group | Private Bank of California | |||||||||||||||
November 8, 2014 | January 31, 2014 | October 31, 2013 | September 10, 2013 | July 1, 2013 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Assets acquired | |||||||||||||||||||
Cash and due from banks | $ | 5,532 | $ | — | $ | 482 | $ | 900 | $ | 33,752 | |||||||||
Interest-bearing deposits | — | — | — | 5 | — | ||||||||||||||
Securities available-for-sale | — | — | — | — | 219,298 | ||||||||||||||
Loans held-for-sale | — | — | 4,982 | — | — | ||||||||||||||
Loans and leases receivable | 1,065,088 | — | — | — | 385,256 | ||||||||||||||
Premises, equipment, and capital leases | 9,002 | — | 704 | — | 1,501 | ||||||||||||||
Income tax receivable | — | — | — | — | 682 | ||||||||||||||
Goodwill | 7,653 | 2,239 | 7,178 | — | 15,126 | ||||||||||||||
Other intangible assets | 15,777 | 761 | 690 | — | 10,400 | ||||||||||||||
Other assets | 2,301 | — | 608 | 364 | 6,578 | ||||||||||||||
Total assets acquired | $ | 1,105,353 | $ | 3,000 | $ | 14,644 | $ | 1,269 | $ | 672,593 | |||||||||
Liabilities assumed | |||||||||||||||||||
Deposits | $ | 1,076,906 | $ | — | $ | — | $ | — | $ | 561,890 | |||||||||
Advances from Federal Home Loan Bank | — | — | — | — | 41,833 | ||||||||||||||
Other liabilities | 506 | 1,000 | 6,722 | 1,219 | 2,481 | ||||||||||||||
Total liabilities assumed | 1,077,412 | 1,000 | 6,722 | 1,219 | 606,204 | ||||||||||||||
SBLF preferred stock assumed | — | — | — | — | 10,000 | ||||||||||||||
Total consideration paid | $ | 27,941 | $ | 2,000 | $ | 7,922 | $ | 50 | $ | 56,389 | |||||||||
Summary of consideration | |||||||||||||||||||
Cash paid | $ | 27,941 | $ | 1,000 | $ | 1,500 | $ | 50 | $ | 28,077 | |||||||||
Common stock issued | — | 1,000 | 1,964 | — | 28,282 | ||||||||||||||
Replacement awards | — | — | — | — | 30 | ||||||||||||||
Noninterest-bearing note | — | — | 3,150 | — | — | ||||||||||||||
Performance based equity | — | — | 1,308 | — | — | ||||||||||||||
Earn-out liabilities | — | 1,000 | — | — | — | ||||||||||||||
121
Banco Popular’s California Branch Network Acquisition
Effective November 8, 2014, the Bank acquired 20 full-service branches from Banco Popular North America (BPNA) in the Southern California banking market (the BPNA Branch Acquisition). The purchase price, net of deposit premiums received of $3.9 million, was $24.0 million. At the time of its completion, the transaction added $1.07 billion in loans and $1.08 billion in deposits to the Bank.
The following table summarizes the total consideration transferred as a part of the BPNA Branch Acquisition as well as the fair value adjustments to the BPNA balance sheet as of the respective acquisition date:
November 8, 2014 | |||||||
(In thousands) | |||||||
Total Consideration | $ | 27,941 | |||||
Net assets pre-acquisition | 24,027 | ||||||
Fair value adjustments | |||||||
Loans receivable | $ | (19,526 | ) | ||||
Core Deposit Intangibles | 15,777 | ||||||
Certificates of deposit purchase premium | (1,208 | ) | |||||
Premises and equipment | 1,218 | ||||||
Total fair value adjustments | (3,739 | ) | |||||
Fair value of net assets acquired | 20,288 | ||||||
Consideration paid in excess of fair value of net assets acquired (goodwill) | $ | 7,653 | |||||
The Company recorded core deposit intangible assets of $15.8 million as part of the BPNA Branch Acquisition. Core deposit intangible assets were valued using a net cost savings method and was calculated as the present value of the estimated net cost savings attributable to the core deposit base over the expected remaining life of the deposits. The cost savings derived from the core deposit balance were calculated as the difference between the prevailing alternative cost of funds and the estimated cost of the core deposits. The core deposit intangible is being amortized over its estimated useful life of ten years using the sum of years-digits amortization methodology.
The fair value of loans acquired from BPNA was estimated by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of BPNA's allowance for loan losses associated with the acquired loans as the loans were initially recorded at fair value.
The fair value of savings and transaction deposit accounts acquired from BPNA was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting the expected cash flows based on the remaining contractual terms of the certificates of deposit. These cash flows were discounted based on market rates for certificates of deposit with corresponding remaining maturities.
Direct costs related to the BPNA Branch Acquisition were expensed as incurred and amounted to $4.3 million for the year ended December 31, 2014.
During the year ended December 31, 2015, the Company finalized its purchase accounting for the BPNA Branch Acquisition and recorded the measurement period adjustments. The measurement period adjustments included recording Goodwill of $7.7 million, an additional discount of $7.4 million to Loans and Leases Receivable, and an additional premium of $292 thousand to Deposits. Recorded in the Consolidated Statements of Operations, the cumulative life to date measurement period adjustments related to the loan discount and deposit premium amortization were a $33 thousand decrease in Interest and Dividend Income on Loans and a $110 thousand decrease in Interest Expense on Deposits, respectively.
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. The
122
Company recorded $2.2 million of goodwill and $761 thousand of other intangible assets. The other intangible assets are related to a customer relationship intangible.
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 Bank executive Jeffrey T. Seabold. As a result of the acquisition, CS Financial became a wholly owned subsidiary of the Bank. For additional information regarding this transaction, see Note 25.
The purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their estimated fair values as of October 31, 2013. The Company recorded $7.2 million of goodwill and $690 thousand of other intangible assets. The other intangible assets are related to a trade name intangible.
The Palisades Group, LLC Acquisition
Effective September 10, 2013, the Company acquired The Palisades Group, a Delaware limited liability company and a registered investment adviser under the Investment Advisers Act of 1940, pursuant to the terms of the Amended and Restated Units Purchase Agreement dated as of November 30, 2012, amended and restated as of August 12, 2013, for $50 thousand. The Palisades Group provides financial advisory and asset management services to third parties, including the Bank, with respect to the purchase, sale and management of portfolios of residential mortgage loans.
The Palisades Group acquisition was accounted for under GAAP guidance for business combinations. The assets and liabilities were recorded at their estimated fair values at the 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 (then a separate subsidiary bank of the Company) and PBOC. PBOC merged with and into Beach Business Bank, with Beach Business Bank 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 (i) 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 (ii) $25.4 million in cash. Additionally, the Company paid $2.7 million for the cancellation of certain outstanding options to acquire PBOC common stock in accordance with the PBOC Merger Agreement and converted the remaining outstanding PBOC stock options to Company stock options with an assumed fair value of approximately $30 thousand. On the basis of the number of shares of PBOC common stock issued and outstanding immediately prior to the completion of the merger, each outstanding share of PBOC common stock was converted into the right to receive $6.52 in cash and 0.5379 shares of Company common stock.
In addition, upon completion of the acquisition, each share of preferred stock issued by PBOC as part of the Small Business Lending Fund (SBLF) program of the United States Department of Treasury (10,000 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company. The terms of the preferred stock issued by the Company in exchange for the PBOC preferred stock are substantially identical to the preferred stock previously issued by the Company as part of its own participation in the SBLF program (32,000 shares in aggregate with a liquidation preference amount of $1,000 per share).
In accordance with GAAP guidance for business combinations, the Company expensed approximately $2.6 million of direct acquisition costs, all of which were recognized in 2013, and recorded $15.1 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 acquired from PBOC that were considered credit impaired were written down to fair value at the acquisition date in accordance with purchase accounting. In addition, the ALLL for all PBOC loans was not carried over to the Company’s ALLL. 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.
123
Unaudited Pro Forma Information
While the BPNA Branch Acquisition is considered a purchase of a business for accounting purposes, pro forma income statement information is not presented because the BPNA Branch Acquisition does not represent the acquisition of a business which has continuity both before and after the acquisition. Pro formation income statement information for RenovationReady is not presented because it is immaterial.
The following table presents unaudited pro forma information as if the acquisitions of PBOC, The Palisades Group, and CS Financial had occurred on January 1, 2013 after giving effect to certain adjustments. The unaudited pro forma information for the year ended December 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.
Year Ended December 31, 2013 | |||
(In thousands, except per share data) | |||
Net interest income | $ | 107,607 | |
Provision for loan and lease losses | 8,822 | ||
Noninterest income | 118,459 | ||
Noninterest expense | 207,513 | ||
Income before income taxes | 9,731 | ||
Income tax expense | 8,984 | ||
Net income | 747 | ||
Preferred stock dividends | 2,185 | ||
Net loss available to common stockholders | $ | (1,438 | ) |
Basic loss per total common share | $ | (0.09 | ) |
Diluted loss per total common share | $ | (0.09 | ) |
The above unaudited pro forma financial information for 2013 includes the pre-acquisition periods for PBOC, The Palisades Group, 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 $859 thousand for the year ended December 31, 2013. The above pro forma financial information does not include cost saves or integration costs and may not be reflective of what the actual results would have been for the applicable period had the transaction occurred at the beginning of the period.
Building Sale
On June 25, 2015, the Company sold an improved real property office complex located at 1588 South Coast Drive, Costa Mesa, California (the Property) at a sale price of approximately $52.3 million with a gain on sale of $9.9 million. The Property had a book value of $42.3 million at the sale date. Additionally, the Company incurred selling costs of $2.3 million for this transaction, which were reported in Professional Fees and All Other Expenses in the Consolidated Statements of Operations.
Branch Sales
On September 25, 2015, the Bank completed a branch sale transaction to Americas United Bank, a California banking corporation (AUB). In the transaction, the Bank sold two branches and certain related assets and deposit liabilities to AUB. The transaction included a transfer of $46.9 million of deposits to AUB. Additionally, as part of the transaction, the leases related to both locations were assumed by AUB. The Company recognized a gain of $163 thousand from this transaction, which is included in Other Income in the Consolidated Statements of Operations.
The Bank also sold certain loans of $40.2 million to AUB as part of the transaction. The Company recognized a gain of $644 thousand from the sale of these loans, which is included in Net Gain on Sale of Loans in the Consolidated Statements of Operations.
On October 4, 2013, the Bank sold eight branches and related assets and deposit liabilities to a Washington state chartered bank (AWB). The transaction was completed with a transfer of $464.3 million deposits to AWB in exchange for a deposit premium of 2.3 percent. Certain other assets related to the branches include the real estate for three of the branch locations and certain overdraft and other credit facilities related to the deposit accounts. The Company recognized a gain of $12.6 million from this transaction, of which $12.1 million was recognized in 2013.
124
NOTE 3 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Value Hierarchy
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:
• | Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
• | Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
• | Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured on a Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and respective terms and conditions for debt instruments. The Company employs procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. Level 2 securities include SBA loan pool securities, U.S. GSE and agency securities, private label residential MBS, agency residential MBS, non-agency commercial MBS, collateralized loan obligations, and non-agency corporate bonds. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. The Company had no securities available-for-sale classified as Level 3 at December 31, 2015 and 2014.
Loans Held-for-Sale, Carried at Fair Value: 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, except for loans that are repurchased out of Ginnie Mae loan pools that become severely delinquent which are valued based on an internal model that estimates the expected loss the Company will incur on these loans. Therefore, loans held-for-sale subjected to recurring fair value adjustments are classified as Level 2 or, in the case of loans repurchased out of Ginnie Mae loan pools, Level 3. The fair value includes the servicing value of the loans as well as any accrued interest.
Derivative Assets and Liabilities:
Derivative Instruments Related to Mortgage Banking Activities. The Company enters into interest rate lock commitments (IRLCs) with prospective residential mortgage borrowers. These commitments are carried at fair value based on the fair value of the underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. The Company hedges the risk of the overall change in the fair value of loan commitments to borrowers by selling forward contracts on securities of GSEs. These forward settling contracts are classified as Level 2, as valuations are based on market observable inputs.
Interest Rate Swaps and Caps. The Company has entered into pay-fixed, receive-variable interest rate swap contracts with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR-based variable rate deposits and other borrowings. The Company also offers interest rate swaps and caps products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an identical offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash
125
flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.
Mortgage Servicing Rights: The Company retains servicing on some of its mortgage loans sold and elected the fair value option for valuation of these mortgage servicing rights (MSRs). The value is based on a third party provider that calculates the present value of the expected net servicing income from the portfolio based on key factors that include interest rates, prepayment assumptions, discount rate and estimated cash flows. Because of the significance of unobservable inputs, these servicing rights are classified as Level 3. At December 31, 2014, $5.9 million of the mortgage servicing rights were valued based on a market bid that settled subsequent to that date, which was included as Level 3.
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
Fair Value Measurement Level | |||||||||||||||
Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(In thousands) | |||||||||||||||
December 31, 2015 | |||||||||||||||
Assets | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
SBA loan pools securities | $ | 1,504 | $ | — | $ | 1,504 | $ | — | |||||||
Private label residential mortgage-backed securities | 1,768 | — | 1,768 | — | |||||||||||
Corporate bonds | 26,152 | — | 26,152 | — | |||||||||||
Collateralized loan obligation | 111,468 | — | 111,468 | — | |||||||||||
Agency mortgage-backed securities | 692,704 | — | 692,704 | — | |||||||||||
Loans held-for-sale, carried at fair value | 379,155 | — | 360,864 | 18,291 | |||||||||||
Derivative assets (1) | 9,042 | — | 9,042 | — | |||||||||||
Mortgage servicing rights (2) | 49,939 | — | — | 49,939 | |||||||||||
Liabilities | |||||||||||||||
Derivative liabilities (3) | 1,067 | — | 1,067 | — | |||||||||||
December 31, 2014 | |||||||||||||||
Assets | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
SBA loan pools securities | $ | 1,715 | $ | — | $ | 1,715 | $ | — | |||||||
U.S. government-sponsored entities and agency securities | 1,982 | — | 1,982 | — | |||||||||||
Private label residential mortgage-backed securities | 3,168 | — | 3,168 | — | |||||||||||
Agency mortgage-backed securities | 338,830 | — | 338,830 | — | |||||||||||
Loans held-for-sale, carried at fair value | 278,749 | — | 278,749 | — | |||||||||||
Derivative assets (1) | 6,379 | — | 6,379 | — | |||||||||||
Mortgage servicing rights (2) | 19,082 | — | — | 19,082 | |||||||||||
Liabilities | |||||||||||||||
Derivative liabilities (3) | 3,235 | — | 3,235 | — | |||||||||||
(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 |
126
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 Backed Securities | Mortgage Servicing Rights | Loans Repurchased from Ginnie Mae Loan Pools | Total | ||||||||||||
(In thousands) | |||||||||||||||
Balance at December 31, 2012 | $ | 2,214 | $ | 1,739 | $ | — | $ | 3,953 | |||||||
Transfers in (out of) Level 3 (1) | — | — | — | — | |||||||||||
Total gains or losses (realized/unrealized): | |||||||||||||||
Included in earnings-fair value adjustment | — | 1,360 | — | 1,360 | |||||||||||
Additions | — | 11,463 | — | 11,463 | |||||||||||
Sales and settlements | (2,214 | ) | (1,027 | ) | — | (3,241 | ) | ||||||||
Balance at December 31, 2013 | $ | — | $ | 13,535 | $ | — | $ | 13,535 | |||||||
Transfers in (out of) Level 3 (1) | $ | — | $ | — | $ | — | $ | — | |||||||
Total gains or losses (realized/unrealized): | |||||||||||||||
Included in earnings-fair value adjustment | — | (233 | ) | — | (233 | ) | |||||||||
Additions | — | 26,399 | — | 26,399 | |||||||||||
Sales and settlements | — | (20,619 | ) | — | (20,619 | ) | |||||||||
Balance at December 31, 2014 | $ | — | $ | 19,082 | $ | — | $ | 19,082 | |||||||
Transfers in (out of) Level 3 (1) | $ | — | $ | — | $ | 1,088 | $ | 1,088 | |||||||
Total gains or losses (realized/unrealized): | |||||||||||||||
Included in earnings-fair value adjustment | — | (3,568 | ) | — | (3,568 | ) | |||||||||
Additions | — | 45,263 | 18,555 | 63,818 | |||||||||||
Sales and settlements | — | (10,838 | ) | (1,352 | ) | (12,190 | ) | ||||||||
Balance at December 31, 2015 | $ | — | $ | 49,939 | $ | 18,291 | $ | 68,230 | |||||||
(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 causes the transfer. |
The following table presents, as of the dates indicated, quantitative information about Level 3 fair value measurements on a recurring basis, other than the mortgage servicing rights that were valued based on a market bid that settled subsequent to that date and loans that become severely delinquent and are repurchased out of Ginnie Mae loan pools that were valued based on an estimate of the expected loss the Company will incur on these loans, which was included as Level 3 at December 31, 2014 and 2015:
Fair Value (In thousands) | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | ||||||
December 31, 2015 | |||||||||
Mortgage servicing rights | $ | 49,939 | Discounted cash flow | Discount rate | 9.00% to 18.00% (9.75%) | ||||
Prepayment rate | 6.07% to 35.01% (11.81%) | ||||||||
December 31, 2014 | |||||||||
Mortgage servicing rights | $ | 13,135 | Discounted cash flow | Discount rate | 9.00% to 19.50% (10.09%) | ||||
Prepayment rate | 4.59% to 31.02% (13.22%) | ||||||||
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 prepayment rate. The significant unobservable inputs used in the fair value measurement of the Company's loans repurchased from Ginnie Mae pools at December 31, 2015 included an expected loss rate of 1.85 percent. 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.
127
Assets and Liabilities Measured on a Non-Recurring Basis
Securities Held-to-Maturity: Investment securities that the Company has the ability and the intent to hold to maturity are classified as held-to-maturity. Investment securities classified as held-to-maturity are carried at cost. The fair values of securities held-to-maturity are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and respective terms and conditions for debt instruments (Level 2). The Company employs procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. Only securities held-to-maturity with other-than-temporary impairment (OTTI) are considered to be carried at fair value. The Company did not have any OTTI on securities held-to-maturity at December 31, 2015.
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, Carried at Lower of Cost or Fair Value: The Company records non-conforming jumbo mortgage loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.
SBA Servicing Assets: SBA servicing assets represent the value associated with servicing SBA loans that have been sold. The fair value for SBA servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for SBA servicing assets. SBA servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3.
Other Real Estate Owned Assets: Other real estate owned assets (OREO) are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of other real estate owned assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. The Company recorded valuation allowance expense for OREO of $38 thousand, $32 thousand and $97 thousand for the years ended December 31, 2015, 2014, and 2013, respectively.
Alternative Investments (Affordable Housing Fund Investment, SBIC, and Other Investment): The Company generally accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing. These are non-public investments that cannot be redeemed since the Company’s investment is distributed as the underlying investments are liquidated, which generally takes 10 years. There are currently no plans to sell any of these investments prior to their liquidation. The alternative investments carried at cost are considered to be measured at fair value on a non-recurring basis when there is impairment. The Company had unfunded commitments of $439 thousand, $13.2 million, and $2.0 million for Affordable House Fund Investment, SBIC, and Other Investments at December 31, 2015, respectively. The Company recorded no impairment on these investments.
128
The following table presents the Company’s financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:
Fair Value Measurement Level | |||||||||||||||
Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(In thousands) | |||||||||||||||
December 31, 2015 | |||||||||||||||
Assets | |||||||||||||||
Impaired loans: | |||||||||||||||
Single family residential mortgage | $ | 3,585 | $ | — | $ | — | $ | 3,585 | |||||||
Commercial and industrial | 1,073 | — | — | 1,073 | |||||||||||
Other real estate owned: | |||||||||||||||
Single family residential | 1,097 | — | — | 1,097 | |||||||||||
December 31, 2014 | |||||||||||||||
Assets | |||||||||||||||
Impaired loans: | |||||||||||||||
Single family residential mortgage | $ | 6,206 | $ | — | $ | — | $ | 6,206 | |||||||
Commercial real estate | 4,313 | — | — | 4,313 | |||||||||||
SBA servicing rights | 484 | — | — | 484 | |||||||||||
Other real estate owned: | |||||||||||||||
Single family residential | 423 | — | — | 423 | |||||||||||
The following table presents the gains and (losses) recognized on assets measured at fair value on a non-recurring basis for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Impaired loans: | |||||||||||
Single family residential mortgage | $ | — | $ | (375 | ) | $ | (1,143 | ) | |||
Commercial real estate | — | 88 | — | ||||||||
Multi-family | — | — | (465 | ) | |||||||
SBA | 4 | — | — | ||||||||
Other consumer | — | (2 | ) | (2 | ) | ||||||
SBA servicing assets | — | (42 | ) | — | |||||||
Other real estate owned | (15 | ) | 34 | 367 | |||||||
129
Estimated Fair Values of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates indicated:
Carrying | Fair Value Measurement Level | ||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
(In thousands) | |||||||||||||||||||
December 31, 2015 | |||||||||||||||||||
Financial assets | |||||||||||||||||||
Cash and cash equivalents | $ | 156,124 | $ | 156,124 | $ | — | $ | — | $ | 156,124 | |||||||||
Time deposits in financial institutions | 1,500 | 1,500 | — | — | 1,500 | ||||||||||||||
Securities available-for-sale | 833,596 | — | 833,596 | — | 833,596 | ||||||||||||||
Securities held-to-maturity | 962,203 | — | 932,285 | — | 932,285 | ||||||||||||||
FHLB and other bank stock | 59,069 | — | 59,069 | — | 59,069 | ||||||||||||||
Loans held-for-sale | 668,841 | — | 654,559 | 18,291 | 672,850 | ||||||||||||||
Loans and leases receivable, net of allowance | 5,148,861 | — | — | 5,244,251 | 5,244,251 | ||||||||||||||
Accrued interest receivable | 22,800 | 22,800 | — | — | 22,800 | ||||||||||||||
Derivative assets | 9,042 | — | 9,042 | — | 9,042 | ||||||||||||||
Financial liabilities | |||||||||||||||||||
Deposits | 6,303,085 | — | — | 6,010,606 | 6,010,606 | ||||||||||||||
Advances from Federal Home Loan Bank | 930,000 | — | 929,727 | — | 929,727 | ||||||||||||||
Long term debt | 261,876 | — | 264,269 | — | 264,269 | ||||||||||||||
Derivative liabilities | 1,067 | — | 1,067 | — | 1,067 | ||||||||||||||
Accrued interest payable | 4,234 | 4,234 | — | — | 4,234 | ||||||||||||||
December 31, 2014 | |||||||||||||||||||
Financial assets | |||||||||||||||||||
Cash and cash equivalents | $ | 231,199 | $ | 231,199 | $ | — | $ | — | $ | 231,199 | |||||||||
Time deposits in financial institutions | 1,900 | 1,900 | — | — | 1,900 | ||||||||||||||
Securities available-for-sale | 345,695 | — | 345,695 | — | 345,695 | ||||||||||||||
FHLB and other bank stock | 42,241 | — | 42,241 | — | 42,241 | ||||||||||||||
Loans held-for-sale | 1,187,090 | — | 1,195,834 | — | 1,195,834 | ||||||||||||||
Loans and leases receivable, net of allowance | 3,919,642 | — | — | 4,045,465 | 4,045,465 | ||||||||||||||
Accrued interest receivable | 15,113 | 15,113 | — | — | 15,113 | ||||||||||||||
Derivative assets | 6,379 | — | 6,379 | — | 6,379 | ||||||||||||||
Financial liabilities | |||||||||||||||||||
Deposits | 4,671,831 | — | — | 4,575,264 | 4,575,264 | ||||||||||||||
Advances from Federal Home Loan Bank | 633,000 | — | 633,083 | — | 633,083 | ||||||||||||||
Long term debt | 93,569 | — | 100,788 | — | 100,788 | ||||||||||||||
Derivative liabilities | 3,235 | — | 3,235 | — | 3,235 | ||||||||||||||
Accrued interest payable | 2,044 | 2,044 | — | — | 2,044 | ||||||||||||||
130
The methods and assumptions used to estimate fair value are described as follows:
Cash and Cash Equivalents and Time Deposits in Financial Institutions: The carrying amounts of cash and cash equivalents and time deposits in financial institutions approximate fair value due to the short-term nature of these instruments (Level 1).
FHLB and Other Bank Stock: FHLB and other bank stock is recorded at cost. Ownership of FHLB stock is restricted to member banks, and purchases and sales of these securities are at par value with the issuer (Level 2).
Securities Held-to-Maturity: The fair values of securities held to maturity are based on pricing received from an independent pricing service that utilizes matrix pricing to calculate fair value (Level 2).
Loans and Leases Receivable, Net of Allowance for Loan and Lease Losses: The fair value of loans and leases receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product and payment types. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ materially from the values that we may ultimately realize (Level 3).
Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Deposits: The fair value of deposits is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Advances from Federal Home Loan Bank: The fair values of advances from FHLB are estimated based on the discounted cash flows approach. The discount rate was derived from the current market rates for borrowings with similar remaining maturities (Level 2).
Long Term Debt: Fair value of long term debt is determined by observable data such as market spreads, cash flows, yield curves, credit information, and respective terms and conditions for debt instruments (Level 2).
Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value (Level 1).
131
NOTE 4 – INVESTMENT SECURITIES
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
December 31, 2015 | |||||||||||||||
Held-to-maturity | |||||||||||||||
Corporate bonds | $ | 239,274 | $ | 255 | $ | (20,946 | ) | $ | 218,583 | ||||||
Collateralized loan obligations | 416,284 | — | (5,077 | ) | 411,207 | ||||||||||
Commercial mortgage-backed securities | 306,645 | 41 | (4,191 | ) | 302,495 | ||||||||||
Total securities held-to-maturity | $ | 962,203 | $ | 296 | $ | (30,214 | ) | $ | 932,285 | ||||||
Available-for-sale | |||||||||||||||
SBA loan pool securities | $ | 1,485 | $ | 19 | $ | — | $ | 1,504 | |||||||
Private label residential mortgage-backed securities | 1,755 | 14 | (1 | ) | 1,768 | ||||||||||
Corporate bonds | 26,657 | — | (505 | ) | 26,152 | ||||||||||
Collateralized loan obligations | 111,719 | 31 | (282 | ) | 111,468 | ||||||||||
Agency mortgage-backed securities | 697,152 | 134 | (4,582 | ) | 692,704 | ||||||||||
Total securities available-for-sale | $ | 838,768 | $ | 198 | $ | (5,370 | ) | $ | 833,596 | ||||||
December 31, 2014 | |||||||||||||||
Available-for-sale | |||||||||||||||
SBA loan pool securities | $ | 1,697 | $ | 18 | $ | — | $ | 1,715 | |||||||
U.S. government-sponsored entities and agency securities | 1,940 | 42 | — | 1,982 | |||||||||||
Private label residential mortgage-backed securities | 3,169 | 12 | (13 | ) | 3,168 | ||||||||||
Agency mortgage-backed securities | 338,072 | 1,363 | (605 | ) | 338,830 | ||||||||||
Total securities available-for-sale | $ | 344,878 | $ | 1,435 | $ | (618 | ) | $ | 345,695 | ||||||
The following table presents amortized cost and fair value of the held-to-maturity and available-for-sale investment securities portfolio by expected maturity. In the case of mortgage-backed securities, collateralized loan obligations, 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, collateralized loan obligations, and SBA loan pool securities are not included in the maturity categories.
December 31, 2015 | |||||||||||||||
Held-to-Maturity | Available-for-Sale | ||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
Maturity: | |||||||||||||||
Within one year | $ | — | $ | — | $ | — | $ | — | |||||||
One to five years | — | — | — | — | |||||||||||
Five to ten years | 212,219 | 193,080 | 26,657 | 26,152 | |||||||||||
Greater than ten years | 27,055 | 25,503 | — | — | |||||||||||
Collateralized loan obligations, SBA loan pool, private label residential mortgage-backed, commercial mortgage-backed, and agency mortgage-backed securities | 722,929 | 713,702 | 812,111 | 807,444 | |||||||||||
Total | $ | 962,203 | $ | 932,285 | $ | 838,768 | $ | 833,596 | |||||||
At December 31, 2015 and 2014, 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 stockholders’ equity.
132
The following table presents proceeds from sales and calls of securities and the associated gross gains and losses realized through earnings upon the sale of available-for-sale securities for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Gross realized gains on sales of securities available-for-sale | $ | 3,260 | $ | 1,221 | $ | 438 | |||||
Gross realized losses on sales of securities available-for-sale | (2 | ) | (38 | ) | (107 | ) | |||||
Net realized gains on sales of securities available-for-sale | $ | 3,258 | $ | 1,183 | $ | 331 | |||||
Proceeds from sales of securities available-for-sale | $ | 989,786 | $ | 111,764 | $ | 127,298 | |||||
Tax expense on sales of securities available-for-sale | $ | 1,368 | $ | 498 | $ | — | |||||
Investment securities with carrying values of $47.9 million and $27.1 million as of December 31, 2015 and 2014, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated:
Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||
Held-to-maturity | |||||||||||||||||||||||
Corporate bonds | $ | 190,332 | $ | (20,946 | ) | $ | — | $ | — | $ | 190,332 | $ | (20,946 | ) | |||||||||
Collateralized loan obligation | 411,207 | (5,077 | ) | — | — | 411,207 | (5,077 | ) | |||||||||||||||
Commercial mortgage-backed securities | 277,351 | (4,191 | ) | — | — | 277,351 | (4,191 | ) | |||||||||||||||
Total securities held-to-maturity | $ | 878,890 | $ | (30,214 | ) | $ | — | $ | — | $ | 878,890 | $ | (30,214 | ) | |||||||||
Available-for-sale | |||||||||||||||||||||||
Private label residential mortgage-backed securities | $ | — | $ | — | $ | 403 | $ | (1 | ) | $ | 403 | $ | (1 | ) | |||||||||
Corporate bonds | 26,152 | (505 | ) | — | — | 26,152 | (505 | ) | |||||||||||||||
Collateralized loan obligation | 72,204 | (282 | ) | — | — | 72,204 | (282 | ) | |||||||||||||||
Agency mortgage-backed securities | 599,814 | (4,459 | ) | 6,832 | (123 | ) | 606,646 | (4,582 | ) | ||||||||||||||
Total securities available-for-sale | $ | 698,170 | $ | (5,246 | ) | $ | 7,235 | $ | (124 | ) | $ | 705,405 | $ | (5,370 | ) | ||||||||
December 31, 2014 | |||||||||||||||||||||||
Available-for-sale | |||||||||||||||||||||||
Private label residential mortgage-backed securities | $ | 372 | $ | (9 | ) | $ | 1,355 | $ | (4 | ) | $ | 1,727 | $ | (13 | ) | ||||||||
Agency mortgage-backed securities | 68,200 | (332 | ) | 22,212 | (273 | ) | 90,412 | (605 | ) | ||||||||||||||
Total securities available-for-sale | $ | 68,572 | $ | (341 | ) | $ | 23,567 | $ | (277 | ) | $ | 92,139 | $ | (618 | ) | ||||||||
The Company did not record other-than-temporary impairment (OTTI) for investment securities for the years ended December 31, 2015, 2014 and 2013.
At December 31, 2015, the Company’s securities available-for-sale portfolio consisted of 95 securities, 70 of which were in an unrealized loss position and securities held-to-maturity consisted of 93 securities, 87 of which were in an unrealized loss position. The unrealized losses were attributable to higher market interest rates at December 31, 2015 which negatively impacted the fair value of fixed rate agency mortgage backed securities, wider pricing spreads for corporate bonds and wider pricing spreads for collateral loan obligations.
The Company monitors to ensure it has adequate credit support and as of December 31, 2015, the Company believes there is no OTTI and did not have the intent to sell these securities and it is not likely that it will be required to sell the securities before
133
their anticipated recovery. The Company considers the lowest credit rating for identification of potential OTTI. As of December 31, 2015, all of the Company's investment securities in an unrealized loss position received an investment grade credit rating.
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 | Traditional Loans | Total NTM and Traditional Loans | Purchased Credit Impaired | Total Loans and Leases Receivable | |||||||||||||||
($ in thousands) | |||||||||||||||||||
December 31, 2015 | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | — | $ | 876,146 | $ | 876,146 | $ | 853 | $ | 876,999 | |||||||||
Commercial real estate | — | 718,108 | 718,108 | 9,599 | 727,707 | ||||||||||||||
Multi-family | — | 904,300 | 904,300 | — | 904,300 | ||||||||||||||
SBA | — | 54,657 | 54,657 | 3,049 | 57,706 | ||||||||||||||
Construction | — | 55,289 | 55,289 | — | 55,289 | ||||||||||||||
Lease financing | — | 192,424 | 192,424 | — | 192,424 | ||||||||||||||
Consumer: | |||||||||||||||||||
Single family residential mortgage | 675,960 | 775,263 | 1,451,223 | 699,230 | 2,150,453 | ||||||||||||||
Green Loans (HELOC) - first liens | 105,131 | — | 105,131 | — | 105,131 | ||||||||||||||
Green Loans (HELOC) - second liens | 4,704 | — | 4,704 | — | 4,704 | ||||||||||||||
Other consumer | 113 | 109,568 | 109,681 | — | 109,681 | ||||||||||||||
Total loans and leases | $ | 785,908 | $ | 3,685,755 | $ | 4,471,663 | $ | 712,731 | $ | 5,184,394 | |||||||||
Percentage to total loans and leases | 15.2 | % | 71.1 | % | 86.3 | % | 13.7 | % | 100.0 | % | |||||||||
Allowance for loan and lease losses | (35,533 | ) | |||||||||||||||||
Loans and leases receivable, net | $ | 5,148,861 | |||||||||||||||||
December 31, 2014 | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | — | $ | 489,766 | $ | 489,766 | $ | 1,134 | $ | 490,900 | |||||||||
Commercial real estate | — | 988,330 | 988,330 | 11,527 | 999,857 | ||||||||||||||
Multi-family | — | 955,683 | 955,683 | — | 955,683 | ||||||||||||||
SBA | — | 32,998 | 32,998 | 3,157 | 36,155 | ||||||||||||||
Construction | — | 42,198 | 42,198 | — | 42,198 | ||||||||||||||
Lease financing | — | 85,749 | 85,749 | — | 85,749 | ||||||||||||||
Consumer: | |||||||||||||||||||
Single family residential mortgage | 222,306 | 595,100 | 817,406 | 231,079 | 1,048,485 | ||||||||||||||
Green Loans (HELOC) - first liens | 123,177 | — | 123,177 | — | 123,177 | ||||||||||||||
Green Loans (HELOC) - second liens | 4,979 | — | 4,979 | — | 4,979 | ||||||||||||||
Other consumer | 113 | 161,826 | 161,939 | — | 161,939 | ||||||||||||||
Total loans and leases | $ | 350,575 | $ | 3,351,650 | $ | 3,702,225 | $ | 246,897 | $ | 3,949,122 | |||||||||
Percentage to total loans and leases | 8.9 | % | 84.8 | % | 93.7 | % | 6.3 | % | 100.0 | % | |||||||||
Allowance for loan and lease losses | (29,480 | ) | |||||||||||||||||
Loans and leases receivable, net | $ | 3,919,642 | |||||||||||||||||
134
Non Traditional Mortgage Loans
The Company’s NTM portfolio is comprised of three interest only products: Green Loans, fixed or adjustable hybrid interest only rate mortgage (Interest Only) loans and a small number of additional loans with the potential for negative amortization. As of December 31, 2015 and 2014, the NTM loans totaled $785.9 million, or 15.2 percent of total loans and leases, and $350.6 million, or 8.9 percent of total loans and leases, respectively. The total NTM portfolio increased by $435.3 million, or 124.2 percent, during the year ended December 31, 2015.
The following table presents the composition of the NTM portfolio as of the dates indicated:
December 31, | |||||||||||||||||||
2015 | 2014 | ||||||||||||||||||
Count | Amount | Percent | Count | Amount | Percent | ||||||||||||||
($ in thousands) | |||||||||||||||||||
Green Loans (HELOC) - first liens | 121 | $ | 105,131 | 13.4 | % | 148 | $ | 123,177 | 35.1 | % | |||||||||
Interest only - first liens | 521 | 664,358 | 84.4 | % | 207 | 209,207 | 59.7 | % | |||||||||||
Negative amortization | 30 | 11,602 | 1.5 | % | 32 | 13,099 | 3.7 | % | |||||||||||
Total NTM - first liens | 672 | 781,091 | 99.3 | % | 387 | 345,483 | 98.5 | % | |||||||||||
Green Loans (HELOC) - second liens | 16 | 4,704 | 0.6 | % | 19 | 4,979 | 1.4 | % | |||||||||||
Interest only - second liens | 1 | 113 | 0.1 | % | 1 | 113 | 0.1 | % | |||||||||||
Total NTM - second liens | 17 | 4,817 | 0.7 | % | 20 | 5,092 | 1.5 | % | |||||||||||
Total NTM loans | 689 | 785,908 | 100.0 | % | 407 | 350,575 | 100.0 | % | |||||||||||
Total loans and leases | $ | 5,184,394 | $ | 3,949,122 | |||||||||||||||
% of NTM to total loans and leases | 15.2 | % | 8.9 | % | |||||||||||||||
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 December 31, 2015 and 2014, Green Loans totaled $109.8 million and $128.2 million, respectively. At December 31, 2015 and 2014, $10.1 million and $12.5 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 for negative amortization; however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on LTV ratios and the Company’s contractual ability to curtail loans when the value of the 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 payments in initial periods before converting to a fully amortizing loan. At December 31, 2015 and 2014, interest only loans totaled $664.5 million and $209.3 million, respectively. At December 31, 2015 and 2014, $4.6 million and $2.0 million of the interest only loans were non-performing, respectively.
Loans with the Potential for Negative Amortization
Negative amortization loans totaled $11.6 million and $13.1 million at December 31, 2015 and 2014, respectively. The Company discontinued origination of negative amortization loans in 2007. At December 31, 2015 and 2014, no loans that had the potential for negative amortization were non-performing. 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 LTV ratios.
135
Risk Management of Non-Traditional Mortgages
The Company has determined that significant performance indicators for NTMs are LTV ratios 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 HELOCs, as needed in conjunction with portfolio management, and ordering third party AVMs. 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 score of 10 percent or more and/or a resulting FICO score 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 score is the first indication that the borrower may have difficulty in making their future payment obligations.
The Company proactively manages the NTM portfolio by performing detailed analyses on the portfolio. The Company’s IARC conducts meetings on at least a quarterly basis to review the loans classified as special mention, substandard, or doubtful and determines whether a suspension or reduction in credit limit is warranted. If a 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 be a material increase in the required payment and then monitors the loans for possible delinquency. The individual loans are monitored for possible downgrading of risk rating.
Non-Traditional Mortgage Performance Indicators
The following table presents the Company’s NTM Green Loans first lien portfolio at December 31, 2015 by FICO scores that were obtained during the quarter ended December 31, 2015, comparing to the FICO scores for those same loans that were obtained during the quarter ended December 31, 2014:
December 31, 2015 | |||||||||||||||||||||||||||||
By FICO Scores Obtained During the Quarter Ended December 31, 2015 | By FICO Scores Obtained During the Quarter Ended December 31, 2014 | Change | |||||||||||||||||||||||||||
Count | Amount | Percent | Count | Amount | Percent | Count | Amount | Percent | |||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||||
FICO Score | |||||||||||||||||||||||||||||
800+ | 22 | $ | 14,438 | 13.7 | % | 24 | $ | 16,587 | 15.8 | % | (2 | ) | $ | (2,149 | ) | (2.1 | )% | ||||||||||||
700-799 | 60 | 48,775 | 46.5 | % | 58 | 44,678 | 42.5 | % | 2 | 4,097 | 4.0 | % | |||||||||||||||||
600-699 | 23 | 23,600 | 22.4 | % | 24 | 26,768 | 25.5 | % | (1 | ) | (3,168 | ) | (3.1 | )% | |||||||||||||||
<600 | 5 | 4,030 | 3.8 | % | 8 | 11,817 | 11.2 | % | (3 | ) | (7,787 | ) | (7.4 | )% | |||||||||||||||
No FICO score | 11 | 14,288 | 13.6 | % | 7 | 5,281 | 5.0 | % | 4 | 9,007 | 8.6 | % | |||||||||||||||||
Totals | 121 | $ | 105,131 | 100.0 | % | 121 | $ | 105,131 | 100.0 | % | — | $ | — | — | % | ||||||||||||||
The Company updates FICO scores on a semi-annual basis, typically in the second and fourth quarters or as needed in conjunction with proactive portfolio management.
136
Loan to Value Ratio
LTV ratio represents estimated current loan to value ratio, determined by dividing current unpaid principal balance by latest estimated property value received per the Company policy. The table below represents the Company’s single family residential NTM first lien portfolio by LTV ratios 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) | |||||||||||||||||||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||||||||||||||||
< 61 | 70 | $ | 51,221 | 48.7 | % | 141 | $ | 208,120 | 31.3 | % | 17 | $ | 5,271 | 45.4 | % | 228 | $ | 264,612 | 33.9 | % | |||||||||||||||||||
61-80 | 33 | 42,075 | 40.0 | % | 291 | 408,662 | 61.6 | % | 12 | 6,106 | 52.7 | % | 336 | 456,843 | 58.4 | % | |||||||||||||||||||||||
81-100 | 12 | 6,836 | 6.5 | % | 37 | 30,167 | 4.5 | % | 1 | 225 | 1.9 | % | 50 | 37,228 | 4.8 | % | |||||||||||||||||||||||
> 100 | 6 | 4,999 | 4.8 | % | 52 | 17,409 | 2.6 | % | — | — | — | % | 58 | 22,408 | 2.9 | % | |||||||||||||||||||||||
Total | 121 | $ | 105,131 | 100.0 | % | 521 | $ | 664,358 | 100.0 | % | 30 | $ | 11,602 | 100.0 | % | 672 | $ | 781,091 | 100.0 | % | |||||||||||||||||||
December 31, 2014 | |||||||||||||||||||||||||||||||||||||||
< 61 | 77 | $ | 58,856 | 47.8 | % | 60 | $ | 93,254 | 44.7 | % | 15 | $ | 6,023 | 46.0 | % | 152 | $ | 158,133 | 45.8 | % | |||||||||||||||||||
61-80 | 45 | 46,177 | 37.5 | % | 54 | 81,472 | 38.9 | % | 12 | 5,901 | 45.0 | % | 111 | 133,550 | 38.6 | % | |||||||||||||||||||||||
81-100 | 18 | 11,846 | 9.6 | % | 33 | 14,927 | 7.1 | % | 4 | 781 | 6.0 | % | 55 | 27,554 | 8.0 | % | |||||||||||||||||||||||
> 100 | 8 | 6,298 | 5.1 | % | 60 | 19,554 | 9.3 | % | 1 | 394 | 3.0 | % | 69 | 26,246 | 7.6 | % | |||||||||||||||||||||||
Total | 148 | $ | 123,177 | 100.0 | % | 207 | $ | 209,207 | 100.0 | % | 32 | $ | 13,099 | 100.0 | % | 387 | $ | 345,483 | 100.0 | % | |||||||||||||||||||
The decrease in Green Loans was due to reductions in principal balance and payoffs and the increase in interest only was due to increased originations. The Company updates LTV ratios on a semi-annual basis, typically in the second and fourth quarters or as needed in conjunction with proactive portfolio management.
137
Allowance for Loan and Lease Losses
The Company has an established credit risk management process that includes regular management review of the loan and lease portfolio to identify problem loans and leases. During the ordinary course of business, management becomes aware of borrowers and lessees that may not be able to meet the contractual requirements of the loan and lease agreements. Such loans and leases are subject to increased monitoring. Consideration is given to placing the loan or lease on non-accrual status, assessing the need for additional allowance for loan and lease losses, and partial or full charge-off. The Company maintains the allowance for loan and lease losses at a level that is considered adequate to cover the estimated and known inherent risks in the loan and lease portfolio.
The Company also maintains a reserve for unfunded loan commitments at a level that is considered adequate to cover the estimated and known inherent risks. The probability of usage of the unfunded loan commitments and credit risk factors determined based on outstanding loan balance of the same customer or outstanding loans that share similar credit risk exposure are used to determine the adequacy of the reserve. At December 31, 2015 and 2014, the reserve for unfunded loan commitments was $2.1 million and $1.9 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 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. Additions to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses. Identified credit exposures that are determined to be uncollectible are charged against the allowance for loan and lease losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for loan and lease losses.
The following table presents a summary of activity in the allowance for loan and lease losses for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 29,480 | $ | 18,805 | $ | 14,448 | |||||
Loans and leases charged-off | (1,942 | ) | (923 | ) | (3,013 | ) | |||||
Recoveries of loans and leases previously charged off | 526 | 1,235 | 850 | ||||||||
Transfer of loans to held-for-sale | — | (613 | ) | (1,443 | ) | ||||||
Provision for loan and lease losses | 7,469 | 10,976 | 7,963 | ||||||||
Balance at end of year | $ | 35,533 | $ | 29,480 | $ | 18,805 | |||||
138
The following table presents the activity and balance in the allowance for loan and lease losses and the recorded investment, excluding accrued interest, in loans and leases by portfolio segment and is based on the impairment method as of or for the year ended December 31, 2015:
Commercial and Industrial | Commercial Real Estate | Multi- family | SBA | Construction | Lease Financing | Single Family Residential Mortgage | Other Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2014 | $ | 6,910 | $ | 3,840 | $ | 7,179 | $ | 335 | $ | 846 | $ | 873 | $ | 7,192 | $ | 2,305 | $ | — | $ | 29,480 | |||||||||||||||||||
Charge-offs | (33 | ) | (259 | ) | — | (106 | ) | — | (1,541 | ) | — | (3 | ) | — | (1,942 | ) | |||||||||||||||||||||||
Recoveries | 8 | 132 | 3 | 288 | — | 79 | — | 16 | — | 526 | |||||||||||||||||||||||||||||
Provision | (1,035 | ) | 539 | (1,170 | ) | 166 | 684 | 2,784 | 6,662 | (1,161 | ) | — | 7,469 | ||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 5,850 | $ | 4,252 | $ | 6,012 | $ | 683 | $ | 1,530 | $ | 2,195 | $ | 13,854 | $ | 1,157 | $ | — | $ | 35,533 | |||||||||||||||||||
Individually evaluated for impairment | $ | 38 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 331 | $ | — | $ | — | $ | 369 | |||||||||||||||||||
Collectively evaluated for impairment | 5,754 | 4,140 | 6,012 | 664 | 1,530 | 2,195 | 13,506 | 1,157 | — | 34,958 | |||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 58 | 112 | — | 19 | — | — | 17 | — | — | 206 | |||||||||||||||||||||||||||||
Total ending allowance balance | $ | 5,850 | $ | 4,252 | $ | 6,012 | $ | 683 | $ | 1,530 | $ | 2,195 | $ | 13,854 | $ | 1,157 | $ | — | $ | 35,533 | |||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 7,159 | $ | 312 | $ | — | $ | 3 | $ | — | $ | — | $ | 26,256 | $ | 553 | $ | — | $ | 34,283 | |||||||||||||||||||
Collectively evaluated for impairment | 868,987 | 717,796 | 904,300 | 54,654 | 55,289 | 192,424 | 1,530,098 | 113,832 | — | 4,437,380 | |||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 853 | 9,599 | — | 3,049 | — | — | 699,230 | — | — | 712,731 | |||||||||||||||||||||||||||||
Total ending loan balances | $ | 876,999 | $ | 727,707 | $ | 904,300 | $ | 57,706 | $ | 55,289 | $ | 192,424 | $ | 2,255,584 | $ | 114,385 | $ | — | $ | 5,184,394 | |||||||||||||||||||
139
The following table presents the activity and balance in the allowance for loan and lease losses and the recorded investment, excluding accrued interest, in loans and leases by portfolio segment and is based on the impairment method as of or for the year ended December 31, 2014:
Commercial and Industrial | Commercial Real Estate | Multi- family | SBA | Construction | Lease Financing | Single Family Residential Mortgage | Other Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2013 | $ | 1,822 | $ | 5,484 | $ | 2,566 | $ | 235 | $ | 244 | $ | 428 | $ | 7,044 | $ | 532 | $ | 450 | $ | 18,805 | |||||||||||||||||||
Charge-offs | — | (65 | ) | (3 | ) | (17 | ) | — | (244 | ) | (374 | ) | (220 | ) | — | (923 | ) | ||||||||||||||||||||||
Recoveries | 56 | 842 | — | 314 | — | 20 | — | 3 | — | 1,235 | |||||||||||||||||||||||||||||
Transfer of loans to held-for-sale | — | — | — | — | — | — | (613 | ) | — | — | (613 | ) | |||||||||||||||||||||||||||
Provision | 5,032 | (2,421 | ) | 4,616 | (197 | ) | 602 | 669 | 1,135 | 1,990 | (450 | ) | 10,976 | ||||||||||||||||||||||||||
Balance at December 31, 2014 | $ | 6,910 | $ | 3,840 | $ | 7,179 | $ | 335 | $ | 846 | $ | 873 | $ | 7,192 | $ | 2,305 | $ | — | $ | 29,480 | |||||||||||||||||||
Individually evaluated for impairment | $ | 788 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 500 | $ | — | $ | — | $ | 1,288 | |||||||||||||||||||
Collectively evaluated for impairment | 6,122 | 3,834 | 7,179 | 335 | 846 | 873 | 6,675 | 2,305 | — | 28,169 | |||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | — | 6 | — | — | — | — | 17 | — | — | 23 | |||||||||||||||||||||||||||||
Total ending allowance balance | $ | 6,910 | $ | 3,840 | $ | 7,179 | $ | 335 | $ | 846 | $ | 873 | $ | 7,192 | $ | 2,305 | $ | — | $ | 29,480 | |||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 9,021 | $ | 1,017 | $ | 1,594 | $ | 6 | $ | — | $ | — | $ | 21,337 | $ | 503 | $ | — | $ | 33,478 | |||||||||||||||||||
Collectively evaluated for impairment | 480,745 | 987,313 | 954,089 | 32,992 | 42,198 | 85,749 | 919,246 | 166,415 | — | 3,668,747 | |||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 1,134 | 11,527 | — | 3,157 | — | — | 231,079 | — | — | 246,897 | |||||||||||||||||||||||||||||
Total ending loan balances | $ | 490,900 | $ | 999,857 | $ | 955,683 | $ | 36,155 | $ | 42,198 | $ | 85,749 | $ | 1,171,662 | $ | 166,918 | $ | — | $ | 3,949,122 | |||||||||||||||||||
140
The following table presents loans and leases individually evaluated for impairment by class of loans and leases as of the dates indicated. The recorded investment, excluding accrued interest, presents customer balances net of any partial charge-offs recognized on the loans and leases and net of any deferred fees and costs.
December 31, | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance for Loan and Lease Losses | Unpaid Principal Balance | Recorded Investment | Allowance for Loan and Lease Losses | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | $ | 6,244 | $ | 6,086 | $ | — | $ | 4,803 | $ | 4,708 | $ | — | |||||||||||
Commercial real estate | 1,200 | 312 | — | 1,910 | 1,017 | — | |||||||||||||||||
Multi-family | — | — | — | 1,747 | 1,594 | — | |||||||||||||||||
SBA | 22 | 3 | — | 24 | 6 | — | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 24,224 | 22,671 | — | 15,729 | 15,131 | — | |||||||||||||||||
Other consumer | 553 | 553 | — | 507 | 503 | — | |||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 1,072 | 1,073 | 38 | 4,310 | 4,313 | 788 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 3,575 | 3,585 | 331 | 6,422 | 6,206 | 500 | |||||||||||||||||
Total | $ | 36,890 | $ | 34,283 | $ | 369 | $ | 35,452 | $ | 33,478 | $ | 1,288 | |||||||||||
141
The following table presents information on impaired loans and leases, disaggregated by class, for the periods indicated:
Year Ended | |||||||||||
Average Recorded Investment | Interest Income Recognized | Cash Basis Interest Recognized | |||||||||
(In thousands) | |||||||||||
December 31, 2015 | |||||||||||
Commercial: | |||||||||||
Commercial and industrial | $ | 6,750 | $ | 305 | $ | 302 | |||||
Commercial real estate | 353 | 37 | 37 | ||||||||
Multi-family | 395 | 13 | 15 | ||||||||
SBA | 7 | 2 | — | ||||||||
Consumer: | |||||||||||
Single family residential mortgage | 25,093 | 869 | 885 | ||||||||
Other consumer | 424 | 12 | 13 | ||||||||
Total | $ | 33,022 | $ | 1,238 | $ | 1,252 | |||||
December 31, 2014 | |||||||||||
Commercial: | |||||||||||
Commercial and industrial | $ | 4,166 | $ | 92 | $ | 133 | |||||
Commercial real estate | 2,865 | 110 | 125 | ||||||||
Multi-family | 1,653 | 43 | 43 | ||||||||
SBA | 3 | — | — | ||||||||
Consumer: | |||||||||||
Single family residential mortgage | 16,285 | 390 | 405 | ||||||||
Other consumer | 580 | 25 | 24 | ||||||||
Total | $ | 25,552 | $ | 660 | $ | 730 | |||||
December 31, 2013 | |||||||||||
Commercial: | |||||||||||
Commercial and industrial | $ | 67 | $ | 10 | $ | 10 | |||||
Commercial real estate | 3,554 | 163 | 171 | ||||||||
Multi-family | 1,345 | 35 | 37 | ||||||||
SBA | 12 | 1 | 1 | ||||||||
Consumer: | |||||||||||
Single family residential mortgage | 12,562 | 304 | 308 | ||||||||
Other consumer | 693 | 2 | 2 | ||||||||
Total | $ | 18,233 | $ | 515 | $ | 529 | |||||
142
Non-accrual Loans and Leases
The following table presents nonaccrual loans and leases, and loans past due 90 days or more and still accruing as of the dates indicated:
December 31, | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
NTM Loans | Traditional Loans | Total | NTM Loans | Traditional Loans | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Loans past due 90 days or more and still accruing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Nonaccrual loans: | |||||||||||||||||||||||
The Company maintains specific allowances for these loans of $0 in 2015 and $478 in 2014 | 14,703 | 30,426 | 45,129 | 14,592 | 23,789 | 38,381 | |||||||||||||||||
The following table presents the composition of nonaccrual loans and leases as of the dates indicated:
December 31, | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
NTM Loans | Traditional Loans | Total | NTM Loans | Traditional Loans | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | $ | — | $ | 4,383 | $ | 4,383 | $ | — | $ | 7,143 | $ | 7,143 | |||||||||||
Commercial real estate | — | 1,552 | 1,552 | — | 1,017 | 1,017 | |||||||||||||||||
Multi-family | — | 642 | 642 | — | 1,834 | 1,834 | |||||||||||||||||
SBA | — | 422 | 422 | — | 285 | 285 | |||||||||||||||||
Construction | — | — | — | — | — | — | |||||||||||||||||
Lease financing | — | 598 | 598 | — | 100 | 100 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 4,615 | 22,615 | 27,230 | 2,049 | 13,370 | 15,419 | |||||||||||||||||
Green Loans (HELOC) - first liens | 10,088 | — | 10,088 | 12,334 | — | 12,334 | |||||||||||||||||
Green Loans (HELOC) - second liens | — | — | — | 209 | — | 209 | |||||||||||||||||
Other consumer | — | 214 | 214 | — | 40 | 40 | |||||||||||||||||
Total nonaccrual loans and leases | $ | 14,703 | $ | 30,426 | $ | 45,129 | $ | 14,592 | $ | 23,789 | $ | 38,381 | |||||||||||
143
Past Due Loans and Leases
The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2015, excluding accrued interest receivable (which is not considered to be material), by class of loans and leases:
December 31, 2015 | |||||||||||||||||||||||
30 - 59 Days Past Due | 60 - 89 Days Past Due | Greater than 89 Days Past due | Total Past Due | Current | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
NTM loans: | |||||||||||||||||||||||
Single family residential mortgage | $ | 3,935 | $ | — | $ | 3,447 | $ | 7,382 | $ | 668,578 | $ | 675,960 | |||||||||||
Green Loans (HELOC) - first liens | 7,913 | — | — | 7,913 | 97,218 | 105,131 | |||||||||||||||||
Green Loans (HELOC) - second liens | — | — | — | — | 4,704 | 4,704 | |||||||||||||||||
Other consumer | — | — | — | — | 113 | 113 | |||||||||||||||||
Total NTM loans | 11,848 | — | 3,447 | 15,295 | 770,613 | 785,908 | |||||||||||||||||
Traditional loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 23 | 4,984 | 544 | 5,551 | 870,595 | 876,146 | |||||||||||||||||
Commercial real estate | — | — | 911 | 911 | 717,197 | 718,108 | |||||||||||||||||
Multi-family | 223 | — | 432 | 655 | 903,645 | 904,300 | |||||||||||||||||
SBA | — | 162 | 173 | 335 | 54,322 | 54,657 | |||||||||||||||||
Construction | — | — | — | — | 55,289 | 55,289 | |||||||||||||||||
Lease financing | 2,005 | 1,041 | 394 | 3,440 | 188,984 | 192,424 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 15,762 | 3,887 | 17,226 | 36,875 | 738,388 | 775,263 | |||||||||||||||||
Other consumer | — | 11 | 211 | 222 | 109,346 | 109,568 | |||||||||||||||||
Total traditional loans | 18,013 | 10,085 | 19,891 | 47,989 | 3,637,766 | 3,685,755 | |||||||||||||||||
PCI loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | — | — | 176 | 176 | 677 | 853 | |||||||||||||||||
Commercial real estate | — | — | 1,425 | 1,425 | 8,174 | 9,599 | |||||||||||||||||
SBA | 386 | 163 | 621 | 1,170 | 1,879 | 3,049 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 33,507 | 6,235 | 4,672 | 44,414 | 654,816 | 699,230 | |||||||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||||||
Total PCI loans | 33,893 | 6,398 | 6,894 | 47,185 | 665,546 | 712,731 | |||||||||||||||||
Total | $ | 63,754 | $ | 16,483 | $ | 30,232 | $ | 110,469 | $ | 5,073,925 | $ | 5,184,394 | |||||||||||
144
The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2014, excluding accrued interest receivable (which is not considered to be material), by class of loans and leases:
December 31, 2014 | |||||||||||||||||||||||
30 - 59 Days Past Due | 60 - 89 Days Past Due | Greater than 89 Days Past due | Total Past Due | Current | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
NTM loans: | |||||||||||||||||||||||
Single family residential mortgage | $ | 1,415 | $ | 165 | $ | 2,049 | $ | 3,629 | $ | 218,677 | $ | 222,306 | |||||||||||
Green Loans (HELOC) - first liens | 8,853 | — | 437 | 9,290 | 113,887 | 123,177 | |||||||||||||||||
Green Loans (HELOC) - second liens | 294 | — | 209 | 503 | 4,476 | 4,979 | |||||||||||||||||
Other consumer | — | — | — | — | 113 | 113 | |||||||||||||||||
Total NTM loans | 10,562 | 165 | 2,695 | 13,422 | 337,153 | 350,575 | |||||||||||||||||
Traditional loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 79 | 37 | 3,370 | 3,486 | 486,280 | 489,766 | |||||||||||||||||
Commercial real estate | 2,237 | — | — | 2,237 | 986,093 | 988,330 | |||||||||||||||||
Multi-family | 1,072 | 208 | — | 1,280 | 954,403 | 955,683 | |||||||||||||||||
SBA | 82 | — | 254 | 336 | 32,662 | 32,998 | |||||||||||||||||
Construction | — | — | — | — | 42,198 | 42,198 | |||||||||||||||||
Lease financing | 1,055 | 36 | 100 | 1,191 | 84,558 | 85,749 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 17,185 | 7,878 | 10,411 | 35,474 | 559,626 | 595,100 | |||||||||||||||||
Other consumer | 9 | 89 | 5 | 103 | 161,723 | 161,826 | |||||||||||||||||
Total traditional loans | 21,719 | 8,248 | 14,140 | 44,107 | 3,307,543 | 3,351,650 | |||||||||||||||||
PCI Loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | — | — | — | — | 1,134 | 1,134 | |||||||||||||||||
Commercial real estate | — | — | 951 | 951 | 10,576 | 11,527 | |||||||||||||||||
SBA | 878 | — | 300 | 1,178 | 1,979 | 3,157 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 13,262 | 3,501 | 4,510 | 21,273 | 209,806 | 231,079 | |||||||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||||||
Total PCI loans | 14,140 | 3,501 | 5,761 | 23,402 | 223,495 | 246,897 | |||||||||||||||||
Total | $ | 46,421 | $ | 11,914 | $ | 22,596 | $ | 80,931 | $ | 3,868,191 | $ | 3,949,122 | |||||||||||
145
Troubled Debt Restructurings
Troubled Debt Restructurings (TDRs) of loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
For the year ended December 31, 2015, there were 14 modifications through bankruptcy discharges. There were six modifications through extensions of maturities for the year ended December 31, 2014. There were two modifications through extensions of maturities for the year ended December 31, 2013. The following table summarizes the pre-modification and post-modification balances of the new TDRs for the periods indicated:
Year Ended | ||||||||||
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||
($ in thousands) | ||||||||||
December 31, 2015 | ||||||||||
Consumer: | ||||||||||
Single family residential mortgage | 13 | 4,571 | 4,493 | |||||||
Other consumer | 1 | 261 | 259 | |||||||
Total | 14 | $ | 4,832 | $ | 4,752 | |||||
December 31, 2014 | ||||||||||
Consumer: | ||||||||||
Single family residential mortgage | 5 | 1,245 | 1,229 | |||||||
Other consumer | 1 | 294 | 294 | |||||||
Total | 6 | $ | 1,539 | $ | 1,523 | |||||
December 31, 2013 | ||||||||||
Consumer: | ||||||||||
Other consumer | 2 | 435 | 435 | |||||||
Total | 2 | $ | 435 | $ | 435 | |||||
For the years ended December 31, 2015, 2014, and 2013, there were no loans and leases that were modified as TDRs during the past 12 months that had payment defaults during the periods.
Troubled debt restructured loans and leases consist of the following as of the dates indicated:
December 31, | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
NTM Loans | Traditional Loans | Total | NTM Loans | Traditional Loans | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
SBA | — | 3 | 3 | — | 6 | 6 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 1,015 | 5,841 | 6,856 | — | 4,269 | 4,269 | |||||||||||||||||
Green Loans (HELOC) - first liens | 2,400 | — | 2,400 | 3,442 | — | 3,442 | |||||||||||||||||
Green Loans (HELOC) - second liens | 553 | — | 553 | 294 | — | 294 | |||||||||||||||||
Total | $ | 3,968 | $ | 5,844 | $ | 9,812 | $ | 3,736 | $ | 4,275 | $ | 8,011 | |||||||||||
The Company did not have any commitments to lend to customers with outstanding loans or leases that were classified as troubled debt restructurings as of December 31, 2015 and 2014.
146
Credit Quality Indicators
The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company performs historical loss analysis that is combined with a comprehensive loan or lease to value analysis to analyze the associated risks in the current loan and lease portfolio. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes all loans and leases delinquent over 60 days and non-homogeneous loans and leases such as commercial and commercial real estate loans and leases. Classification of problem single family residential loans is performed on a monthly basis while analysis of non-homogeneous loans and leases is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Pass: Loans and leases classified as pass are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weakness as defined under “Special Mention”, “Substandard” or “Doubtful/Loss”.
Special Mention: Loans and leases classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or of the Company’s credit position at some future date.
Substandard: Loans and leases classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful/Loss: Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Not-Rated: When accrual of income on a pool of PCI loans with common risk characteristics is appropriate in accordance with ASC 310-30, individual loans in those pools are not risk-rated. The credit criteria evaluated are FICO scores, LTV ratios, delinquency, and actual cash flows versus expected cash flows of the loan pools.
Loans and leases not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases.
147
The following table presents the risk categories for loans and leases as of December 31, 2015:
December 31, 2015 | |||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Not-Rated | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
NTM loans: | |||||||||||||||||||||||
Single family residential mortgage | $ | 660,683 | $ | 11,731 | $ | 3,546 | $ | — | $ | — | $ | 675,960 | |||||||||||
Green Loans (HELOC) - first liens | 87,967 | 2,329 | 14,835 | — | — | 105,131 | |||||||||||||||||
Green Loans (HELOC) - second liens | 4,704 | — | — | — | — | 4,704 | |||||||||||||||||
Other consumer | 113 | — | — | — | — | 113 | |||||||||||||||||
Total NTM loans | 753,467 | 14,060 | 18,381 | — | — | 785,908 | |||||||||||||||||
Traditional loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 860,993 | 3,175 | 11,978 | — | — | 876,146 | |||||||||||||||||
Commercial real estate | 707,238 | 4,788 | 6,082 | — | — | 718,108 | |||||||||||||||||
Multi-family | 901,578 | 403 | 2,319 | — | — | 904,300 | |||||||||||||||||
SBA | 53,078 | 1,132 | 447 | — | — | 54,657 | |||||||||||||||||
Construction | 55,289 | — | — | — | — | 55,289 | |||||||||||||||||
Lease financing | 190,976 | — | 1,448 | — | — | 192,424 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 738,196 | 12,301 | 24,766 | — | — | 775,263 | |||||||||||||||||
Other consumer | 109,206 | 148 | 214 | — | — | 109,568 | |||||||||||||||||
Total traditional loans | 3,616,554 | 21,947 | 47,254 | — | — | 3,685,755 | |||||||||||||||||
PCI loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 54 | — | 799 | — | — | 853 | |||||||||||||||||
Commercial real estate | 5,621 | 523 | 3,455 | — | — | 9,599 | |||||||||||||||||
SBA | 988 | — | 2,061 | — | — | 3,049 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | — | — | 139 | — | 699,091 | 699,230 | |||||||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||||||
Total PCI loans | 6,663 | 523 | 6,454 | — | 699,091 | 712,731 | |||||||||||||||||
Total | $ | 4,376,684 | $ | 36,530 | $ | 72,089 | $ | — | $ | 699,091 | $ | 5,184,394 | |||||||||||
148
The following table presents the risk categories for loans and leases as of December 31, 2014:
December 31, 2014 | |||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Not-Rated | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
NTM loans: | |||||||||||||||||||||||
Single family residential mortgage | $ | 219,747 | $ | 279 | $ | 2,280 | $ | — | $ | — | $ | 222,306 | |||||||||||
Green Loans (HELOC) - first liens | 104,640 | 399 | 18,138 | — | — | 123,177 | |||||||||||||||||
Green Loans (HELOC) - second liens | 4,770 | — | 209 | — | — | 4,979 | |||||||||||||||||
Other consumer | 113 | — | — | — | — | 113 | |||||||||||||||||
Total NTM loans | 329,270 | 678 | 20,627 | — | — | 350,575 | |||||||||||||||||
Traditional loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 477,319 | 117 | 12,330 | — | — | 489,766 | |||||||||||||||||
Commercial real estate | 943,645 | 14,281 | 30,404 | — | — | 988,330 | |||||||||||||||||
Multi-family | 932,438 | 6,684 | 16,561 | — | — | 955,683 | |||||||||||||||||
SBA | 32,171 | — | 827 | — | — | 32,998 | |||||||||||||||||
Construction | 42,198 | — | — | — | — | 42,198 | |||||||||||||||||
Lease financing | 85,613 | 36 | 100 | — | — | 85,749 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 569,871 | 10,395 | 14,834 | — | — | 595,100 | |||||||||||||||||
Other consumer | 161,701 | 85 | 40 | — | — | 161,826 | |||||||||||||||||
Total traditional loans | 3,244,956 | 31,598 | 75,096 | — | — | 3,351,650 | |||||||||||||||||
PCI loans: | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Commercial and industrial | 104 | — | 1,030 | — | — | 1,134 | |||||||||||||||||
Commercial real estate | 6,676 | 985 | 3,866 | — | — | 11,527 | |||||||||||||||||
SBA | 677 | 351 | 2,129 | — | — | 3,157 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | — | — | 268 | — | 230,811 | 231,079 | |||||||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||||||
Total PCI loans | 7,457 | 1,336 | 7,293 | — | 230,811 | 246,897 | |||||||||||||||||
Total | $ | 3,581,683 | $ | 33,612 | $ | 103,016 | $ | — | $ | 230,811 | $ | 3,949,122 | |||||||||||
149
Purchased Credit Impaired Loans
During the years ended December 31, 2015, 2014, and 2013, the Company acquired loans and leases through business acquisitions and purchases of loan pools for which there was, at acquisition, evidence of deterioration of credit quality subsequent to origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the outstanding balance and carrying amount of those loans and leases, which are sometimes collectively referred to as “PCI loans” as of the dates indicated:
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Outstanding Balance | Carrying Amount | Outstanding Balance | Carrying Amount | ||||||||||||
(In thousands) | |||||||||||||||
Commercial: | |||||||||||||||
Commercial and industrial | $ | 1,001 | $ | 853 | $ | 1,767 | $ | 1,134 | |||||||
Commercial real estate | 11,255 | 9,599 | 13,708 | 11,527 | |||||||||||
SBA | 4,033 | 3,049 | 4,220 | 3,157 | |||||||||||
Consumer: | |||||||||||||||
Single family residential mortgage | 764,814 | 699,230 | 283,067 | 231,079 | |||||||||||
Total | $ | 781,103 | $ | 712,731 | $ | 302,762 | $ | 246,897 | |||||||
The following table presents a summary of accretable yield, or income expected to be collected for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 92,301 | $ | 126,336 | $ | 32,206 | |||||
New loans or leases purchased | 138,046 | — | 155,416 | ||||||||
Accretion of income | (23,441 | ) | (25,335 | ) | (19,177 | ) | |||||
Increase (decrease) in expected cash flows | 19,852 | 29,267 | (17,358 | ) | |||||||
Disposals | (21,209 | ) | (37,967 | ) | (24,751 | ) | |||||
Balance at end of year | $ | 205,549 | $ | 92,301 | $ | 126,336 | |||||
The following table presents loans and leases purchased and acquired through business acquisitions at acquisition dates for which it was probable at acquisition that all contractually required payments would not be collected for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Commercial: | |||||||||||
Commercial and industrial | $ | — | $ | — | $ | 2,721 | |||||
Commercial real estate | — | — | 3,226 | ||||||||
Construction | — | — | 4,333 | ||||||||
Consumer: | |||||||||||
Single family residential mortgage | 571,245 | — | 473,942 | ||||||||
Other consumer | — | — | 844 | ||||||||
Outstanding unpaid principal balance at acquisition | $ | 571,245 | $ | — | $ | 485,066 | |||||
Cash flows expected to be collected at acquisitions | $ | 667,224 | $ | — | $ | 504,197 | |||||
Fair value of acquired loans at acquisition | 529,178 | — | 348,569 | ||||||||
150
The Company completed seven bulk loan acquisitions with unpaid principal balances and fair values of $622.1 million and $578.7 million, respectively, at the respective acquisition dates during the year ended December 31, 2015. The Company determined that unpaid principal balance and fair value of $571.2 million and $529.2 million of these loans displayed evidence of credit quality deterioration since origination and it was probable, at acquisition that all contractually required payments would not be collected. The Company sold a portion of PCI loans with unpaid principal balances and carrying values of $52.4 million and $32.5 million, respectively, during the year ended December 31, 2015. The Company recognized net gain on sale of $9.4 million from these transactions for the year ended December 31, 2015, and the gain was included in Net Gain on Sale of Loans on the Consolidated Statements of Operations.
The Company did not purchase any PCI loans during the year ended December 31, 2014. The Company sold a portion of PCI loans with unpaid principal balances and carrying values as of the respective sale dates of $91.9 million and $56.7 million, respectively, during the year ended December 31, 2014. The Company recognized net gain on sale loans of $11.8 million from these transactions for the year ended December 31, 2014, and the gain was included in Net Gain on Sale of Loans on the Consolidated Statements of Operations.
The Company completed five bulk loan acquisitions with unpaid principal balances and fair values of $1.02 billion and $849.9 million, respectively, at the respective acquisition dates during the year ended December 31, 2013. The Company determined that unpaid principal balance and fair value of $485.1 million and $348.6 million of these loans displayed evidence of credit quality deterioration since origination and it was probable, at acquisition that all contractually required payments would not be collected. The Company sold a portion of PCI loans with unpaid principal balances and carrying values of $141.7 million and $80.5 million, respectively, during the year ended December 31, 2013. The Company recognized net gain on sale of $2.4 million from these transactions for the year ended December 31, 2013, and the gain was included in Net Gain on Sale of Loans on the Consolidated Statements of Operations.
Purchases and Sales
The following table presents loans and leases purchased and/or sold by portfolio segment, excluding loans held-for-sale, loans and leases acquired in business combinations and PCI loans for the periods indicated:
Year Ended December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||
Purchases | Sales | Purchases | Sales | Purchases | Sales | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||
Multi-family | $ | — | $ | 242,580 | $ | — | $ | — | $ | — | $ | — | |||||||||||
SBA | — | 3,599 | — | 7,838 | — | 2,507 | |||||||||||||||||
Lease financing | 127,043 | — | 38,572 | — | 7,850 | — | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Single family residential mortgage | 49,488 | 165,915 | — | 82,552 | 507,736 | 186,140 | |||||||||||||||||
Total | $ | 176,531 | $ | 412,094 | $ | 38,572 | $ | 90,390 | $ | 515,586 | $ | 188,647 | |||||||||||
The Company purchased the above loans and leases at a net discount of $1.4 million, $0, and $43.4 million for the years ended December 31, 2015, 2014, and 2013, respectively. For the purchased loans and leases disclosed above, the Company did not incur any specific allowances for loan and lease losses during the years ended December 31, 2015, 2014, and 2013. The Company determined that it was probable at acquisition that all contractually required payments would be collected.
151
NOTE 6 – PREMISES, EQUIPMENT, AND CAPITAL LEASES, NET
The following table presents the summary of premises, equipment, and capital lease, net, as of the dates indicated:
December 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Land | $ | 11,130 | $ | 22,330 | |||
Building and improvement | 78,358 | 31,403 | |||||
Furniture, fixtures, and equipment | 34,235 | 30,469 | |||||
Leasehold improvements | 11,671 | 8,764 | |||||
Construction in process | 1,793 | 3,176 | |||||
Total | 137,187 | 96,142 | |||||
Less accumulated depreciation | (25,648 | ) | (17,457 | ) | |||
Premises, equipment, and capital lease, net | $ | 111,539 | $ | 78,685 | |||
On November 12, 2015, the Company purchased a certain real property located at 3 MacArthur Place, Santa Ana, California at a purchase price of approximately $77.0 million in cash.
On September 25, 2015, the Company sold of two branch locations to AUB. The transaction included net book values of $47 thousand of leasehold improvements and $30 thousand of furniture, fixtures, and equipment as of the transaction date.
On June 25, 2015, the Company sold a certain improved real property located 1588 South Coast Drive, Costa Mesa, California at a book value of $42.3 million at the transaction date.
The Company recognized depreciation expense of $9.2 million, $6.8 million and $4.3 million for years ended December 31, 2015, 2014, and 2013, respectively.
The Company leases certain equipment under capital leases. Capital leases totaled $2.3 million and $3.2 million at December 31, 2015 and 2014, respectively. The lease arrangements require monthly payments through 2019.
The Company leases certain properties under operating leases. Total rent expense for the years ended December 31, 2015, 2014, and 2013 amounted to $16.4 million, $13.0 million and $7.6 million, respectively. Pursuant to the terms of non-cancellable lease agreements in effect at December 31, 2015 pertaining to banking premises and equipment, future minimum rent commitments under various operating leases are as follows, before considering renewal options that generally are present.
The following table presents the future commitments under operating leases and capital leases as of December 31, 2015:
2016 | 2017 | 2018 | 2019 | 2020 and After | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commitments under operating leases | $ | 12,945 | $ | 10,192 | $ | 6,708 | $ | 4,298 | $ | 7,899 | $ | 42,042 | |||||||||||
Commitments under capital lease | 998 | 939 | 385 | 47 | — | 2,369 | |||||||||||||||||
Total | $ | 13,943 | $ | 11,131 | $ | 7,093 | $ | 4,345 | $ | 7,899 | $ | 44,411 | |||||||||||
152
NOTE 7 – SERVICING RIGHTS
The Company retains mortgage servicing rights (MSRs) from certain of its sales of residential mortgage loans. MSRs on residential mortgage loans are reported at fair value. Income earned by the Company on its MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs and third party subservicing costs. The Company retains servicing rights in connection with its SBA loan operations, which are measured using the amortization method.
Income from servicing rights was $3.0 million, $4.2 million and $2.0 million for the years ended December 31, 2015, 2014, and 2013, respectively. The Company recognized (losses) gains on the fair values of servicing rights of $(8.8) million, $(1.6) million and $298 thousand for the years ended December 31, 2015, 2014, and 2013, respectively. These decreases were partially offset by increases in servicing fees. The Company recognized servicing fees of $11.7 million, $5.8 million, and $1.8 million for the years ended December 31, 2015, 2014, and 2013, respectively. The decrease in fair value of servicing rights was due to generally lower interest rates and the increase in servicing fees was due to the increase in unpaid principal balance of loans sold with servicing retained. These amounts are reported in Loan Servicing Income on the Consolidated Statements of Operations. The following table presents a composition of servicing rights as of the dates indicated:
December 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Mortgage servicing rights, at fair value | $ | 49,939 | $ | 19,082 | |||
SBA servicing rights, at cost | 788 | 484 | |||||
Total | $ | 50,727 | $ | 19,566 | |||
Mortgage loans sold with servicing retained are not reported as assets and are subserviced by a third party vendor. The unpaid principal balance of these loans at December 31, 2015 and 2014 was $4.77 billion and $1.92 billion, respectively. Custodial escrow balances maintained in connection with serviced loans were $21.1 million and $8.3 million at December 31, 2015 and 2014, respectively.
Mortgage Servicing Rights
The following table presents the key characteristics, inputs and economic assumptions used to estimate the Level 3 fair value of the MSRs as of the dates indicated:
December 31, | |||||||
2015 | 2014 | ||||||
($ in thousands) | |||||||
Fair value of retained MSRs | $ | 49,939 | $ | 13,135 | |||
Discount rate | 9.75 | % | 10.09 | % | |||
Constant prepayment rate | 11.81 | % | 13.22 | % | |||
Weighted-average life (in years) | 6.48 | 5.80 | |||||
At December 31, 2014, $5.9 million of the mortgage servicing rights was valued based on a market bid that settled subsequent to year end, which was included as Level 3 fair value of MSRs.
The following table presents activity in the MSRs for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 19,082 | $ | 13,535 | $ | 1,739 | |||||
Additions | 45,263 | 26,399 | 11,463 | ||||||||
Changes in fair value resulting from valuation inputs or assumptions | (3,568 | ) | (233 | ) | 1,360 | ||||||
Sales of servicing rights | (5,862 | ) | (17,773 | ) | — | ||||||
Other—loans paid off | (4,976 | ) | (2,846 | ) | (1,027 | ) | |||||
Balance at end of year | $ | 49,939 | $ | 19,082 | $ | 13,535 | |||||
153
SBA Servicing Rights
The Company used a discount rate of 7.50 percent to calculate the present value of cash flows and an estimated prepayment speed based on prepayment data available. Discount rates and prepayment speeds are reviewed quarterly and adjusted as appropriate. The following table presents activity in the SBA servicing rights for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 484 | $ | 348 | $ | 539 | |||||
Additions | 597 | 261 | 32 | ||||||||
Amortization, including prepayments | (71 | ) | (83 | ) | (223 | ) | |||||
Impairment | (222 | ) | (42 | ) | — | ||||||
Balance at end of year | $ | 788 | $ | 484 | $ | 348 | |||||
NOTE 8 – OTHER REAL ESTATE OWNED
The following table presents the activity in other real estate owned for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 423 | $ | — | $ | 4,527 | |||||
Additions | 1,598 | 653 | 229 | ||||||||
Sales and net direct write-downs | (886 | ) | (198 | ) | (6,825 | ) | |||||
Net change in valuation allowance | (38 | ) | (32 | ) | 2,069 | ||||||
Balance at end of year | $ | 1,097 | $ | 423 | $ | — | |||||
The following table presents the activity in the other real estate owned valuation allowance for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 32 | $ | — | $ | 2,069 | |||||
Additions | 38 | 32 | 97 | ||||||||
Net direct write-downs and removals from sale | — | — | (2,166 | ) | |||||||
Balance at end of year | $ | 70 | $ | 32 | $ | — | |||||
The following table presents expenses related to foreclosed assets included in Loan Servicing and Foreclosure Expenses on the Consolidated Statements of Operations for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Net gain on sales | $ | 23 | $ | 66 | $ | 464 | |||||
Operating expenses, net of rental income | — | — | (362 | ) | |||||||
Total | $ | 23 | $ | 66 | $ | 102 | |||||
154
NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
At December 31, 2015, the Company had goodwill of $39.2 million related to the following acquisitions: BPNA Branch Acquisition, RenovationReady, CS Financial, PBOC, and Beach Business Bank acquisitions. The following table presents changes in the carrying amount of goodwill for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Goodwill balance at beginning of the year | $ | 31,591 | $ | 30,143 | $ | 7,048 | |||||
Goodwill acquired during the year | — | 2,239 | 23,095 | ||||||||
Goodwill adjustments for purchase accounting | 7,653 | (791 | ) | — | |||||||
Impairment losses | — | — | — | ||||||||
Goodwill balance at end of year | $ | 39,244 | $ | 31,591 | $ | 30,143 | |||||
Accumulated impairment losses at end of year | $ | — | $ | — | $ | — | |||||
The Company made the goodwill adjustments related to the finalization of accounting adjustments for the BPNA Branch Acquisition during the year ended December 31, 2015 and the CS Financial and PBOC acquisitions during the year ended December 31, 2014.
The Company tests its goodwill for impairment annually as of August 31 (the Measurement Date). At the Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluates, based on the weight of evidence, the significance of all qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The assessment of qualitative factors at the most recent Measurement Date indicated that it is not more likely than not that impairment existed; as a result, no further testing was performed.
Core deposit intangibles are amortized over their useful lives ranging from 4 to 10 years. As of December 31, 2015, the weighted average remaining amortization period for core deposit intangibles was approximately 7.4 years. Customer relationship intangible, related to the RenovationReady acquisition, is amortized over its useful life of 5 years. As of December 31, 2015, the remaining amortization period for customer relationship intangible was approximately 3.1 years. Trade name intangibles, related to the RenovationReady and CS Financial acquisitions, have indefinite useful lives. The following table presents a summary of other intangible assets as of the dates indicated:
Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||
(In thousands) | |||||||||||
December 31, 2015 | |||||||||||
Core deposit intangibles | $ | 30,904 | $ | 12,939 | $ | 17,965 | |||||
Customer relationship intangible | 670 | 257 | 413 | ||||||||
Trade name intangibles | 780 | — | 780 | ||||||||
December 31, 2014 | |||||||||||
Core deposit intangibles | $ | 31,162 | $ | 7,237 | $ | 23,925 | |||||
Customer relationship intangible | 670 | 123 | 547 | ||||||||
Trade name intangibles | 780 | — | 780 | ||||||||
The Company recorded impairment on intangible assets of $258 thousand, $48 thousand, and $1.1 million for the years ended December 31, 2015, 2014, and 2013, respectively. During the year ended December 31, 2015, the Company wrote off a portion of core deposit intangibles on non-interest bearing demand deposits and money market accounts acquired through the BPNA Branch Acquisition of $258 thousand, as these deposits were transferred in connection with the sale of two branches to AUB. During the year ended December 31, 2014, the Company wrote off a portion of core deposit intangibles related to the Beach Business Bank acquisition of $48 thousand due to lower remaining deposit balances than forecasted. During the year ended December 31, 2013, the Company wrote off all remaining trade name intangible assets of Beach Business Bank, Gateway Bancorp and PBOC of $976 thousand due to the merger of the Company’s two banking subsidiaries into a single bank and a portion of core deposit intangibles related to the Gateway Bancorp acquisition of $85 thousand due to lower remaining deposit balances than forecasted.
155
Aggregate amortization of intangible assets was $5.8 million, $4.1 million and $2.7 million for the years ended December 31, 2015, 2014, and 2013, respectively. The following table presents estimated future amortization expenses as of December 31, 2015:
2016 | 2017 | 2018 | 2019 | 2020 and After | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Estimated future amortization expense | $ | 4,946 | $ | 4,066 | $ | 3,205 | $ | 2,202 | $ | 3,959 | $ | 18,378 | |||||||||||
The Company realigned its management reporting structure at December 31, 2014, and accordingly its segment reporting structures and goodwill reporting units. In connection with the realignment, management reallocated goodwill to the new reporting units using a relative fair value approach. The carrying values of goodwill allocated to the reportable segments were $37.1 million and $2.1 million to the Banking segment and Mortgage Banking segment, respectively, at December 31, 2015. See Note 22 for additional information.
NOTE 10 – DEPOSITS
The following table presents the components of interest-bearing deposits as of the dates indicated:
December 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Interest-bearing demand deposits | $ | 1,697,055 | $ | 1,054,828 | |||
Money market accounts | 1,479,931 | 1,074,432 | |||||
Savings accounts | 823,618 | 985,646 | |||||
Certificates of deposits of under $100,000 | 633,372 | 449,580 | |||||
Certificates of deposits of $100,000 through $250,000 | 250,868 | 392,899 | |||||
Certificates of deposits of more than $250,000 | 297,117 | 52,151 | |||||
Total interest-bearing deposits | $ | 5,181,961 | $ | 4,009,536 | |||
As of December 31, 2015, the Bank had brokered deposits of $992.9 million, which represented 12.1 percent of total assets. The Company primarily relies on competitive pricing policies, marketing and customer service to attract and retain deposits.
The following table presents scheduled maturities of certificates of deposit as of December 31, 2015:
2016 | 2017 | 2018 | 2019 | 2020 and After | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Certificates of deposits of under $100,000 | $ | 609,728 | $ | 13,864 | $ | 3,233 | $ | 3,386 | $ | 3,161 | $ | 633,372 | |||||||||||
Certificates of deposits of $100,000 through $250,000 | 154,462 | 69,243 | 22,995 | 2,915 | 1,253 | 250,868 | |||||||||||||||||
Certificates of deposits of more than $250,000 | 290,484 | 4,162 | 1,351 | 297 | 823 | 297,117 | |||||||||||||||||
Total certificates of deposit | $ | 1,054,674 | $ | 87,269 | $ | 27,579 | $ | 6,598 | $ | 5,237 | $ | 1,181,357 | |||||||||||
156
NOTE 11 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
At December 31, 2015, the Bank had fixed-rate advances of $200.0 million at a weighted average interest rate of 0.89 percent and variable-rate advances of $730.0 million at a weighted average interest rate of 0.27 percent from the FHLB. At December 31, 2014, $400.0 million of the Bank’s advances from the FHLB were fixed-rate and had interest rates ranging from 0.19 percent to 0.82 percent with a weighted average interest rate of 0.31 percent, and $233.0 million of the Bank’s advances from the FHLB were variable-rate and had a weighted average interest rate of 0.27 percent. The following table presents contractual maturities by year of the Bank's advances as of December 31, 2015:
2016 | 2017 | 2018 | 2019 | 2020 and After | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Fixed rate | $ | 50,000 | $ | 100,000 | $ | 25,000 | $ | 25,000 | $ | — | $ | 200,000 | |||||||||||
Variable rate | 730,000 | — | — | — | — | 730,000 | |||||||||||||||||
Total | $ | 780,000 | $ | 100,000 | $ | 25,000 | $ | 25,000 | $ | — | $ | 930,000 | |||||||||||
Each advance is payable at its maturity date. Advances paid early are subject to a prepayment penalty. At December 31, 2015 and 2014, the Bank’s advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid principal balance of $3.38 billion and $1.84 billion, respectively. The Bank’s investment in capital stock of the FHLB of San Francisco totaled $39.2 million and $29.8 million, respectively, at December 31, 2015 and 2014. Based on this collateral and the Bank’s holdings of FHLB stock, the Bank was eligible to borrow an additional $1.29 billion at December 31, 2015. In addition, the Bank had available lines of credit with the Federal Reserve Bank totaling $89.7 million at December 31, 2015.
The following table presents financial data of FHLB advances as of the dates or for the periods indicated:
As of or For the Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
($ in thousands) | |||||||||||
Weighted-average interest rate at end of year | 0.40 | % | 0.29 | % | 0.13 | % | |||||
Average interest rate during the year | 0.38 | % | 0.20 | % | 0.36 | % | |||||
Average balance | $ | 553,162 | $ | 267,816 | $ | 74,712 | |||||
Maximum amount outstanding at any month-end | $ | 1,355,000 | $ | 633,000 | $ | 250,000 | |||||
Balance at end of year | $ | 930,000 | $ | 633,000 | $ | 250,000 | |||||
157
NOTE 12 – LONG TERM DEBT
Senior Notes
On April 23, 2012, the Company completed the public offering of $33.0 million aggregate principal amount of its 7.50 percent Senior Notes due April 15, 2020 (the Senior Notes I) at a price to the public of $25.00 per Senior Note I. Net proceeds after discounts were approximately $31.7 million. On December 6, 2012, the Company completed the issuance and sale of an additional $45.0 million aggregate principal amount of the Senior Notes I at a price to the public of $25.00 per Senior Note I, plus accrued interest from October 15, 2012. Net proceeds after discounts, including a full exercise of the $6.8 million underwriters’ overallotment option on December 7, 2012, were approximately $50.1 million.
On April 6, 2015, the Company completed the issuance and sale of $175.0 million aggregate principal amount of its 5.25 percent Senior Notes due April 15, 2025 (the Senior Notes II, together with the Senior Notes I, the Senior Notes). Net proceeds after discounts were approximately $172.8 million.
The Senior Notes were issued under the Senior Debt Securities Indenture, dated as of April 23, 2012 (the Base Indenture), as supplemented by the First Supplemental Indenture dated as of April 23, 2012 for the Senior Notes I, and the Second Supplemental Indenture dated as of April 6, 2015 for the Senior Notes II (the Supplemental Indentures and together with the Base Indenture, the Indenture), between the Company and U.S. Bank National Association, as trustee.
The Senior Notes are the Company’s senior unsecured debt obligations and rank equally with all of the Company’s other present and future unsecured unsubordinated obligations. The Senior Notes I and II bear interest at a per-annum rate of 7.50 percent and 5.25 percent, respectively. The Company makes interest payments on the Senior Notes I quarterly in arrears and on the Senior Notes II semi-annually in arrears.
The Senior Notes I and II will mature on April 15, 2020 and April 15, 2025, respectively. The Company may, at its option, on any scheduled interest payment date for the Senior Notes I (beginning with April 15, 2015) redeem the Senior Notes I in whole or in part, and on or after January 15, 2025 for the Senior Note II redeem the Senior Notes II in whole at any time or in part from time to time, in each case on not less than 30 nor more than 60 days’ prior notice. The Senior Notes will be redeemable at a redemption price equal to 100 percent of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to the date of redemption.
The Indenture contains several covenants which, among other things, restrict the Company’s ability and the ability of the Company’s subsidiaries to dispose of or incur liens on the voting stock of certain subsidiaries and also contains customary events of default.
Tangible Equity Units – Amortizing Notes
On May 21, 2014, the Company issued $69.0 million of 8.00 percent tangible equity units (TEUs) in an underwritten public offering. A total of 1,380,000 TEUs were issued, including 180,000 TEUs issued to the underwriter upon exercise of its overallotment option, with each TEU having a stated amount of $50.00. Each TEU is comprised of (i) a prepaid stock purchase contract (each a Purchase Contract) that will be settled by delivery of a specified number of shares of Company Common Stock and (ii) a junior subordinated amortizing note due May 15, 2017 (each an Amortizing Note) that has an initial principal amount of $10.604556 per Amortizing Note, bears interest at a rate of 7.50 percent per annum and has a scheduled final installment payment date of May 15, 2017. The Company has the right to defer installment payments on the Amortizing Notes at any time and from time to time, subject to certain restrictions, so long as such deferral period does not extend beyond May 15, 2019.
The Purchase Contracts and Amortizing Notes are accounted for separately. The Purchase Contract component of the TEUs is recorded in Additional Paid in Capital on the Consolidated Statements of Financial Condition. The Amortizing Note component is recorded in Long Term Debt on the Consolidated Statements of Financial Condition. The relative fair values of the Amortizing Notes and Purchase Contracts were estimated to be approximately $14.6 million and $54.4 million, respectively. Total issuance costs associated with the TEUs were $4.0 million (including the underwriter discount of $3.3 million), of which $857 thousand was allocated to the liability component and $3.2 million was allocated to the equity component of the TEUs. The portion of the issuance costs allocated to the debt component of the TEUs is being amortized over the term of the Amortizing Notes. Net proceeds of $65.0 million from the issuance of the TEUs were designated to partially finance the BPNA Branch Acquisition and for general corporate purposes. See Note 18 for additional information.
158
NOTE 13 – INCOME TAXES
The following table presents the components of income tax (benefit) expense for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Current income taxes: | |||||||||||
Federal | $ | 27,555 | $ | 11,070 | $ | 400 | |||||
State | 7,360 | 2,348 | 19 | ||||||||
Total current income tax expense | 34,915 | 13,418 | 419 | ||||||||
Deferred income taxes: | |||||||||||
Federal | 4,754 | (235 | ) | 2,646 | |||||||
State | 2,525 | 762 | 858 | ||||||||
Total deferred income tax expense | 7,279 | 527 | 3,504 | ||||||||
Change in valuation allowance | — | (17,684 | ) | 4,069 | |||||||
Income tax expense (benefit) | $ | 42,194 | $ | (3,739 | ) | $ | 7,992 | ||||
The following table presents a reconciliation of the recorded income tax expense (benefit) to the amount of taxes computed by applying the applicable statutory Federal income tax rate of 35 percent to earnings or loss before income taxes for the years ended December 31, 2015 and 2014 and the applicable statutory Federal income tax rate of 34 percent to earnings or loss before income taxes for the year ended December 31, 2013:
Year Ended December 31, | ||||||||
2015 | 2014 | 2013 | ||||||
Computed expected income tax expense (benefit) at Federal statutory rate | 35.0 | % | 35.0 | % | 34.0 | % | ||
Increase (decrease) resulting from: | ||||||||
Proportional amortization | 0.7 | % | 2.1 | % | 6.8 | % | ||
Other permanent book-tax differences | (0.4 | )% | 0.3 | % | 3.4 | % | ||
State tax expense, net of federal benefit | 6.2 | % | 8.1 | % | 7.2 | % | ||
Income tax credits | (0.6 | )% | — | % | — | % | ||
Change in valuation allowance | — | % | (66.8 | )% | 51.5 | % | ||
Federal effect of state tax deferred due to the change in valuation allowance | — | % | 7.2 | % | — | % | ||
Other, net | (0.4 | )% | — | % | (1.8 | )% | ||
Effective tax rates | 40.5 | % | (14.1 | )% | 101.1 | % | ||
The Company had net income taxes payable of $637 thousand and $56 thousand at December 31, 2015 and 2014, respectively, on its Consolidated Statements of Financial Condition. The Company had available at December 31, 2015, $3.8 million of unused Federal net operating loss carryforwards that may be applied against future taxable income through 2031. The Company had available at December 31, 2015, $13.2 million of unused state net operating loss carryforwards that may be applied against future taxable income through 2031. Utilization of the net operating loss and other carryforwards are subject to annual limitations set forth in Section 382 of the Internal Revenue Code. The tax attributes acquired in the Beach Business Bank and Gateway Bancorp acquisitions are subject to an annual Internal Revenue Code (IRC) Section 382 limitation of $1.3 million and $474 thousand, respectively. Additionally, the Company's tax attributes are limited to an annual IRC Section 382 limitation of $9.8 million.
159
The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of the dates indicated:
December 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Deferred tax assets: | |||||||
Allowance for loan and lease losses | $ | 20,684 | $ | 17,923 | |||
Stock options and awards | 4,660 | 3,991 | |||||
Accrued expenses | 2,090 | 2,898 | |||||
Valuation allowance on other real estate owned | 29 | 13 | |||||
Reserve for loss on repurchased loans | 4,028 | 3,491 | |||||
Federal net operating losses | 1,328 | 1,494 | |||||
State net operating losses | 869 | 973 | |||||
Federal credits | 10 | 10 | |||||
Unrealized loss on securities available-for-sale | 2,177 | — | |||||
Other deferred tax assets | 10,690 | 2,374 | |||||
Total deferred tax assets | 46,565 | 33,167 | |||||
Deferred tax liabilities: | |||||||
Unrealized gain on securities available-for-sale | — | (307 | ) | ||||
Derivative instruments adjustment | (3,409 | ) | (1,421 | ) | |||
Mortgage servicing rights | (20,735 | ) | (8,023 | ) | |||
FHLB stock dividends | (564 | ) | (571 | ) | |||
Intangible amortization | (857 | ) | (3,595 | ) | |||
Other deferred tax liabilities | (9,659 | ) | (2,877 | ) | |||
Total deferred tax liabilities | (35,224 | ) | (16,794 | ) | |||
Valuation allowance | — | — | |||||
Net deferred tax assets | $ | 11,341 | $ | 16,373 | |||
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, and tax planning strategies. Based on this analysis, management determined that it was more likely than not that all of the deferred tax assets would be realized therefore no valuation allowance against net deferred tax assets of $11.3 million was required at December 31, 2015. The Company had recorded no valuation allowance against net deferred tax assets of $16.4 million at December 31, 2014.
The positive evidence supporting the reversal of the Company’s deferred tax asset valuation allowance as of December 31, 2015 included: (i) pretax book income of $104.3 million and estimated taxable income before net operating losses (NOL) of $82.1 million for the year ended December 31, 2015, (ii) four consecutive quarters of positive and accelerating pretax book income from core earnings, (iii) cumulative pretax book income of approximately $138.6 million over the previous 36 month period, (iv) projections of pretax book income for the 2016, 2017 and 2018 years, (v) projection of significant taxable income for the 2016, 2017, and 2018 years, (vi) utilization of $474 thousand and $8.5 million of Federal and State NOL (representing approximately 31 percent of the total NOL’s included in the Company’s deferred tax assets) during the year ended December 31, 2015, and (vii) acquisitions which strengthened the Company’s position in primary existing and new markets. Generally, to the extent the Company has book income it will also have taxable income (with the exception of book/tax differences related to the timing of loan charge-offs versus loan loss provisions and the timing of certain mortgage banking gains and losses). Continued profitability from core banking operations through 2015, without significant loan losses, suggests that pretax book income should be sustainable for future years absent a significant increase in loan losses.
The negative evidence that management considered included: (i) uncertainty in accurately and consistently projecting earnings from operations for tax years ending after December 31, 2015, and (ii) taxable losses generated for the 2012 and 2013 years.
160
During the year ended December 31, 2015, estimated taxable income before utilization of NOLs of $82.1 million allowed the Company to utilize $474 thousand and $8.5 million of Federal and State NOL (representing approximately 31 percent of the total NOLs included in the Company’s deferred tax assets), and all of its $632 thousand of Federal low income housing tax credits. The remaining NOLs are limited under IRC Section 382 and will expire if not used by 2031. In order to utilize all of its existing NOL carryover, the Company would only need taxable income of approximately $1.4 million in 2018 and approximately $474 thousand in each year from 2019 to 2031. The Company believes that the utilization of a significant portion of the NOL and tax credits in 2015, along with the Company’s projection of future taxable income should be considered significant positive evidence that the NOL deferred tax assets will be realized in future periods. Taking all of the foregoing information into account, management believes that it is “more likely than not” that all of the Company’s federal and state net deferred assets will be realized in future years and that, as of December 31, 2015, no valuation allowance against its federal and state deferred tax assets is required.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10-25 prescribes a threshold and a measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had unrecognized tax benefits of $0 and $5.4 million at December 31, 2015 and 2014, respectively. The Company has changed its tax accounting method for various items and filed amended state income tax returns to reflect audit adjustments. As a result, the total amount of unrecognized tax benefits has decreased by $5.4 million during the year ended December 31, 2015. The Company does not believe that the unrecognized tax benefits will change within the next twelve months. As of December 31, 2015, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $0.
At December 31, 2015 and 2014, the Company had $0 and $23 thousand accrued interest or penalties, respectively. The table below summaries the activity related to our unrecognized tax benefits:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Beginning balance | $ | 5,421 | $ | 2,203 | $ | — | |||||
(Decrease) increase related to prior year tax positions | (5,421 | ) | 369 | 345 | |||||||
Increase in current year tax positions | — | 2,849 | 1,858 | ||||||||
Ending balance | $ | — | $ | 5,421 | $ | 2,203 | |||||
In the event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income tax expense.
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax in multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2012 (with the exception of Gateway Bancorp, a predecessor entity, which is currently under exam by the Internal Revenue Service for the 2008 and 2009 tax years).The statute of limitations for the assessment of California Franchise taxes has expired for tax years before 2011 (other state income and franchise tax statutes of limitations vary by state).
ASU 2014-01 was adopted effective January 1, 2015. Under this standard, amortization of investments in Qualified Affordable Housing Projects is reported within income tax expense.
161
NOTE 14 – MORTGAGE BANKING ACTIVITIES
The Bank originates conforming single family residential mortgage loans and sells these loans in the secondary market. The amount of net revenue on mortgage banking activities is a function of mortgage loans originated for sale and the fair values of these loans and related derivatives. Net revenue on mortgage banking activities includes mark to market pricing adjustments on loan commitments and forward sales contracts, and initial capitalized value of MSRs.
During the year ended December 31, 2015, the Bank originated $4.39 billion and sold $4.30 billion of conforming single family residential mortgage loans in the secondary market. The net gain and margin were $128.7 million and 2.93 percent, respectively, and loan origination fees were $15.9 million for the year ended December 31, 2015. Included in the net gain is the initial capitalized value of our MSRs, which totaled $44.3 million on loans sold to Fannie Mae, Freddie Mac and Ginnie Mae for the year ended December 31, 2015.
During the year ended December 31, 2014, the Bank originated $2.82 billion and sold $2.75 billion of conforming single family residential mortgage loans in the secondary market. The net gain and margin were $84.1 million and 2.98 percent, respectively, and loan origination fees were $11.3 million for the year ended December 31, 2014. Included in the net gain is the initial capitalized value of our MSRs, which totaled $25.2 million on loans sold to Fannie Mae and Freddie Mac for the year ended December 31, 2014.
During the year ended December 31, 2013, the Bank originated $1.94 billion and sold $1.86 billion of conforming single family residential mortgage loans in the secondary market. The net gain and margin were $58.0 million and 2.99 percent, respectively, and loan origination fees were $9.9 million for the year ended December 31, 2013. Included in the net gain is the initial capitalized value of our MSRs, which totaled $10.9 million on loans sold to Fannie Mae and Freddie Mac for the year ended December 31, 2013.
Mortgage Loan Repurchase Obligations
In addition to net revenue on mortgage banking activities, the Company records provisions to the representation and warranty reserve representing our initial estimate of losses on probable mortgage repurchases or loss reimbursements. Total provision for loan repurchases totaled $4.4 million, $4.2 million and $2.4 million for the years ended December 31, 2015, 2014, and 2013, respectively. Of these total provision for loan repurchases, the Company provided initial provision for loan repurchases of $2.0 million and $1.4 million against net revenue on mortgage banking activities during the years ended December 31, 2015 and 2014, respectively.
The following table presents a summary of activity in the reserve for loss on repurchased loans for the periods indicated:
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | 8,303 | $ | 5,427 | $ | 3,485 | |||||
Acquired in business combinations | — | — | 314 | ||||||||
Provision for loan repurchases | 4,352 | 4,243 | 2,383 | ||||||||
Change in estimates | 846 | — | — | ||||||||
Utilization of reserve for loan repurchases | (3,801 | ) | (1,367 | ) | (755 | ) | |||||
Balance at end of year | $ | 9,700 | $ | 8,303 | $ | 5,427 | |||||
In addition to the reserve for losses on repurchased loans at December 31, 2015, the Company may receive repurchase demands in future periods that could be material to the Company's financial position or results of operations. The Company believes that all demands received were adequately reserved at December 31, 2015.
162
NOTE 15 – RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS
The Company uses derivative instruments and other risk management techniques to reduce its exposure to adverse fluctuations in interest rates and foreign exchange rates in accordance with its risk management policies. The Company utilizes forward contracts and investor commitments to economically hedge mortgage banking products and may from time to time use interest rate swaps as hedges against certain liabilities.
Derivative Instruments Related to Mortgage Banking Activities: In connection with mortgage banking activities, if interest rates increase, the value of the Company’s loan commitments to borrowers and fixed rate mortgage loans held-for-sale are adversely impacted. The Company attempts to economically hedge the risk of the overall change in the fair value of loan commitments to borrowers and mortgage loans held-for-sale by selling forward contracts on securities with government-sponsored enterprises (GSEs) and investors in loans. Forward contracts on securities of GSEs and loan commitments to borrowers are non-designated derivative instruments and the gains and losses resulting from these derivative instruments are included in Net Revenue on Mortgage Banking Activities on the Consolidated Statements of Operations. the fair value of resulting derivative assets and liabilities are included in Other Assets and Accrued Expenses and Other Liabilities, respectively, on the Consolidated Statements of Financial Condition.
The net losses relating to these derivative instruments used for mortgage banking activities are $8.0 million, $17.3 million and $270 thousand for the years ended December 31, 2015, 2014, and 2013, respectively, and are included in Net Revenue on Mortgage Banking Activities on the Consolidated Statements of Operations.
Interest Rate Swaps on Deposits and Other Borrowings: On September 30, 2013 and January 30, 2015, the Company entered into pay-fixed, receive-variable interest-rate swap contracts for the notional amounts of $50.0 million and $25.0 million, respectively, with maturity dates of September 27, 2018 and January 30, 2022, respectively. These swap contracts were entered into with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR based variable rate deposits and borrowings.
During the year ended December 31, 2015, the Company exited the underlying hedged items related to interest rate swaps designated as cash flow hedges. As a result, the Company discontinued hedge accounting related to these interest rate swaps, and reclassified the fair value of the derivatives from AOCI into earnings. At September 30, 2015, the fair value of these derivative instruments discontinued from hedge accounting was $918 thousand, which was reclassified into earnings. During the year ended December 31, 2015, the Company recognized a total loss of $110 thousand.
Interest Rate Swaps and Caps on Loans: The Company offers interest rate swaps and caps products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an identical offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. These swaps and caps are not designated as hedging instruments and are recorded at fair value in Other Assets and Accrued Expenses and Other Liabilities on the Consolidated Statement of Financial Condition. The changes in fair value are recorded in Other Income in the Consolidated Statements of Operations. During the year ended December 31, 2015, changes in fair value recorded through Other Income were insignificant.
163
The following table presents the amount and market value of derivative instruments included in the Consolidated Statements of Financial Condition as of the dates indicated. Note 3 contains further disclosures pertaining to the fair value of mortgage banking derivatives.
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
Included in assets: | |||||||||||||||
Interest rate lock commitments | $ | 262,135 | $ | 7,343 | $ | 179,923 | $ | 5,750 | |||||||
Mandatory forward commitments | 468,740 | 1,130 | 25,735 | 629 | |||||||||||
Interest rate swaps on deposits and other borrowings | 25,000 | 331 | — | — | |||||||||||
Interest rate swaps and cap on loans with customers | 27,467 | 238 | — | — | |||||||||||
Total included in assets | $ | 783,342 | $ | 9,042 | $ | 205,658 | $ | 6,379 | |||||||
Included in liabilities: | |||||||||||||||
Interest rate lock commitments | $ | 16,790 | $ | 88 | $ | 10,075 | $ | 197 | |||||||
Mandatory forward commitments | 215,272 | 300 | 364,829 | 2,803 | |||||||||||
Interest rate swaps on deposits and other borrowings | 50,000 | 441 | 50,000 | 235 | |||||||||||
Interest rate swaps and caps on loans with correspondent bank | 27,467 | 238 | — | — | |||||||||||
Total included in liabilities | $ | 309,529 | $ | 1,067 | $ | 424,904 | $ | 3,235 | |||||||
NOTE 16 – EMPLOYEE STOCK COMPENSATION
Share-based Compensation Expense
For the years ended December 31, 2015, 2014, and 2013, share-based compensation expense on stock option awards, restricted stock awards and restricted stock units was $9.1 million, $6.3 million, and $2.9 million respectively, and the related tax benefits were $3.8 million, $2.7 million and $0, respectively. Share-based compensation expense on stock appreciation rights was $202 thousand, $2.0 million, and $1.1 million, respectively, and the related tax benefits were $85 thousand, $827 thousand, and $0, respectively, for the years ended December 31, 2015, 2014, and 2013.
On July 16, 2013, the Company’s stockholders approved the Company’s 2013 Omnibus Stock Incentive Plan (the 2013 Omnibus Plan). Upon the approval of the 2013 Omnibus Plan, the Company ceased being able to grant new awards under the Company’s 2011 Omnibus Incentive Plan or any prior equity incentive plans. The 2013 Omnibus Plan provides that the aggregate number of shares of Company common stock that may be subject to awards under the 2013 Omnibus Plan will be 20 percent of the then outstanding shares of Company common stock (the Share Limit), provided that in no event will the Share Limit be less than the greater of 2,384,711 shares of Company common stock and the aggregate number of shares of Company common stock with respect to which awards have been properly granted under the 2013 Omnibus Plan up to that point in time. As of December 31, 2015, based on the number of shares then-registered for issuance under the 2013 Omnibus Plan, 2,171,553 shares were available for future awards under the 2013 Omnibus Plan.
Unrecognized Share-based Compensation Expense
The following table presents unrecognized share-based compensation expense as of December 31, 2015:
Unrecognized Expense | Average Expected Recognition Period | ||||
($ in thousands) | |||||
Stock option awards | $ | 1,260 | 3.2 years | ||
Restricted stock awards and restricted stock units | 10,448 | 2.9 years | |||
Stock appreciation rights | $ | 27 | 1.4 years | ||
Total | $ | 11,735 | 3.0 years | ||
164
Stock Options
The Company has issued stock options to certain employees, officers and directors. Stock options are issued at the closing market price immediately before the grant date, and generally have a three to five year vesting period and contractual terms of seven to ten years.
The weighted-average estimated fair value per share options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions.
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
($ in thousands, except per share data) | |||||||||||
Granted date fair value of options granted | $ | 729 | $ | 781 | $ | 1,399 | |||||
Fair value of options vested | $ | 481 | $ | 346 | $ | 1,090 | |||||
Total intrinsic value of options exercised | $ | 75 | $ | 110 | $ | 104 | |||||
Cash received from options exercised | $ | 501 | $ | 993 | $ | — | |||||
Weighted-average estimated fair value per share of options granted | $ | 3.76 | $ | 3.38 | $ | 3.52 | |||||
Expected volatility was determined based on the historical monthly volatility of our stock price over a period equal to the expected term of the options granted. The expected term of the options represents the period that options granted are expected to be outstanding based primarily on the historical exercise behavior associated with previous options grants. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.
The following table presents a summary of weighted-average assumptions used for calculating fair value options for the periods indicated:
Year Ended December 31, | ||||||||
2015 | 2014 | 2013 | ||||||
Weighted-average assumptions | ||||||||
Dividend yield | 4.14 | % | 3.69 | % | 3.87 | % | ||
Expected volatility | 43.04 | % | 40.26 | % | 41.06 | % | ||
Expected term | 6.4 years | 6.0 years | 5.0 years | |||||
Risk-free interest rate | 1.68 | % | 1.99 | % | 1.21 | % | ||
The following table represents stock option activity and weighted-average exercise price per share for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
Outstanding at beginning of year | 879,070 | $ | 12.67 | 734,721 | $ | 12.73 | 525,799 | $ | 12.16 | |||||||||||
Granted | 193,696 | $ | 13.28 | 231,016 | $ | 12.05 | 389,569 | $ | 13.72 | |||||||||||
Replacement awards issued | — | $ | — | — | $ | — | 22,581 | $ | 12.65 | |||||||||||
Exercised | (43,333 | ) | $ | 11.55 | (86,667 | ) | $ | 11.46 | (44,988 | ) | $ | 12.00 | ||||||||
Forfeited | (68,554 | ) | $ | 12.38 | — | $ | — | (158,240 | ) | $ | 13.41 | |||||||||
Outstanding at end of year | 960,879 | $ | 12.86 | 879,070 | $ | 12.67 | 734,721 | $ | 12.73 | |||||||||||
Exercisable at end of year | 394,613 | $ | 12.70 | 166,016 | $ | 11.28 | 526,667 | $ | 12.00 | |||||||||||
165
The following table represents changes in unvested stock options and related information as of and for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
Outstanding at beginning of year | 552,672 | $ | 12.74 | 419,569 | $ | 13.16 | 266,668 | $ | 11.70 | |||||||||||
Granted | 193,696 | $ | 13.28 | 231,016 | $ | 12.05 | 389,569 | $ | 13.72 | |||||||||||
Vested | (170,102 | ) | $ | 12.57 | (97,913 | ) | $ | 12.94 | (93,334 | ) | $ | 11.68 | ||||||||
Forfeited | (10,000 | ) | $ | 12.03 | — | $ | — | (143,334 | ) | $ | 12.95 | |||||||||
Outstanding at end of year | 566,266 | $ | 12.99 | 552,672 | $ | 12.74 | 419,569 | $ | 13.16 | |||||||||||
The following table presents a summary of stock options outstanding as of December 31, 2015:
Options Outstanding | Options Exercisable | ||||||||||||||||||||||||
Number of Shares | Intrinsic Value | Weighted- Average Exercise Price per Share | Weighted- Average Remaining Contractual Life | Number of Shares | Intrinsic Value | Weighted- Average Exercise Price per Share | Weighted- Average Remaining Contractual Life | ||||||||||||||||||
$10.89 to $11.87 | 177,683 | $ | 583,747 | $ | 11.33 | 6.5 years | 125,529 | $ | 404,201 | $ | 11.40 | 6.0 years | |||||||||||||
$11.87 to $12.85 | 285,000 | 675,700 | $ | 12.25 | 8.0 years | 128,327 | 305,752 | $ | 12.24 | 7.5 years | |||||||||||||||
$12.85 to $13.83 | 298,696 | 402,016 | $ | 13.27 | 8.2 years | 40,000 | 60,400 | $ | 13.11 | 7.4 years | |||||||||||||||
$13.83 to $14.81 | 166,622 | 61,744 | $ | 14.25 | 3.5 years | 67,879 | 25,609 | $ | 14.24 | 3.5 years | |||||||||||||||
$14.81 to $15.81 | 32,878 | — | $ | 15.81 | 5.5 years | 32,878 | — | $ | 15.81 | 5.5 years | |||||||||||||||
Total | 960,879 | $ | 1,723,207 | $ | 12.86 | 6.9 years | 394,613 | $ | 795,962 | $ | 12.70 | 6.1 years | |||||||||||||
Restricted Stock Awards and Restricted Stock Units
The Company also has granted restricted stock awards and restricted stock units to certain employees, officers and directors. The restricted stock awards and units are valued at the closing price of the Company’s stock on the date of award. The restricted stock awards and units fully vest after a specified number of years (ranging from one to five years) of continued service from the date of grant. The Company recognizes an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock, generally when vested or, in the case of restricted stock units, when settled.
The following table represents restricted stock awards and restricted stock units activity for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||
Number of Shares | Weighted- Average Price per Share | Number of Shares | Weighted- Average Price per Share | Number of Shares | Weighted- Average Price per Share | |||||||||||||||
Outstanding at beginning of year | 1,287,302 | $ | 12.53 | 893,886 | $ | 13.78 | 163,682 | $ | 11.43 | |||||||||||
Granted | 930,830 | $ | 12.31 | 915,077 | $ | 11.77 | 936,542 | $ | 13.82 | |||||||||||
Vested | (451,196 | ) | $ | 12.64 | (261,952 | ) | $ | 13.51 | (88,169 | ) | $ | 11.98 | ||||||||
Forfeited | (250,575 | ) | $ | 12.29 | (259,709 | ) | $ | 13.21 | (118,169 | ) | $ | 12.70 | ||||||||
Outstanding at end of year | 1,516,361 | $ | 12.40 | 1,287,302 | $ | 12.53 | 893,886 | $ | 13.78 | |||||||||||
166
Stock Appreciation Rights
On August 21, 2012, the Company granted to its chief executive officer a ten-year stock appreciation right (SAR) with respect to 500,000 shares (Initial SAR) of the Company’s common stock with a base price of $12.12 per share. One-third of the Initial SAR vested on the grant date, one-third vested on the first anniversary of the grant date and one-third vested on the second anniversary of the grant date such that the SAR was fully vested on August 21, 2014, the second anniversary of the grant date. Upon cessation of the chief executive officer’s service with the Company for “Cause” or without “Good Reason” (including a cessation of service following the expiration of the term of the chief executive officer’s employment agreement), the vested portion of all SARs will expire 90 days following the cessation of service.
The SARs originally were to be settled in cash and the compensation expense for the SARs was recognized over the vesting period based on the fair value as calculated using Black Scholes as of the grant date and adjusted each quarter. The Company amended the Initial SAR agreement to provide that the SARs be settled in shares of voting common stock rather than cash, with all other terms remaining substantially the same on December 13, 2013 (the Conversion Date). Currently, compensation expense has been recognized over the expected term of the SARs based on the fair value as calculated using Black Scholes as of the Conversion Date for the SARs issued before the Conversion Date and grant dates for the SARs issued after the Conversion Date.
The SAR agreement, as amended, provides that the SAR (whether vested or unvested) is entitled to dividend equivalent rights and also contains an anti-dilution provision pursuant to which additional SARs (Additional SARs) are (and have been) issued to the Company’s chief executive officer with a base price determined as of the date of issuance, but otherwise with the same terms and conditions (including vesting and dividend equivalent rights) as the Initial SAR. These Additional SARs are (and have been) issued upon the Company’s subsequent issuances of shares of common stock; however, the anti-dilution adjustment does not apply to certain issuances of common stock for compensatory purposes as described more fully under the terms of the SAR agreement, as amended.
The weighted-average estimated fair value per share of SARs granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions.
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Dividend yield | — | % | — | % | — | % | |||||
Expected volatility | 23.79 | % | 27.28 | % | 30.54 | % | |||||
Expected term | 2.0 years | 2.7 years | 2.6 years | ||||||||
Risk-free interest rate | 0.64 | % | 0.70 | % | 0.36 | % | |||||
Weighted-average estimated fair value per share of SARs granted | $ | 1.72 | $ | 1.93 | $ | 2.33 | |||||
The Initial SAR and Additional SARs have the same vesting and dividend equivalent terms, except for an additional SAR for 300,219 shares granted on May 21, 2014 (Additional TEU SAR) to the Company’s chief executive officer relating to a public offering of the Company’s tangible equity units (TEUs). Each TEU is comprised of a prepaid stock purchase contract (each, a Purchase Contract) and a junior subordinated amortizing note due May 15, 2017 issued by the Company (each, an Amortizing Note).The Purchase Contracts are settled in shares of the Company’s voting common stock based on a maximum settlement rate (subject to adjustment) and a minimum settlement rate (subject to adjustment) as more fully described under Note 18. The number of settlement shares underlying the Additional TEU SAR was calculated using the initial maximum settlement rate and, therefore, the number of shares underlying the Additional TEU SAR is subject to adjustment and forfeiture if the aggregate number of shares of stock issued in settlement of any single Purchase Contract is less than the initial maximum settlement rate. The Additional TEU SAR vests in full on May 21, 2017, which is the date each Purchase Contract is required to be settled in shares of voting common stock, unless settled earlier at the holder’s option. Until the Additional TEU SAR vests in full on May 21, 2017 or accelerates in vesting due to early settlement of a Purchase Contract at the holders' option, the Additional TEU SAR has no dividend equivalent rights and the shares underlying the Additional TEU SAR are subject to forfeiture.
167
The following table represents SARs activity and the weighted-average exercise price per share for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
Outstanding at beginning of year | 1,575,394 | $ | 11.58 | 825,451 | $ | 12.54 | 500,000 | $ | 12.12 | |||||||||||
Granted | 2,973 | $ | 12.27 | 768,576 | $ | 10.52 | 325,451 | $ | 13.18 | |||||||||||
Exercised | — | $ | — | — | $ | — | — | $ | — | |||||||||||
Forfeited | (16,686 | ) | $ | 10.09 | (18,633 | ) | $ | 10.09 | — | $ | — | |||||||||
Outstanding at end of year | 1,561,681 | $ | 11.60 | 1,575,394 | $ | 11.58 | 825,451 | $ | 12.54 | |||||||||||
Exercisable at end of year | 1,535,718 | $ | 11.63 | 1,427,805 | $ | 11.74 | 550,299 | $ | 12.54 | |||||||||||
The following table represents changes in unvested SARs and related information as of and for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | Number of Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
Outstanding at beginning of year | 147,589 | $ | 10.09 | 275,152 | $ | 12.54 | 333,334 | $ | 12.12 | |||||||||||
Granted | 2,973 | $ | 12.27 | 768,576 | $ | 10.52 | 325,451 | $ | 13.18 | |||||||||||
Vested | (107,913 | ) | $ | 10.15 | (877,506 | ) | $ | 11.23 | (383,633 | ) | $ | 12.72 | ||||||||
Forfeited | (16,686 | ) | $ | 10.09 | (18,633 | ) | $ | 10.09 | — | $ | — | |||||||||
Outstanding at end of year | 25,963 | $ | 10.09 | 147,589 | $ | 10.09 | 275,152 | $ | 12.54 | |||||||||||
NOTE 17 – EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan whereby all employees can participate in the plan. Employees may contribute up to 100 percent of their compensation subject to certain limits based on federal tax laws. The Company makes an enhanced safe-harbor matching contribution that equals to 100 percent of the first 4 percent of the employee’s deferral rate not to exceed 4 percent of the employee’s compensation. The safe-harbor matching contribution is fully vested by the participant when made.
For the years ended December 31, 2015, 2014 and 2013 expense attributable to 401(k) plans amounted to $3.6 million, $2.5 million and $1.7 million, respectively.
The Company has adopted a Deferred Compensation Plan under Section 401 of the Internal Revenue Code. The purpose of this plan is to provide specified benefits to a select group of management and highly compensated employees. Participants may elect to defer compensation, which accrues interest quarterly at the prime rate as reflected in The Wall Street Journal as of the last business day of the prior quarter. The Company does not make contributions to the Plan.
Employee Equity Ownership Plan
The Company established the Employee Equity Ownership Plan (EEOP) effective October 15, 2013 for the benefit of employees. The EEOP is administered under the Company’s 2013 Omnibus Stock Incentive Plan and the awards thereunder are issued upon the terms and conditions and subject to the restrictions of the Company’s 2013 Omnibus Stock Incentive Plan. The EEOP provides that employees eligible to receive awards under the EEOP are any employees with titles below Assistant Vice President or any employees who are not otherwise given shares pursuant to any other Company-sponsored equity program. The Company issued 362,353 shares of restricted stock awards and units under the EEOP.
168
NOTE 18 – STOCKHOLDERS’ EQUITY
Warrants
On November 1, 2010, the Company issued warrants to TCW Shared Opportunity Fund V, L.P. for up to 240,000 shares of non-voting common stock at an original exercise price of $11.00 per share, subject to certain adjustments to the number of shares underlying the warrants as well as certain adjustments to the warrant exercise price as applicable. These warrants were exercisable from the date of original issuance through November 1, 2015. On August 3, 2015, these warrants were exercised in full using a cashless (net) exercise, resulting in a net number of shares of non-voting common stock issued in the aggregate of 70,690, which were immediately thereafter exchanged for an aggregate of 70,690 shares of voting common stock. Based on automatic adjustments to the original $11.00 exercise price, the exercise price at the time of exercise was $9.13 per share.
On November 1, 2010, the Company also issued warrants to COR Advisors LLC, an entity controlled by Steven A. Sugarman, who became a director of the Company on that date and later became President and Chief Executive Officer of the Company, to purchase up to 1,395,000 shares of non-voting common stock at an exercise price of $11.00 per share, subject to certain adjustments to the number of shares underlying the warrants as well as certain adjustments to the warrant exercise price as applicable. Subsequent to their original issuance, warrants for the right to purchase 960,000 shares of non-voting common stock were transferred to Mr. Sugarman and his spouse through a living trust, and warrants for the right to purchase 435,000 shares of non-voting common stock were transferred to Jeffrey T. Seabold, Executive Vice President and Chief Banking Officer of the Bank. These warrants vest in tranches, with each tranche being exercisable for 5 years after the tranche’s vesting date. With respect to the warrants transferred to Mr. Sugarman, 50,000 shares vested on October 1, 2011 and the remainder vested in seven equal quarterly installments beginning January 1, 2012 and ending on July 1, 2013. With respect to the warrants transferred to Mr. Seabold, 95,000 shares vested on January 1, 2011; 130,000 shares vested on each of April 1 and July 1, 2011, and 80,000 shares vested on October 1, 2011.
On December 8, 2015, Mr. Seabold exercised 95,000 of these warrants using a cashless (net) exercise, resulting in a net number of shares of non-voting common stock issued in the aggregate of 37,355. Based on automatic adjustments to the original $11.00 exercise price, the exercise price at the time of exercise was $9.04 per share. As a result of these exercises, Mr. Seabold now holds warrants for the right to purchase 340,000 shares of non-voting common stock.
Under the terms of the respective warrant agreements, the warrants are exercisable for voting common stock in lieu of non-voting common stock following the transfer of the warrants in a widely dispersed offering or in other limited circumstances. Based on automatic adjustments to the original $11.00 exercise price, the Company has determined that the exercise price for these warrants was $8.97 per share as of December 31, 2015. The terms and issuance of the foregoing warrants were approved by the Company's stockholders at a special meeting held on October 25, 2010.
Common Stock
On June 21, 2013, the Company issued 2,268,000 shares of its voting common stock in an underwritten public offering for gross proceeds of approximately $29.5 million and 1,153,846 shares of voting common stock to two institutional investors in a registered direct offering for gross proceeds of approximately $15 million. On July 2, 2013, the Company issued an additional 360,000 shares of voting common stock upon the exercise in full by the underwriters of the underwritten public offering of their 30-day over-allotment option, for additional gross proceeds of approximately $4.4 million.
On December 10, 2013, the Company completed the issuance and sale of an aggregate of 1,509,450 shares of common stock in a private placement to Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. at $13.25 per share, in exchange for aggregate cash consideration of approximately $20 million.
On May 21, 2014, the Company issued 5,150,000 shares of its voting common stock in an underwritten public offering and for gross proceeds of approximately $50.4 million and 772,500 shares of voting common stock upon the exercise in full by the underwriters of the underwritten public offering of their 30-day over-allotment option, for additional gross proceeds of approximately $7.6 million.
On November 7, 2014, the Company completed the issuance and sale of 3,288,947 shares of its voting common stock to OCM BOCA Investor, LLC (Oaktree), an entity owned by investment funds managed by Oaktree Capital Management, L.P., and 1,900,000 shares of its voting common stock to Patriot Financial Partners, L.P., Patriot Financial Partners Parallel, L.P., Patriot Financial Partners II, L.P. and Patriot Financial Partners Parallel II, L.P, for gross proceeds of $49.9 million.
169
Perpetual Preferred Stock
On June 12, 2013, in an underwritten public offering, the Company sold 1,400,000 depositary shares, each representing a 1/40th interest in a share of its 8.00 percent Non-Cumulative Perpetual Preferred Stock, Series C, par value $0.01 per share and liquidation preference of $1,000 per share, at an offering price of $25 per depositary share, for gross proceeds of $33.9 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 210,000 depositary shares to cover over-allotments, if any, at the same price, for potential additional gross proceeds of $5.1 million, which the underwriters exercised in full on July 8, 2013.
On July 1, 2013, the Company completed its previously announced acquisition of PBOC. 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 with a liquidation preference amount of $1,000 per share, designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series B. 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), designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series A.
On April 8, 2015, the Company completed the issuance and sale of 4,000,000 depositary shares, each representing a 1/40th interest in a share of its 7.375 percent Non-Cumulative Perpetual Preferred Stock, Series D, liquidation preference of $1,000 per share (equivalent to $25 per depositary share), for gross proceeds of $96.9 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 600,000 depositary shares to cover over-allotments, which the underwriters exercised in full concurrently, resulting in additional gross proceeds of $14.5 million.
Subsequent to December 31, 2015, the Company issued 5,000,000 depositary shares, each representing 1/40th interest in a share of its 7.00 percent Non-Cumulative Perpetual Preferred Stock, Series E, liquidation preference of $1,000 per share (equivalent to $25 per depository share). See Note 26 for additional information.
Tangible Equity Units
On May 21, 2014, the Company completed an underwritten public offering of 1,380,000 of its tangible equity units (TEUs), which included 180,000 TEUs issued to the underwriter upon the full exercise of its over-allotment option, resulting in net proceeds of $65.0 million. Each TEU is comprised of a prepaid stock purchase contract (each, a Purchase Contract) and a junior subordinated amortizing note due May 15, 2017 issued by the Company (each, an Amortizing Note). Unless settled early at the holder’s option, each Purchase Contract will automatically settle and the Company will deliver a number of shares of its voting common stock based on the then-applicable market value of the voting common stock, ranging from an initial minimum settlement rate of 4.4456 shares per Purchase Contract (subject to adjustment) if the applicable market value is equal to or greater than $11.247 per share to an initial maximum settlement rate of 5.1124 shares per Purchase Contract (subject to adjustment) if the applicable market value is less than or equal to $9.78 per share.
From the first business day following the issuance of the TEUs to but excluding the third business day immediately preceding May 15, 2017, a holder of a Purchase Contract may settle its Purchase Contract early, and the Company will deliver to the holder 4.4456 shares of voting common stock. The holder also may elect to settle its Purchase Contract early in connection with a “fundamental change,” in which case the holder will receive a number of shares of voting common stock based on a fundamental change early settlement rate. The Company may elect to settle all Purchase Contracts early by delivering to each holder 5.1124 shares of voting common stock or, under certain circumstances, by delivering 4.4456 shares of voting common stock. As of December 31, 2015, a total of 1,244,743 Purchase Contracts had been settled early by their holders, resulting in the issuance by the Company of 5,533,629 shares of voting common stock. As of December 31, 2015, 135,257 Purchase Contracts remained outstanding.
Each Amortizing Note has an initial principal amount of $10.604556 per Amortizing Note, bears interest at a rate of 7.50 percent per annum and has a scheduled final installment payment date of May 15, 2017. On each August 15, November 15, February 15 and May 15, commencing on August 15, 2014, the Company will pay holders of Amortizing Notes equal quarterly cash installments of $1.00 per Amortizing Note (or, in the case of the installment payment due on August 15, 2014, $0.933333 per Amortizing Note) (such installments, the installment payments), which installment payments in the aggregate will be equivalent to a 8.00 percent cash distribution per year with respect to each $50.00 stated amount of TEUs. Each installment payment will constitute a payment of interest (at a rate of 7.50 percent per annum) and a partial repayment of principal on each Amortizing Note. The Company has the right to defer installment payments at any time and from time to time, subject to certain restrictions, so long as such deferral period does not extend beyond May 15, 2019. If the Company elects to settle the Purchase
170
Contracts early, the holders of the Amortizing Notes will have the right to require the Company to repurchase the Amortizing Notes. As of December 31, 2015 and 2014, the Amortizing Notes, net of unamortized discounts, totaled $7.5 million and $12.0 million, respectively, and were included in Long Term Debt on the Consolidated Statements of Financial Condition.
Change in Accumulated Other Comprehensive Income
The Company’s AOCI includes unrealized gain (losses) on available-for-sale investment securities and unrealized gain on cash flow hedge. Changes to AOCI are presented net of tax effect as a component of equity. Reclassifications from AOCI are recorded on the statements of operations either as a gain or loss. The following table presents changes to AOCI for the periods indicated:
Unrealized Gain (Loss) on AFS Securities | Cash Flow Hedge | Total | |||||||||
(In thousands) | |||||||||||
Balance at December 31, 2012 | $ | 1,397 | $ | — | $ | 1,397 | |||||
Unrealized (loss) gain arising during the period | (1,892 | ) | 226 | (1,666 | ) | ||||||
Reclassification adjustment from other comprehensive income | (331 | ) | — | (331 | ) | ||||||
Tax effect of current period changes | — | — | — | ||||||||
Total changes, net of taxes | (2,223 | ) | 226 | (1,997 | ) | ||||||
Balance at December 31, 2013 | $ | (826 | ) | $ | 226 | $ | (600 | ) | |||
Unrealized gain (loss) arising during the period | $ | 3,487 | $ | (461 | ) | $ | 3,026 | ||||
Reclassification adjustment from other comprehensive income | (1,183 | ) | — | (1,183 | ) | ||||||
Tax effect of current period changes | (969 | ) | 99 | (870 | ) | ||||||
Total changes, net of taxes | 1,335 | (362 | ) | 973 | |||||||
Balance at December 31, 2014 | $ | 509 | $ | (136 | ) | $ | 373 | ||||
Unrealized loss arising during the period | $ | (2,731 | ) | $ | (683 | ) | $ | (3,414 | ) | ||
Reclassification adjustment from other comprehensive income | (3,258 | ) | 918 | (2,340 | ) | ||||||
Tax effect of current period changes | 2,485 | (99 | ) | 2,386 | |||||||
Total changes, net of taxes | (3,504 | ) | 136 | (3,368 | ) | ||||||
Balance at December 31, 2015 | $ | (2,995 | ) | $ | — | $ | (2,995 | ) | |||
171
NOTE 19 – REGULATORY CAPITAL MATTERS
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2015, the Company and the Bank met all capital adequacy requirements to which they were then subject. With respect to the Bank, prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
Amount | Minimum Capital Requirements | Minimum Required to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
($ in thousands) | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Banc of California, Inc. | ||||||||||||||||||||
Total risk-based capital ratio | $ | 635,291 | 11.18 | % | $ | 454,515 | 8.00 | % | N/A | N/A | ||||||||||
Tier 1 risk-based capital ratio | 608,644 | 10.71 | % | 340,887 | 6.00 | % | N/A | N/A | ||||||||||||
Common equity tier 1 capital ratio | 417,894 | 7.36 | % | 255,665 | 4.50 | % | N/A | N/A | ||||||||||||
Tier 1 leverage ratio | 608,644 | 8.07 | % | 301,761 | 4.00 | % | N/A | N/A | ||||||||||||
Banc of California, NA | ||||||||||||||||||||
Total risk-based capital ratio | $ | 763,522 | 13.45 | % | $ | 454,192 | 8.00 | % | $ | 567,739 | 10.00 | % | ||||||||
Tier 1 risk-based capital ratio | 725,922 | 12.79 | % | 340,644 | 6.00 | % | 454,192 | 8.00 | % | |||||||||||
Common equity tier 1 capital ratio | 725,922 | 12.79 | % | 255,483 | 4.50 | % | 369,031 | 6.50 | % | |||||||||||
Tier 1 leverage ratio | 725,922 | 9.64 | % | 301,232 | 4.00 | % | 376,540 | 5.00 | % | |||||||||||
December 31, 2014 | ||||||||||||||||||||
Banc of California, Inc. | ||||||||||||||||||||
Total risk-based capital ratio | $ | 473,656 | 11.28 | % | $ | 335,829 | 8.00 | % | N/A | N/A | ||||||||||
Tier 1 risk-based capital ratio | 442,307 | 10.54 | % | 167,914 | 4.00 | % | N/A | N/A | ||||||||||||
Tier 1 leverage ratio | 442,307 | 8.57 | % | 206,502 | 4.00 | % | N/A | N/A | ||||||||||||
Banc of California, NA | ||||||||||||||||||||
Total risk-based capital ratio | $ | 503,727 | 12.04 | % | $ | 334,834 | 8.00 | % | $ | 418,543 | 10.00 | % | ||||||||
Tier 1 risk-based capital ratio | 472,378 | 11.29 | % | 167,417 | 4.00 | % | 251,126 | 6.00 | % | |||||||||||
Tier 1 leverage ratio | 472,378 | 9.17 | % | 206,095 | 4.00 | % | 257,619 | 5.00 | % | |||||||||||
Through December 31, 2014, the FRB required bank holding companies such as the Company to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, through December 31, 2014 the FRB required bank holding companies to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. Through December 31, 2014, in order to be considered “well capitalized,” federal bank regulatory agencies required depository institutions such as the Bank to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent and a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent.
In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The final rule strengthens the definition of regulatory
172
capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Company and the Bank became subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of 2015 through 2019.
The final rule:
• | Permits banking organizations that had less than $15 billion in total consolidated assets as of December 31, 2009, to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock that were issued and included in Tier 1 capital prior to May 19, 2010, subject to a limit of 25 percent of Tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to Tier 1 capital. |
• | Establishes new qualifying criteria for regulatory capital, including new limitations on the inclusion of deferred tax assets and mortgage servicing rights. |
• | Requires a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent. |
• | Increases the minimum Tier 1 capital to risk-weighted assets ratio requirement from 4 percent to 6 percent. |
• | Retains the minimum total capital to risk-weighted assets ratio requirement of 8 percent. |
• | Retains a minimum leverage ratio requirement of 4 percent. |
• | Changes the prompt corrective action standards so that in order to be considered well-capitalized, a depository institution must have a ratio of common equity Tier 1 capital to risk-weighted assets of 6.5 percent (new), a ratio of Tier 1 capital to risk-weighted assets of 8 percent (increased from 6 percent), a ratio of total capital to risk-weighted assets of 10 percent (unchanged), and a leverage ratio of 5 percent (unchanged). |
• | Retains the existing regulatory capital framework for one-to-four family residential mortgage exposures. |
• | Permits banking organizations that are not subject to the advanced approaches rule, such as the Company and the Bank, to retain, through a one-time election, the existing treatment for most accumulated other comprehensive income, such that unrealized gains and losses on securities available-for-sale will not affect regulatory capital amounts and ratios. |
• | Implements a new capital conservation buffer requirement for a banking organization to maintain a common equity capital ratio more than 2.5 percent above the minimum common equity Tier 1 capital, Tier 1 capital and total risk based capital ratios in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments. The capital conservation buffer requirement will be phased in beginning on January 1, 2016 at 0.625 percent and will be fully phased in at 2.50 percent by January 1, 2019. A banking organization with a buffer of less than the required amount would be subject to increasingly stringent limitations on such distributions and payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions or payments during any quarter if its eligible retained income is negative and its capital conservation buffer ratio was 2.5 percent or less at the end of the previous quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. |
• | Increases capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short term commitments and securitization exposures. |
• | Expands the recognition of collateral and guarantors in determining risk-weighted assets. |
• | Removes references to credit ratings consistent with the Dodd Frank Act and establishes due diligence requirements for securitization exposures. |
Dividend Restrictions
The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal banking laws and regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, in the case of the Bank, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. For the year ended December 31, 2015, the Bank had $43.2 million plus any net profits generated in 2015 available to pay dividends to the Company.
173
NOTE 20 – EARNINGS PER COMMON SHARE
Net income (loss) allocated to common stockholders is computed by subtracting income allocated to participating securities, participating securities dividends and preferred stock dividend from net income. Participating securities are instruments granted in share-based payment transactions that contain rights to receive nonforfeitable dividends or dividend equivalents, which includes the SARs as they confer dividend equivalent rights, as described under “Stock Appreciation Rights” in Note 16. Basic earnings (loss) per common share (EPS) is computed by dividing net income allocated to common stockholders by the weighted average number of shares outstanding, including the minimum number of shares issuable under purchase contracts relating to the tangible equity units. Diluted EPS is computed by dividing net income (loss) allocated to common stockholders by the weighted average number of shares outstanding, adjusted for the dilutive effect of the restricted stock units, the potentially issuable shares in excess of the minimum under purchase contracts relating to the tangible equity units, outstanding stock options, and warrants to purchase common stock.
Computations for basic and diluted EPS are provided below:
Year Ended December 31, | |||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||||
Common Stock | Class B Common Stock | Total | Common Stock | Class B Common Stock | Total | Common Stock | Class B Common Stock | Total | |||||||||||||||||||||||||||
($ in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
Basic: | |||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 62,050 | $ | 22 | $ | 62,072 | $ | 29,559 | $ | 646 | $ | 30,205 | $ | (80 | ) | $ | (4 | ) | $ | (84 | ) | ||||||||||||||
Less: income allocated to participating securities | (1,310 | ) | — | (1,310 | ) | (487 | ) | (11 | ) | (498 | ) | — | — | — | |||||||||||||||||||||
Less: participating securities dividends | (713 | ) | — | (713 | ) | (531 | ) | (12 | ) | (543 | ) | — | — | — | |||||||||||||||||||||
Less: preferred stock dividends | (9,820 | ) | (3 | ) | (9,823 | ) | (3,562 | ) | (78 | ) | (3,640 | ) | (2,070 | ) | (115 | ) | (2,185 | ) | |||||||||||||||||
Net income (loss) allocated to common stockholders | $ | 50,207 | $ | 19 | $ | 50,226 | $ | 24,979 | $ | 545 | $ | 25,524 | $ | (2,150 | ) | $ | (119 | ) | $ | (2,269 | ) | ||||||||||||||
Weighted average common shares outstanding | 37,033,725 | 12,869 | 37,046,594 | 27,444,878 | 599,563 | 28,044,441 | 14,481,060 | 805,774 | 15,286,834 | ||||||||||||||||||||||||||
Basic earnings (loss) per common share | $ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 0.91 | $ | 0.91 | $ | 0.91 | $ | (0.15 | ) | $ | (0.15 | ) | $ | (0.15 | ) | ||||||||||||||
Diluted: | |||||||||||||||||||||||||||||||||||
Net income (loss) allocated to common stockholders | $ | 50,207 | $ | 19 | $ | 50,226 | $ | 24,979 | $ | 545 | $ | 25,524 | $ | (2,150 | ) | $ | (119 | ) | $ | (2,269 | ) | ||||||||||||||
Additional income allocation for class B dilutive shares | (520 | ) | 520 | — | (106 | ) | 106 | — | — | — | — | ||||||||||||||||||||||||
Adjusted net income (loss) allocated to common stockholders | $ | 49,687 | $ | 539 | $ | 50,226 | $ | 24,873 | $ | 651 | $ | 25,524 | $ | (2,150 | ) | $ | (119 | ) | $ | (2,269 | ) | ||||||||||||||
Weighted average common shares outstanding | 37,033,725 | 12,869 | 37,046,594 | 27,444,878 | 599,563 | 28,044,441 | 14,481,060 | 805,774 | 15,286,834 | ||||||||||||||||||||||||||
Add: Dilutive effects of restricted stock units | 138,646 | — | 138,646 | 52,286 | — | 52,286 | — | — | — | ||||||||||||||||||||||||||
Add: Dilutive effects of purchase contracts | — | — | — | 26,807 | — | 26,807 | — | — | — | ||||||||||||||||||||||||||
Add: Dilutive effects of stock options | 30,014 | — | 30,014 | 8,692 | — | 8,692 | — | — | — | ||||||||||||||||||||||||||
Add: Dilutive effects of warrants | — | 383,255 | 383,255 | — | 115,997 | 115,997 | — | — | — | ||||||||||||||||||||||||||
Average shares and dilutive common shares | 37,202,385 | 396,124 | 37,598,509 | 27,532,663 | 715,560 | 28,248,223 | 14,481,060 | 805,774 | 15,286,834 | ||||||||||||||||||||||||||
Diluted earnings (loss) per common share | $ | 1.34 | $ | 1.36 | $ | 1.34 | $ | 0.90 | $ | 0.91 | $ | 0.90 | $ | (0.15 | ) | $ | (0.15 | ) | $ | (0.15 | ) | ||||||||||||||
For the years ended December 31, 2015, 2014, and 2013, there were 498,196, 658,054 and 1,560,172 stock options, respectively, and 0, 0, and 1,635,000 warrants, respectively, that were not considered in computing diluted earnings (loss) per common share, because they were anti-dilutive.
174
NOTE 21 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Risk of credit loss exists up to the face amount of these instruments. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows for the dates indicated:
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | ||||||||||||
(In thousands) | |||||||||||||||
Commitments to extend credit | $ | 40,312 | $ | 99,026 | $ | 87,517 | $ | 82,818 | |||||||
Unused lines of credit | 6,044 | 508,295 | 20,631 | 295,626 | |||||||||||
Letters of credit | 2,611 | 11,278 | 825 | 10,411 | |||||||||||
Commitments to make loans are generally made for periods of 30 days or less.
As of December 31, 2015, total forward commitments were $684.0 million. These commitments consisted of TBAs of $632.0 million and best efforts of $52.0 million. Additionally, the Company had IRLCs of $278.9 million at December 31, 2015.
Litigation
In the normal course of business, we are involved in various legal claims. Management has reviewed all pending legal claims against us with in-house or outside legal counsel and has taken into consideration the views of such counsel as to the outcome of the claims. In management’s opinion, the final disposition of all such claims will not have a material adverse effect on our financial position or results of operations.
175
NOTE 22 – SEGMENT REPORTING
The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall. The Company has identified four operating segments for purposes of management reporting: (i) Commercial Banking; (ii) Mortgage Banking; (iii) Financial Advisory; and (iv) Corporate/Other. Each of these four business divisions meets the criteria of an operating segment, as each segment engages in business activities from which it earns revenues and incurs expenses and its operating results are regularly reviewed by the Company’s chief operating decision-maker, the Company's President and Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available.
The principal business of the Commercial Banking segment consists of attracting deposits and investing these funds primarily in commercial, consumer and real estate secured loans. The principal business of the Mortgage Banking segment is originating conforming SFR loans and selling these loans in the secondary market. The principal business of the Financial Advisory segment is operated by The Palisades Group and provides services of purchase, sale and management of SFR mortgage loans. The Corporate/Other segment includes the holding company. The Corporate/Other segment engages in business activities through the sale of other real estate owned and loans held at the holding company and incurs interest expense on debt as well as non-interest expense for corporate related activities. During the fourth quarter of 2015, the Company developed a measurement method to allocate centrally incurred costs to its operating segments. The Company allocates shared service costs within Commercial Banking noninterest expense, as well as Corporate/Other noninterest expense, to the respective operating segments. These allocations of centrally incurred costs resulted in a reduction of noninterest expense for Commercial Banking and Corporate/Other, in the amount of $7.1 million and $13.8 million, respectively. Additionally, these allocations resulted in an increase of noninterest expense for Mortgage Banking and Financial Advisory, in the amount of $19.3 million and $1.6 million, respectively.
The Company did not change the measurement method of prior period operating segment information, as it was not deemed practicable to do so. The following table represents the operating segments’ financial results and other key financial measures as of or for the years ended December 31, 2015, 2014, and 2013:
As of or For the Year Ended | |||||||||||||||||||||||
Commercial Banking | Mortgage Banking | Financial Advisory | Corporate/ Other | Inter-segment Elimination | Consolidated | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||
Net interest income | $ | 225,869 | $ | 12,502 | $ | — | $ | (14,654 | ) | $ | — | $ | 223,717 | ||||||||||
Provision for loan and lease losses | 7,469 | — | — | — | — | 7,469 | |||||||||||||||||
Noninterest income | 65,829 | 144,522 | 15,960 | — | (6,092 | ) | 220,219 | ||||||||||||||||
Noninterest expense | 183,918 | 143,912 | 10,463 | — | (6,092 | ) | 332,201 | ||||||||||||||||
Income (loss) before income taxes | $ | 100,311 | $ | 13,112 | $ | 5,497 | $ | (14,654 | ) | $ | — | $ | 104,266 | ||||||||||
Total assets | $ | 7,785,887 | $ | 445,509 | $ | 11,865 | $ | 157,944 | $ | (165,650 | ) | $ | 8,235,555 | ||||||||||
December 31, 2014 | |||||||||||||||||||||||
Net interest income | $ | 154,322 | $ | 8,455 | $ | — | $ | (7,500 | ) | $ | — | $ | 155,277 | ||||||||||
Provision for loan and lease losses | 10,976 | — | — | — | — | 10,976 | |||||||||||||||||
Noninterest income | 34,122 | 98,322 | 19,697 | 217 | (6,721 | ) | 145,637 | ||||||||||||||||
Noninterest expense | 150,539 | 96,103 | 11,071 | 12,480 | (6,721 | ) | 263,472 | ||||||||||||||||
Income (loss) before income taxes | $ | 26,929 | $ | 10,674 | $ | 8,626 | $ | (19,763 | ) | $ | — | $ | 26,466 | ||||||||||
Total assets | $ | 5,648,986 | $ | 309,241 | $ | 14,957 | $ | 60,593 | $ | (62,480 | ) | $ | 5,971,297 | ||||||||||
December 31, 2013 | |||||||||||||||||||||||
Net interest income | $ | 96,222 | $ | 7,792 | $ | — | $ | (6,785 | ) | $ | — | $ | 97,229 | ||||||||||
Provision for loan and lease losses | 7,963 | — | — | — | — | 7,963 | |||||||||||||||||
Noninterest income | 26,740 | 69,687 | 2,832 | 5 | (2,521 | ) | 96,743 | ||||||||||||||||
Noninterest expense | 88,449 | 76,210 | 2,339 | 13,624 | (2,521 | ) | 178,101 | ||||||||||||||||
Income (loss) before income taxes | $ | 26,550 | $ | 1,269 | $ | 493 | $ | (20,404 | ) | $ | — | $ | 7,908 | ||||||||||
Total assets | $ | 3,395,793 | $ | 222,269 | $ | 2,876 | $ | 33,974 | $ | (27,050 | ) | $ | 3,627,862 | ||||||||||
176
NOTE 23 – PARENT COMPANY FINANCIAL STATEMENTS
The parent company only condensed statements of financial condition as of December 31, 2015 and 2014, and the related condensed statements of operations and condensed statements of cash flows for the years ended December 31, 2015, 2014, and 2013 are presented below:
Condensed Statements of Financial Condition
December 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 149,541 | $ | 31,362 | |||
FHLB and other bank stock | 78 | 78 | |||||
Loans and leases receivable | 626 | 635 | |||||
Other assets | 13,087 | 35,222 | |||||
Investment in subsidiaries | 776,986 | 541,050 | |||||
Total assets | $ | 940,318 | $ | 608,347 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Notes payable, net | 261,876 | 93,569 | |||||
Accrued expenses and other liabilities | 26,037 | 11,463 | |||||
Stockholders’ equity | 652,405 | 503,315 | |||||
Total liabilities and stockholders’ equity | $ | 940,318 | $ | 608,347 | |||
Condensed Statements of Operations
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Income | |||||||||||
Dividends from subsidiaries | $ | 8,500 | $ | — | $ | — | |||||
Interest income on loans | 5 | 361 | 159 | ||||||||
Gain on sale of loans | — | 209 | — | ||||||||
Other operating income | — | 8 | 5 | ||||||||
Total income | 8,505 | 578 | 164 | ||||||||
Expenses | |||||||||||
Interest expense for notes payable | 14,659 | 7,861 | 6,941 | ||||||||
Other operating expense | 13,810 | 12,478 | 14,015 | ||||||||
Total expenses | 28,469 | 20,339 | 20,956 | ||||||||
Loss before income taxes and equity in undistributed earnings of subsidiaries | (19,964 | ) | (19,761 | ) | (20,792 | ) | |||||
Income tax (benefit) expense | (8,431 | ) | (18,226 | ) | 20 | ||||||
Loss before equity in undistributed earnings of subsidiaries | (11,533 | ) | (1,535 | ) | (20,812 | ) | |||||
Equity in undistributed earnings of subsidiaries | 73,605 | 31,740 | 20,728 | ||||||||
Net income (loss) | $ | 62,072 | $ | 30,205 | $ | (84 | ) | ||||
177
Condensed Statements of Cash Flows
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 62,072 | $ | 30,205 | $ | (84 | ) | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | |||||||||||
Equity in undistributed earnings of subsidiaries | (73,605 | ) | (31,740 | ) | (20,728 | ) | |||||
Stock option compensation expense | 336 | 260 | 121 | ||||||||
Stock award compensation expense | 2,635 | 1,824 | 806 | ||||||||
Stock appreciation right expense | 202 | 1,889 | 1,072 | ||||||||
Amortization of debt issuance cost | 727 | 686 | 385 | ||||||||
Net gain on sale of loans | — | (209 | ) | — | |||||||
Amortization of premiums and discounts on purchased loans | — | (298 | ) | — | |||||||
Deferred income tax (benefit) expense | (3,575 | ) | (1,298 | ) | — | ||||||
Net change in other assets and liabilities | 37,515 | (26,471 | ) | 8,601 | |||||||
Net cash provided by (used in) operating activities | 26,307 | (25,152 | ) | (9,827 | ) | ||||||
Cash flows from investing activities: | |||||||||||
Loan purchases from bank and principal collections, net | 9 | 568 | (6,043 | ) | |||||||
Proceeds from sale of loans held-for-investment | — | 5,347 | — | ||||||||
Capital contribution to bank subsidiary | (160,000 | ) | (127,000 | ) | (81,000 | ) | |||||
Capital contribution to non-bank subsidiary | — | — | (100 | ) | |||||||
Investment in acquired business | — | — | (29,465 | ) | |||||||
Net cash used in investing activities | (159,991 | ) | (121,085 | ) | (116,608 | ) | |||||
Cash flows from financing activities: | |||||||||||
Net proceeds from issuance of long term debt | 172,304 | — | — | ||||||||
Net proceeds from issuance of tangible equity units | — | 64,959 | — | ||||||||
Net proceeds from issuance of common stock | — | 103,656 | 67,792 | ||||||||
Net proceeds from issuance of preferred stock | 110,873 | — | 37,943 | ||||||||
Payment of Amortizing Debt | (4,715 | ) | (2,157 | ) | — | ||||||
Purchase of treasury stock | — | (280 | ) | (5,005 | ) | ||||||
Proceeds from exercise of stock options | 501 | 993 | 540 | ||||||||
Dividends paid on stock appreciation rights | (699 | ) | (471 | ) | — | ||||||
Dividends paid on common stock | (16,955 | ) | (10,669 | ) | (6,736 | ) | |||||
Dividends paid on preferred stock | (9,446 | ) | (3,652 | ) | (2,185 | ) | |||||
Net cash provided by financing activities | 251,863 | 152,379 | 92,349 | ||||||||
Net change in cash and cash equivalents | 118,179 | 6,142 | (34,086 | ) | |||||||
Cash and cash equivalents at beginning of year | 31,362 | 25,220 | 59,306 | ||||||||
Cash and cash equivalents at end of year | $ | 149,541 | $ | 31,362 | $ | 25,220 | |||||
178
NOTE 24 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the unaudited quarterly results for the periods indicated:
Three Months Ended, | |||||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||||
($ in thousands, except per share data) | |||||||||||||||
2015 | |||||||||||||||
Interest income | $ | 60,780 | $ | 64,844 | $ | 66,515 | $ | 74,199 | |||||||
Interest expense | 8,783 | 10,740 | 10,965 | 12,133 | |||||||||||
Net interest income | 51,997 | 54,104 | 55,550 | 62,066 | |||||||||||
Provision for loan losses | — | 5,474 | 735 | 1,260 | |||||||||||
Noninterest income | 45,980 | 66,693 | 50,727 | 56,819 | |||||||||||
Noninterest expense | 75,879 | 87,920 | 81,743 | 86,659 | |||||||||||
Income before income tax | 22,098 | 27,403 | 23,799 | 30,966 | |||||||||||
Income tax expense | 9,524 | 11,479 | 9,263 | 11,928 | |||||||||||
Net income | 12,574 | 15,924 | 14,536 | 19,038 | |||||||||||
Dividends on preferred stock | 910 | 2,843 | 3,040 | 3,030 | |||||||||||
Net income available to common stockholders | $ | 11,664 | $ | 13,081 | $ | 11,496 | $ | 16,008 | |||||||
Basic earnings per common share | $ | 0.30 | $ | 0.33 | $ | 0.29 | $ | 0.40 | |||||||
Diluted earnings per common share | $ | 0.29 | $ | 0.32 | $ | 0.29 | $ | 0.39 | |||||||
Basic earnings per class B common share | $ | 0.30 | $ | 0.33 | $ | 0.29 | $ | 0.40 | |||||||
Diluted earnings per class B common share | $ | 0.30 | $ | 0.33 | $ | 0.29 | $ | 0.40 | |||||||
2014 | |||||||||||||||
Interest income | $ | 42,776 | $ | 43,634 | $ | 46,649 | $ | 55,080 | |||||||
Interest expense | 7,591 | 8,059 | 8,463 | 8,749 | |||||||||||
Net interest income | 35,185 | 35,575 | 38,186 | 46,331 | |||||||||||
Provision for loan losses | 1,929 | 2,108 | 2,780 | 4,159 | |||||||||||
Noninterest income | 25,278 | 35,372 | 44,098 | 40,889 | |||||||||||
Noninterest expense | 57,594 | 60,304 | 67,354 | 78,220 | |||||||||||
Income before income tax | 940 | 8,535 | 12,150 | 4,841 | |||||||||||
Income tax expense (benefit) | 191 | 436 | 903 | (5,269 | ) | ||||||||||
Net income | 749 | 8,099 | 11,247 | 10,110 | |||||||||||
Dividends on preferred stock | 910 | 910 | 910 | 910 | |||||||||||
Net (loss) income available to common stockholders | $ | (161 | ) | $ | 7,189 | $ | 10,337 | $ | 9,200 | ||||||
Basic (loss) earnings per common share | $ | (0.01 | ) | $ | 0.27 | $ | 0.31 | $ | 0.25 | ||||||
Diluted (loss) earnings per common share | $ | (0.01 | ) | $ | 0.27 | $ | 0.31 | $ | 0.25 | ||||||
Basic (loss) earnings per class B common share | $ | (0.01 | ) | $ | 0.27 | $ | 0.31 | $ | 0.25 | ||||||
Diluted (loss) earnings per class B common share | $ | (0.01 | ) | $ | 0.25 | $ | 0.31 | $ | 0.25 | ||||||
179
NOTE 25 – RELATED-PARTY TRANSACTIONS
General. The Bank has granted loans to certain officers and directors and their related interests. Loans outstanding to officers and directors and their related interests amounted to $236 thousand and $200 thousand at December 31, 2015 and 2014, respectively, each of which were performing in accordance with their respective terms. These loans are made in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those of comparable transactions with non-insiders prevailing at the time, in accordance with the Bank’s underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features. The Bank has an Employee Loan Program (the Program) which is available to all employees and offers executive officers, directors and principal stockholders that meet the eligibility requirements the opportunity to participate on the same terms as employees generally, provided that any loan to an executive officer, director or principal stockholder must be approved by the Bank’s Board of Directors. The sole benefit provided under the Program is a reduction in loan fees.
Deposits from principal officers, directors, and their related interests amounted to $2.5 million and $4.5 million at December 31, 2015 and 2014, respectively.
Underwriting Services. Keefe, Bruyette & Woods, Inc., a Stifel company, acted as an underwriter of public offerings of the Company’s securities in 2015 and 2014. Halle J. Benett, a director of the Company and the Bank, is employed as a Managing Director and Head of the Diversified Financials Group at Keefe, Bruyette & Woods, Inc. The details of these underwritten public offerings are as follows:
• | On February 8, 2016, the Company issued and sold 5,000,000 depositary shares (Series E Depositary Shares) each representing a 1/40th ownership interest in a share of 7.00 percent Non-Cumulative Perpetual Preferred Stock, Series E, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Pursuant to an underwriting agreement entered into with the Company for that offering on February 1, 2016, Keefe, Bruyette & Woods, Inc. received gross underwriting fees and commission from the Company of approximately $944 thousand (less expenses, the amount was $849 thousand). See Note 26 for additional information. |
• | On April 8, 2015, the Company issued and sold 4,600,000 depositary shares (Series D Depositary Shares) each representing 1/40th ownership interest in a share of 7.375 percent Non-Cumulative Perpetual Preferred Stock, Series D, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Pursuant to an underwriting agreement entered into with the Company for that offering on March 31, 2015, Keefe, Bruyette & Woods, Inc. received gross underwriting fees and commissions from the Company of approximately $590 thousand (less expenses, the amount was $515 thousand). |
• | On April 6, 2015, the Company issued and sold $175.0 million aggregate principal amount of its 5.25 percent Senior Notes due April 15, 2025. Pursuant to a purchase agreement entered into with the Company for that offering on March 31, 2015, Keefe, Bruyette & Woods, Inc. received gross underwriting fees and commissions from the Company of approximately $263 thousand (less expenses, the amount was $221 thousand). |
• | On May 21, 2014, the Company issued and sold 5,922,500 shares of its voting common stock. Pursuant to an underwriting agreement with the Company entered into on May 15, 2014 for that offering, Keefe, Bruyette & Woods, Inc. received gross underwriting fees and commissions from the Company of approximately $521 thousand (less expenses, the amount was $481 thousand). |
TCW Affiliates. TCW Shared Opportunity Fund V, L.P. (SHOP V Fund), an affiliate of The TCW Group, Inc., initially became a holder of the Company’s voting common stock and non-voting common stock as a lead investor in the November 2010 recapitalization of the Company (the Recapitalization). In connection with its investment in the Recapitalization, SHOP V Fund also was issued by the Company an immediately exercisable five-year warrant (the SHOP V Fund Warrant) to purchase 240,000 shares of non-voting common stock or, to the extent provided therein, shares of voting common stock in lieu of non-voting common stock. SHOP V Fund was issued shares of non-voting common stock in the Recapitalization because at that time, a controlling interest in TCW Asset Management Company, the investment manager to SHOP V Fund, was held by a foreign banking organization, and in order to prevent SHOP V Fund from being considered a bank holding company under the Bank Holding Company Act of 1956, as amended, the number of shares of voting common stock it purchased in the Recapitalization had to be limited to 4.99 percent of the total number of shares of voting common stock outstanding immediately following the Recapitalization. For the same reason, the SHOP V Fund Warrant could be exercised by SHOP V Fund for voting common stock in lieu of non-voting common stock only to the extent SHOP V Fund's percentage ownership of the voting common stock at the time of exercise would be less than 4.99 percent as a result of dilution occurring from additional issuances of voting common stock subsequent to the Recapitalization.
180
In 2013, the foreign banking organization sold its controlling interest in TCW Asset Management Company, eliminating the need to limit SHOP V Fund's percentage ownership of the voting common stock to 4.99 percent. As a result, on May 29, 2013, the Company and SHOP V Fund entered into a Common Stock Share Exchange Agreement, dated May 29, 2013 (Exchange Agreement), pursuant to which SHOP V Fund could from time to time exchange its shares of non-voting common stock for shares of voting common stock issued by the Company on a share-for-share basis, provided that immediately following any such exchange, SHOP V Fund's percentage ownership of voting common stock did not exceed 9.99 percent. The shares of non-voting common stock that could be exchanged by SHOP V Fund pursuant to the Exchange Agreement included the shares of non-voting common stock it purchased in the Recapitalization, the additional shares of non-voting common stock SHOP V Fund acquired subsequent to the Recapitalization pursuant to the Company’s Dividend Reinvestment Plan and any additional shares of non-voting common stock that SHOP V Fund acquired pursuant to its exercise of the SHOP V Fund Warrant.
On December 10, 2014, SHOP V Fund and two affiliated entities, Crescent Special Situations Fund Legacy V, L.P. (CSSF Legacy V) and Crescent Special Situations Fund Investor Group, L.P. (CSSF Investor Group), entered into a Contribution, Distribution and Sale Agreement pursuant to which SHOP V Fund agreed to transfer shares of non-voting common stock and portions of the SHOP V Fund Warrant to CSSF Legacy V and CSSF Investor Group. Also on December 10, 2014, SHOP V Fund, CSSF Legacy V, CSSF Investor Group and the Company entered into an Assignment and Assumption Agreement pursuant to which all of SHOP V Fund’s rights and obligations under the Exchange Agreement with respect to the shares of non-voting common stock transferred by it to CSSF Legacy V and CSSF Investor Group pursuant to the Contribution, Distribution and Sale Agreement were assigned to CSSF Legacy V and CSSF Investor Group, including the right of SHOP V Fund to exchange such shares for shares of voting common stock on a one-for-one basis.
Based on a Schedule 13-G amendment filed with the SEC on February 12, 2015, as of December 31, 2014, The TCW Group, Inc. and its affiliates held 1,318,462 shares of voting common stock (which included, for purposes of the calculation, the 240,000 shares of stock underlying the as yet unexercised SHOP V Fund Warrant). On June 3, 2013, January 5, 2015, January 20, 2015, and March 16, 2015, SHOP V Fund or CSSF Legacy V or CSSF Investor Group exchanged 550,000 shares, 522,564 shares, 86,620 shares, and 934 shares, respectively, of non-voting common stock for the same number of shares of voting common stock. In addition, on August 3, 2015, the SHOP V Fund Warrant, which was held in separate portions by CSSF Legacy V and CSSF Investor Group, was exercised in full using a cashless (net) exercise, resulting in a net number of shares of non-voting common stock issued in the aggregate of 70,690, which were immediately thereafter exchanged for an aggregate of 70,690 shares of voting common stock. Based on automatic adjustments to the original $11.00 exercise price of the SHOP V Fund Warrant, the exercise price at the time of exercise was $9.13 per share. As a result of these exchanges and exercises The TCW Group, Inc. and its affiliates no longer hold any shares of non-voting common stock or warrants to acquire stock. Based on TCW Group's prior report of owning 1,318,462 shares of the Company’s voting common stock, TCW Group, Inc. would have owned 3.5 percent of the Company’s outstanding voting common stock as of December 31, 2015.
Oaktree Affiliates. As reported in a Schedule 13-G filed with the SEC on January 16, 2015, OCM BOCA Investor, LLC (OCM), an affiliate of Oaktree Capital Management, L.P., owned 3,288,947 shares of the Company’s voting common stock as of November 7, 2014, which OCM reported represented 9.9 percent of the Company’s total shares outstanding as of the dates set forth in the Schedule 13-G. For the details of the transaction in which OCM acquired these shares, see “Securities Purchase Agreement with Oaktree.” However, as reported in a Schedule 13-G amendment filed with the SEC on February 12, 2016 OCM and its affiliates owned 958,296 shares of the Company’s voting common stock as of December 31, 2015, which OCM reported represented less than 5 percent of the Company’s total shares outstanding.
Loans. Effective September 30, 2015, the Bank provides a $15.0 million committed revolving line of credit to Teleios LS Holdings DE, LLC and Teleios LS Holdings II DE, LLC (Teleios), which generate income through the purchase, monitoring, maintenance and maturity of life insurance policies. The Teleios entities are hedge funds in which Oaktree Capital Management L.P. or one of its affiliates is a controlling investor.
Advances under the Teleios line of credit are secured by life insurance policies purchased by Teleios that have a market value in excess of the balance of the advances under the line of credit. As of December 31, 2015, outstanding advances by the Bank (and the largest aggregate amount outstanding) under the Teleios line of credit were $3.6 million. Interest on the outstanding balance under the Teleios line of credit accrues at the Prime Rate plus a margin. During the year ended December 31, 2015, no principal and $14 thousand in interest was paid by Teleios on the line of credit to the Bank.
Effective June 26, 2015, the Bank provides a $35.0 million committed revolving repurchase facility (the Sabal repurchase facility) to Sabal TL1, LLC, a Delaware limited liability company, with a maximum funding amount of $40.0 million in certain situations. At the time the facility was executed, Sabal TL1, LLC was controlled by an affiliate of Oaktree Capital Management, L.P. Under the Sabal repurchase facility, commercial mortgage loans originated by Sabal are purchased from Sabal by the Bank, together with a simultaneous agreement by Sabal to repurchase the
181
commercial mortgage loans from the Bank at a future date. The advances under the Sabal repurchase facility are secured by commercial mortgage loans that have a market value in excess of the balance of the advances under the facility. During the year ended December 31, 2015, the largest aggregate amount of principal outstanding under the Sabal repurchase facility (and the amount outstanding as of December 31, 2015) was $26.3 million. Interest on the outstanding balance under the Sabal repurchase facility accrues at the six month LIBOR rate plus a margin. $105.0 million in principal and $252 thousand in interest was paid by Sabal on the facility to the Bank during the year ended December 31, 2015.
Securities Purchase Agreement. As noted above, as reported in a Schedule 13-G filed with the SEC on January 16, 2015, OCM owned 3,288,947 shares of the Company’s voting common stock. OCM purchased these shares from the Company on November 7, 2014 at a price of $9.78 per share pursuant to a securities purchase agreement entered into on April 22, 2014 (and amended on October 28, 2014) in order for the Company to raise a portion of the capital to be used to finance the acquisition of select assets and assumption of certain liabilities by the Bank from Banco Popular North America (BPNA) comprising BPNA’S network of 20 California branches (the BPNA Branch Acquisition), which was completed on November 8, 2014. In consideration for its commitment under the securities purchase agreement, OCM was paid at closing an equity support payment from the Company of $1.6 million.
Management Services. Approximately nine months before OCM became a stockholder of the Company, The Palisades Group, LLC (The Palisades Group) and certain affiliates of Oaktree Capital Management, L.P. (collectively, the Oaktree Funds) entered into a management agreement, effective as of January 30, 2014, as amended (the Management Agreement), pursuant to which The Palisades Group serves as the credit manager of pools of single family residential mortgage loans held in securitization trusts or other vehicles beneficially owned by the Oaktree Funds. Under the Management Agreement, The Palisades Group is paid a monthly management fee primarily based on the amount of certain designated pool assets and may earn additional fees for advice related to financing opportunities. During the year ended December 31, 2015 and 2014, the Oaktree Funds paid The Palisades Group $5.1 million and $5.3 million as management fees, respectively, which in some instances represents fees for partial year services. In addition to the Management Agreement, the Bank may from time to time in the future enter into lending transactions with portfolio companies of investment funds managed by Oaktree Capital Management, L.P.
Patriot Affiliates. As reported in a Schedule 13-D amendment filed with the SEC on November 10, 2014, Patriot Financial Partners, L.P and Patriot Financial Partners Parallel, L.P. (Patriot) owned 3,100,564 shares of the Company’s voting common stock as of November 7, 2014, which Patriot reported represented 9.3 percent of the Company’s outstanding voting common stock as of that date. For the details of the transaction in which Patriot acquired certain of these shares, see “Securities Purchase Agreement with Patriot.” Based on Patriot's prior report of owning 3,100,564 shares, Patriot owned 8.2 percent of the Company’s outstanding voting common stock as of December 31, 2015.
Bank Owned Life Insurance. On July 14, 2015, the Bank made a $50.0 million investment in Bank Owned Life Insurance (BOLI) and on September 15, 2015, the Bank made an additional $30.0 million investment in BOLI, with the BOLI being issued by Northwestern Mutual Life Insurance Company (Northwestern), which is rated AAA by Fitch Ratings, Aaa by Moody's and AA+ by Standard and Poor’s. With respect to these BOLI investments, the Bank’s BOLI vendor and a provider of certain compliance, accounting and management services related to the BOLI is BFS Financial Services Group (BFS Group), which was referred to the Bank by Kirk Wycoff, a principal of Patriot. Mr. Wycoff’s son, Jordan Wycoff, is employed as a regional director with BFS Group. As long as BFS Group is the broker of record for BOLI purchased from and issued by Northwestern, then the services BFS Group provides to the Bank are given free of charge, although BFS Group receives remuneration from Northwestern for the BOLI the Bank purchases that are issued by Northwestern.
The BOLI is a single premium purchase life insurance policy on the lives of a group of designated employees. The Bank is the owner of the policy and beneficiary of the policy. As of the year ended December 31, 2015, the Bank owned $100.2 million in BOLI or approximately 13.8 percent of the Bank's Tier 1 Capital at December 31, 2015. Pursuant to guidelines of the OCC, BOLI holdings by a financial institution must not exceed 25 percent of Tier 1 capital.
Securities Purchase Agreement. As noted above, as reported in a Schedule 13-D amendment filed on November 10, 2014 with the SEC, Patriot owned 3,100,564 shares of the Company’s voting common stock as of November 7, 2014, which Patriot reported represented 9.3 percent of the Company’s total shares outstanding as of the dates set forth in the Schedule 13-D. On April 22, 2014, the Company entered into a Securities Purchase Agreement (Patriot SPA) with Patriot to raise a portion of the capital to be used to finance the BPNA Branch Acquisition. The Patriot SPA was due to expire by its terms on October 31, 2014. Prior to such expiration, the Company and Patriot Financial Partners, L.P., Patriot Financial Partners Parallel, L.P., Patriot Financial Partners II, L.P. and Patriot Financial Partners Parallel II, L.P.
182
(together referred to as Patriot Partners) entered into a Securities Purchase Agreement, dated as of October 30, 2014 (New Patriot SPA). Pursuant to the New Patriot SPA, substantially concurrently with the BPNA Branch Acquisition, Patriot Partners purchased from the Company (i) 1,076,000 shares of its voting common stock at a price of $9.78 per share and (ii) 824,000 shares of its voting common stock at a price of $11.55 per share, for an aggregate purchase price of $20.0 million. In consideration for Patriot’s commitment under the New SPA and pursuant the terms of the New SPA, on the closing of the sale of such shares on November 7, 2014, the Company paid Patriot an equity support payment of $538 thousand and also reimbursed Patriot $100 thousand in out-of-pocket expenses.
On October 30, 2014, concurrent with the execution of the New Patriot SPA, Patriot and the Company entered into a Settlement Agreement and Release (the Settlement Agreement) in order to resolve, without admission of any wrongdoing by either party, a prior dispute regarding, among other things, the proper interpretation of certain provisions of the SPA, including but not limited to the computation of the purchase price per share (the Dispute). Pursuant to the Settlement Agreement, Patriot and the Company released any claims they may have had against the other party with respect to the Dispute. In addition, Patriot and the Company agreed for the period beginning on the date of the Settlement Agreement and ending on December 31, 2016, that neither Patriot nor the Company would disparage the other party or its affiliates.
During the period beginning on the date of the Settlement Agreement and ending on December 31, 2016, Patriot also agreed not to:
• | institute, solicit, assist or join, as a party, any proxy solicitation, consent solicitation, board nomination or director removal relating to the Company against or involving the Company or any of its subsidiaries, affiliates, successors, assigns, directors, officers, employees, agents, attorneys or financial advisors; |
• | take any action relative to the governance of the Company that would violate its passivity commitments or vote the shares of voting common stock held or controlled by it on any matters related to the election, removal or replacement of directors or the calling of any meeting related thereto, other than in accordance with management’s recommendations included in the Company’s proxy statement for any annual meeting or special meeting; |
• | form or join in a partnership, limited partnership, syndicate or other group, or solicit proxies or written consents of stockholders or conduct any other type of referendum (binding or non-binding) with respect to, or from the holders of, the voting common stock and any other securities of the Company entitled to vote in the election of directors, or securities convertible into, or exercisable or exchangeable for, voting common stock or such other securities (such other securities, together with the voting common stock, being referred to as Voting Securities), or become a participant in or assist, encourage or advise any person in any solicitation of any proxy, consent or other authority to vote any Voting Securities; or |
• | enter into any negotiations, agreements, arrangements or understandings with any person with respect to any of the foregoing or advise, assist, encourage or seek to persuade any person to take any action with respect to any of the foregoing. |
The Company also agreed, during the same period, not to:
• | institute, solicit, assist or join, as a party, any proxy solicitation, consent solicitation, board nomination or director removal relating to Patriot against or involving Patriot or any of its subsidiaries, affiliates, successors, assigns, officers, partners, principals, employees, agents, attorneys or financial advisors; or |
• | enter into any negotiations, agreements, arrangements or understandings with any person with respect to any of the foregoing or advise, assist, encourage or seek to persuade any person to take any action with respect to any of the foregoing. |
St. Cloud Affiliates. On November 24, 2014, the Bank invested as a limited partner in an affiliate of St. Cloud Capital LLC (St. Cloud). Based on a Schedule 13-G amendment filed with the SEC on February 14, 2012, St. Cloud holds 700,538 shares of the Company’s voting common stock (approximately 1.8 percent of the Company's outstanding shares as of December 31, 2015). The affiliate is St. Cloud Capital Partners III SBIC, LP (the Partnership), which applied for a license granted by the U.S. Small Business Administration to operate as a debenture Small Business Investment Company (SBIC) under the Small Business Investment Act of 1958 and the regulations promulgated thereunder. The Community Reinvestment Act of 1977 expressly identifies an investment by a bank in an SBIC as a type of investment that is presumed by the regulatory agencies to promote economic development. The Boards of Directors of the Company and the Bank approved the Bank’s investment. The Bank has agreed to invest a minimum of $5.0 million, but up to $7.5 million as long as the Bank’s limited partnership interest in the Partnership remains under 9.9 percent.
183
Other affiliated funds of St. Cloud have previously invested in CORSHI, of which Steven A. Sugarman (the Chairman, President and Chief Executive Officer of the Company and the Bank) is the Chief Executive Officer as well as a controlling stockholder (both directly and indirectly). St. Cloud Capital Partners III SBIC, LP has provided oral representations to the Bank that the Partnership will not make any investments in COR Securities Holdings, Inc.
Consulting Services to the Company. On May 15, 2014, the disinterested members of the Board of Directors of the Company approved a strategic advisor agreement with Chrisman & Co. pursuant to which Chrisman & Co. would provide strategic advisory services for the Company. Timothy Chrisman, who retired from the Company’s Board on May 15, 2014 upon the expiration of the term of his directorship after the Company’s 2014 annual meeting of stockholders, is the Chief Executive Officer and founding principal of Chrisman & Co. The term of the strategic advisor agreement was for a period of one year, which ended on May 15, 2015. For services performed during the term of the agreement, a fixed annual advisory fee of $200 thousand was paid to Chrisman & Co. during the year ended December 31, 2014 and no additional fees were paid during the year ended December 31, 2015.
Consulting Services to The Palisades Group. The Company acquired The Palisades Group on September 16, 2013. Effective as of July 1, 2013, prior to the Company’s acquisition of The Palisades Group, The Palisades Group entered into a consulting agreement with Jason Sugarman, the brother of the Company’s and the Bank’s Chairman, President and Chief Executive Officer, Steven A. Sugarman. Jason Sugarman provides advisory services to financial institutions and other institutional clients related to investments in residential mortgages, real estate and real estate related assets and The Palisades Group entered into the consulting agreement with Jason Sugarman to provide these types of services. The consulting agreement is for a term of 5 years, with a minimum payment of $30 thousand owed at the end of each quarter (or $600 thousand in aggregate quarterly payments over the five-year term of the agreement). These payments do not include any bonuses that may be earned under the agreement. For the years ended December 31, 2015, 2014 and 2013 base and bonus amounts earned by Jason Sugarman under the consulting agreement totaled $30 thousand, $1.2 million, and $121 thousand, respectively. Effective as of March 26, 2015, the bonus amount earned by Jason Sugarman for consulting services he provided during the year ended December 31, 2014 was credited in satisfaction and full discharge of all then currently accrued but unpaid quarterly payments as well as any future quarterly payments specified under the consulting agreement, but not against any future bonuses that he may earn under the consulting agreement. The consulting agreement may be terminated at any time by either The Palisades Group or Jason Sugarman upon 30 days prior written notice. The consulting agreement with Jason Sugarman was later reviewed as a related party transaction and approved by the Compensation, Nominating and Corporate Governance Committee and approved by the disinterested directors of the Board.
Lease Payment Reimbursements for The Palisades Group. At the time it was acquired by the Company on September 16, 2013, The Palisades Group occupied premises in Santa Monica, California leased by COR Securities Holding, Inc. (CORSHI). Steven A. Sugarman, the Chairman, President and Chief Executive Officer of the Company and the Bank, is the Chief Executive Officer, as well as a controlling stockholder (both directly and indirectly), of CORSHI. In light of the benefit received by The Palisades Group of its occupancy of the Santa Monica premises, the disinterested directors of the Company’s Board ratified reimbursement to CORSHI for rental payments made for the Santa Monica premises for the period from September 16, 2013 through June 27, 2014, the last date The Palisades Group occupied the premises. The Palisades Group negotiated with an unaffiliated third party a lease for new premises and occupied those premises on June 27, 2014.
The aggregate amount of rent payments reimbursed to CORSHI from September 16, 2013 through December 30, 2013 were $40 thousand. In addition, the Company reimbursed CORSHI for a $34 thousand security deposit and The Palisades Group, in turn, reimbursed the Company for this cost. For the period from January 1, 2014 through June 27, 2014, CORSHI granted The Palisades Group a rent abatement equal to the $34 thousand security deposit and, combined with additional payments, The Palisades Group paid leasing costs totaling $58 thousand to CORSHI for that same time period. The Compensation, Nominating and Corporate Governance Committee of the Board monitored all the reimbursement costs and reviewed the aggregate reimbursement costs.
CS Financial Acquisition. Effective October 31, 2013, the Company acquired CS Financial, which was controlled by Jeffrey T. Seabold (who is currently employed as Executive Vice President, Chief Banking Officer and previously served as a director of the Company and the Bank) and in which certain relatives of Steven A. Sugarman (the Chairman, President and Chief Executive Officer of the Company and the Bank) directly or through their affiliated entities also owned certain minority, non-controlling interests.
CS Financial Services Agreement. On December 27, 2012, the Company entered into a Management Services Agreement (Services Agreement) with CS Financial. On December 27, 2012, Mr. Seabold was then a member of the Board of Directors of each of the Company and the Bank. Under the Services Agreement, CS Financial agreed to provide the Bank such reasonably requested financial analysis, management consulting, knowledge sharing, training services and general advisory services as the Bank and CS Financial mutually agreed upon with respect to the Bank’s
184
residential mortgage lending business, including strategic plans and business objectives, compliance function, monitoring, reporting and related systems, and policies and procedures, at a monthly fee of $100 thousand. The Services Agreement was recommended by disinterested members of management of the Bank and negotiated and approved by special committees of the Board of Directors of each of the Company and the Bank (Special Committees), comprised exclusively of independent, disinterested directors of the Boards. Each of the Boards of Directors of the Bank and the Company also considered and approved the Services Agreement, upon the recommendation of the Special Committees.
On May 13, 2013, the Bank hired Mr. Seabold as Managing Director and Chief Lending Officer by entering into a three-year employment agreement with Mr. Seabold (the 2013 Employment Agreement, which was amended and restated effective as of April 1, 2015 subsequent to Mr. Seabold's appointment as Chief Banking Officer). Simultaneously with entering into the 2013 Employment Agreement, the Bank terminated, with immediate effect, its Services Agreement with CS Financial. For the year ended December 31, 2013, the total compensation paid to CS Financial under the Services Agreement was $439 thousand.
Option to Acquire CS Financial. Under the 2013 Employment Agreement, Mr. Seabold granted to the Company and the Bank an option (CS Call Option), to acquire CS Financial for a purchase price of $10.0 million, payable pursuant to the terms provided under the 2013 Employment Agreement. Based upon the recommendation of the Special Committees, with the assistance of outside financial and legal advisors and consultants, the Boards of Directors of the Company and the Bank, with Mr. Sugarman recusing himself from the discussions and vote due to previously disclosed conflicts of interest, approved the recommendation of the Special Committees and, pursuant to a letter dated July 29, 2013, the Company indicated that the CS Call Option was being exercised by the Bank, subject to the negotiation and execution of definitive transaction documentation consistent with the applicable provisions of the 2013 Employment Agreement and the satisfaction of the terms and conditions set forth therein.
Merger Agreement. After exercise of the CS Call Option as described above, the Company and the Bank entered into an Agreement and Plan of Merger (Merger Agreement) with CS Financial, the stockholders of CS Financial (Sellers) and Mr. Seabold, as the Sellers’ Representative, and completed its acquisition of CS Financial on October 31, 2013.
Subject to the terms and conditions set forth in the Merger Agreement, which was approved by the Board of Directors of each of the Company, the Bank and CS Financial, at the effective time of the Merger, the outstanding shares of common stock of CS Financial were converted into the right to receive in the aggregate: (i) upon the closing of the Merger, (a) 173,791 shares (Closing Date Shares) of voting common stock, par value $0.01 per share, of the Company, and (b) $1.5 million in cash and $3.2 million in the form of a noninterest-bearing note issued by the Company to Mr. Seabold that was due and paid by the Company on January 2, 2014; and (i) upon the achievement of certain performance targets by the Bank’s lending activities following the closing of the Merger that are set forth in the Merger Agreement, up to 92,781 shares (Performance Shares) of voting common stock ((i) and (ii), together, Merger Consideration).
Seller Stock Consideration. The Sellers under the Merger Agreement included Mr. Seabold, and the following relatives of Mr. Sugarman, Jason Sugarman (brother), Elizabeth Sugarman (sister-in-law), and Michael Sugarman (father), who each owned minority, non-controlling interests in CS Financial.
Upon the closing of the Merger and pursuant to the terms of the Merger Agreement, the aggregate shares of voting common stock issued as the consideration to the Sellers was 173,791 shares, which was allocated by the Sellers and issued as follows: (i) 103,663 shares to Mr. Seabold; (ii) 16,140 shares to Jason Sugarman; (iii) 16,140 shares to Elizabeth Sugarman; (iv) 3,228 shares to Michael Sugarman; and (v) 34,620 shares to certain employees of CS Financial. Of the 103,663 shares to be issued to Mr. Seabold, as allowed under the Merger Agreement and in consideration of repayment of a certain debt incurred by CS Financial owed to an entity controlled by Elizabeth Sugarman, Mr. Seabold requested the Company to issue all 103,663 shares directly to Elizabeth Sugarman, and such shares were so issued by the Company to Elizabeth Sugarman.
On October 31, 2014, certain of the Performance Shares were issued as follows: (i) 28,545 shares to Mr. Seabold; (ii) 1,082 shares to Jason Sugarman; (iii) 1,082 shares to Elizabeth Sugarman; and (iv) 216 shares to Michael Sugarman. An additional portion of the Performance Shares was issued on November 2, 2015 as follows: (i) 28,545 shares to Mr. Seabold; (ii) 1,082 shares to Jason Sugarman; (iii) 1,082 shares to Elizabeth Sugarman; and (iv) 216 shares to Michael Sugarman.
Approval of the CS Call Option, Merger Agreement and Merger. All decisions and actions with respect to the exercise of the CS Agreement Option, the Merger Agreement and the Merger (including without limitation the determination of
185
the Merger Consideration and the other material terms of the Merger Agreement) were subject to under the purview and authority of special committees of the Board of Directors of each of the Company and the Bank, each of which was composed exclusively of independent, disinterested directors of the Boards of Directors, with the assistance of outside financial and legal advisors. Mr. Sugarman abstained from the vote of each of the Boards of Directors of the Company and the Bank to approve the Merger Agreement and the Merger.
NOTE 26 – SUBSEQUENT EVENTS
On January 22, 2016, the Company dissolved PTB Property Holding, LLC (PTB). PTB was a California Limited Liability Company formed in 2014 with its sole managing member being that of the Company to hold the transfer of real estate, cash, and fixed income securities.
On February 8, 2016, the Company completed the issuance and sale, in an underwritten public offering, of 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 7.00 percent Non-Cumulative Perpetual Preferred Stock, Series E (with 125,000 shares of Series E Non-Cumulative Perpetual Preferred Stock issued), with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share), for gross proceeds of $121.1 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 750,000 depositary shares to cover over-allotments, if any, at the same price, for potential additional gross proceeds of $18.2 million.
Management has evaluated subsequent events through the date of issuance of the financial data included herein. Other than the events discussed above, there have been no subsequent events occurred during such period that would require disclosure in this report or would be required to be recognized in the Consolidated Financial Statements as of December 31, 2015.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Act) as of December 31, 2015 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2015, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
186
Report of Management and Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Management's Report on Internal Control Over Financial Reporting
The management of Banc of California, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2015 the Company’s internal control over financial reporting was effective based on the criteria established in Internal Control—Integrated Framework (2013).
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, has been audited by KPMG LLP, an independent registered public accounting firm.
/s/ Steven A. Sugarman | /s/ James J. McKinney | |
Steven A. Sugarman Chairman, President and Chief Executive Officer | James J. McKinney Executive Vice President and Chief Financial Officer | |
187
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Banc of California, Inc.:
We have audited Banc of California, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Banc of California, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Banc of California, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Banc of California, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 18, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP KPMG LLP | |
Irvine, California
February 18, 2016
188
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers. The information concerning directors and executive officers of the Company required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year.
Audit Committee Financial Expert. Information concerning the audit committee of the Company’s Board of Directors required by this item, including information regarding the audit committee financial experts serving on the audit committee, is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, except for information contained under the heading “Report of the Audit Committee,” a copy of which will be filed not later than 120 days after the close of the fiscal year.
Code of Ethics. The Company adopted a written Code of Business Conduct and Ethics based upon the standards set forth under Item 406 of Regulation S-K of the Securities Exchange Act. The Code of Business Conduct and Ethics applies to all of the Company’s directors, officers and employees. On October 28, 2014, the Company adopted a revised Code of Business Conduct and Ethics (Code), to enhance the Company's governance, including among other things by: (i) adding a requirement that all members of the Board annually agree to adhere to the Code; (ii) expanding the definition of the "Confidential Information" and (iii) limiting certain financial arrangements to which directors may be party. A full text of the Code is available on the Company’s website at www.bancofcal.com, by clicking "Investors" and then "Governance Documents."
Section 16(a) Beneficial Ownership Reporting Compliance. The information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by directors, officers and ten percent stockholders of the Company required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year.
Nomination Procedures. There have been changes to the procedures by which stockholders may recommend nominees to the Company’s Board of Directors, including, among others, (i) additional disclosure requirements by stockholders proposing business or submitting nominees at annual or special meetings of stockholders and (ii),changes made to the advance-notice period for stockholder proposals and nominations, (a) first modified on October 28, 2014 from 90-120 days prior to the first anniversary of the preceding year’s annual meeting to 120-150 days prior to the first anniversary of the preceding year’s annual meeting and (b) most recently modified on February 24, 2015 from 120-150 days prior to the first anniversary of the preceding year’s annual meeting to 150-180 days prior to the first anniversary of the preceding year’s annual meeting. The complete nomination procedure is set forth in the Company’s Fourth Amended and Restated Bylaws, a copy of which was filed as an exhibit to the Company's Current Report on Form 8-K filed on October 2, 2015.
Item 11. Executive Compensation
The information concerning compensation and other matters required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, except for information contained under the headings “Compensation Committee report on Executive Compensation” a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year.
189
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information concerning security ownership of certain beneficial owners and management required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year.
The following table summarizes our equity compensation plans as of December 31, 2015:
Plan Category | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of Securities remaining available for future issuance under equity compensation plans (2) | ||||||
Equity compensation plans approved by security holders | 3,822,560 | $ | 11.02 | 2,171,553 | |||||
Equity compensation plans not approved by security holders | — | $ | — | — | |||||
(1) | The exercise price of included warrants to purchase 1,300,000 shares of non-voting common stock is subject to certain adjustments. |
(2) | The 2013 Omnibus Stock Incentive Plan provides that the aggregate number of shares of Company common stock that may be subject to awards under the 2013 Omnibus Stock Incentive Plan will be 20 percent of the then outstanding shares of Company common stock (the Share Limit), provided that in no event will the Share Limit be less than the greater of 2,384,711 shares of Company common stock and the aggregate number of shares of Company common stock with respect to which awards have been properly granted under the 2013 Omnibus Plan up to that point in time. |
Item 13. Certain Relationships and Related Transactions and Director Independence
Information concerning certain relationships and related transactions and director independence required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.
Item 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services is incorporated herein by reference from the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, a copy of which will be filed no later than 120 days after the close of the fiscal year.
190
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: See Part II—Item 8. Financial Statements and Supplementary Data
(a)(2) | Financial Statement Schedule: All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable. |
(a)(3) | Exhibits |
2.1 | Stock Purchase Agreement, dated as of June 3, 2011, by and among Banc of California, Inc., (f/k/a First PacTrust Bancorp, Inc.) (sometimes referred to below as the Registrant or the Company), Gateway Bancorp, Inc. (Gateway), each of the stockholders of Gateway and the D & E Tarbell Trust, u/d/t dated February 19, 2002 (in its capacity as the Sellers’ Representative) | (a) |
2.1A | Amendment No. 1, dated as of November 28, 2011, to Stock Purchase Agreement, dated as of June 3, 2011, by and among The Registrant, Gateway Bancorp, the Sellers named therein and the D & E Tarbell Trust, u/d/t dated February 19, 2002 (in its capacity as the Sellers’ Representative) | (a)(1) |
2.2B | Amendment No. 2, dated as of February 24, 2012, to Stock Purchase Agreement, dated as of June 3, 2011, by and among the Registrant, Gateway Bancorp, the Sellers named therein and the D & E Tarbell Trust, u/d/t dated February 19, 2002 (in its capacity as the Sellers’ Representative) | (a)(2) |
2.2C | Amendment No. 3, dated as of June 30, 2012, to Stock Purchase Agreement, dated as of June 3, 2011, by and among the Registrant, Gateway Bancorp, the Sellers named therein and the D & E Tarbell Trust, u/d/t dated February 19, 2002 (in its capacity as the Sellers’ Representative) | (a)(3) |
2.2D | Amendment No. 4, dated as of July 31, 2012, to Stock Purchase Agreement, dated as of June 3, 2011, by and among the Registrant, Gateway Bancorp, the Sellers named therein and the D & E Tarbell Trust, u/d/t dated February 19, 2002 (in its capacity as the Sellers’ Representative) | (a)(4) |
2.3 | Agreement and Plan of Merger, dated as of August 30, 2011, by and between the Registrant and Beach Business Bank, as amended by Amendment No. 1thereto dated as of October 31, 2011 | (b) |
2.4 | Agreement and Plan of Merger, dated as of August 21, 2012, by and among First PacTrust Bancorp, Inc., Beach Business Bank and The Private Bank of California | (c) |
2.5 | Amendment No. 1, dated as of May 5, 2013, to Agreement and Plan of Merger, dated as of August 21, 2012, by and among the Registrant, Beach Business Bank and The Private Bank of California | (x) |
2.6 | Agreement and Plan of Merger, dated as of October 25, 2013, by and among the Registrant, Banc of California, National Association, CS Financial, Inc., the Sellers named therein and the Sellers’ Representative named therein | (y) |
2.7 | Purchase and Assumption Agreement, dated as of April 22, 2014, by and between Banco Popular North America and Banc of California, National Association | (aa) |
3.1 | Articles of Incorporation of the Registrant | (d) |
3.2 | Articles of Amendment to the Charter of the Registrant increasing the authorized capital stock of the Registrant | (e) |
3.3 | Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s Senior Non-Cumulative Perpetual Preferred Stock, Series A | (f) |
3.4 | Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s Class B Non-Voting Common Stock | (g) |
3.5 | Articles of Amendment to Articles Supplementary to the Charter of the Registrant containing the terms of the Registrant’s Class B Non-Voting Common Stock | (h) |
3.6 | Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s 8.00% Non-Cumulative Perpetual Preferred Stock, Series C | (o) |
3.7 | Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s Non-Cumulative Perpetual Preferred Stock, Series B | (p) |
3.8 | Articles of Amendment to the Charter of the Registrant changing the Registrant’s name | (q) |
3.9 | Articles of Amendment to the Charter of the Registrant increasing the authorized capital stock of the Registrant | (bb) |
3.10 | Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s 7.375% Non-Cumulative Perpetual Preferred Stock, Series D | (mm) |
3.11 | Bylaws of the Registrant | (ii) |
191
3.12 | Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s 7.00% Non-Cumulative Perpetual Preferred Stock, Series E | (rr) |
4.2 | Warrant to purchase up to 1,395,000 shares of the Registrant common stock originally issued on November 1, 2010 | (g) |
4.3 | Senior Debt Securities Indenture, dated as of April 23, 2012, between the Registrant and U.S. Bank National Association, as Trustee | (l) |
4.4 | Supplemental Indenture, dated as of April 23, 2012, between the Registrant and U.S. Bank National Association, as Trustee, relating to the Registrant’s 7.50% Senior Notes due April 15, 2020 and form of 7.50% Senior Notes due April 15, 2020 | (l) |
4.5 | Second Supplemental Indenture, dated as of April 6, 2015, between the Registrant and U.S. Bank National Association, as Trustee, relating to the Registrant’s 5.25% Senior Notes due April 15, 2025 and form of 5.25% Senior Notes due April 15, 2025 | (ll) |
4.6 | Deposit Agreement, dated as of June 12, 2013, among the Registrant, Registrar and Transfer Company, as Depositary and the holders from time to time of the depositary receipts described therein | (o) |
4.7 | Deposit Agreement, dated as of April 8, 2015, among the Registrant, Computershare Inc. and Computershare Trust Company, N.A., collectively as Depositary, and the holders from time to time of the depositary receipts described therein | (mm) |
4.8 | Purchase Contract Agreement, dated May 21, 2014, between the Company and U.S. Bank National Association | (ee) |
4.9 | Indenture, dated May 21, 2014, between the Company and U.S. Bank National Association | (ee) |
4.10 | First Supplemental Indenture, dated May 21, 2014, between the Company and U.S. Bank National Association relating to the Registrant's 8% Tangible Equity Units due May 15, 2017 | (ee) |
4.11 | Deposit Agreement, dated as of February 8, 2016, among the Registrant, Computershare Inc. and Computershare Trust Company, N.A., collectively as Depositary, and the holders from time to time of the depositary receipts described therein. | (rr) |
10.1 | Employment Agreement, dated as of August 21, 2012, by and between the Registrant and Steven A. Sugarman | (i) |
10.1A | Stock Appreciation Right Grant Agreement between the Registrant and Steven A. Sugarman dated August 21, 2012 | (i) |
10.1B | Amendment dated December 13, 2013 to Stock Appreciation Right Grant Agreement between the Registrant and Steven Sugarman dated August 21, 2012 | (ff) |
10.1C | Letter Agreement, dated as of May 23, 2014, by and between the Registrant and Steven A. Sugarman, relating to Stock Appreciation Rights issued with respect to Tangible Equity Units | (gg) |
10.2 | Employment Agreement, dated as of September 25, 2012, by and among the Registrant, Pacific Trust Bank and Beach Business Bank and Robert M. Franko | (i) |
10.2A | Mutual Termination and Release Letter Agreement, dated September 25, 2012, relating to Executive Employment Agreement, dated June 1, 2003, between Doctors’ Bancorp, predecessor-in-interest to Beach Business Bank, and Robert M. Franko | (i) |
10.3 | Employment Agreement, dated as of August 22, 2012, by and among the Registrant and John C. Grosvenor | (i) |
10.3A | First Amendment to Employment Agreement, dated January 1, 2016, by and between the Registrant and John C. Grosvenor | 10.3A |
10.4 | Employment Agreement, dated as of November 5, 2012, by and among the Registrant and Ronald J. Nicolas, Jr. | (i) |
10.4A | Separation and Settlement Agreement, dated as of August 12, 2015, by and between the Registrant and Ronald J. Nicolas, Jr. | (qq) |
10.5 | Employment Agreement, dated as of September 17, 2013, by and among the Registrant and Hugh F. Boyle | (cc) |
10.5A | First Amendment to Employment Agreement, dated as of January 1, 2016 by and between Registrant and Hugh F. Boyle | 10.5A |
10.6 | Registrant’s 2011 Omnibus Incentive Plan | (j) |
10.7A | Form of Incentive Stock Option Agreement under 2011 Omnibus Incentive Plan | (m) |
10.7B | Form of Non-Qualified Stock Option Agreement under 2011 Omnibus Incentive Plan | (m) |
10.7C | Form of Restricted Stock Agreement Under 2011 Omnibus Incentive Plan | (m) |
10.8 | Registrant’s 2003 Stock Option and Incentive Plan | (k) |
192
10.9 | Registrant’s 2003 Recognition and Retention Plan | (k) |
10.10 | Small Business Lending Fund-Securities Purchase Agreement, dated August 30, 2011, between the Registrant and the Secretary of the United States Treasury | (f) |
10.11 | Management Services Agreement, dated as of December 27, 2012, by and between CS Financial, Inc. and Pacific Trust Bank | (n) |
10.12 | Employment Agreement, dated as of May 13, 2013, by and among Pacific Trust Bank and Jeffrey T. Seabold | (z) |
10.12A | Amended and Restated Employment Agreement, effective as of April 1, 2015, by and among Banc of California, National Association, and Jeffrey T. Seabold | (kk) |
10.12B | First Amendment to Amended and Restated Employment Agreement, dated effective as of January 1, 2016, by between Banc of California, National Association and Jeffrey T. Seabold | 10.12B |
10.13 | Registrant’s 2013 Omnibus Stock Incentive Plan | (r) |
10.13A | Form of Incentive Stock Option Agreement under 2013 Omnibus Stock Incentive Plan | (s) |
10.13B | Form of Non-Qualified Stock Option Agreement under 2013 Omnibus Stock Incentive Plan | (s) |
10.13C | Form of Restricted Stock Agreement under 2013 Omnibus Stock Incentive Plan | (s) |
10.13D | Form of Restricted Stock Unit Agreement under 2013 Omnibus Stock Incentive Plan | (dd) |
10.13E | Form of Restricted Stock Unit Agreement for Employee Equity Ownership Program under 2013 Omnibus Stock Incentive Plan | (dd) |
10.13F | Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under 2013 Omnibus Stock Incentive Plan | (gg) |
10.13G | Form of Restricted Stock Agreement for Non-Employee Directors under 2013 Omnibus Stock Incentive Plan | (gg) |
10.13H | Form of Performance Unit Agreement under 2013 Omnibus Stock Incentive Plan | (kk) |
10.13I | Form of Performance-Based Incentive Stock Option Agreement under the 2013 Omnibus Stock Incentive Plan | (kk) |
10.13J | Form of Performance-Based Non-Qualified Stock Option Agreement under the 2013 Omnibus Stock Incentive Plan | (kk) |
10.13K | Form of Performance-Based Restricted Stock Agreement under the 2013 Omnibus Stock Incentive Plan. | (kk) |
10.14 | Agreement to Assume Liabilities and to Acquire Assets of Branch Banking Offices, dated as of May 31, 2013, between Pacific Trust Bank and AmericanWest Bank | (t) |
10.15 | Common Stock Share Exchange Agreement, dated as of May 29, 2013, by and between the Registrant and TCW Shared Opportunity Fund V, L.P. | (u) |
10.15A | Assignment and Assumption Agreement, dated as of December 10, 2014, by and among Crescent Special Situations Fund (Investor Group), L.P., Crescent Special Situations Fund (Legacy V), L.P., TCW Shared Opportunity Fund V, L.P. and the Registrant. | (jj) |
10.16 | Purchase and Sale Agreement and Escrow Instructions, dated as of July 24, 2013, by and between the Registrant and Memorial Health Services | (v) |
10.17 | Assumption Agreement, dated as of July 1, 2013, by and between the Registrant and The Private Bank of California | (w) |
10.18 | Securities Purchase Agreement, dated as of April 22, 2014, by and between the Registrant and OCM BOCA Investor, LLC | (aa) |
10.18A | Acknowledgment and Amendment to Securities Purchase Agreement, dated as of October 28, 2014 by and between Banc of California, Inc. and OCM BOCA Investor, LLC. | (hh) |
10.19 | Securities Purchase Agreement, dated as of October 30, 2014, by and among the Registrant, Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel L.P., Patriot Financial Partners II, L.P., and Patriot Financial Partners Parallel II, L.P. | (hh) |
10.20 | Purchase and Sale Agreement and Escrow Instructions, dated as of May 19, 2015, by and between Banc of California, N.A. and VF Outdoor, Inc. | (nn) |
10.21 | Amendment to Purchase and Sale Agreement and Escrow Instructions, dated as of May 19, 2015, by and between Banc of California, N.A. and VF Outdoor, Inc. | (oo) |
10.22 | Employment Agreement, dated as of July 29, 2015, by and among the Registrant and James J. McKinney | (pp) |
193
10.23 | Agreement of Purchase and Sale, dated as of October 2, 2015, by and between The Realty Associates Fund IX, L.P. and Banc of California, National Association | (ii) |
10.24 | Employment Agreement, dated as of January 6, 2014, by and among Banc of California, National Association and J. Francisco A. Turner | 10.24 |
10.25 | Form Director and Executive Officer Indemnification Agreement | 10.25 |
11.0 | Statement regarding computation of per share earnings | (ss) |
12.0 | Statement regarding ratio of earnings to combined fixed charges | 12.0 |
18.0 | Letter regarding change in accounting principles | None |
21.0 | Subsidiaries of the Registrant | 21.0 |
22.0 | Published report regarding matters submitted to vote of security holders | None |
23.0 | Consent of KPMG LLP | 23.0 |
24.0 | Power of Attorney | (tt) |
31.1 | Rule 13a-14(a) Certification (Chief Executive Officer) | 31.1 |
31.2 | Rule 13a-14(a) Certification (Chief Financial Officer) | 31.2 |
32.0 | Rule 13a-14(b) and 18 U.S.C. 1350 Certification | 32.0 |
101.0 | The following financial statements and footnotes from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements. | 101.0 |
(a) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on June 9, 2011 and incorporated herein by reference. |
(a)(1) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 1, 2011 and incorporated herein by reference. |
(a)(2) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 28, 2012 and incorporated herein by reference. |
(a)(3) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 2, 2012 and incorporated herein by reference. |
(a)(4) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on August 2, 2012 and incorporated herein by reference. |
(b) | Filed as Appendix A to the proxy statement/prospectus included in the Registrant’s Registration Statement on Form S-4 filed on November 1, 2011 and incorporated herein by reference. |
(c) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on August 27, 2012 and incorporated herein by reference. |
(d) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 filed on March 28, 2002 and incorporated herein by reference. |
(e) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on March 4, 2011 and incorporated herein by reference. |
(f) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on August 30, 2011 and incorporated herein by reference. |
(g) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K/A filed on November 16, 2010 and incorporated herein by reference. |
(h) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on May 12, 2011 and incorporated herein by reference. |
(i) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference. |
(j) | Filed as an appendix to the Registrant’s definitive proxy statement filed on April 25, 2011 and incorporated herein by reference. |
(k) | Filed as an appendix to the Registrant’s definitive proxy statement filed on March 21, 2003 and incorporated herein by reference. |
(l) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 23, 2012 and incorporated herein by reference. |
(m) | Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference. |
(n) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on January 3, 2013 and incorporated herein by reference. |
(o) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on June 12, 2013 and incorporated herein by reference. |
(p) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 3, 2013 and incorporated herein by reference. |
(q) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 17, 2013 and incorporated herein by reference. |
(r) | Filed as an appendix to the Registrant’s definitive proxy statement filed on June 11, 2013 and incorporated herein by reference. |
(s) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 filed on July 31, 2013 and incorporated herein by reference. |
(t) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on June 3, 2013 and incorporated herein by reference. |
(u) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on June 4, 2013 and incorporated herein by reference. |
(v) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 30, 2013 and incorporated herein by reference. |
(w) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 3, 2013 and incorporated herein by reference. |
(x) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on May 6, 2013 and incorporated herein by reference. |
(y) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 31, 2013 and incorporated herein by reference. |
194
(z) | Field as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and incorporated herein by reference. |
(aa) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 25, 2014 and incorporated herein by reference. |
(bb) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on November 22, 2013 and incorporated herein by reference. |
(cc) | Field as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference. |
(dd) | Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference. |
(ee) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on May 21, 2014 and incorporated herein by reference. |
(ff) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and incorporated herein by reference. |
(gg) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference. |
(hh) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 30, 2014 and incorporated herein by reference. |
(ii) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on October 2, 2015 and incorporated herein by reference. |
(jj) | Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. |
(kk) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference. |
(ll) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on April 6, 2015 and incorporated herein by reference. |
(mm) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on April 8, 2015 and incorporated herein by reference. |
(nn) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on May 28, 2015 and incorporated herein by reference. |
(oo) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on June 16, 2015 and incorporated herein by reference. |
(pp) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and incorporated herein by reference. |
(qq) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on August 12, 2015 and incorporated herein by reference. |
(rr) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on February 8, 2016 and incorporated herein by reference. |
(ss) | Refer to Note 20 of the Notes to Consolidated Financial Statements contained in Item 8 of this report. |
(tt) | Included on signatory pages of this report. |
195
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, and hereunto duly authorized.
BANC OF CALIFORNIA, INC. | ||
Date: February 18, 2016 | /s/ Steven A. Sugarman | |
Steven A. Sugarman | ||
Chairman/President/Chief Executive Officer | ||
(Duly Authorized Representative) | ||
POWER OF ATTORNEY
We, the undersigned officers and directors of BANC OF CALIFORNIA, INC., hereby severally and individually constitute and appoint Steven A. Sugarman and James J. McKinney, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 18, 2016 | /s/ Steven A. Sugarman | |
Steven A. Sugarman | ||
Chairman/President/Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: February 18, 2016 | /s/ James J. McKinney | |
James J. McKinney | ||
Executive Vice President/Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
Date: February 18, 2016 | /s/ Chad T. Brownstein | |
Chad T. Brownstein, Director | ||
Date: February 18, 2016 | /s/ Robert Sznewajs | |
Robert Sznewajs, Director | ||
Date: February 18, 2016 | /s/ Eric Holoman | |
Eric Holoman, Director | ||
Date: February 18, 2016 | /s/ Jeffrey Karish | |
Jeffrey Karish, Director | ||
Date: February 18, 2016 | /s/ Jonah Schnel | |
Jonah Schnel, Director | ||
Date: February 18, 2016 | /s/ Halle Benett | |
Halle Benett, Director | ||
196