Edgar Filing: BANC OF CALIFORNIA, INC.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

BANC-3.31.2015-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2015



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

For the transition period from to

Commission file number 001-35522

BANC OF CALIFORNIA, INC.

(Exact name of registrant as specified in its charter)

Maryland

(State or other jurisdiction of

incorporation or organization)

04-3639825

(IRS Employer Identification No.)

18500 Von Karman Ave, Suite 1100, Irvine, California

(Address of principal executive offices)

92612

(Zip Code)

(855) 361-2262

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

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

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

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

As of April 30, 2015, the registrant had outstanding 35,610,318 shares of voting common stock and 11 shares of Class B non-voting common stock.

BANC OF CALIFORNIA, INC.

FORM 10-Q QUARTERLY REPORT

March 31, 2015

Table of Contents



		Page

Part I – Financial Information		5

Item 1 –	Financial Information	5

Item 2 –	Management’s Discussion and Analysis of Financial Condition and Result of Operations	66

Item 3 –	Quantitative and Qualitative Disclosures About Market Risk	103

Item 4 –	Controls and Procedures	105

Part II – Other Information		106

Item 1 –	Legal Proceedings	106

Item 1A –	Risk Factors	106

Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds	106

Item 3 –	Defaults Upon Senior Securities	106

Item 4 –	Mine Safety Disclosure	106

Item 5 –	Other Information	106

Item 6 –	Exhibits	107

Signatures		111

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.	the ability of the Company to successfully integrate the branches its wholly owned bank subsidiary, Banc of California, N.A. (the Bank), acquired from Banco Popular North America (BPNA or Banco Popular);

ii.

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


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


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

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;


vi.	the quality and composition of our securities portfolio;


vii.	changes in general economic conditions, either nationally or in our market areas, or financial markets;


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


ix.	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;


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


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


xii.	our ability to control operating costs and expenses;


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


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


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


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


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


xviii.	increased competitive pressures among financial services companies;


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


xx.	adverse changes in the securities markets;


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


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


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


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


xxv.	war or terrorist activities; and

xxvi.

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” in our Annual Report on Form 10-K for the year ended December 31, 2014.

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.

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

(Unaudited)



	March 31, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	14,004		$	14,364
Interest-bearing deposits	251,398			216,835
Total cash and cash equivalents	265,402			231,199
Time deposits in financial institutions	1,900			1,900
Securities available for sale, at fair value	393,586			345,695
Loans held for sale, carried at fair value	355,746			278,749
Loans held for sale, carried at lower of cost or fair value	885,196			908,341
Loans and leases receivable, net of allowance of $29,345 at March 31, 2015 and $29,480 at December 31, 2014	3,904,370			3,919,642
Federal Home Loan Bank and other bank stock, at cost	39,844			42,241
Servicing rights, net ($21,165 and $13,135 measured at fair value at March 31, 2015 and December 31, 2014, respectively)	21,829			13,619
Servicing rights held for sale, carried at fair value	—			5,947
Accrued interest receivable	14,970			15,113
Other real estate owned, net	498			423
Premises, equipment, and capital leases, net	78,285			78,685
Bank-owned life insurance	19,154			19,095
Goodwill	31,591			31,591
Affordable housing fund investment	4,577			4,737
Deferred income tax	14,157			16,373
Other intangible assets, net	23,708			25,252
Other assets	42,542			32,695
Total Assets	$	6,097,355		$	5,971,297
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing deposits	$	749,129		$	662,295
Interest-bearing deposits	4,112,863			4,009,536
Total deposits	4,861,992			4,671,831
Advances from Federal Home Loan Bank	545,000			633,000
Other borrowings	15,000			—
Notes payable, net	92,668			93,569
Reserve for loss on repurchased loans	8,432			8,303
Income taxes payable	4,488			56
Accrued expenses and other liabilities	55,615			61,223
Total liabilities	5,583,195			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 March 31, 2015 and December 31, 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 March 31, 2015 and December 31, 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 March 31, 2015 and December 31, 2014	37,943			37,943
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 36,702,222 shares issued and 35,063,199 shares outstanding at March 31, 2015; 35,829,763 shares issued and 34,190,740 shares outstanding at December 31, 2014	367			358
Class B non-voting non-convertible common stock, $0.01 par value per share, 3,136,156 shares authorized; 11 shares issued and outstanding at March 31, 2015 and 609,195 shares issued and outstanding at December 31, 2014	—			6
Additional paid-in capital	424,636			422,910
Retained earnings	36,880			29,589
Treasury stock, at cost (1,639,023 shares of common stock at March 31, 2015 and December 31, 2014)	(29,798		)	(29,798		)
Accumulated other comprehensive income, net	2,198			373
Total stockholders’ equity	514,160			503,315
Total liabilities and stockholders’ equity	$	6,097,355		$	5,971,297

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)



	Three Months Ended March 31,
	2015			2014
Interest and dividend income
Loans, including fees	$	58,155		$	41,530
Securities	1,927			924
Dividends and other interest-earning assets	698			322
Total interest and dividend income	60,780			42,776
Interest expense
Deposits	6,361			5,735
Federal Home Loan Bank advances	353			100
Notes payable and other interest-bearing liabilities	2,069			1,756
Total interest expense	8,783			7,591
Net interest income	51,997			35,185
Provision for loan and lease losses	—			1,929
Net interest income after provision for loan and lease losses	51,997			33,256
Noninterest income
Customer service fees	910			253
Loan servicing (loss) income	(442		)	1,253
Income from bank owned life insurance	59			47
Net (loss) gain on sale of securities available for sale	(2		)	507
Net gain on sale of loans	4,472			2,603
Net revenue on mortgage banking activities	37,933			17,324
Advisory service fees	1,197			1,110
Loan brokerage income	1,141			1,911
Other income	712			270
Total noninterest income	45,980			25,278
Noninterest expense
Salaries and employee benefits	49,771			34,681
Occupancy and equipment	9,771			8,537
Professional fees	3,435			3,865
Data processing	1,835			791
Advertising	912			1,075
Regulatory assessments	1,354			941
Loan servicing and foreclosure expense	319			175
Valuation allowance for other real estate owned	22			—
Net gain on sales of other real estate owned	(17		)	—
Provision for loan repurchases	845			571
Amortization of intangible assets	1,544			939
All other expense	6,088			6,019
Total noninterest expense	75,879			57,594
Income before income taxes	22,098			940
Income tax expense	9,524			191
Net income	12,574			749
Preferred stock dividends	910			910
Net income (loss) available to common stockholders	$	11,664		$	(161	)
Basic earnings (loss) per common share	$	0.30		$	(0.01	)
Diluted earnings (loss) per common share	$	0.29		$	(0.01	)
Basic earnings (loss) per class B common share	$	0.30		$	(0.01	)
Diluted earnings (loss) per class B common share	$	0.30		$	(0.01	)

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)



	Three Months Ended March 31,
	2015			2014
Net income	$	12,574		$	749
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities:
Unrealized gain arising during the period	1,928			1,023
Reclassification adjustment for loss (gain) included in net income	1			(507		)
Total change in unrealized gain on available for sale securities	1,929			516
Unrealized loss on cash flow hedge:
Unrealized loss arising during the period	(104		)	(217		)
Total change in unrealized loss on cash flow hedge	(104		)	(217		)
Total other comprehensive income	1,825			299
Comprehensive income	$	14,399		$	1,048

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERSS’ EQUITY

(Amounts in thousands)

(Unaudited)



	Preferred Stock						Common Stock					Additional Paid- in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)
	Series A		Series B		Series C		Voting		Class B Non-Voting			Additional Paid- in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
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	—		—		—		—		—			—			749			—			—			749
Other comprehensive income, net	—		—		—		—		—			—			—			—			299			299
Issuance of common stock	—		—		—		1		—			999			—			—			—			1,000
Capital raise cost	—		—		—		—		—			(50		)	—			—			—			(50		)
Repurchase of 7,562 shares of common stock	—		—		—		—		—			—			—			(97		)	—			(97		)
Exercise of stock options	—		—		—		—		—			757			—			—			—			757
Issuance of stock awards from treasury stock	—		—		—		—		—			(282		)	—			282			—			—
Shares purchased under the Dividend Reinvestment Plan	—		—		—		—		—			208			(202		)	—			—			6
Stock option compensation expense	—		—		—		—		—			99			—			—			—			99
Restricted stock compensation expense	—		—		—		—		—			824			—			—			—			824
Dividends declared ($0.12 per common share)	—		—		—		—		—			—			(2,228		)	—			—			(2,228		)
Preferred stock dividends	—		—		—		—		—			—			(910		)	—			—			(910		)
Balance at March 31, 2014	$	31,934	$	10,000	$	37,943	$	211	$	6		$	258,861		$	14,229		$	(27,726	)	$	(301	)	$	325,157
Balance at December 31, 2014	$	31,934	$	10,000	$	37,943	$	358	$	6		$	422,910		$	29,589		$	(29,798	)	$	373		$	503,315
Comprehensive income:
Net income	—		—		—		—		—			—			12,574			—			—			12,574
Other comprehensive income, net	—		—		—		—		—			—			—			—			1,825			1,825
Issuance of common stock	—		—		—		9		(6		)	(3		)	—			—			—			—
Stock option compensation expense	—		—		—		—		—			123			—			—			—			123
Restricted stock compensation expense	—		—		—		—		—			1,528			—			—			—			1,528
Stock appreciation right expense	—		—		—		—		—			42			—			—			—			42
Restricted stock surrendered due to employee tax liability	—		—		—		—		—			(84		)	—			—			—			(84		)
Tax effect of dividends paid on unvested equity awards	—		—		—		—		—			68			—			—			—			68
Shares purchased under the Dividend Reinvestment Plan	—		—		—		—		—			52			(179		)	—			—			(127		)
Stock appreciation right dividend equivalents	—		—		—		—		—			—			(173		)	—			—			(173		)
Dividends declared ($0.12 per common share)	—		—		—		—		—			—			(4,021		)	—			—			(4,021		)
Preferred stock dividends	—		—		—		—		—			—			(910		)	—			—			(910		)
Balance at March 31, 2015	$	31,934	$	10,000	$	37,943	$	367	$	—		$	424,636		$	36,880		$	(29,798	)	$	2,198		$	514,160

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net income	$	12,574		$	749
Adjustments to reconcile net income to net cash used in operating activities
Provision for loan and lease losses	—			1,929
Provision for loan repurchases	845			571
Net revenue on mortgage banking activities	(37,933		)	(17,324		)
Net gain on sale of loans	(4,472		)	(2,603		)
Net amortization (accretion) of securities	224			229
Depreciation on premises and equipment	2,182			1,562
Amortization of intangibles	1,544			939
Amortization of debt issuance cost	245			96
Stock option compensation expense	123			99
Stock award compensation expense	1,528			824
Stock appreciation right expense	42			—
Bank owned life insurance income	(59		)	(47		)
Net loss (gain) on sale of securities available for sale	2			(507		)
Gain on sale of other real estate owned	(17		)	—
Deferred income tax expense	1,191			—
Loss on sale or disposal of property and equipment	—			119
Increase in valuation allowances on other real estate owned	22			—
Repurchase of mortgage loans	(2,663		)	—
Originations of loans held for sale from mortgage banking	(1,007,720		)	(511,451		)
Originations of other loans held for sale	(257,460		)	(373,002		)
Proceeds from sales of and principal collected on loans held for sale from mortgage banking	948,675			548,284
Proceeds from sales of and principal collected on other loans held for sale	282,091			93,407
Change in deferred loan (costs) fees	56			46
Amortization of premiums and discounts on purchased loans	(6,811		)	(10,436		)
Change in accrued interest receivable	143			(96		)
Change in other assets	(1,905		)	3,187
Change in accrued interest payable and other liabilities	(2,436		)	(4,502		)
Net cash used in operating activities	(69,989		)	(267,927		)
Cash flows from investing activities:
Proceeds from sales of securities available for sale	174			50,973
Proceeds from maturities and calls of securities available for sale	—			2,754
Proceeds from principal repayments of securities available for sale	20,093			10,741
Purchases of securities available for sale	(65,051		)	(1,177		)
Net cash used in acquisitions	—			(1,000		)
Loan originations and principal collections, net	11,316			(16,352		)
Purchase of loans	(16,901		)	(2,093		)
Redemption of Federal Home Loan Bank stocks	6,810			—
Purchase of Federal Home Loan Bank and other bank stocks	(4,413		)	(4,201		)
Proceeds from sale of loans held for investment	39,642			51,813
Net change in time deposits in financial institutions	—			101
Proceeds from sale of other real estate owned	454			—
Proceeds from sale of mortgage servicing rights	3,089			—
Additions to premises and equipment	(1,782		)	(2,853		)
Payments of capital lease obligations	(229		)	(232		)
Net cash (used in) provided by investing activities	(6,798		)	88,474
Cash flows from financing activities:
Net increase in deposits	190,161			190,502
Net increase (decrease) in short-term Federal Home Loan Bank advances	(223,000		)	155,000
Repayment of long-term Federal Home Loan Bank advances	(15,000		)	(10,000		)
Proceeds from long-term Federal Home Loan Bank advances	150,000			—
Net increase in other borrowings	15,000			70,000
Capital raise cost	—			(50		)
Payment of amortizing debt	(1,146		)	—
Purchase of treasury stock	—			(97		)
Proceeds from exercise of stock options	—			757
Dividend equivalents paid on stock appreciation rights	(171		)	—
Dividends paid on preferred stock	(910		)	(910		)
Dividends paid on common stock	(3,944		)	(2,228		)
Net cash provided by financing activities	110,990			402,974
Net change in cash and cash equivalents	34,203			223,521
Cash and cash equivalents at beginning of period	231,199			110,118
Cash and cash equivalents at end of period	$	265,402		$	333,639
Supplemental cash flow information
Interest paid on deposits and borrowed funds	$	8,754		$	7,609
Income taxes paid	3,944			—
Income taxes refunds received	17			—
Supplemental disclosure of noncash activities
Transfer from loans to other real estate owned, net	534			150
Transfer of loans receivable to loans held for sale, net of transfer of $0 and $963 from allowance for loan and lease losses for the three months ended March 31, 2015 and 2014, respectively	—			59,137
Transfer of loans held for sale to loans receivable	—			6,984
Equipment acquired under capital leases	34			989

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

BANC OF CALIFORNIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2015

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying unaudited consolidated financial statements include the accounts of Banc of California, Inc. (collectively, with its consolidated subsidiaries, the Company, we, us and our) and its wholly owned subsidiaries, Banc of California, National Association (the Bank), The Palisades Group, LLC (the Palisades Group), and PTB Property Holdings, LLC (PTB), as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014. Significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries.

Nature of Operations: 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 and PTB.

Banc of California, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board or FRB) and the Bank operates under a national bank charter issued by the Office of the Comptroller of the Currency (the OCC), its primary regulator. The Bank is a member of the Federal Home Loan Bank (FHLB) system, and maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation (FDIC). The Bank offers a variety of financial services to meet the banking and financial needs of the communities we serve, with operations conducted through 38 banking offices, serving San Diego, Los Angeles, and Orange counties, California and 61 loan production offices in California, Arizona, Oregon, Virginia, Indiana, Maryland, Colorado, Idaho, and Nevada as of March 31, 2015. The Palisades Group provides financial advisory and asset management services and PTB manages and disposes of other real estate owned properties.

The accounting and reporting polices of the Company are based upon U.S. generally accepted accounting principles (GAAP) and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies or in its estimates and assumptions from those disclosed in its 2014 Annual Report on Form 10-K, the adoption of new accounting pronouncements and other authoritative guidance that became effective for the Company on or after January 1, 2015. Refer to Accounting Pronouncements below for discussion of accounting pronouncements adopted in 2015.

Basis of Presentation: The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by GAAP are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2014 filed by the Company with the Securities and Exchange Commission. The December 31, 2014 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission, but does not include all of the disclosures required by GAAP.

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

The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan and lease losses, reserve for loss on repurchased loans, servicing rights, 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.

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 March 31, 2015, the Company had a net deferred tax asset of $14.2 million, net of a $0 valuation allowance and as of December 31, 2014, the Company had a net deferred tax asset of $16.4 million, net of a $0 valuation allowance (See further discussion in Note 11, Income Taxes).

Allowance for Loan and Lease Losses: During the year ended December 31, 2014, the Company enhanced the 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 the 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 the 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.

Accounting Pronouncements: During the three months ended March 31, 2015, the following pronouncements applicable to the Company were issued or became effective:

In January 2014, the FASB issued guidance within Accounting Standards Update (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 in the three months ended March 31, 2014 decreased by $8 thousand due to the change in accounting principle.

The following tables present the effect of the retrospective application of this change in accounting principle on the Company’s Consolidated Statements of Financial Condition, Consolidated Statements of Operations and Consolidated Statement of Cash Flows for the respective periods:

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)



	Three Months Ended March 31, 2014
	As Previously Reported			Effect of Change in Accounting Principle			As Adjusted
	(In thousands, except per share data)
Interest and dividend income	$	42,776		$	—		$	42,776
Interest expense	7,591			—			7,591
Net interest income	35,185			—			35,185
Provision for loan and lease losses	1,929			—			1,929
Noninterest income	25,278			—			25,278
Noninterest expense	57,768			(174		)	57,594
Income before income taxes	766			174			940
Income tax expense	9			182			191
Net income	757			(8		)	749
Preferred stock dividends	910			—			910
Net loss available for common stockholders	$	(153	)	$	(8	)	$	(161	)
Basic earnings for total common stockholders	$	(0.01	)	$	—		$	(0.01	)
Diluted earnings (loss) per total common share	$	(0.01	)	$	—		$	(0.01	)

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31, 2014
	As Previously Reported			Effect of Change in Accounting Principle			As Adjusted
	(In thousands)
Cash flow from operating activities
Net income	$	757		$	(8	)	$	749
Total adjustment in net income	(268,684		)	8			(268,676		)
Net cash used in operating activities	(267,927		)	—			(267,927		)
Cash flow from investing activities
Net cash provided by investing activities	88,474			—			88,474
Cash flow from financing activities
Net cash provided by financing activities	402,974			—			402,974
Net increase in cash and cash equivalents	223,521			—			223,521
Cash and cash equivalents at beginning of period	110,118						110,118
Cash and cash equivalents at end of period	$	333,639		$	—		$	333,639

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 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. The ASU becomes effective for Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The ASU changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. In addition, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The ASU also requires disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the 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 June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

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 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.

NOTE 2 – BUSINESS COMBINATIONS

The Company completed the following acquisitions between January 1, 2014 and March 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
	November 8, 2014		January 31, 2014
	(In thousands)
Assets acquired:
Cash and due from banks	$	5,532	$	—
Loans and leases receivable	1,072,449		—
Premises, equipment, and capital leases	9,002		—
Goodwill	—		2,239
Other intangible assets	15,777		761
Other assets	2,301		—
Total assets acquired	$	1,105,061	$	3,000
Liabilities assumed:
Deposits	$	1,076,614	$	—
Other liabilities	506		1,000
Total liabilities assumed	1,077,120		1,000
Total consideration paid	$	27,941	$	2,000
Summary of consideration
Cash paid	$	27,941	$	1,000
Common stock issued	—		1,000
Earn-out liabilities	—		1,000

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. 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 part of the BPNA Branch Acquisition as well as the fair value adjustments to the net assets acquired as of the acquisition date:



	November 8, 2014
	(In thousands)
Total Consideration				$	27,941
Net assets pre-acquisition				24,027
Fair value adjustments
Loans receivable	$	(12,165	)
Core deposit intangibles	15,777
Certificates of deposit purchase premium	(916		)
Premises and equipment	1,218
Total fair value adjustments				3,914
Fair value of net assets acquired				27,941
Net fair value in excess of consideration				$	—

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.

Core deposit intangible asset of $15.8 million recognized as part of the BPNA Branch Acquisition was 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 was calculated as the difference between the prevailing alternative cost of funds and the estimated actual cost of the core deposits. The core deposit intangible is being amortized over its estimated useful life of 10 years using the sum of years-digits amortization methodology.

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. These included technology costs related to system conversion and professional fees.

Certain valuations related to acquired loans receivable, premises and equipment, and other intangible assets and assumed deposits are still under review by management and considered preliminary and could differ significantly when management's review is finalized.

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 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.

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.

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 market, 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, and Agency MBS. 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 March 31, 2015 and December 31, 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. Therefore, loans held for sale subjected to recurring fair value adjustments are classified as Level 2. The fair value includes the servicing value of the loans as well as any accrued interest.

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

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

are classified as Level 3. At March 31, 2015 and December 31, 2014, $0 and $5.9 million of the mortgage servicing rights were valued based on a market bid that settled subsequent to each period end, which is included as Level 3, respectively.

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)
March 31, 2015
Assets
Available for sale securities:
SBA loan pools securities	$	1,635	$	—	$	1,635	$	—
U.S. government-sponsored entities and agency securities	2,001		—		2,001		—
Private label residential mortgage-backed securities	2,615		—		2,615		—
Agency mortgage-backed securities	387,335		—		387,335		—
Loans held for sale	355,746		—		355,746		—
Derivative assets ⁽¹⁾	13,555		—		13,555		—
Mortgage servicing rights ⁽²⁾	21,165		—		—		21,165
Liabilities
Derivative liabilities ⁽³⁾	4,552		—		4,552		—
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	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

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



	Three Months Ended March 31,
	2015			2014
	(In thousands)
Mortgage servicing rights
Balance at beginning of period	$	19,082		$	13,535
Transfers out of Level 3 ⁽¹⁾	—			(9,185		)
Total gains or losses (realized/unrealized):
Included in earnings—realized	—			—
Included in earnings—fair value adjustment	(528		)	315
Included in other comprehensive income	—			—
Amortization of premium (discount)	—			—
Additions	10,192			4,326
Sales and settlements	(7,581		)	(584		)
Balance at end of period	$	21,165		$	8,407


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

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



	Fair Value (In thousands)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
March 31, 2015
Mortgage servicing rights	$	21,165	Discounted cash flow	Discount rate	9.00% to 13.20% (9.84%)
				Prepayment rate	5.15% to 34.28% (12.98%)
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%)
March 31, 2014
Mortgage servicing rights	$	8,407	Discounted cash flow	Discount rate	10.00% to 17.89% (10.81%)
				Prepayment rate	3.92% to 34.54% (13.17%)

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights include the discount rate and prepayment rate. 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.

Assets and Liabilities Measured on a Non-Recurring Basis

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. The Company obtains fair values from a third party independent valuation service provider. Loans held for sale are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost and are classified as Level 2.

SBA Servicing Assets: SBA servicing assets represents 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 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 $22 thousand and $0 for the three months ended March 31, 2015 and 2014, respectively.

Alternative Investments (Affordable Housing Fund Investment & SBIC): 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 $487 thousand and $7.2 million for Affordable House Fund Investment and SBIC at March 31, 2015, respectively.

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)
March 31, 2015
Assets
Impaired loans:
Single family residential mortgage	$	5,065	$	—	$	—	$	5,065
Commercial and industrial	4,134		—		—		4,134
Other real estate owned:
Single family residential	498		—		—		498
December 31, 2014
Assets
Impaired loans:
Single family residential mortgage	$	6,206	$	—	$	—	$	6,206
Commercial and industrial	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:



	Three Months Ended March 31,
	2015			2014
	(In thousands)
Impaired loans:
Single family residential mortgage	$	—		$	(151	)
Other consumer	—			(2		)
Other real estate owned:
Single family residential	(5		)	—

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)
March 31, 2015
Financial assets
Cash and cash equivalents	$	265,402	$	265,402	$	—	$	—	$	265,402
Time deposits in financial institutions	1,900		1,900		—		—		1,900
Securities available for sale	393,586		—		393,586		—		393,586
FHLB and other bank stock	39,844		—		39,844		—		39,844
Loans held for sale	1,240,942		—		1,249,370		—		1,249,370
Loans and leases receivable, net of allowance	3,904,370		—		—		4,008,008		4,008,008
Accrued interest receivable	14,970		14,970		—		—		14,970
Derivative assets	13,555		—		13,555		—		13,555
Financial liabilities
Deposits	4,861,992		—		—		4,719,344		4,719,344
Advances from Federal Home Loan Bank	545,000		—		545,195		—		545,195
Other borrowings	15,000		—		15,000		—		15,000
Notes payable	92,668		86,750		12,102		—		98,852
Derivative liabilities	4,552		—		4,552		—		4,552
Accrued interest payable	2,016		2,016		—		—		2,016
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
Notes payable	93,569		87,428		13,360		—		100,788
Derivative liabilities	3,235		—		3,235		—		3,235
Accrued interest payable	2,044		2,044		—		—		2,044

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.

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 offering 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 and other borrowings: The fair values of advances from FHLB and other borrowings 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).

Accrued interest payable: The carrying amount of accrued interest payable approximates its fair value (Level 1).

NOTE 4 – SECURITIES AVAILABLE FOR SALE

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



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
March 31, 2015
Available for sale
SBA loan pool securities	$	1,600	$	35	$	—		$	1,635
U.S. government-sponsored entities and agency securities	1,943		58		—			2,001
Private label residential mortgage-backed securities	2,607		11		(3		)	2,615
Agency mortgage-backed securities	383,287		4,224		(176		)	387,335
Total securities available for sale	$	389,437	$	4,328	$	(179	)	$	393,586
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 available for sale investment securities portfolio by expected maturity. In the case of mortgage-backed securities and SBA loan pool securities, expected maturities may differ from contractual maturities because borrowers generally have the right to call or prepay obligations with or without call or prepayment penalties. For that reason, mortgage-backed securities and SBA loan pool securities are not included in the maturity categories.



	March 31, 2015
	Amortized Cost		Fair Value
	(In thousands)
Maturity:
Within one year	$	—	$	—
One to five years	1,943		2,001
Five to ten years	—		—
Greater than ten years	—		—
SBA loan pool, private label residential mortgage-backed and agency mortgage-backed securities	387,494