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

Document

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 June 30, 2016



¨	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 July 28, 2016, the registrant had outstanding 49,563,203 shares of voting common stock and 161,841 shares of Class B non-voting common stock.

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BANC OF CALIFORNIA, INC.

FORM 10-Q QUARTERLY REPORT

June 30, 2016

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		Page

Part I – Financial Information		5

Item 1 –	Financial Statements	5

Item 2 –	Management’s Discussion and Analysis of Financial Condition and Result of Operations	65

Item 3 –	Quantitative and Qualitative Disclosures About Market Risk	95

Item 4 –	Controls and Procedures	97

Part II – Other Information		98

Item 1 –	Legal Proceedings	98

Item 1A –	Risk Factors	98

Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds	99

Item 3 –	Defaults Upon Senior Securities	99

Item 4 –	Mine Safety Disclosures	99

Item 5 –	Other Information	99

Item 6 –	Exhibits	101

Signatures		106

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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:

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 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, any of which 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 from our growth 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;


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 or their application to our business, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

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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” in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

(Unaudited)



	June 30, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	15,598		$	15,051
Interest-bearing deposits	256,134			141,073
Total cash and cash equivalents	271,732			156,124
Time deposits in financial institutions	1,500			1,500
Securities available-for-sale, at fair value	1,302,785			833,596
Securities held-to-maturity, at amortized cost (fair value of $980,871 and $932,285 at June 30, 2016 and December 31, 2015, respectively)	962,282			962,203
Loans held-for-sale, carried at fair value	418,517			379,155
Loans held-for-sale, carried at lower of cost or fair value	475,265			289,686
Loans and leases receivable, net of allowance for loan and lease losses of $37,483 and $35,533 at June 30, 2016 and December 31, 2015, respectively	6,198,632			5,148,861
Federal Home Loan Bank and other bank stock, at cost	81,115			59,069
Servicing rights, net ($52,567 and $49,939 measured at fair value at June 30, 2016 and December 31, 2015, respectively)	53,650			50,727
Other real estate owned, net	429			1,097
Premises, equipment, and capital leases, net	120,755			111,539
Bank-owned life insurance	101,314			100,171
Goodwill	39,244			39,244
Deferred income tax	7,270			11,341
Income tax receivable	5,904			604
Other intangible assets, net	16,514			19,158
Receivable on unsettled securities sales	10,049			—
Other assets	90,705			71,480
Total Assets	$	10,157,662		$	8,235,555
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing deposits	$	1,093,686		$	1,121,124
Interest-bearing deposits	6,835,270			5,181,961
Total deposits	7,928,956			6,303,085
Advances from Federal Home Loan Bank	930,000			930,000
Long term debt, net	177,743			261,876
Reserve for loss on repurchased loans	10,438			9,700
Income taxes payable	—			1,241
Due on unsettled securities purchases	89,500			—
Accrued expenses and other liabilities	81,141			77,248
Total liabilities	9,217,778			7,583,150
Commitments and contingent liabilities
Preferred stock	269,071			190,750
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 51,077,371 shares issued and 49,478,348 shares outstanding at June 30, 2016; 39,601,290 shares issued and 38,002,267 shares outstanding at December 31, 2015	510			395
Class B non-voting non-convertible common stock, $0.01 par value per share, 3,136,156 shares authorized; 161,841 shares issued and outstanding at June 30, 2016 and 37,355 shares issued and outstanding December 31, 2015	2			1
Additional paid-in capital	608,303			429,790
Retained earnings	88,385			63,534
Treasury stock, at cost (1,599,023 shares at June 30, 2016 and at December 31, 2015)	(29,070		)	(29,070		)
Accumulated other comprehensive income (loss), net	2,683			(2,995		)
Total stockholders’ equity	939,884			652,405
Total liabilities and stockholders’ equity	$	10,157,662		$	8,235,555

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2016			2015		2016			2015
Interest and dividend income
Loans and leases, including fees	$	73,743		$	60,699	$	140,887		$	118,854
Securities	19,393			2,119		35,440			4,046
Dividends and other interest-earning assets	1,504			2,026		2,553			2,724
Total interest and dividend income	94,640			64,844		178,880			125,624
Interest expense
Deposits	8,385			6,165		16,492			12,526
Federal Home Loan Bank advances	1,966			290		3,228			643
Securities sold under repurchase agreements	389			—		549			—
Long term debt and other interest-bearing liabilities	2,863			4,285		7,157			6,354
Total interest expense	13,603			10,740		27,426			19,523
Net interest income	81,037			54,104		151,454			106,101
Provision for loan and lease losses	1,769			5,474		2,090			5,474
Net interest income after provision for loan and lease losses	79,268			48,630		149,364			100,627
Noninterest income
Customer service fees	1,173			1,072		2,021			1,982
Loan servicing income (loss)	(3,347		)	2,007		(8,635		)	1,565
Income from bank owned life insurance	580			47		1,143			106
Net gain (loss) on sale of securities available-for-sale	12,824			—		29,613			(2		)
Net gain on sale of loans	2,147			7,838		4,342			12,310
Net revenue on mortgage banking activities	43,795			39,403		77,479			77,336
Advisory service fees	510			4,435		1,507			5,632
Loan brokerage income	759			661		1,633			1,802
Gain on sale of building	—			9,919		—			9,919
Gain on sale of a subsidiary	3,694			—		3,694			—
Other income	3,469			1,311		4,766			2,023
Total noninterest income	65,604			66,693		117,563			112,673
Noninterest expense
Salaries and employee benefits	61,022			56,120		118,205			105,891
Occupancy and equipment	11,943			10,325		23,683			20,096
Professional fees	6,763			6,689		12,975			10,124
Outside service fees	3,186			1,729		6,249			3,056
Data processing	2,838			2,075		5,032			3,910
Advertising	2,406			1,252		4,233			2,164
Regulatory assessments	1,879			1,376		3,615			2,730
Provision (reversal) for loan repurchases	(141		)	999		(500		)	1,844
Amortization of intangible assets	1,322			1,545		2,644			3,089
Impairment on intangible assets	—			258		—			258
All other expense	8,857			5,552		13,039			10,637
Total noninterest expense	100,075			87,920		189,175			163,799
Income before income taxes	44,797			27,403		77,752			49,501
Income tax expense	18,269			11,479		31,537			21,003
Net income	26,528			15,924		46,215			28,498
Preferred stock dividends	5,114			2,843		9,689			3,753
Net income available to common stockholders	$	21,414		$	13,081	$	36,526		$	24,745
Basic earnings per common share	$	0.44		$	0.33	$	0.81		$	0.62
Diluted earnings per common share	$	0.43		$	0.32	$	0.79		$	0.62
Basic earnings per class B common share	$	0.44		$	0.33	$	0.81		$	0.62
Diluted earnings per class B common share	$	0.44		$	0.33	$	0.81		$	0.62

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Net income	$	26,528		$	15,924		$	46,215		$	28,498
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available-for-sale:
Unrealized gain (loss) arising during the period	7,442			(1,982		)	23,280			(54		)
Reclassification adjustment for (gain) loss included in net income	(7,594		)	—			(17,602		)	1
Total change in unrealized gain (loss) on securities available-for-sale	(152		)	(1,982		)	5,678			(53		)
Unrealized gain on cash flow hedge:
Unrealized gain arising during the period	—			336			—			232
Reclassification adjustment for gain included in net income	—			—			—			—
Total change in unrealized gain on cash flow hedge	—			336			—			232
Total change in other comprehensive income	(152		)	(1,646		)	5,678			179
Comprehensive income	$	26,376		$	14,278		$	51,893		$	28,677

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)



	Preferred Stock			Common Stock						Additional Paid- in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)
	Preferred Stock			Voting			Class B Non-Voting			Additional Paid- in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2014	$	79,877		$	358		$	6		$	422,910		$	29,589		$	(29,798	)	$	373		$	503,315
Comprehensive income:
Net income	—			—			—			—			28,498			—			—			28,498
Other comprehensive income, net	—			—			—			—			—			—			179			179
Issuance of common stock	—			15			(6		)	(9		)	—			—			—			—
Issuance of preferred stock	110,873			—			—			—			—			—			—			110,873
Exercise of stock options	—			—			—			(263		)	—			728			—			465
Stock option compensation expense	—			—			—			247			—			—			—			247
Restricted stock compensation expense	—			—			—			4,038			—			—			—			4,038
Stock appreciation right expense	—			—			—			72			—			—			—			72
Restricted stock surrendered due to employee tax liability	—			(1		)	—			(1,441		)	—			—			—			(1,442		)
Tax effect from stock compensation plan	—			—			—			135			—			—			—			135
Shares purchased under the Dividend Reinvestment Plan	—			—			—			95			(95		)	—			—			—
Stock appreciation right dividend equivalents	—			—			—			—			(346		)	—			—			(346		)
Dividends declared ($0.24 per common share)	—			—			—			—			(8,399		)	—			—			(8,399		)
Preferred stock dividends	—			—			—			—			(3,753		)	—			—			(3,753		)
Balance at June 30, 2015	$	190,750		$	372		$	—		$	425,784		$	45,494		$	(29,070	)	$	552		$	633,882
Balance at December 31, 2015	$	190,750		$	395		$	1		$	429,790		$	63,534		$	(29,070	)	$	(2,995	)	$	652,405
Comprehensive income:
Net income	—			—			—			—			46,215			—			—			46,215
Other comprehensive income, net	—			—			—			—			—			—			5,678			5,678
Issuance of common stock	—			117			1			174,976			—			—			—			175,094
Issuance of preferred stock	120,255			—			—			—			—			—			—			120,255
Repayment of preferred stock	(41,934		)	—			—			—			(66		)	—			—			(42,000		)
Cash settlement of stock options	—			—			—			(359		)	—			—			—			(359		)
Stock option compensation expense	—			—			—			297			—			—			—			297
Restricted stock compensation expense	—			—			—			5,394			—			—			—			5,394
Stock appreciation right expense	—			—			—			15			—			—			—			15
Restricted stock surrendered due to employee tax liability	—			(2		)	—			(3,386		)	—			—			—			(3,388		)
Tax effect from stock compensation plan	—			—			—			1,468			—			—			—			1,468
Shares purchased under the Dividend Reinvestment Plan	—			—			—			108			(113		)	—			—			(5		)
Stock appreciation right dividend equivalents	—			—			—			—			(372		)	—			—			(372		)
Dividends declared ($0.24 per common share)	—			—			—			—			(11,124		)	—			—			(11,124		)
Preferred stock dividends	—			—			—			—			(9,689		)	—			—			(9,689		)
Balance at June 30, 2016	$	269,071		$	510		$	2		$	608,303		$	88,385		$	(29,070	)	$	2,683		$	939,884

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

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BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Six Months Ended
	June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	46,215		$	28,498
Adjustments to reconcile net income to net cash used in operating activities
Provision for loan and lease losses	2,090			5,474
Provision (reversal) for loan repurchases	(500		)	1,844
Net revenue on mortgage banking activities	(77,479		)	(77,336		)
Net gain on sale of loans	(4,342		)	(12,310		)
Net amortization of premiums and discounts on securities	709			618
Depreciation on premises and equipment	5,664			4,374
Amortization of intangibles	2,644			3,089
Amortization of debt issuance cost	363			546
Stock option compensation expense	297			247
Stock award compensation expense	5,394			4,038
Stock appreciation right expense	15			72
Bank owned life insurance income	(1,143		)	(106		)
Impairment on intangible assets	—			258
Debt redemption costs	2,737			—
Net (gain) loss on sale of securities available-for-sale	(29,613		)	2
Gain on sale of building	—			(9,919		)
Gain on sale of a subsidiary	(3,694		)	—
Gain on sale of mortgage servicing rights	(2		)	—
Gain on sale of other real estate owned	(44		)	(23		)
Deferred income tax expense	1,456			4,293
Loss on sale or disposal of property and equipment	5			—
Loss from change of fair value and runoff on mortgage servicing rights	18,717			3,134
Increase in valuation allowances on other real estate owned	9			22
Repurchase of mortgage loans	(18,648		)	(6,908		)
Originations of loans held-for-sale from mortgage banking	(2,301,125		)	(2,276,490		)
Originations of other loans held-for-sale	(383,841		)	(381,767		)
Proceeds from sales of and principal collected on loans held-for-sale from mortgage banking	2,348,055			2,195,821
Proceeds from sales of and principal collected on other loans held-for-sale	206,085			452,535
Change in deferred loan fees	(379		)	(808		)
Net amortization of premiums and discounts on purchased loans	(21,096		)	(13,967		)
Change in accrued interest receivable	(5,295		)	238
Change in other assets	(30,153		)	(1,515		)
Change in accrued interest payable and other liabilities	922			10,868
Net cash used in operating activities	(235,977		)	(65,178		)
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	3,551,453			174
Proceeds from maturities and calls of securities available-for-sale	—			687
Proceeds from principal repayments of securities available-for-sale	47,167			54,096
Purchases of securities available-for-sale	(3,949,717		)	(197,258		)
Purchases of securities held-to-maturity	—			(53,419		)
Proceeds from sale of a subsidiary	259			—
Loan and lease originations and principal collections, net	(939,348		)	(173,082		)
Purchase of loans and leases	(156,258		)	(131,532		)
Redemption of Federal Home Loan Bank stock	5,690			16,913
Purchase of Federal Home Loan Bank and other bank stock	(27,774		)	(8,859		)
Proceeds from sale of loans	62,927			313,746
Proceeds from sale of other real estate owned	1,007			908
Proceeds from sale of mortgage servicing rights	5			3,089
Proceeds from sale of premises and equipment	—			52,250
Additions to premises and equipment	(15,458		)	(3,815		)
Payments of capital lease obligations	(473		)	(469		)
Net cash used in investing activities	(1,420,520		)	(126,571		)
Cash flows from financing activities:
Net increase in deposits	1,625,871			433,179
Net increase (decrease) in short-term Federal Home Loan Bank advances	50,000			(318,000		)
Repayment of long-term Federal Home Loan Bank advances	(50,000		)	(115,000		)
Proceeds from long-term Federal Home Loan Bank advances	—			150,000
Net proceeds from issuance of common stock	175,094			—
Net proceeds from issuance of preferred stock	120,255			110,873
Redemption of preferred stock	(42,000		)	—
Net proceeds from issuance of long term debt	—			172,304
Payment of amortizing debt	(2,492		)	(2,314		)
Redemption of long term debt	(84,750		)	—
Proceeds from exercise of stock options	—			465
Cash settlement of stock options	(359		)	—
Dividend equivalents paid on stock appreciation rights	(370		)	(343		)
Dividends paid on preferred stock	(9,405		)	(3,385		)
Dividends paid on common stock	(9,739		)	(8,239		)
Net cash provided by financing activities	1,772,105			419,540
Net change in cash and cash equivalents	115,608			227,791
Cash and cash equivalents at beginning of period	156,124			231,199
Cash and cash equivalents at end of period	$	271,732		$	458,990
Supplemental cash flow information
Interest paid on deposits and borrowed funds	$	26,457		$	21,686
Income taxes paid	36,404			19,502
Income taxes refunds received	1			158
Supplemental disclosure of non-cash activities
Transfer from loans to other real estate owned, net	304			534
Transfer of loans held-for-investment to loans held-for-sale, net of transfer of $0 from allowance for loan and lease losses for the six months ended June 30, 2016 and 2015	61,410			43,667
Transfer of loans held-for-sale to loans held-for-investment	7,155			476,901
Equipment acquired under capital leases	16			34
Non-cash consideration received from sale of a subsidiary	2,896			—
Receivable on unsettled securities sales	10,049			—
Due on unsettled securities purchases	89,500			—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

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BANC OF CALIFORNIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2016

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 subsidiary, Banc of California, National Association (the Bank) as of June 30, 2016 and December 31, 2015 and for the three and six months ended June 30, 2016 and 2015. On January 22, 2016, PTB Property Holding, LLC (PTB), which was a subsidiary of the Company, was dissolved. PTB was a California limited liability company originally formed in 2014, with the Company as its sole managing member, to hold real estate, cash, and fixed income securities transferred to it by the Company. The Company also sold another subsidiary, The Palisades Group, on May 5, 2016. The Company originally acquired the Palisades Group, a Delaware limited liability company, on September 10, 2013, which provided financial advisory services with respect to the purchase, sale, and management of single family residential (SFR) mortgage loans. Significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its then 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 Irvine, California and incorporated under the laws of Maryland. Banc of California, Inc.'s assets primarily consist of the outstanding stock of the Bank.

Banc of California, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System (FRB) and the Bank operates under a national bank charter issued by the Office of the Comptroller of the Currency (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 had 38 banking offices, serving Orange, Los Angeles, San Diego, and Santa Barbara counties in California, and 63 loan production offices, in California, Arizona, Oregon, Virginia, Colorado, Idaho, and Nevada, as of June 30, 2016.

The accounting and reporting policies 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 from those disclosed in its 2015 Annual Report on Form 10-K. Refer to Accounting Pronouncements below for discussion of accounting pronouncements adopted in 2016.

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, 2015 filed by the Company with the SEC. The December 31, 2015 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, 2015 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 condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.

The results of operations for the three and six months ended June 30, 2016 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 (ALLL), reserve for loss on repurchased loans, servicing rights, the valuation of goodwill and other intangible assets, derivative instruments, purchased credit impaired (PCI) loan discount accretion, and the fair value measurement of financial instruments are particularly subject to change and any 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 basis of assets and liabilities, computed using enacted tax rates. A valuation allowance is established when necessary to reduce deferred tax assets when it is more-likely-than-not that a portion or all of the net deferred tax assets will not be realized. As of June 30, 2016, the Company had a net deferred tax asset of $7.3 million, with no valuation

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allowance and as of December 31, 2015, the Company had a net deferred tax asset of $11.3 million, with no valuation allowance. See Note 11 for additional information.

Affordable Housing Fund Investment: The Company elected the proportional amortization method retrospectively for all periods presented during the quarter ended March 31, 2015 in accordance with Accounting Standard Update (ASU) 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects," which amends FASB Accounting Standards Codification (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). Under the proportional amortization method, the Company 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).

Earnings Per Common Share: Net income allocated to common stockholders is computed by subtracting income allocated to participating securities, participating securities dividends and preferred stock dividends from net income. Participating securities are instruments granted in share-based payment transactions that contain rights to receive nonforfeitable dividends or dividend equivalents, which includes the Stock Appreciation Rights to the extent they confer dividend equivalent rights, as described under “Stock Appreciation Rights” in Note 14. Basic earnings per common share (EPS) is computed by dividing net income allocated to common stockholders by the weighted average number of common shares outstanding, including the minimum number of shares issuable under purchase contracts relating to the tangible equity units, as described under "Tangible Equity Units" in Note 15. 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. For information regarding the tangible equity units, see Notes 10 and 15.

Adopted Accounting Pronouncements: During the six months ended June 30, 2016, the following pronouncements applicable to the Company were adopted:

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. Adoption of the new guidance has not had a significant impact on the Company's consolidated financial statements.

Accounting Pronouncements Not Yet Adopted: The following are recently issued accounting pronouncements applicable to the Company that have not yet been adopted:

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This Update amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; it simplifies the impairment assessment of equity investments by requiring a qualitative assessment; it eliminates the requirement for public business entities to disclose methods and assumptions for financial instruments measured at amortized cost on the statement of financial position; it requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability; it requires separate presentation of financial assets and liabilities by measurement category; and certain other requirements. ASU 2016-01 becomes effective for interim and annual periods beginning on or after December 15, 2017. Early application is permitted by public business entities, as of the beginning of the fiscal year of adoption. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases.” This Update requires lessees to recognize the assets and liabilities that arise from leases, as well as defines classification criteria for distinguishing between financing leases and operating leases. For financing leases, lessees are required to recognize a right-of-use asset and a lease liability in the statement of financial position, recognize interest on the lease liability in the statement of comprehensive income, and classify the principal portion of the lease liability within financing activities and payments of interest within operating activities in the statement of cash flows. For operating leases, lessees are required to recognize a right-of-use asset and a lease liability in the statement of financial position, recognize a single lease cost calculated so that the cost of the lease is allocated over lease term on a straight line basis, and classify all cash payments as operating activities in the statement of cash flows. Lessor accounting is largely unchanged, but does align the transfer of control principle for a sale in Topic 606 to leases. For example, whether a lease is similar to a sale

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of the underlying asset depends on whether the lessee, in effect, obtains control of the underlying asset as a result of the lease. For public business entities, the amendments to this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606).” This Update amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 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. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. The amendments in ASU 2016-08 affect the guidance in ASU 2014-09, which is effective for public business entities in annual and interim reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718).” This Update was issued as a part of the FASB’s simplification initiative, and intends to improve the accounting for share-based payment transactions. The ASU changes several aspects of the accounting for share-based payment award transactions, including accounting for excess tax benefits and deficiencies, income statement recognition, cash flow classification, forfeitures, and tax withholding requirements. ASU 2016-09 is effective for public business entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim or annual period provided the entire ASU is adopted. If an entity early adopts the ASU in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606).” This Update amends the guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies identifying performance obligations and the licensing implementation guidance. This Update better articulates the principle for determining whether promises to transfer goods or services are separately identifiable, which is utilized in identifying performance obligations in a contract. Additionally, the amendments in this Update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in ASU 2016-10 affect the guidance in ASU 2014-09, which is effective for public business entities in annual and interim reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients.” This Update amends the guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies the collectability criterion, accounting policy elections, noncash consideration, satisfied and unsatisfied performance obligations, completed contracts, and disclosures. The amendments in ASU 2016-12 affect the guidance in ASU 2014-09, which is effective for public business entities in annual and interim reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." This Update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public business entities that are SEC filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact that adoption of this guidance may have on its consolidated financial statements.

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NOTE 2 – ASSET SALE AND SUBSIDIARY SALE TRANSACTIONS

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 for the three and six months ended June 30, 2015.

Branch Sale

On September 25, 2015, the Company completed a branch sale transaction to Americas United Bank, a California banking corporation (AUB). In the transaction, the Company 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 for the three months ended September 30, 2015.

The Company also sold certain loans totaling $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.

The Palisades Group Sale

On May 5, 2016, the Company completed the sale of all of its membership interests in The Palisades Group, a wholly owned subsidiary of the Company, to an entity wholly owned by Stephen Kirch and Jack Macdowell who serve as the Chief Executive Officer and Chief Investment Officer of The Palisades Group. At the time of sale, The Palisades Group had total assets and net assets of $4.5 million and $(540) thousand, respectively. As part of the sale, The Palisades Group issued to the Company a 10 percent, $5.0 million note due May 5, 2018 (the Note) and agreed to pay the Company an additional contingent amount of up to $15.0 million from future earnings. The Note is payable in cash, or a combination of certain unpaid cash due at maturity and issuance of a 19.9 percent interest in The Palisades Group. Subsequent to the sale, The Palisades Group has been providing advisory services to the Company over certain loan portfolio assets. The Company recognized a gain on sale of $3.7 million from this transaction.

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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 primarily 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 Small Business Administration (SBA) loan pool securities, U.S. government sponsored entity (GSE) and agency securities, private label residential mortgage-backed securities, agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, 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 June 30, 2016 or December 31, 2015.

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 London Interbank Offering Rate (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 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

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derivatives is based on a discounted cash 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.

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)
June 30, 2016
Assets
Securities available-for-sale:
SBA loan pools securities	$	1,416	$	—	$	1,416	$	—
Private label residential mortgage-backed securities	1,453		—		1,453		—
Corporate bonds	60,113		—		60,113		—
Collateralized loan obligation	942,706		—		942,706		—
Commercial mortgage-backed securities	11,398		—		11,398		—
Agency mortgage-backed securities	285,699		—		285,699		—
Loans held-for-sale	418,517		—		384,266		34,251
Derivative assets ⁽¹⁾	15,679		—		15,679		—
Mortgage servicing rights ⁽²⁾	52,567		—		—		52,567
Liabilities
Derivative liabilities ⁽³⁾	8,413		—		8,413		—
December 31, 2015
Assets
Securities available-for-sale:
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	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		—


(1)	Included in Other Assets on the Consolidated Statements of Financial Condition


(2)	Included in Servicing Rights, Net on the Consolidated Statements of Financial Condition


(3)	Included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition

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



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(In thousands)
Mortgage servicing rights
Balance at beginning of period	$	48,370		$	21,165		$	49,939		$	19,082
Total gains or losses (realized/unrealized):
Included in earnings—fair value adjustment	(5,831		)	1,538			(14,032		)	1,010
Additions	12,766			13,699			21,348			23,891
Sales, paydowns, and other	(2,738		)	(2,204		)	(4,688		)	(9,785		)
Balance at end of period	$	52,567		$	34,198		$	52,567		$	34,198
Loans Repurchased from Ginnie Mae Loan Pools
Balance at beginning of period	$	26,580		$	—		$	18,291		$	—
Total gains or losses (realized/unrealized):
Included in earnings—fair value adjustment	95			—			142			—
Additions	11,277			—			21,103			—
Sales, settlements, and other	(3,701		)	—			(5,285		)	—
Balance at end of period	$	34,251		$	—		$	34,251		$	—

Loans repurchased from Ginnie Mae Loan pools had aggregated unpaid principal balances of $34.8 million and $18.6 million at June 30, 2016 and December 31, 2015, respectively.

The following table presents, as of the dates indicated, quantitative information about Level 3 fair value measurements on a recurring basis, other than 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 June 30, 2016 and December 31, 2015:



	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	($ in thousands)
June 30, 2016
Mortgage servicing rights	$	52,567	Discounted cash flow	Discount rate	9.00% to 14.50% (10.29%)
				Prepayment rate	6.01% to 40.52% (17.01%)
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%)

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 June 30, 2016 and December 31, 2015 included an expected loss rate of 1.63 percent and 1.85 percent, respectively. 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.

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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 June 30, 2016.

Impaired Loans and Leases: The fair value of impaired loans and leases with specific allocations of the ALLL 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 $9 thousand and $0 for the three months ended June 30, 2016 and 2015, respectively, and $9 thousand and $22 thousand for the six months ended June 30, 2016 and 2015, respectively, in All Other Expense in the Consolidated Statements of Operations.

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 $349 thousand, $13.2 million, and $2.0 million for Affordable House Fund Investment, SBIC, and Other Investments at June 30, 2016, respectively. The Company recorded no impairment on these investments.

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



			Fair Value Measurement Level
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
June 30, 2016
Assets
Impaired loans:
Single family residential mortgage	$	10,431	$	—	$	—	$	10,431
Other real estate owned:
Single family residential	429		—		—		429
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

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					Six Months Ended
	June 30,					June 30,
	2016			2015		2016			2015
	(In thousands)
Impaired loans:
Single family residential mortgage	$	(149	)	$	—	$	(149	)	$	—
Other real estate owned:
Single family residential	(2		)	6		35			1

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



	Carrying		Fair Value Measurement Level
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
June 30, 2016
Financial assets
Cash and cash equivalents	$	271,732	$	271,732	$	—	$	—	$	271,732
Time deposits in financial institutions	1,500		1,500		—		—		1,500
Securities available-for-sale	1,302,785		—		1,302,785		—		1,302,785
Securities held-to-maturity	962,282		—		980,871		—		980,871
Federal Home Loan Bank and other bank stock	81,115		—		81,115		—		81,115
Loans held-for-sale	893,782		—		869,459		34,251		903,710
Loans and leases receivable, net of ALLL	6,198,632		—		—		6,370,177		6,370,177
Accrued interest receivable	28,095		28,095		—		—		28,095
Derivative assets	15,679		—		15,679		—		15,679
Financial liabilities
Deposits	7,928,956		—		—		7,818,605		7,818,605
Advances from Federal Home Loan Bank	930,000		—		931,168		—		931,168
Long term debt	177,743		—		181,933		—		181,933
Derivative liabilities	8,413		—		8,413		—		8,413
Accrued interest payable	3,265		3,265		—		—		3,265
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
Federal Home Loan Bank 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 ALLL	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

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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).

Federal Home Loan Bank and Other Bank Stock: Federal Home Loan Bank 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).

Loans and Leases Receivable, Net of ALLL: 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. 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).

Securities sold under repurchase agreements: The carrying amount of securities sold under repurchase agreements approximates fair value due to the short-term nature of these instruments as all outstanding securities sold under repurchase agreements have original maturities of 30 days or less (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).

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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)
June 30, 2016
Securities held-to-maturity:
Corporate bonds	$	239,675	$	10,101	$	(572	)	$	249,204
Collateralized loan obligations	416,322		—		(6,692		)	409,630
Commercial mortgage-backed securities	306,285		16,026		(274		)	322,037
Total securities held-to-maturity	$	962,282	$	26,127	$	(7,538	)	$	980,871
Securities available-for-sale:
SBA loan pool securities	$	1,363	$	53	$	—		$	1,416
Private label residential mortgage-backed securities	1,452		4		(3		)	1,453
Corporate bonds	60,167		285		(339		)	60,113
Collateralized loan obligation	939,215		4,430		(939		)	942,706
Commercial mortgage-backed securities	11,186		212		—			11,398
Agency mortgage-backed securities	284,813		1,081		(195		)	285,699
Total securities available-for-sale	$	1,298,196	$	6,065	$	(1,476	)	$	1,302,785
December 31, 2015
Securities 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
Securities available-for-sale:
SBA loan pool securities	$	1,485	$	19