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

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

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

For the transition period from to

Commission file number 001-35522

BANC OF CALIFORNIA, INC.

(Exact name of registrant as specified in its charter)

Maryland

(State or other jurisdiction of

incorporation or organization)

04-3639825

(IRS Employer Identification No.)

18500 Von Karman Ave, Suite 1100, Irvine, California

(Address of principal executive offices)

92612

(Zip Code)

(949) 236-5211

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

BANC OF CALIFORNIA, INC.

FORM 10-Q QUARTERLY REPORT

June 30, 2014

Table of Contents


		Page

Part I – Financial Information			5

Item 1 –	Financial Information		5

Item 2 –	Management’s Discussion and Analysis of Financial Condition and Result of Operations		54

Item 3 –	Quantitative and Qualitative Disclosures About Market Risk		83

Item 4 –	Controls and Procedures		85

Part II – Other Information			85

Item 1 –	Legal Proceedings		85

Item 1A –	Risk Factors		86

Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds		88

Item 3 –	Defaults Upon Senior Securities		89

Item 4 –	Mine Safety Disclosure		89

Item 5 –	Other Information		89

Item 6 –	Exhibits		90

Signatures			94

Forward-looking Statements

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

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

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

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

iii.

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

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

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

vi.

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

vii.	the quality and composition of our securities portfolio;

viii.

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

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

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

xi.

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

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

xiii.

our ability to control operating costs and expenses;

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

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

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

xvii.

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

xviii.

costs and effects of litigation, including settlements and judgments;

xix.	increased competitive pressures among financial services companies;

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

xxi.	adverse changes in the securities markets;

xxii.

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

xxiii.

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

xxiv.

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

xxv.

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

xxvi.

war or terrorist activities; and

xxvii.

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

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

PART I – FINANCIAL INFORMATION

ITEM 1 –

FINANCIAL STATEMENTS

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

(Unaudited)


	June 30, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	5,764		$	4,937
Interest-bearing deposits		252,287			105,181

Total cash and cash equivalents		258,051			110,118
Time deposits in financial institutions		2,145			1,846
Securities available for sale, at fair value		233,013			170,022
Loans held for sale, carried at fair value		244,778			192,613
Loans held for sale, carried at lower of cost or fair value		850,963			524,120
Loans and leases receivable, net of allowance of $22,627 at June 30, 2014 and $18,805 at December 31, 2013		2,579,586			2,427,306
Federal Home Loan Bank and other bank stock, at cost		34,392			22,600
Servicing rights, net ($9,816 measured at fair value at June 30, 2014 and $13,535 at December 31, 2013)		10,191			13,883
Accrued interest receivable		11,170			10,866
Other real estate owned, net		605			—
Premises, equipment, and capital leases, net		67,457			66,260
Bank-owned life insurance		18,984			18,881
Goodwill		32,150			30,143
Affordable housing fund investment		5,293			5,628
Deferred income tax		2,546			—
Income tax receivable		—			2,995
Other intangible assets, net		10,959			12,152
Other assets		24,239			18,590

Total Assets	$	4,386,522		$	3,628,023

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	408,404		$	429,158
Interest-bearing deposits		2,938,951			2,489,486

Total deposits		3,347,355			2,918,644
Advances from Federal Home Loan Bank		450,000			250,000
Notes payable, net		96,481			82,320
Reserve for loss on repurchased loans		6,174			5,427
Income taxes payable		31			—
Accrued expenses and other liabilities		47,163			46,763

Total liabilities		3,947,204			3,303,154
Commitments and contingent liabilities
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized:
Series A, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 32,000 shares authorized, 32,000 shares issued and outstanding at June 30, 2014 and December 31, 2013		31,934			31,934
Series B, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 10,000 shares authorized, 10,000 shares issued and outstanding at June 30, 2014 and December 31, 2013		10,000			10,000
Series C, 8.00% non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 40,250 shares authorized, 40,250 shares issued and outstanding at June 30, 2014 and December 31, 2013		37,943			37,943
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 28,658,873 shares issued and 27,032,464 shares outstanding at June 30, 2014; 20,959,286 shares issued and 19,561,469 shares outstanding at December 31, 2013		287			210
Class B non-voting non-convertible Common stock, $.01 par value per share, 3,136,156 shares authorized; 596,018 shares issued and outstanding at June 30, 2014 and 584,674 shares issued and outstanding at December 31, 2013		6			6
Additional paid-in capital		369,530			256,306
Retained earnings		18,779			16,981
Treasury stock, at cost (1,626,409 shares at June 30, 2014 and 1,397,817 shares at December 31, 2013)		(29,652	)		(27,911	)
Accumulated other comprehensive income (loss), net		491			(600	)

Total shareholders’ equity		439,318			324,869

Total liabilities and shareholders’ equity	$	4,386,522		$	3,628,023

See accompanying notes to unaudited consolidated financial statements

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Interest and dividend income
Loans, including fees	$	42,077	$	26,153		$	83,607	$	44,690
Securities		993		369			1,917		867
Dividends and other interest-earning assets		564		219			886		352

Total interest and dividend income		43,634		26,741			86,410		45,909
Interest expense
Deposits		6,071		3,303			11,806		5,302
Federal Home Loan Bank advances		99		58			199		121
Notes payable and other interest-bearing liabilities		1,889		1,755			3,645		3,502

Total interest expense		8,059		5,116			15,650		8,925

Net interest income		35,575		21,625			70,760		36,984
Provision for loan and lease losses		2,108		1,918			4,037		4,086

Net interest income after provision for loan and lease losses		33,467		19,707			66,723		32,898
Noninterest income
Customer service fees		356		509			609		1,055
Loan servicing income		774		458			2,027		646
Income from bank owned life insurance		56		50			103		88
Net gain on sale of securities available for sale		15		1			522		309
Net gain on sale of loans		3,038		3,724			5,641		4,036
Net gain on mortgage banking activities		26,133		20,261			43,457		36,631
Other income		5,000		1,069			8,291		1,235

Total noninterest income		35,372		26,072			60,650		44,000
Noninterest expense
Salaries and employee benefits		39,130		25,311			73,811		44,391
Occupancy and equipment		7,425		3,630			15,962		6,823
Professional fees		3,528		2,947			7,393		5,244
Data processing		1,270		1,365			2,061		2,275
Advertising		710		890			1,785		1,412
Regulatory assessments		1,046		211			1,987		592
Loan servicing and foreclosure expense		175		148			350		352
Operating loss on equity investment		161		131			335		290
Valuation allowance for other real estate owned		—		—			—		79
Net (gain) loss on sales of other real estate owned		—		(37	)		—		(151	)
Provision for loan repurchases		330		732			901		988
Amortization of intangible assets		944		367			1,883		734
All other expense		5,746		3,899			11,765		6,123

Total noninterest expense		60,465		39,594			118,233		69,152

Income before income taxes		8,374		6,185			9,140		7,746
Income tax expense		253		1,822			262		2,454

Net income		8,121		4,363			8,878		5,292
Preferred stock dividends		910		—			1,820		288

Net income available to common shareholders	$	7,211	$	4,363		$	7,058	$	5,004

Basic earnings per common share	$	0.27	$	0.35			0.30	$	0.41
Diluted earnings per common share	$	0.27	$	0.35			0.30	$	0.41
Basic earnings per class B common share	$	0.27	$	0.35			0.30	$	0.41
Diluted earnings per class B common share	$	0.25	$	0.29			0.24	$	0.36

See accompanying notes to unaudited consolidated financial statements

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net income	$	8,121		$	4,363		$	8,878		$	5,292
Unrealized gain (loss) on available-for-sale securities:
Unrealized gain (loss) arising during the period, net of tax (expense) benefit of $0 and $0, respectively		1,099			(400	)		2,122			(300	)
Reclassification adjustment for gain included in net income, net of tax expense of $0 and $0, respectively		(15	)		(1	)		(522	)		(309	)

Total change in unrealized loss (gain) on available-for-sale securities		1,084			(401	)		1,600			(609	)
Unrealized loss on cash flow hedge
Unrealized loss arising during the period, net of tax (expense) benefit of $0 and $0, respectively		(292	)		—			(509	)		—

Total change in unrealized loss on cash flow hedge		(292	)		—			(509	)		—

Total other comprehensive income (loss), net of tax		792			(401	)		1,091			(609	)

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

See accompanying notes to unaudited consolidated financial statements

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)


	Preferred Stock						Common Stock					Additional Paid-			Retained			Treasury			Accumulated Other Comprehensive
	Series A		Series B		Series C		Class A		Class B			in Capital			Earnings			Stock			Income (Loss)			Total
Balance at December 31, 2012	$	31,934	$	—	$	—	$	120	$	11		$	154,563		$	26,550		$	(25,818	)	$	1,397		$	188,757
Comprehensive income (loss):
Net income		—		—		—		—		—			—			5,292			—			—			5,292
Other comprehensive income, net		—		—		—		—		—			—			—			—			(609	)		(609	)
Issuance of common stock		—		—		—		42		(6	)		43,450			—			—			—			43,486
Issuance of preferred stock		—		—		33,734		—		—			—			—			—			—			33,734
Purchase of 6,216 shares of treasury stocks		—		—		—		—		—			—			—			(69	)		—			(69	)
Issuance of stock awards from treasury stock		—		—		—		—		—			(1,799	)		—			1,799
Shares purchased under the Dividend Reinvestment Plan		—		—		—		—		—			186			(186	)		—			—			—
Stock option compensation expense		—		—		—		—		—			215			—			—			—			215
Restricted stock compensation expense		—		—		—		—		—			657			—			—			—			657
Dividends declared ($0.24 per common share)		—		—		—		—		—			—			(2,690	)		—			—			(2,690	)
Preferred stock dividends		—		—		—		—		—			—			(288	)		—			—			(288	)

Balance at June 30, 2013	$	31,934	$	—	$	33,734	$	162	$	5		$	197,272		$	28,678		$	(24,088	)	$	788		$	268,485

Balance at December 31, 2013	$	31,934	$	10,000	$	37,943	$	210	$	6		$	256,306		$	16,981		$	(27,911	)	$	(600	)	$	324,869
Comprehensive income:																									—
Net income		—		—		—		—		—			—			8,878			—			—			8,878
Other comprehensive income, net		—		—		—		—		—			—			—			—			1,091			1,091
Issuance of common stock		—		—		—		77		—			55,397			—			—			—			55,474
Issuance of tangible equity units		—		—		—		—		—			51,720			—			—			—			51,720
Purchase of 10,888 shares of treasury stock		—		—		—		—		—			—			—			(134	)		—			(134	)
Reclassification adjustment for awards issued from treasury stock		—		—		—		—		—			1,926			—			(1,926	)		—			—
Exercise of stock options		—		—		—		—		—			757			—			—			—			757
Stock option compensation expense		—		—		—		—		—			156			—			—			—			156
Restricted stock compensation expense		—		—		—		—		—			2,663			—			—			—			2,663
Stock appreciation right expense		—		—		—		—		—			514			—			—			—			514
Issuance of stock awards from treasury stock		—		—		—		—		—			(319	)		—			319			—			—
Shares purchased under the Dividend Reinvestment Plan		—		—		—		—		—			410			28			—			—			438
Dividends declared ($0.24 per common share)		—		—		—		—		—			—			(5,288	)		—			—			(5,288	)
Preferred stock dividends		—		—		—		—		—			—			(1,820	)		—			—			(1,820	)

Balance at June 30, 2014	$	31,934	$	10,000	$	37,943	$	287	$	6		$	369,530		$	18,779		$	(29,652	)	$	491		$	439,318

See accompanying notes to unaudited consolidated financial statements

BANC OF CALIFORNIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	8,878		$	5,292
Adjustments to reconcile net income to net cash used in operating activities
Provision for loan losses		4,037			4,086
Provision for loan repurchases		901			988
Net gain on mortgage banking activities		(43,457	)		(36,631	)
Gain on sale of loans		(5,641	)		(4,036	)
Net amortization (accretion) of securities		345			576
Depreciation on premises and equipment		3,250			1,510
Amortization of intangibles		1,883			734
Amortization of debt issuance cost		239			192
Stock option compensation expense		156			215
Stock award compensation expense		2,663			657
Stock appreciation right expense		514			298
Bank owned life insurance income		(103	)		(88	)
Operating loss on equity investment		335			290
Net (gain) loss on sale of securities available for sale		(522	)		(309	)
Gain on sale of other real estate owned		—			(151	)
Loss (Gain) on sale or disposal of property and equipment		297			(2	)
Increase in valuation allowances on other real estate owned		—			79
Originations of loans held for sale from mortgage banking		(1,226,599	)		(867,640	)
Originations of other loans held for sale		(751,061	)		—
Proceeds from sales of and principal collected on loans held for sale from mortgage banking		1,215,423			752,478
Proceeds from sales of and principal collected on other loans held for sale		339,144			—
Change in deferred loan (costs) fees		617			(399	)
Amortization of premiums and discounts on purchased loans		(19,311	)		(8,001	)
Change in accrued interest receivable		(304	)		(2,885	)
Change in other assets		8,917			8,710
Change in accrued interest payable and other liabilities		(984	)		863

Net cash used in operating activities		(460,383	)		(143,174	)

Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		52,245			8,539
Proceeds from maturities and calls of securities available-for-sale		1,105			8,767
Proceeds from principal repayments of securities available-for-sale		16,843			45,130
Purchases of securities available-for-sale		(131,407	)		(48,626	)
Net cash used in acquisitions		(1,000	)		—
Loan originations and principal collections, net		(116,192	)		(144,707	)
Purchase of loans		(11,956	)		(374,878	)
Redemption of Federal Home Loan Bank stocks		—			25
Purchase of Federal Home Loan Bank and other bank stocks		(11,792	)		(2,021	)
Proceeds from sale of loans held for investment		73,398			155,209
Net change in time deposits in financial institutions		(299	)		2,438
Proceeds from sale of other real estate owned		48			3,474
Additions to premises and equipment		(5,355	)		(4,033	)
Payments of capital lease obligations		(504	)		(113	)

Net cash used in investing activities		(134,866	)		(350,796	)

Cash flows from financing activities:
Net increase in deposits		428,711			803,489
Net increase (decrease) in Federal Home Loan Bank advances		200,000			(30,000	)
Net proceeds from issuance of common stock		54,474			43,486
Net proceeds from issuance of preferred stock		—			33,734
Net proceeds from issuance of tangible equity units		65,642			—
Purchase of treasury stock		(134	)		(69	)
Proceeds from exercise of stock options		757			—
Dividends paid on preferred stock		(1,832	)		(288	)
Dividends paid on common stock		(4,436	)		(2,690	)

Net cash provided by financing activities		743,182			847,662

Net change in cash and cash equivalents		147,933			353,692
Cash and cash equivalents at beginning of period		110,118			108,643

Cash and cash equivalents at end of period	$	258,051		$	462,335

Supplemental cash flow information
Interest paid on deposits and borrowed funds	$	15,563		$	8,893
Income taxes paid		—			—
Income taxes refunds received		—			2,305
Supplemental disclosure of noncash activities
Transfer from loans to other real estate owned, net		653			—
Transfer of loans receivable to loans held for sale, net of transfer of $963 and $0 from allowance for loan and lease losses for the six months ended June 30, 2014 and 2013, respectively		62,057			10,358
Transfer of loans held for sale to loans receivable		94,837			—
Equipment acquired under capital leases		989			714

See accompanying notes to unaudited consolidated financial statements

BANC OF CALIFORNIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE 2 – BUSINESS COMBINATIONS AND BRANCH SALES

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


	Acquisition and Date Acquired
	Renovation Ready		CS Financial		The Palisades Group		Private Bank of California
	January 31, 2014		October 31, 2013		September 10, 2013		July 1, 2013
	(In thousands)
Assets acquired:
Cash and due from banks	$	—	$	482	$	900	$	33,752
Interest-bearing deposits		—		—		5		—
Securities available for sale		—		—		—		219,298
Loans held for sale		—		4,982		—		—
Loans and leases receivable		—		—		—		385,256
Premises, equipment, and capital leases		—		704		—		1,501
Income tax receivable		—		—		—		682
Goodwill		3,000		7,178		—		14,925
Other intangible assets		—		690		—		10,400
Other assets		—		608		364		6,578

Total assets acquired	$	3,000	$	14,644	$	1,269	$	672,392

Liabilities assumed:
Deposits	$	—	$	—	$	—	$	561,689
Advances from Federal Home Loan Bank		—		—		—		41,833
Other liabilities		1,000		6,722		1,219		2,481

Total liabilities assumed		1,000		6,722		1,219		606,003
SBLF preferred stock assumed		—		—		—		10,000

Total consideration paid	$	2,000	$	7,922	$	50	$	56,389

Summary of consideration
Cash paid	$	1,000	$	1,500	$	50	$	28,077
Common stock issued		1,000		1,964		—		28,282
Replacement awards		—		—		—		30
Noninterest-bearing note		—		3,150		—		—
Performance based equity		—		1,308		—		—
Earn-out liabilities		1,000		—		—		—

RenovationReady® Acquisition

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

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

CS Financial Acquisition

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

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

The Palisades Group, LLC, Acquisition

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

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

The Private Bank of California Acquisition

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

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

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

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

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

Pro Forma Information

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(In thousands, except per share data)
Net interest income	$	35,575	$	26,863	$	70,760	$	47,392
Provision for loan and lease losses		2,108		2,412		4,037		4,929
Noninterest income		35,372		34,348		60,650		58,958
Noninterest expense		60,465		50,851		118,233		90,276

Income before income taxes		8,374		7,948		9,140		11,145
Income tax expense		253		2,564		262		3,882

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

Basic earnings per total common share	$	0.27	$	0.36	$	0.30	$	0.47
Diluted earnings per total common share	$	0.27	$	0.35	$	0.30	$	0.47

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

Branch Sales

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

Pending Acquisition of Banco Popular’s California Branch Network

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

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

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

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

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

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

NOTE 3 – FAIR VALUES OF FINANCIAL INSTRUMENTS

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

•

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

•

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

•

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

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

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

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

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

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

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

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

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

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


			Fair Value Measurement Level
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level One)		Significant Other Observable Inputs (Level Two)		Significant Unobservable Inputs (Level Three)
	(In thousands)
June 30, 2014:
Assets
Available-for-sale securities:
SBA loan pools securities	$	1,755	$	—	$	1,755	$	—
U.S. government-sponsored entities and agency securities		1,970		—		1,970		—
Private label residential mortgage-backed securities		4,109		—		4,109		—
Agency mortgage-backed securities		225,179		—		225,179		—
Loans held for sale		244,778		—		244,778		—
Derivative assets ⁽¹⁾		7,937		—		7,937		—
Mortgage servicing rights ⁽²⁾		9,816		—		—		9,816
Liabilities
Derivative liabilities ⁽³⁾		3,991		—		3,991		—
December 31, 2013:
Assets
Available-for-sale securities:
SBA loan pools securities	$	1,736	$	—	$	1,736	$	—
U.S. government-sponsored entities and agency securities		1,920		—		1,920		—
Private label residential mortgage-backed securities		14,752		—		14,752		—
Agency mortgage-backed securities		151,614		—		151,614		—
Loans held for sale		192,613		—		192,613		—
Derivative assets ⁽¹⁾		5,493		—		5,493		—
Mortgage servicing rights ⁽²⁾		13,535		—		—		13,535
Liabilities
Derivative liabilities ⁽³⁾		—		—		—		—

⁽¹⁾

Included in other assets on the consolidated statements of financial condition

⁽²⁾

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

⁽³⁾

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

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


			Fair Value Measurement Level
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
June 30, 2014:
Assets
Impaired loans:
Single family residential mortgage	$	26,413	$	—	$	—	$	26,413
Commercial and industrial		4,507		—		—		4,507
Commercial real estate		3,148		—		—		3,148
Multi-family		1,651		—		—		1,651
Other consumer		211		—		—		211
SBA		6		—		—		6
Other real estate owned:
Single family residential		605		—		—		605
December 31, 2013:
Assets
Impaired loans:
Single family residential mortgage	$	12,814	$	—	$	8,769	$	4,045
Commercial real estate		3,868		—		105		3,763
Multi-family		1,972		—		—		1,972
Other consumer		249		—		216		33
Commercial and industrial		33		—		—		33
SBA		10		—		—		10

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

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


	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(In thousands)
Impaired loans:
Single family residential mortgage	$	(181	)	$	(308	)	$	(332	)	$	(432	)
Multi-family		—			(169	)		—			(465	)
Other consumer		—			—			(2	)		(2	)
Other real estate owned:
Single family residential		—			37			—			(33	)
Commercial real estate		—			—			—			105

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


	Three Months Ended									Six Months Ended
	Private Label Residential Mortgage Backed Securities			Mortgage Servicing Rights			Total			Private Label Residential Mortgage Backed Securities			Mortgage Servicing Rights			Total
	(In thousands)
June 30, 2014:
Balance at beginning of period	$	—		$	8,407		$	8,407		$	—		$	13,535		$	13,535
Transfers out of Level 3 ⁽¹⁾		—			—			—			—			(9,185	)		(9,185	)
Total gains or losses (realized/unrealized):
Included in earnings—realized		—			—			—			—			—			—
Included in earnings—fair value adjustment		—			(565	)		(565	)		—			(250	)		(250	)
Included in other comprehensive income		—			—			—			—			—			—
Amortization of premium (discount)		—			—			—			—			—			—
Additions		—			5,996			5,996			—			10,322			10,322
Sales and settlements		—			(4,022	)		(4,022	)		—			(4,606	)		(4,606	)

Balance at end of period	$	—		$	9,816		$	9,816		$	—		$	9,816		$	9,816

June 30, 2013:
Balance at beginning of period	$	1,919		$	2,579		$	4,498		$	2,214		$	1,739		$	3,953
Transfers out of Level 3 ⁽¹⁾		—			—			—			—			—			—
Total gains or losses (realized/unrealized):
Included in earnings—realized		—			—			—			—			—			—
Included in earnings—fair value adjustment		—			305			305			—			330			330
Included in other comprehensive income		4			—			4			3			—			3
Amortization of premium (discount)		—			—			—			—			—			—
Additions		—			1,852			1,852			—			2,762			2,762
Sales and settlements		(217	)		(116	)		(333	)		(511	)		(211	)		(722	)

Balance at end of period	$	1,706		$	4,620		$	6,326		$	1,706		$	4,620		$	6,326

(1)

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

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

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average)

June 30, 2014:

Mortgage servicing rights

9,816

Discounted cash flow

Discount rate

10.00% to 16.42% (10.92%)

Prepayment rate

4.34% to 36.13% (14.20%)

December 31, 2013:

Mortgage servicing rights

13,535

Discounted cash flow

Discount rate

10.00% to 17.94% (10.26%)

Prepayment rate

4.19% to 34.54% (9.85%)

June 30, 2013:

Mortgage servicing rights

4,620

Discounted cash flow

Discount rate

10.50% to 17.87% (10.59%)

Prepayment rate

6.04% to 36.08% (9.04%)

Private label residential mortgage backed securities

1,706

Discounted cash flow

Voluntary prepayment rate

1.37% to 4.92% (3.15%)

Collateral default rate

6.23% to 6.26% (6.25%)

Loss severity at default

55%

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

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

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


	Carrying		Fair Value Measurement Level
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
June 30, 2014:
Financial assets
Cash and cash equivalents	$	258,051	$	258,051	$	—	$	—	$	258,051
Time deposits in financial institutions		2,145		2,145		—		—		2,145
Securities available-for-sale		233,013		—		233,013		—		233,013
FHLB and other bank stock		34,392		—		34,392		—		34,392
Loans held for sale		1,095,741		—		1,101,569		—		1,101,569
Loans and leases receivable, net of allowance		2,579,586		—		—		2,633,738		2,633,738
Accrued interest receivable		11,170		11,170		—		—		11,170
Derivative assets		7,937		—		7,937		—		7,937
Financial liabilities
Deposits		3,347,355		—		3,321,428		—		3,321,428
Advances from Federal Home Loan Bank		450,000		—		450,053		—		450,053
Notes payable		96,481		86,648		16,041		—		102,689
Derivative liabilities		3,991		—		3,991		—		3,991
Accrued interest payable		1,733		1,733		—		—		1,733
December 31, 2013:
Financial assets
Cash and cash equivalents	$	110,118	$	110,118	$	—	$	—	$	110,118
Time deposits in financial institutions		1,846		1,846		—		—		1,846
Securities available-for-sale		170,022		—		170,022		—		170,022
FHLB and other bank stock		22,600		—		22,600		—		22,600
Loans held for sale		716,733		—		719,496		—		719,496
Loans and leases receivable, net of allowance		2,427,306		—		—		2,460,953		2,460,953
Accrued interest receivable		10,866		10,866		—		—		10,866
Derivative assets		5,493		—		5,493		—		5,493
Financial liabilities
Deposits		2,918,644		—		2,877,650		—		2,877,650
Advances from Federal Home Loan Bank		250,000		—		250,090		—		250,090
Notes payable		82,320		85,564		—		—		85,564
Derivative liabilities		—		—		—		—		—
Accrued interest payable		1,646		1,646		—		—		1,646

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

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

NOTE 4 – SECURITIES AVAILABLE FOR SALE

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2014:
Available for sale
SBA loan pools securities	$	1,749	$	6	$	—		$	1,755
U.S. government-sponsored entities and agency securities		1,934		36		—			1,970
Private label residential mortgage-backed securities		4,114		13		(18	)		4,109
Agency mortgage-backed securities		225,103		879		(803	)		225,179

Total securities available for sale	$	232,900	$	934	$	(821	)	$	233,013

December 31, 2013:
Available for sale
SBA loan pools securities	$	1,794	$	—	$	(58	)	$	1,736
U.S. government-sponsored entities and agency securities		1,928		—		(8	)		1,920
Private label residential mortgage-backed securities		14,653		135		(36	)		14,752
Agency mortgage-backed securities		153,134		299		(1,819	)		151,614

Total securities available for sale	$	171,509	$	434	$	(1,921	)	$	170,022

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


	June 30, 2014
	Amortized Cost		Fair Value
	(In thousands)
Maturity:
Available for sale
Within one year	$	—	$	—
One to five years		—		—
Five to ten years		1,934		1,970
Greater than ten years		—		—
SBA loan pools, private label residential mortgage backed and agency mortgage-backed securities		230,966		231,043

Total	$	232,900	$	233,013

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014			2013
	(In thousands)
Gross realized gains on sales of securities available for sale	$	15	$	1	$	560		$	309
Gross realized losses on sales of securities available for sale		—		—		(38	)		—

Net realized gains (losses) on sales of securities available for sale	$	15	$	1	$	522		$	309

Proceeds from sales of securities available for sale	$	1,272	$	475	$	52,245		$	8,539

Tax expense on sales of securities available for sale	$	—	$	—	$	—		$	—

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

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


	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In thousands)
June 30, 2014:
Available for sale
SBA loan pools securities	$	—	$	—		$	—	$	—		$	—	$	—
U.S. government-sponsored entities and agency securities		—		—			—		—			—		—
Private label residential mortgage-backed securities		556		(12	)		1,688		(6	)		2,244		(18	)
Agency mortgage-backed securities		77,343		(486	)		17,919		(317	)		95,262		(803	)

Total securities available for sale	$	77,899	$	(498	)	$	19,607	$	(323	)	$	97,506	$	(821	)

December 31, 2013:
Available for sale
SBA loan pools securities	$	1,736	$	(58	)	$	—	$	—		$	1,736	$	(58	)
U.S. government-sponsored entities and agency securities		1,920		(8	)		—		—			1,920		(8	)
Private label residential mortgage-backed securities		2,064		(11	)		3,913		(25	)		5,977		(36	)
Agency mortgage-backed securities		114,104		(1,790	)		1,821		(29	)		115,925		(1,819	)

Total securities available for sale	$	119,824	$	(1,867	)	$	5,734	$	(54	)	$	125,558	$	(1,921	)

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

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

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

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

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

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


	Non-Traditional Mortgages (NTM)			Traditional Loans			Total NTM and Traditional Loans			Purchased Credit Impaired			Total Loans and Leases Receivable
	($ in thousands)
June 30, 2014:
Commercial:
Commercial and industrial	$	—		$	367,111		$	367,111		$	1,429		$	368,540
Commercial real estate		—			521,168			521,168			14,576			535,744
Multi-family		—			234,179			234,179			—			234,179
SBA		—			25,264			25,264			3,420			28,684
Constructions		—			30,761			30,761			—			30,761
Lease financing		—			57,754			57,754			—			57,754
Consumer:
Single family residential mortgage		182,509			612,235			794,744			284,083			1,078,827
Green Loans (HELOC) - first liens		133,986			—			133,986			—			133,986
Green Loans (HELOC) - second liens		4,962			—			4,962			—			4,962
Other consumer		113			127,114			127,227			1,549			128,776

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

Percentage to total gross loans		12.4	%		75.9	%		88.3	%		11.7	%		100.0	%
Allowance for loan and lease losses														(22,627	)

Loans and leases receivable, net													$	2,579,586

December 31, 2013:
Commercial:
Commercial and industrial	$	—		$	283,743		$	283,743		$	4,028		$	287,771
Commercial real estate		—			514,869			514,869			15,014			529,883
Multi-family		—			141,580			141,580			—			141,580
SBA		—			23,740			23,740			3,688			27,428
Constructions		—			24,933			24,933			—			24,933
Lease financing		—			31,949			31,949			—			31,949
Consumer:
Single family residential mortgage		156,490			667,526			824,016			314,820			1,138,836
Green Loans (HELOC) - first liens		147,705			—			147,705			—			147,705
Green Loans (HELOC) - second liens		5,289			—			5,289			—			5,289
Other consumer		113			108,888			109,001			1,736			110,737

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

Percentage to total gross loans		12.7	%		73.4	%		86.1	%		13.9	%		100.0	%
Allowance for loan and lease losses														(18,805	)

Loans and leases receivable, net													$	2,427,306

Non Traditional Mortgage Loans

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

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


	June 30, 2014								December 31, 2013
	Count		Amount			Percent			Count		Amount			Percent
	($ in thousand)
Green Loans (HELOC) - first liens		156	$	133,986			41.7	%		173	$	147,705			47.6	%
Interest-only - first liens		210		168,141			52.2	%		244		139,867			45.2	%
Negative amortization		33		14,368			4.5	%		37		16,623			5.4	%

Total NTM - first liens		399		316,495			98.4	%		454		304,195			98.2	%

Green Loans (HELOC) - second liens		20		4,962			1.5	%		23		5,289			1.7	%
Interest-only - second liens		1		113			0.1	%		1		113			0.1	%

Total NTM - second liens		21		5,075			1.6	%		24		5,402			1.8	%

Total NTM loans		420	$	321,570			100.0	%		478	$	309,597			100.0	%

Total gross loan portfolio			$	2,602,213							$	2,446,111
% of NTM to total gross loan portfolio				12.4	%							12.7	%

Green Loans

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

Interest Only Loans

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

Loans with the Potential for Negative Amortization

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

Risk Management of Non-Traditional Mortgages

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

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

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

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

Non Traditional Mortgage Performance Indicators

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


	June 30, 2014							December 31, 2013							Change
	Count		Amount		Percent			Count		Amount		Percent			Count			Amount			Percent
	($ in thousand)
FICO Score
800+		21	$	13,057		9.7	%		13	$	7,347		5.5	%		8		$	5,710			4.2	%
700-799		77		62,287		46.5	%		90		70,337		52.5	%		(13	)		(8,050	)		-6.0	%
600-699		34		29,158		21.8	%		34		31,772		23.7	%		—			(2,614	)		-1.9	%
<600		10		12,953		9.7	%		9		9,394		7.0	%		1			3,559			2.7	%
No FICO		14		16,531		12.3	%		10		15,136		11.3	%		4			1,395			1.0	%

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

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

Loan to Value

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


	Green							Interest Only							Negative Amortization							Total
	Count		Amount		Percent			Count		Amount		Percent			Count		Amount		Percent			Count		Amount		Percent
	($ in thousand)
June 30, 2014:
LTV’s (1)
< 61		83	$	80,922		60.4	%		67	$	85,050		50.5	%		15	$	7,459		51.9	%		165	$	173,431		54.7	%
61-80		46		35,886		26.8	%		41		46,669		27.8	%		10		4,152		28.9	%		97		86,707		27.4	%
81-100		22		12,725		9.5	%		38		15,474		9.2	%		7		2,356		16.4	%		67		30,555		9.7	%
> 100		5		4,453		3.3	%		64		20,948		12.5	%		1		401		2.8	%		70		25,802		8.2	%

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

December 31, 2013:
LTV’s (1)
< 61		90	$	78,807		53.3	%		80	$	65,181		46.6	%		13	$	4,930		29.7	%		183	$	148,918		49.0	%
61-80		38		33,604		22.8	%		51		28,999		20.7	%		13		7,643		45.9	%		102		70,246		23.1	%
81-100		26		14,917		10.1	%		43		21,474		15.4	%		8		3,277		19.7	%		77		39,668		13.0	%
> 100		19		20,377		13.8	%		70		24,213		17.3	%		3		773		4.7	%		92		45,363		14.9	%

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

(1)

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

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

Allowance for Loan and Lease Losses

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

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

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Balance at beginning of period	$	20,003		$	16,015		$	18,805		$	14,448
Loans and leases charged off		(383	)		(1,027	)		(586	)		(1,932	)
Recoveries of loans and leases previously charged off		641			73			1,076			377
Transfer of loans from (to) held-for-sale		258			—			(705	)		—
Provision for loan and lease losses		2,108			1,918			4,037			4,086

Balance at end of period	$	22,627		$	16,979		$	22,627		$	16,979

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


	Commercial and Industrial		Commercial Real Estate		Multi- family			SBA		Construction		Lease Financing		Single Family Residential Mortgage		Other Consumer		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses:
Balance at March 31, 2014	$	2,367	$	6,449	$	2,720		$	211	$	352	$	622	$	6,147	$	782	$	353	$	20,003
Charge-offs		—		—		(3	)		—	&