R e p o r
t
2 0 1 9 A n n u a l
WE ARE
CALIFORNIA’S
BUSINESS
BANK.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2019
or
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number 001-35522
BANC OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
3 MacArthur Place,
Santa Ana, California
(Address of principal executive offices)
04-3639825
(IRS Employer
Identification No.)
92707
(Zip Code)
Title of each class
Registrant’s telephone number, including area code -855 361-2262
Securities registered pursuant to Section 12(b) of the Act:
Trading
symbol
Common Stock, par value $0.01 per share
Depositary Shares each representing a 1/40th
Interest in a share of 7.375% Non-Cumulative
Perpetual Preferred Stock, Series D
Depositary Shares each representing a 1/40th
Interest in a share of 7.00% Non-Cumulative
Perpetual Preferred Stock, Series E
BANC
BANC PRD
Name of each exchange
on which registered
New York Stock Exchange
New York Stock Exchange
BANC PRE
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È
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 È No ‘
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer È
Non-accelerated filer ‘
‘
Accelerated filer
Smaller reporting company ‘
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of
such stock on the New York Stock Exchange as of June 30, 2019, was $634.2 million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant). As of February 25, 2020, the registrant had
outstanding 50,419,439 shares of voting common stock and 477,321 shares of Class B non-voting common stock.
PART III of Form 10-K—Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 2020.
DOCUMENTS INCORPORATED BY REFERENCE
BANC OF CALIFORNIA, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 2019
Table of Contents
Forward-Looking Statements
Part I
Item 1.
Business
Item 1.A.
Risk Factors
Item 1.B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7.A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.A.
Controls and Procedures
Item 9.B.
Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page
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5
16
29
29
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30
31
34
39
72
75
155
155
157
158
158
158
159
159
160
163
2
Forward-Looking Statements
When used in this report and in public stockholder communications, in other documents of Banc of California, Inc. 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 of Banc
of California Inc. and its consolidated subsidiaries, including Banc of California, National Association (the “Company”, “we”,
“us” or “our”). 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.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
ongoing litigation or future litigation may result in adverse findings, reputational damage, the imposition of sanctions,
increased costs, the diversion of management time and resources, and other negative consequences;
the costs and effects of litigation generally, including legal fees and other expenses, settlements and judgments;
the risk that our performance may be adversely affected by the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) transition we have recently undergone;
the risk that the benefits we realize from exiting the third party mortgage origination and brokered single-family
residential lending business will be less than anticipated and that the costs we incur from exiting that business will be
greater than anticipated;
the risk that we will not be successful in the implementation of our capital utilization strategy and our other strategies
for transitioning to a traditional community bank;
risks that any merger and acquisition transactions of the Company may disrupt current plans and operations and lead to
difficulties in client and employee retention, risks that the costs, fees, expenses and charges related to these
transactions could be significantly higher than anticipated and risks that the expected revenues, cost savings, synergies
and other benefits of these transactions might not be realized to the extent anticipated, within the anticipated
timetables, or at all;
the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial
condition of borrowers, and the operational risk of lending activities, including but not limited to the effectiveness of
our underwriting practices and the risk of fraud, any of which credit and operational risks may lead to increased loan
delinquencies, losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses
not being adequate to cover actual losses and require us to materially increase our loan loss reserves;
the transition to a new accounting standard adopted by the Financial Accounting Standards Board, referred to as
Current Expected Credit Loss, which will require financial institutions to determine periodic estimates of lifetime
expected credit losses on loans, and provide for the expected credit losses as allowances for credit losses;
the quality and composition of our securities portfolio;
changes in general economic conditions, either nationally or in our market areas, or changes in financial markets;
continuation of or changes in the short-term interest rate environment, changes in the levels of general interest rates,
volatility in the interest rate environment, the relative differences between short- and long-term interest rates, deposit
interest rates, our net interest margin and funding sources;
fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in commercial
and residential real estate values in our market area;
our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our
activities;
results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may,
among other things, limit our business activities, require us to change our business mix, increase our allowance for
loan losses, write-down asset values, or increase our capital levels, or affect our ability to borrow funds or maintain or
increase deposits, any of which could adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business, including, without limitation, changes in tax laws
and policies and changes in regulatory capital or other rules, and the availability of resources to address or respond to
such changes;
xvi.
our ability to control operating costs and expenses;
3
xvii.
xviii.
xix.
xx.
xxi.
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work
force and potential associated charges;
the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the
potential for losses;
errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in
valuation;
the network and computer systems on which we depend could fail or experience a security breach;
our ability to attract and retain key members of our senior management team;
xxii.
increased competitive pressures among financial services companies;
xxiii.
changes in consumer spending, borrowing and saving habits;
xxiv.
xxv.
xxvi.
the effects of severe weather, natural disasters, acts of war or terrorism and other external events on our business;
the ability of key third-party providers to perform their obligations to us;
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;
xxvii.
share price volatility and reputational risks, related to, among other things, speculative trading and certain traders
shorting our common shares and attempting to generate negative publicity about us; and
xxviii. 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 “Part I. Item 1A. Risk Factors” of
this Annual Report on Form 10-K.
We undertake no obligation to update any such statement to reflect circumstances or events that occur after the date, on which
the forward-looking statement is made, except as required by law.
4
PART I
Item 1. Business
General
Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the holding company for its
wholly owned subsidiary, Banc of California, National Association (the Bank), a California-based bank. When we refer to the
“parent” or the “holding company", we are referring to Banc of California, Inc., the parent company, on a stand-alone basis.
When we refer to “we,” “us,” “our,” or the “Company”, we are referring to Banc of California, Inc. and its consolidated
subsidiaries including the Bank, collectively. We are regulated as a bank holding company by the Board of Governors of the
Federal Reserve System (the FRB) and the Bank is regulated by the Office of the Comptroller of the Currency (the OCC).
Our principal executive office is currently located at 3 MacArthur Place, Santa Ana, California, and our telephone number is
(855) 361-2262. Our common stock trades on the New York Stock Exchange under the trading symbol of “BANC”.
Business Overview
The Bank is a relationship-focused business bank. We deliver comprehensive products and solutions for businesses, business
owners, and individuals within our footprint through our 32 full service branches extending from San Diego to Santa Barbara.
We have served California markets since 1941 through the Bank and its predecessors. The Bank offers a variety of financial
products and services designed around our clients in order to serve all of their banking and financial needs.
Strategy
Our strategic objective is to deliver outstanding service to our banking clients through our team's ability to collaborate and
execute and perform superior to our competition. This involves listening to understand our clients' needs deeply so that we can
actively develop and deliver customized solutions to meet their business needs; executing promptly and holding ourselves
accountable to the promises we make our clients. We are focused on fostering relationships with businesses in our markets to
establish this understanding and provide an exceptional level of service. We offer a wide variety of deposit, loan and other
financial services to both large and small businesses, non-profit organizations, business owners, entrepreneurs, professionals,
and high-net worth individuals. Our deposit products include checking, savings, money market, certificates of deposit,
retirement accounts and safe deposit boxes. Additional products and services leverage other technology and include automated
bill payment, cash and treasury management, master demand accounts, foreign exchange, interest rate swaps, card payment
services, remote and mobile deposit capture, automated clearing house origination, wire transfer, and direct deposit. Our
lending activities are focused on providing thoughtful financing solutions to our clients. We consistently invest in automated
solutions and our technology infrastructure to gain operating efficiencies and effectiveness and to improve the client experience
as we deliver our high standard of service.
Investment Activities
The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining
earnings when loan demand is low and to provide a relatively stable source of interest income while satisfactorily managing
risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. For additional information, see Item 7A of this
Annual Report on Form 10-K.
Currently, we primarily invest in collateralized loan obligations (CLOs), agency securities, municipal bonds, agency residential
mortgage-backed securities, and corporate debt securities.
A CLO is a single security backed by a pool of debt. The debt pool is a professionally managed portfolio of senior secured
loans to corporations. CLOs are not directly secured by residential or commercial mortgages. Rather, the CLOs have rights to
the cash flows from a specific tranche of the debt pool via the CLO structure. CLO managers of the debt pools are typically
large non-bank financial institutions or banks. CLOs are typically $300 million to $1 billion in size, contain 100 or more loans,
and have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and an equity tranche. Interest and principal are
paid out to the AAA tranche first then move down the capital stack. Losses are borne by the equity tranche first then move up
the capital stack. CLOs typically have subordination levels that range from approximately 33% to 39% for AAA, 20% to 28%
for AA, 15% to 18% for A and 10% to 14% for BBB.
The CLOs we currently hold may, from time to time, not be actively traded and, under certain market conditions, may be
relatively illiquid investments. The market value of CLOs, which can be volatile, may be affected by, among other things,
perceived changes in the economy, performance by the manager and performance of the underlying loans.
We attempt to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of AA or
higher and by maintaining a pre-purchase due diligence and through an ongoing review process by a dedicated credit
administration team. No assurance can be given that these risk mitigation efforts will be successful.
5
Products Offered
We offer a full array of competitively priced and client-tailored commercial loan and deposit products and services.
Loan Products
We offer a number of commercial loan products including commercial and industrial loans; commercial real estate loans and
multifamily loans; Small Business Administration (SBA) loans; construction loans; and other consumer loans. In addition, we
have a single family residential (SFR) mortgage loan portfolio that we service, however we no longer originate this type of loan
product.
At December 31, 2019, our total loans held-for-investment and loans held-for-sale were $6.0 billion, or 76.0% of total assets,
and $22.6 million, or 0.3% of total assets, respectively, compared to $7.70 billion or 72.4% of total assets and $8.1 million or
0.1% of total assets at December 31, 2018, respectively. For additional information concerning changes in our loan portfolio,
see "Loans Receivable, Net" and "Loans Held-for-Sale" included in Item 7 of this Annual Report on Form 10-K.
Commercial and Industrial Loans
Commercial and industrial loans are made to finance operations, provide working capital, finance the purchase of fixed assets,
equipment or real property, business acquisitions, warehousing lending, and other business lines of credit. A borrower’s cash
flow from operations is generally the primary source of repayment. Accordingly, our policies provide specific guidelines
regarding debt coverage and other financial ratios. Commercial and industrial loans include lines of credit, commercial term
loans and owner occupied commercial real estate loans. Commercial lines of credit are extended to businesses generally to
finance operations and working capital needs. Commercial term loans are typically made to finance the acquisition of fixed
assets, refinance short-term debt originally used to purchase fixed assets or make business acquisitions. Owner occupied
commercial real estate loans are extended to purchase or refinance real property and are usually 50% or more occupied by the
underlying business and the business's cash flow is the primary source of repayment. Warehouse lending is a line of credit
given to a loan originator, the funds from which are used to finance a mortgage that a borrower uses to purchase SFR property
or refinance an existing mortgage.
Commercial and industrial loans are extended based on the financial strength and integrity of the borrower and guarantor(s) and
are generally collateralized by the borrower's assets such as accounts receivable, loans, inventory, equipment or real estate and
typically have a term of 1-5 years.
Commercial and industrial loans may be unsecured for well-capitalized and highly profitable borrowers. The interest rates on
these loans generally are adjustable and usually are indexed to The Wall Street Journal’s prime rate (Prime Rate) and will vary
based on market conditions and be commensurate to the perceived credit risk. Loans are generally written with a floor rate of
interest typically set at market. Some of the owner-occupied commercial real estate loans may be fixed for periods of up to 10
years and many have prepayment penalties. Commercial and industrial loans generally are made to businesses that have had
profitable operations and have a conservative debt-to-net worth ratio, good payment histories as evidenced by credit reports,
acceptable working capital, and operating cash flow sufficient to demonstrate the ability to pay obligations as they become due.
Our commercial credit banking standard includes credit file documentation and analysis of the borrower’s background, capacity
to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of macro and micro conditions
affecting the borrower and the industry in which they participate. Detailed analysis of the borrower’s past, present and future
cash flow is also an important aspect of the credit analysis, as it is the primary source of repayment. In addition, commercial
and industrial loans are typically monitored periodically to provide an early warning for deteriorating cash flow. All commercial
and industrial loans must have well-defined primary and secondary or, at times, tertiary sources of repayment.
In order to mitigate the risk of borrower default, we generally require collateral to support the credit and, in the case of loans
made to businesses, we typically obtain personal guarantees from their owners. We attempt to control the risk by generally
requiring loan-to-value (LTV) ratios as of the origination date to be lower than 80%, or in the case of SBA loans that are
secured by owner occupied commercial real estate loans, to be lower than 75%, and by regularly monitoring the amount and
value of the collateral in order to maintain that ratio. However, the collateral securing the loans may depreciate over time, may
be difficult to appraise or may fluctuate in value based on the success of a business. Because of the potential value reduction,
the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of
the business itself, which, in turn, is often dependent, in part, upon general economic conditions. See “Asset Quality” under
"Loans Receivable, Net" included in Item 7 of this Annual Report on Form 10-K.
Commercial and industrial loan growth also assists in the growth of our deposits because many commercial and industrial loan
borrowers establish deposit accounts and utilize treasury management services. Those deposit accounts help us to reduce the
overall cost of funds and those banking service relationships provide a source of noninterest fee income.
6
Commercial Real Estate and Multifamily Loans
Commercial real estate and multifamily loans are secured primarily by multifamily dwellings, industrial/warehouse buildings,
anchored and non-anchored retail centers, office buildings and, on a limited basis, hospitality properties primarily located in our
market area.
Loans secured by commercial real estate and multifamily properties are originated with either a fixed or an adjustable interest
rate. The interest rate on adjustable rate loans is based on a variety of indices, generally determined through negotiation with the
borrower. LTV ratios on these loans typically do not exceed 75% of the appraised value of the property securing the loan. These
loans typically require monthly payments, may contain balloon payments and generally have maturities of 15 years with
maximum maturities of 30 years for multifamily loans and 10 years for commercial real estate loans.
Loans secured by commercial real estate and multifamily properties are underwritten based on the income producing potential
of the property and the financial strength of the borrower and/or guarantor. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the
outstanding debt. We generally require an assignment of rents or leases in order to be assured that the cash flow from the
project will be used to repay the debt. Appraisals on properties securing commercial real estate and multifamily loans are
performed by independent state licensed appraisers approved by management. In order to monitor the adequacy of cash flows
on income-producing properties, the borrower is generally required to provide periodic financial information. Because
payments on loans secured by commercial real estate and multifamily properties are often dependent on the successful
operation or management of the properties, adverse conditions in the real estate market or the economy may affect repayment of
these loans. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay
the loan may be impaired. See “Asset Quality” under "Loans Receivable, Net" included in Item 7 of this Annual Report on
Form 10-K.
Small Business Administration Loans
We provide SBA loan products through the Bank and have earned the Preferred Lender Program designation which delegates
loan approval, as well as closing and most servicing and liquidation authority to the Bank. We currently provide the following
SBA products:
•
•
7(a)—These loans provide the Bank with a guarantee from the SBA for up to 85% of the loan amount for loans up to
$150,000 and 75% of the loan amount for loans of more than $150,000, with a maximum loan amount of $5 million.
These are term loans that can be used for a variety of purposes including commercial real estate, business acquisition,
working capital, expansion, renovation, new construction, and equipment purchases. Depending on collateral, these
loans can have terms ranging from 7 to 25 years. The guaranteed portion of these loans is often sold into the secondary
market.
504 Loans—These are real estate loans in which the lender can advance up to 90% of the purchase price; retain 50%
as a first trust deed; and have a Certified Development Company (CDC) retain the second trust deed for 40% of the
total cost. CDCs are licensed by the SBA. Required equity of the borrower is 10%. Terms of the first trust deed are
typically similar to market rates for conventional real estate loans, while the CDC establishes rates and terms for the
second trust deed loan.
SBA loans are subject to federal legislation that can affect the availability and funding of the program. This dependence on
legislative funding might cause future limitations and uncertainties with regard to the continued funding of such programs,
which could potentially have an adverse financial impact on our business. Our portfolio of SBA loans is subject to certain risks,
including, but not limited to: (i) the effects of economic downturns on the economy; (ii) interest rate increases; (iii)
deterioration of the value of the underlying collateral; and (iv) deterioration of a borrower's or guarantor's financial capabilities.
We attempt to mitigate these risks through: (i) reviewing each loan request and renewal individually; (ii) adhering to written
loan policies; (iii) adhering to SBA policies and regulations; (iv) obtaining independent third party appraisals; and (v) obtaining
external independent credit reviews. SBA loans normally require monthly installment payments of principal and interest and
therefore are continually monitored for past due conditions. In general, we review financial statements and other documents of
borrowers on an ongoing basis during the term of the relationship and responds to any identified deterioration.
Construction Loans
We provide short-term construction loans primarily relating to single family or multifamily residential properties. Construction
loans are typically secured by first deeds of trust and guarantees of the borrower. The economic viability of the projects,
borrower’s creditworthiness, and borrower’s and contractor’s experience are primary considerations in the loan underwriting
decision. We utilize independent state licensed appraisers approved by management and monitor projects during construction
through inspections and a disbursement program tied to the percentage of completion of each project. We may, in the future,
originate or purchase loans or participations in construction, renovation and rehabilitation loans on residential, multifamily and/
or commercial real estate properties.
7
Single Family Residential Mortgage Loans
We previously originated SFR mortgage loans but discontinued offering this loan product during 2019. Our SFR portfolio
generally consists of mortgage loans that are secured by a first deed of trust on single family residences mainly throughout
California. The SFR portfolio includes non-conforming SFR mortgage loans where the loan amount exceeded Fannie Mae or
Freddie Mac limits, or the loans otherwise did not conform to Fannie Mae or Freddie Mac guidelines. The SFR portfolio
generally includes mortgage loans that earn interest on either a fixed or an adjustable rate basis. The SFR portfolio generally
includes mortgage loans underwritten based on the applicant’s income and credit history and the appraised value of the subject
property. Properties secured by SFR mortgage loans were appraised by independent fee appraisers approved by management at
origination. We required borrowers to obtain title insurance, hazard insurance, and flood insurance, if necessary. A majority of
SFR mortgage loans originated by us were made to finance the purchase or the refinance of existing loans on owner occupied
homes, with a smaller percentage used to finance non-owner occupied homes.
The majority of the SFR loans in the portfolio are Adjustable Rate Mortgage (ARM) loans tied to a variety of indices which
were offered with flexible initial repricing dates, ranging from 1 to 10 years, and periodic repricing dates through the life of the
loan. During the year ended December 31, 2019, we originated $315.9 million of held-for-investment SFR ARM loans with
terms up to 30 years. At December 31, 2019, $1.56 billion, or 97.9% of the SFR mortgage portfolio, were adjustable rate and
this compares to $2.25 billion, or 97.4% of the SFR mortgage portfolio, at December 31, 2018.
The SFR portfolio also includes interest only loans, which have payment features that allow interest only payments during the
first five or seven years during which time the interest rate is fixed before converting to fully amortizing payments. Following
the expiration of the fixed interest rate period, the interest rate and payment begin to adjust on an annual basis, with fully
amortized payments that include principal and interest calculated over the remaining term of the loan. The loan could be
secured by owner or non-owner occupied properties that include single family units and second homes. For additional
information, see “Non-Traditional Mortgage Portfolio” and “Non-Traditional Mortgage Loan Credit Risk Management” under
“Loans Receivable, Net” included in Item 7 of this Annual Report on Form 10-K.
Other Consumer Loans
We originate consumer loans primarily in our market area, including a limited amount of unsecured loans. Consumer loans
generally have shorter terms to maturity or variable interest rates, which reduces our exposure to changes in interest rates, and
carry higher rates of interest than SFR mortgage loans. We believe offering consumer loan products helps to expand and create
stronger ties to our existing client base by increasing the number of client relationships and providing cross-marketing
opportunities.
Lending Limits
Our lending is subject to legal lending limits. Legal lending limits are calculated in conformance with OCC regulations, which
prohibit a national bank from lending to any one individual or entity or its related interests any amount that exceeds 15% of a
bank’s capital and surplus, plus an additional 10% of a bank’s capital and surplus, if the amount that exceeds a bank’s 15%
general limit is fully secured by readily marketable collateral. At December 31, 2019, the Bank’s authorized legal lending limits
for loans to one borrower were $151.2 million for unsecured loans and an additional $100.8 million for specific secured loans.
Deposit Products and Sources of Funds
General
Our primary sources of funds are deposits, certificates of deposits, payments (including interest and principal) on outstanding
loans and investment securities, other short-term investments and funds provided from operations and sales of loans and
investment securities. While scheduled payments from loans and investment securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. In addition, we invest excess funds in short-term interest-earning
assets, which provide liquidity to meet known and unknown lending commitments and deposit flows of our clients. We also
generate cash through borrowings mainly by utilizing the Federal Home Loan Bank (FHLB) advances to leverage our capital
base, to provide funds for our lending activities, as a source of liquidity, and to enhance our interest rate risk management.
Deposits
We offer a variety of deposit products to our clients with a wide range of interest rates and terms. Deposits consist of interest-
bearing and noninterest-bearing demand accounts, savings accounts, money market deposit accounts, and certificates of
deposit. We solicit deposits primarily in our market area, excluding brokered deposits. We primarily rely on our relationships
from our lending activities, competitive pricing policies, marketing and exceptional client service to attract and retain deposits.
Deposit levels are influenced significantly by general economic conditions, prevailing interest rates and competition. The
variety of deposit products we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to
changes in demand from actual and prospective clients.
8
We manage the pricing of deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject
to market competitive factors. Based on our experience, we believe that our deposits are a relatively stable source of funds.
Despite this stability, our ability to attract and maintain these deposits and the rates paid on them have been and will continue to
be significantly affected by market conditions.
Core deposits, which we define as low interest-bearing and noninterest-bearing demand deposits, savings, money market
deposit accounts, and certificates of deposits, excluding brokered deposits, decreased $791 million during the year ended
December 31, 2019 and totaled $5.4 billion at December 31, 2019 representing 99.8% of total deposits on that date. We held
brokered deposits of $10.0 million, or 0.2% of total deposits at December 31, 2019, compared to 21.6% at December 31, 2018.
FHLB Advances and Long Term Debt
Although deposits are our primary source of funds, we may utilize borrowings when they are a less costly source of funds and
can be invested at a positive interest rate spread, when we desire additional capacity to fund loan demand or when they meet
our asset/liability management goals to diversify funding sources and enhance interest rate risk management.
We utilize FHLB advances and securities sold under repurchase agreements to leverage our capital base, to provide funds for
our lending activities, to provide a source of liquidity, and to enhance our interest rate risk management activities. We also had
the ability to borrow from the Federal Reserve Bank of San Francisco (Federal Reserve Bank) as well as through unsecured
federal funds lines with correspondent banks. We may obtain advances from the FHLB by collateralizing the advances with
certain of our loans and investment securities. These advances may be made pursuant to several different credit programs each
of which has its own interest rate, range of maturities and call features. At December 31, 2019, we had $1.20 billion in FHLB
advances outstanding and the ability to borrow an additional $1.02 billion.
Availability and terms on securities sold under repurchase agreements are subject to the counterparties' discretion and our
pledging of investment securities. At December 31, 2019, we had no securities sold under repurchase agreements. We also have
the ability to borrow $16.7 million from the Federal Reserve Bank and $185.0 million from unsecured federal funds lines with
correspondent banks as of December 31, 2019. For additional information, see Note 11 to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K.
In addition, we have unsecured long term senior notes with an April 15, 2025 maturity date at a stated rate of 5.25% totaling
$173.4 million as of December 31, 2019. For additional information, see Notes 12 and 13 to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K.
Competition and Market Area
We face strong competition in originating real estate and all of our loan products and in attracting deposits. Competition in
originating real estate loans comes primarily from other commercial banks, savings institutions, credit unions and mortgage
bankers. With respect to commercial and industrial lending and consumer loans, we also encounter vigorous competition from
finance companies. We attract deposits through our relationships from our lending activities, community banking branch
network, and our treasury management services. Consequently, we have the ability to service client needs with a variety of
deposit accounts and products at competitive rates. Competition for deposits is principally from other commercial banks,
savings institutions, and credit unions, as well as mutual funds, broker dealers, registered investment advisors, investment
banks, financial institutions, financial service companies, and other alternative investments.
Based on the most recent branch deposit data as of June 30, 2019, provided by the Federal Deposit Insurance Corporation
(FDIC), the Bank's share of deposits in Los Angeles, Orange, San Diego, and Santa Barbara counties was as follows:
Los Angeles County
Orange County
San Diego County
Santa Barbara County
Employees
June 30, 2019
0.49%
2.51%
0.35%
0.51%
At December 31, 2019, we had a total of 652 full-time employees and 8 part-time employees. Our employees are not
represented by any collective bargaining group and management considers its employee relations to be satisfactory.
9
Available Information
We file with the SEC Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, an
annual proxy statement and other reports and information. We invite you to visit our website at www.bancofcal.com via the
"Investor Relations" link, to access free of charge these filings and amendments to these filings, all of which are made available
as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange
Commission (SEC). We also make available on that website our Code of Business Conduct and Ethics, our Corporate
Governance Guidelines, and the charters for all committees of our Board of Directors. Any changes to our Code of Business
Conduct and Ethics or waiver of our Code of Business Conduct and Ethics for senior financial officers, executive officers or
directors will be posted on that website. The content of our website is not incorporated into and is not part of this Annual
Report on Form 10-K. In addition, you can write to us to obtain a free copy of any of these reports or other documents at Banc
of California, 3 MacArthur Place, Santa Ana, CA 92707, Attn: Investor Relations. The SEC maintains an internet site that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with the
SEC, located at www.sec.gov.
Risk Governance
We conduct our business activities under a system of risk governance controls. Key elements of our risk governance structure
include the risk appetite framework and risk appetite statement. The risk appetite framework we adopted is managed in
conjunction with our strategic and capital plans. The strategic and capital plans articulate the Board of Director's (Board's)
approved statement of financial condition, loan concentration targets and the appropriate level of capital to manage our business
risks properly.
The risk appetite framework includes a risk appetite statement, risk limits, and an outline of roles and responsibilities for risk
management activities. The risk appetite statement is an expression of the maximum level of residual risk that we are prepared
to accept in order to achieve our business objectives. Defining, communicating, and monitoring our risk is fundamental to a
safe and sound control environment and a risk-focused culture.
The Board of Directors establishes our strategic objectives and approves our risk appetite statement, which is developed in
collaboration with our executive leadership. The executive team translates the Board-approved strategic objectives and the risk
appetite statement into targets and constraints for business lines and legal entities.
Our risk appetite framework includes policies, procedures, controls, and management information systems; through which the
risk appetite is established, communicated, managed, and monitored. We utilize a risk assessment process to identify inherent
risks across the Company, gauges the effectiveness of internal controls, and establishes tolerances for residual risk in each of
the following risk categories: strategic, reputational, earnings, capital, liquidity, asset quality (credit), market, operational,
compliance, and diversification/concentration.
Each risk category is assigned a qualitative statement as well as specific, measurable, risk metrics. The risk metrics have
variance thresholds established which indicate whether the metric is within tolerance or at variance to our risk appetite.
Variance(s) to the defined risk appetite are reported and monitored regularly by both executive management and the Board.
Where appropriate, remediation measures and/or risk acceptance, is defined and reviewed by executive management and the
Board.
We integrate risk appetite and enterprise risk management under a common framework. Key elements of this framework that
support our risk management activities include:
• Executive management governance committees that govern the management of risks within the organization and
within the established risk appetite. These committees review and drive risk and control decisions, address escalated
issues and actively oversee our risk mitigation activities with an escalation path to the Board.
•
•
Policies and programs that articulate the culture and risk limits of our business and provides clarity around encouraged
and discouraged activities. Additional policies cover key risk disciplines and business segments (for example, our
Commercial Real Estate Policy) and other important aspects supporting the Bank's activities (for example, policies
relating to appraisals, risk ratings, fair lending, etc.).
Processes, personnel and control systems are in place to promote the identification, measurement, assessment, and
control of both current and emerging risk.
• Three lines of defense that are integrated, include specific roles and responsibilities for risk management activities, and
provide credible challenge and appropriate identification and escalation of critical information and issues.
• Credit Approval Authorities—All of our material credit exposures are approved by a credit risk management group
that is independent of the business units. Above this threshold, credit approvals are made by the chief credit officer or
an executive management credit committee of the Bank. The joint enterprise risk committee of the Company's Board
of Directors and the Bank's Board of Directors review and approve material loan pool purchases, divestitures, and any
other transactions as appropriate.
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Asset Quality
• Concentration Risk Management Policy—To mitigate and manage the risk within our loan portfolio, the Board
adopted a concentration risk management policy, pursuant to which it expects to review and revise concentration risk
to tolerance thresholds at least annually and otherwise from time to time as appropriate. It is anticipated that these
concentration risk to tolerance thresholds may change at any time when the Board of Directors is considering material
strategic initiatives such as acquisitions, new product launches and terminations of products or other factors as the
Board of Directors believes appropriate. We developed procedures relating to the appropriate actions to be taken
should management seek to increase the concentration guidelines or exceed the guideline maximum based on various
factors. Concentration risk to tolerance thresholds are intended to aid management and the Board to ensure that the
loan concentrations are consistent with the Board’s risk appetite.
•
Stress Testing—We have developed a Stress Testing Policy and stress testing methodology as a tool to evaluate our
loan portfolio, capital levels and strategic plan with the objective of ensuring that our loan portfolio and balance sheet
concentrations are consistent with the Board-approved risk appetite and strategic and capital plans.
• Loan Portfolio Management—Our management credit committee formally reviews the loan portfolio on a regular
basis. Risk rating trends, loan portfolio performance, including delinquency status, and the resolution of problem assets
are reviewed and closely managed.
• Regular discussions occur between the areas of executive management, Treasury, Treasury Management, Credit and
Risk Management and the business units with regard to the pricing of our loan products. These groups meet to ensure
that pricing of our products is appropriate and consistent with our strategic and capital plans.
Regulation and Supervision
General
We are extensively regulated under federal laws. As a financial holding company, Banc of California, Inc. is subject to the Bank
Holding Company Act of 1956, as amended (the BHCA), and its primary regulator is the FRB. As a national bank, the Bank is
subject to regulation primarily by the OCC. In addition, as an insured depository institution the Bank is also subject to
regulation by the FDIC.
Federal and state laws and regulations generally applicable to financial institutions regulate Banc of California, Inc.’s and the
Bank’s scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans,
the establishment of branches, mergers, acquisitions, dividends, and other matters. This regulation and supervision by the
federal banking agencies is intended primarily for the protection of clients and depositors, the stability of the U.S. financial
system, and the Deposit Insurance Fund administered by the FDIC and not for the benefit of stockholders or debt holders. Set
forth below is a brief description of material information regarding certain laws and regulations that are applicable to the
Company and the Bank. This description, as well as other descriptions of laws and regulations in this Form 10-K, is not
complete and is qualified in its entirety by reference to applicable laws and regulations.
Banc of California, Inc.
Permissible Activities. In general, the BHCA limits the activities permissible for bank holding companies to the
business of banking, managing or controlling banks and such other activities as the FRB has determined to be so closely related
to banking as to be properly incidental thereto.
As a bank holding company that has elected to become a financial holding company pursuant to the BHCA, Banc of California,
Inc. may also engage in activities permitted for bank holding companies and may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature or incidental or complementary to activities that are
financial in nature. “Financial in nature” activities include securities underwriting, dealing and market making; sponsoring
mutual funds and investment companies; insurance underwriting and agency; and merchant banking.
Acquisitions. The BHCA requires every bank holding company to obtain the prior approval of the FRB before: (i) it
may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after
such acquisition, the bank holding company will directly or indirectly own or control 5% or more of the voting shares of the
institution; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or
savings and loan association; or (iii) it may merge or consolidate with any other bank holding company. In reviewing
applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other
things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks
to the stability of the U.S. banking or financial system, the applicant's managerial and financial resources, the applicant's
performance record under the Community Reinvestment Act of 1977, as amended (the CRA), fair housing laws and other
consumer compliance laws, and the effectiveness of the banks in combating money laundering activities.
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Capital Requirements. As a bank holding company, Banc of California, Inc. is subject to the regulations of the FRB
imposing capital requirements for a bank holding company, which establish a capital framework as described in “Capital
Requirements” below. As of December 31, 2019, Banc of California, Inc. had capital ratios in excess of the minimums required
to be considered "well capitalized".
Dividends. Under the FRB’s policy statement on the payment of cash dividends, a bank holding company should pay
cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with our capital needs, asset quality, and overall financial condition. A bank holding
company must give the FRB prior notice of any purchase or redemption of its equity securities if the consideration for the
purchase or redemption, when combined with the consideration for all such purchases or redemptions in the preceding 12
months, is equal to 10% or more of its consolidated net worth. Notice to the FRB would include, but may not be limited to,
background information on a redemption, pro-forma financial statements that reflect the planned transaction including impact
to the Company and stress testing that incorporates the transaction. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would be an unsafe or unsound practice or would violate any law, regulation, FRB order, or
condition imposed in writing by the FRB. This notification requirement does not apply to a bank holding company that
qualifies as well-capitalized, received a composite rating and a rating for management of “1” or “2” in its last examination and
is not subject to any unresolved supervisory issue. Regarding dividends, see "Capital Requirements" below.
Source of Strength. Under FRB policy and federal law, a bank holding company, such as the Company, must act as a
source of financial and managerial strength for their insured depository institution subsidiaries, such as the Bank, particularly
when such subsidiaries are in financial distress.
The Bank
Liquidity. The Bank is subject to a variety of requirements under federal law. The Bank is required to maintain
sufficient liquidity to ensure safe and sound operations. For additional information, see "Liquidity" included in Item 7 of this
Annual Report on Form 10-K.
Safety and Soundness. The OCC has adopted guidelines establishing safety and soundness standards on such matters
as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk
exposure, and compensation and other employee benefits. Any institution which fails to comply with these standards must
submit a compliance plan.
Reserve Requirements. The FRB requires all depository institutions to maintain noninterest bearing reserves at
specified levels against their transaction accounts, primarily checking, NOW and Super NOW checking accounts. At
December 31, 2019, the Bank was in compliance with these reserve requirements.
Acquisitions. The OCC must approve an acquisition of the Bank and the Bank’s acquisition of other financial
institutions and certain other acquisitions. For a discussion of the factors considered by the OCC in connection with such
acquisitions, see --Banc of California, Inc.-Acquisitions above. Generally, the Bank may branch de novo nationwide, but
branching by acquisition may be restricted by applicable state law.
Lending Limits. The Bank’s general limit on loans to one borrower is 15% of its capital and surplus, plus an additional
10% of its capital and surplus if the amount of loans greater than 15% of capital and surplus is fully secured by readily
marketable collateral. Capital and surplus means Tier 1 and Tier 2 capital plus the amount of allowance for loan losses not
included in Tier 2 capital. The Bank has no loans in excess of its loans-to-one borrower limit.
Dividends. The Company’s primary source of liquidity is dividend payments from the Bank. OCC regulations impose
various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptions or
repurchases, and certain other items. Generally, a bank may make capital distributions during any calendar year equal to up to
100% of net income for the year-to-date plus retained net income for the two preceding years without prior OCC approval.
However, the OCC may restrict dividends by an institution deemed to be in need of more than normal supervision. Dividends
can also be restricted if the capital conservation buffer requirement is not met.
FDIC Insurance
Premiums for deposit insurance and assessments FDIC-insured banks are required to pay deposit insurance assessments to the
FDIC. The amount of the deposit insurance assessment for institutions with less than $10.0 billion in assets is based on its risk
category, with certain adjustments for any unsecured debt or brokered deposits held by the insured bank. Institutions assigned to
higher risk categories (that is, institutions that pose a higher risk of loss to the FDIC’s Deposit Insurance Fund) pay assessments
at higher rates than institutions that pose a lower risk. An institution’s risk classification is assigned based on a combination of
its financial ratios and supervisory ratings, reflecting, among other things, its capital levels and the level of supervisory concern
that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances.
12
The Dodd-Frank Act changes the way that deposit insurance premiums are calculated. The assessment base is based upon
average consolidated total assets less average tangible equity. The Dodd-Frank Act also increased the minimum designated
reserve ratio of the FDIC’s Deposit Insurance Fund from 1.15% to 1.35% of the estimated amount of total insured deposits,
eliminated the upper limit for the reserve ratio designated by the FDIC each year, and eliminated the requirement that the FDIC
pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.
Capital Requirements
The Company and the Bank are subject to capital regulations adopted by the FRB and the OCC. The current regulations
establish required minimum ratios for common equity Tier 1 (CET1) capital, Tier 1 capital and total capital and a leverage ratio;
set risk-weighting for assets and certain other items for purposes of the risk-based capital ratios; require an additional capital
conservation buffer over the minimum required capital ratios; and define what qualifies as capital for purposes of meeting the
capital requirements. Under these capital regulations, the minimum capital ratios are: (i) a CET1 capital ratio of 4.5% of total
risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of total risk-weighted assets; (iii) a total capital ratio of 8.0% of total
risk-weighted assets; and (iv) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0%.
CET1 capital generally consists of common stock, retained earnings, accumulated other comprehensive income (AOCI) except
where an institution elects to exclude AOCI from regulatory capital, and certain minority interests, subject to applicable
regulatory adjustments and deductions, including deduction of certain amounts of mortgage servicing assets and certain
deferred tax assets that exceed specified thresholds. We elected to permanently opt out of including AOCI in regulatory capital.
Tier 1 capital generally consists of CET1 capital plus noncumulative perpetual preferred stock and certain additional items less
applicable regulatory adjustments and deductions. Tier 2 capital generally consists of subordinated debt, certain other preferred
stock, and allowance for loan losses up to 1.25% of risk-weighted assets, less applicable regulatory adjustments and deductions.
Total capital is the sum of Tier 1 capital and Tier 2 capital.
Assets and certain off-balance sheet items are assigned risk-weights ranging from 0% to 1,250%, reflecting credit risk and other
risk exposure, to determine total risk-weighted assets for the risk-based capital ratios.
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Company and the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses.
To be considered "well-capitalized", the Company must maintain on a consolidated basis a total risk-based capital ratio of
10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more and not be subject to any written agreement, capital directive
or prompt corrective action directive issued by the FRB to meet and maintain a specific capital level for any capital measure.
For the well-capitalized standard applicable to the Bank, see “Prompt Corrective Action” below.
In addition, the Company and the Bank are subject to the final rule adopted by the FRB, OCC and FDIC in July 2019 relating to
simplifications of the capital rules applicable to non-advanced approaches banking organizations. These rules will be effective
for the Company on April 1, 2020, and provide for simplified capital requirements relating to the threshold deductions for
mortgage servicing assets, deferred tax assets arising from temporary differences that a banking organization could not realize
through net operating loss carry backs, and investments in the capital of unconsolidated financial institutions, as well as the
inclusion of minority interests in regulatory capital.
Prompt Corrective Action
The Bank is required to maintain specified levels of regulatory capital under the capital and prompt corrective action
regulations of the OCC. To be adequately capitalized, an institution must have the minimum capital ratios discussed in “Capital
Requirements” above. To be well-capitalized, an institution must have a CET1 risk-based capital ratio of at least 6.5%, Tier 1
risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0% and a leverage ratio of at least 5.0%,
and not be subject to any written agreement, capital directive or prompt corrective action directive issued by its primary federal
banking regulator to meet and maintain a specific capital level for any capital measure. Institutions that are not well-capitalized
are subject to certain restrictions on brokered deposits and interest rates on deposits.
The OCC is authorized and, under certain circumstances, required to take certain actions against an institution that is less than
adequately capitalized. Such an institution must submit a capital restoration plan, including a specified guarantee by its holding
company, and until the plan is approved by the OCC, the institution may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make capital distributions.
For institutions that are not at least adequately capitalized, progressively more severe restrictions generally apply as capital
ratios decrease or if the OCC reclassifies an institution into a lower capital category due to unsafe or unsound practices or
unsafe or unsound condition. Such restrictions may cover all aspects of operations and may include a forced merger or
acquisition. An institution that becomes “critically undercapitalized” because it has a tangible equity ratio of 2.0% or less is
generally subject to the appointment of the FDIC as receiver or conservator for the institution within 90 days after it becomes
13
critically undercapitalized. The imposition by the OCC of any of these measures on the Bank may have a substantial adverse
effect on its operations and profitability.
Anti-Money Laundering and Suspicious Activity
Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act and the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) require all
financial institutions, including banks, to implement policies and procedures relating to anti-money laundering, compliance,
suspicious activities, and currency transaction reporting and due diligence on clients. The Patriot Act also requires federal bank
regulators to evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a
proposed bank acquisition.
Community Reinvestment Act
The Bank is subject to the provisions of the CRA. Under the terms of the CRA, the Bank has a continuing and affirmative
obligation, consistent with safe and sound operation, to help meet the credit needs of its community, including providing credit
to individuals residing in low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions, and does not limit an institution’s discretion to develop the types of products and services
that it believes are best suited to its particular community in a manner consistent with the CRA.
The OCC regularly assesses the Bank on its record in meeting the credit needs of the communities it serves, including low-
income and moderate-income neighborhoods. In the uniform four-tier- rating system used by federal banking agencies in
assessing CRA performance, an "Outstanding" rating is the top tier rating. This CRA rating deals strictly with how well an
institution is meeting its responsibilities under the CRA and the OCC takes into account performance under the CRA when
considering a bank’s application to establish or relocate a branch or main office or to merge with, acquire assets of, or assume
liabilities of another insured depository institution. The bank’s record may be the basis for denying the application.
Performance under the CRA also is considered when the FRB reviews applications to acquire, merge or consolidate with
another banking institution or its holding company. In the case of a bank holding company applying for approval to acquire a
bank, the FRB will assess the records of each subsidiary depository institution of the applicant bank holding company, and that
record may be the basis for denying the application.
In December 2019, the OCC and FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify
for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for
measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection,
recordkeeping, and reporting. The FRB has not joined the proposed rulemaking. We will continue to evaluate the impact of any
changes to the regulations implementing the CRA.
Financial Privacy Under the Requirements of the Gramm-Leach-Bliley Act
The Company and its subsidiaries are required periodically to disclose to their retail clients the Company’s policies and
practices with respect to the sharing of nonpublic client information with its affiliates and others, and the confidentiality and
security of that information. Under the Gramm-Leach-Bliley Act (the GLBA), retail clients also must be given the opportunity
to “opt out” of information-sharing arrangements with non-affiliates, subject to certain exceptions set forth in the GLBA.
Limitations on Transactions with Affiliates and Loans to Insiders
Transactions between the Bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a bank is generally any company or entity which controls, is controlled by or is under common control with the bank but
which is not a subsidiary of the bank. The Company and its subsidiaries are affiliates of the Bank. Generally, Section 23A limits
the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal
to 10.0% of the Bank’s capital stock and surplus, and limits all such transactions with all affiliates to an amount equal to 20.0%
of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and
requires that all transactions be on terms substantially the same, or at least as favorable to the Bank, as those provided to a non-
affiliate. The term “covered transaction” includes a loan by the Bank to an affiliate, the purchase of or investment in securities
issued by an affiliate by the Bank, the purchase of assets by the Bank from an affiliate, the acceptance by the Bank of securities
issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance by the
Bank of a guarantee, acceptance or letter of credit on behalf of an affiliate. Loans by the Bank to an affiliate must be
collateralized.
In addition, subject to certain exceptions, the Federal Reserve Act and related regulations place quantitative and other
restrictions on loans to executive officers, directors and principal stockholders of the Bank and its affiliates, including a
requirement that loans to directors, executive officers and principal stockholders be made on terms substantially the same as
those offered in comparable transactions to other persons, and not involve more than the normal risk of repayment or present
other unfavorable features.
14
The Company and its affiliates, including the Bank, maintain programs to meet the limitations on transactions with affiliates
and restrictions on loans to insiders and the Company believes it and the Bank are currently in compliance with these
requirements.
Identity Theft
Under the Fair and Accurate Credit Transactions Act (FACT Act), the Bank is required to develop and implement a written
Identity Theft Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with the opening of
certain accounts or certain existing accounts. Under the FACT Act, the Bank is required to adopt reasonable policies and
procedures to (i) identify relevant red flags for covered accounts and incorporate those red flags into the program: (ii) detect red
flags that have been incorporated into the program; (iii) respond appropriately to any red flags that are detected to prevent and
mitigate identity theft; and (iv) ensure the program is updated periodically, to reflect changes in risks to clients or to the safety
and soundness of the financial institution or creditor from identity theft.
The Bank maintains a program to meet the requirements of the FACT Act and the Bank believes it is currently in compliance
with these requirements.
Consumer Protection Laws and Regulations; Other Regulations
The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern
almost every aspect of its business relationships with consumers, including but not limited to the Truth-in-Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Fair Housing Act, the Secure and Fair Enforcement in Mortgage Licensing Act, the Real Estate Settlement Procedures
Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service
Members Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer
Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws
governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and
various regulations that implement the foregoing. Among other things, these laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal with clients when taking deposits, making loans,
collecting loans and providing other services. If the Bank fails to comply with these laws and regulations, it may be subject to
various penalties.
The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) as an independent bureau within the
Federal Reserve System that is responsible for regulating consumer financial products and services under federal consumer
financial laws. The CFPB has broad rulemaking authority with respect to these laws. The Company and the Bank are subject to
CFPB’s regulations regarding consumer financial services and products. Banks and bank holding companies with assets in
excess of $10 billion are also subject to supervision and examination by the CFPB with respect to federal consumer protection
laws and regulations. The CFPB has issued numerous regulations, and is expected to continue to do so in the next few years.
The CFPB’s rulemaking, examination and enforcement authority has significantly affected, and is expected to continue to
significantly affect, financial institutions involved in the provision of consumer financial products and services, including the
Company and the Bank.
The CFPB has issued rules under the Dodd-Frank Act affecting the Bank’s residential mortgage lending business, including
ability-to-repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-
cost mortgage requirements, appraisal and escrow standards and requirements for higher-priced mortgages.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs
and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have
also recently implemented or modified their data breach notification and data privacy requirements. For example, the California
Consumer Privacy Act became effective on January 1, 2020. We expect this trend of state-level activity in those areas to
continue, and are continually monitoring developments in the states in which our clients are located.
Restrictions on residential mortgages promulgated under the Dodd-Frank Act include (i) a requirement that lenders make a
determination that at the time a residential mortgage loan is consummated the consumer has a reasonable ability to repay the
loan and related costs; (ii) a ban on loan originator compensation based on the interest rate or other terms of the loan (other than
the amount of the principal); (iii) a ban on prepayment penalties for certain types of loans; (iv) bans on arbitration provisions in
mortgage loans; and (v) requirements for enhanced disclosures in connection with the making of a loan. The Dodd-Frank Act
also imposes a variety of requirements on entities that service mortgage loans.
The Bank is a member of the FHLB, which makes loans or advances to members. All advances are required to be fully secured
by sufficient collateral as determined by the FHLB. To be a FHLB member, financial institutions must demonstrate that they
originate and/or purchase long-term home mortgage loans or mortgage-backed securities. The Bank is required to purchase and
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maintain stock in the FHLB. At December 31, 2019, the Bank had $32.3 million in FHLB stock, which was in compliance with
this requirement.
Volcker Rule
The so-called “Volcker Rule” issued under the Dodd-Frank Act, which became effective in July 2015, restricts the ability of the
Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to engage in certain types of
proprietary trading. Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and
affiliates (collectively, banking entities), are generally prohibited, subject to certain exemptions, from proprietary trading of
securities and other financial instruments and from acquiring or retaining an ownership interest in a “covered fund.”
Trading in certain government obligations is not prohibited. These include, among others, obligations of or guaranteed by the
United States or an agency or government sponsored entity (GSE) of the United States, obligations of a State of the United
States or a political subdivision thereof, and municipal securities. Proprietary trading generally does not include transactions
under repurchase and reverse repurchase agreements, securities lending transactions and purchases and sales for the purpose of
liquidity management if the liquidity management plan meets specified criteria; nor does it generally include transactions
undertaken in a fiduciary capacity.
In October 2019, the FRB, OCC, FDIC, Commodity Futures Trading Commission and SEC finalized rules to tailor the
application of the Volcker Rule based on the size and scope of a banking entity’s trading activities and to clarify and amend
certain definitions, requirements and exemptions. These regulators have also stated their intention to engage in further
rulemaking with respect to the implementing regulations relating to covered funds, including potential changes to the definition
of “covered fund” and the prohibitions on certain covered transactions. The ultimate impact of any amendments to the Volcker
Rule will depend on, among other things, further rulemaking and implementation guidance from the relevant U.S. federal
regulatory agencies and the development of market practices and standards. We generally do not engage in the businesses
prohibited by the Volcker Rule; therefore, the Volcker Rule does not have a material effect on the operations of the Company
and its subsidiaries.
Future Legislation or Regulation
In light of recent conditions in the United States economy and the financial services industry, the Trump administration,
Congress, the regulators and various states continue to focus attention on the financial services industry. Additional proposals
that affect the industry have been, and will likely continue to be, introduced. We cannot predict whether any of these proposals
will be enacted or adopted or, if they are, the effect they would have on our business, our operations or financial condition.
Item 1A. Risk Factors
An investment in our securities is subject to certain risks. These risk factors should be considered by prospective and current
investors in our securities when evaluating the disclosures in this Annual Report on Form 10-K. The risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following
risks actually occur, our business, results of operations and financial condition could suffer. In that event, the value of our
securities could decline, and you may lose all or part of your investment.
Risks Relating to Our Business and Operating Environment
The primary focus of our business strategy is transitioning to a relationship-focused business bank, which presents a
number of challenges and risks.
For most of our operating history, reflecting the Bank’s roots as a thrift institution, the vast majority of our loans were secured
by single family residential real estate. The Bank converted from a federal savings bank to a national bank in 2013, and has
recently transformed to a relationship focused business bank. At December 31, 2019, commercial loans totaled $4.31 billion, or
72.4% of total loans held for investment, as compared to $1.04 billion, or 42.7% of total loans held for investment, at December
31, 2013. Commercial loans at December 31, 2019 were principally comprised of commercial real estate loans, commercial and
industrial loans and multifamily loans, totaling $818.8 million, $1.69 billion and $1.49 billion, and representing 13.8%, 28.4%
and 25.1%, of total loans held for investment. As a general matter, commercial real estate and multifamily loans and
commercial and industrial loans are higher yielding, but have a greater risk of loss, than single family residential real estate
loans.
As part of our efforts to transition to a relationship focused business bank, we are focused on marketing our products and
services to businesses, business-owners and entrepreneurs.
Building out our core business banking platform has required us to make a significant investment in human capital. During
2019, we changed almost our entire executive management team and transformed our business banking teams and may add
more new hires in the future. No assurance can be given that we will be able to retain the recent hires or attract and retain
additional new hires with the requisite qualifications. The expanded business banking team has been tasked with growing
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relationships and market share while delivering a tailored client experience. A key marker of success in this area will be growth
in core deposits, which we define as low interest-bearing and noninterest-bearing demand deposits, savings, money market
deposit accounts, and certificates of deposit, excluding brokered deposits, to provide a less costly and more stable source of
funding. It may prove difficult to grow our core deposit base. See “--We may not be able to develop and maintain a strong core
deposit base or other low cost funding sources.”
If we are not successful in our efforts to fully transition to a relationship focused business bank, this could adversely affect our
business, financial condition and results of operations.
Our income property loans, consisting of commercial real estate and multifamily loans, involve higher principal
amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control
of our borrowers.
We originate commercial real estate and multifamily loans for individuals and businesses for various purposes, which are
secured by commercial properties. These loans typically involve higher principal amounts than other types of loans, and
repayment is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts
sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local
market conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained
or renewed in a timely manner or at all, the borrower’s ability to repay the loan may be impaired.
Commercial real estate and multifamily loans also expose us to credit risk because the collateral securing these loans often
cannot be sold easily. In addition, many of our commercial real estate and multifamily loans are not fully amortizing and
contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the
underlying property in order to make the payment, which may increase the risk of default or non-payment.
If we foreclose on a commercial real estate or multifamily loan, our holding period for the collateral typically is longer than for
residential mortgage loans because there are fewer potential purchasers of the collateral. Additionally, commercial real estate
and multifamily loans generally have relatively large balances to single borrowers or groups of related borrowers. Accordingly,
if we make any errors in judgment in the collectability of our commercial real estate and multifamily loans, any resulting
charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Our
commercial real estate and multifamily loans decreased during the year ended December 31, 2019, to $2.31 billion, or 38.9% of
our total loans held-for-investment from $3.11 billion, or 40.4% of our total loans held-for-investment, at December 31, 2018.
Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default.
We make our commercial and industrial loans primarily based on the identified cash flow of the borrower and secondarily on
the underlying collateral provided by the borrower. Collateral securing commercial and industrial loans may depreciate over
time, be difficult to appraise and fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds
for the repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from
its clients. As of December 31, 2019, our commercial and industrial loans totaled $1.69 billion, or 28.4% of our total loans held-
for-investment.
We may not be able to develop and maintain a strong core deposit base or other low cost funding sources.
We depend on checking, savings and money market deposit account balances and other forms of deposits as the primary source
of funding for our lending activities. Our future growth will largely depend on our ability to expand core deposits, to provide a
less costly and stable source of funding. The deposit markets are competitive, and therefore it may prove difficult to grow our
core deposit base.
In 2019, the Bank focused on remixing the deposit base towards core relationship deposits. The Bank experienced net deposit
outflows from high-rate large balance accounts (defined as $100 million or more in balances) primarily in the former
Institutional Banking business unit.
In 2019, the Bank increased its focus and attention toward expanding its core relationship deposit business, including recruiting
sales and product personnel and adding subject matter expertise. The competitive landscape for deposits continued throughout
2019. Outflows were offset by new account and client acquisitions. In a competitive market, depositors have many choices as to
where to place their deposit accounts. As the Bank continues to grow its core deposit base and seeks to reduce its exposure to
high rate/high volatility accounts, it may continue to experience a net deposit outflow, which could negatively impact our
business, financial condition and results of operations.
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We are reducing the overall size of our organization, and we may encounter difficulties in managing our business as a
result of this reduction of expenses.
The reduction of expenses, including a previously implemented reduction in force, resulted in the loss of some longer-term
employees, the loss of institutional knowledge and expertise and the reallocation and combination of certain roles and
responsibilities across the organization, all of which could adversely affect our operations. Given the complexity and nature of
our business, we must continue to implement and improve our managerial, operational and financial systems, manage our
facilities and continue to recruit and retain qualified personnel. This could be made more challenging by the reduction in
expenses and additional measures we may take to reduce costs, including our continued reduction in use of third party advisors.
As a result, our management may need to divert a disproportionate amount of its attention away from our day-to-day strategic
and operational activities and devote a substantial amount of time to managing these organizational changes. Further, the
restructuring and additional cost containment measures may have unintended consequences, such as attrition beyond our
intended reduction in force and reduced employee morale. Employees who were not affected by the reduction in force may seek
alternate employment, which could require us to obtain contract support at unplanned additional expense.
It is possible that the actual savings we realize from the previously implemented reduction in force and our continued reduction
in use of third party advisors will be less than anticipated and the costs associated with the reduction in force will be greater
than anticipated.
New lines of business, new products and services, or strategic project initiatives may subject us to additional risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of
business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets
are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest
significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new
products or services may not be achieved, and price and profitability targets may not prove feasible, which could in turn have a
material negative effect on our operating results. New lines of business and/or new products or services also could subject us to
additional regulatory requirements, increased scrutiny by our regulators and other legal risks.
Additionally, from time to time we undertake strategic project initiatives. Significant effort and resources are necessary to
manage and oversee the successful completion of these initiatives. These initiatives often place significant demands on a limited
number of employees with subject matter expertise and management and may involve significant costs to implement as well as
increase operational risk as employees learn to process transactions under new systems. The failure to properly execute on these
strategic initiatives could adversely impact our business and results of operations.
Our financial condition and results of operations are dependent on the national and local economy, particularly in the
Bank’s market areas. A worsening in economic conditions in the market areas we serve may impact our earnings
adversely and could increase the credit risk of our loan portfolio.
We cannot accurately predict the possibility of the national or local economy’s return to recessionary conditions or to a period
of economic weakness, which would adversely impact the markets we serve. Our primary market area is concentrated in the
greater Los Angeles, Orange, San Diego, and Santa Barbara counties. Adverse economic conditions in any of these areas can
reduce our rate of growth, affect our clients’ ability to repay loans and adversely impact our financial condition and earnings.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may affect our
profitability adversely.
A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse
effect on our business, financial condition and results of operations:
• Demand for our products and services may decline;
• Loan delinquencies, problem assets and foreclosures may increase;
• Collateral for our loans may decline in value; and
• The amount of our low cost or noninterest-bearing deposits may decrease.
Changes in federal, state or local tax laws, or audits from tax authorities, could negatively affect our financial condition
and results of operations.
We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to
previous periods and as a result could negatively affect our current and future financial performance. In particular, the Tax Cuts
and Jobs Act, which was signed into law in December 2017, includes a number of provisions impacting the banking industry
and the borrowers and the market for residential and commercial real estate. Changes include a lower limit on the deductibility
of interest on residential mortgage loans and home equity loans; a limitation on the deductibility of business interest expense; a
limitation on the deductibility of property taxes and state and local income taxes, etc. The law's limitation on the mortgage
interest deduction and state and local tax deduction for individual taxpayers has increased the after-tax cost of owning a home
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for many of our existing clients. The value of the properties securing loans in our loan portfolio may be adversely impacted as a
result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which
would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
Further, these changes implemented by this tax law could make some businesses and industries less inclined to borrow,
potentially reducing demand for our commercial loan products. Finally, we may be negatively impacted more than our
competitors because our business strategy focuses on California, which has a higher cost real estate market compared to other
states.
We are also subject to potential tax audits in various jurisdictions and in such event, tax authorities may disagree with certain
positions we have taken and assess penalties or additional taxes. While we assess regularly the likely outcomes of these
potential audits, there can be no assurance that we will accurately predict the outcome of a potential audit, and an audit could
have a material adverse impact on our business, results of operations, and financial condition.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our
business.
Severe weather, natural disasters such as earthquakes and wildfires, acts of war or terrorism, pandemics and other adverse
external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our
deposit base, impair the ability of our borrowers to repay their outstanding loans, cause significant property damage or
otherwise impair the value of collateral securing our loans, and result in loss of revenue and/or cause us to incur additional
expenses. Although we have established disaster recovery plans and procedures, and we monitor the effects of any such events
on our loans, properties and investments, the occurrence of any such event could have a material adverse effect on us or our
results of operations and our financial condition.
There are risks associated with our lending activities and our allowance for loan losses may prove to be insufficient to
absorb actual incurred losses in our loan portfolio.
Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance
with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other
things:
• Cash flow of the borrower and/or the project being financed;
•
In the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
• The credit history of a particular borrower;
• Changes in interest rates;
• Changes in economic and industry conditions; and
• The duration of the loan.
We maintain an allowance for loan losses which we believe is appropriate to provide for probable incurred losses inherent in
our loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration
of several factors, including, but not limited to:
• An ongoing review of the quality, size and diversity of the loan portfolio;
• Evaluation of non-performing loans;
• Historical default and loss experience;
• Historical recovery experience;
• Existing economic conditions;
• Risk characteristics of the various classifications of loans; and
• The amount and quality of collateral, including guarantees, securing the loans.
If actual losses on our loans exceed our estimates used to establish our allowance for loan losses, our business, financial
condition and profitability may suffer.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and
requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of
many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and
delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future
trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase
in the provision for loan losses. Deterioration in economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans, fraud and other factors, both within and outside of our control, may require an
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increase in the allowance for loan losses. Our allowance for loan losses was 0.97% of total loans held-for-investment and
132.97% of non-performing loans at December 31, 2019. In addition, bank regulatory agencies periodically review our
allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further charge-offs
(which will in turn also require an increase in the provision for loan losses if the charge-offs exceed the allowance for loan
losses), based on judgments different than that of management. Any increases in the provision for loan losses will result in a
decrease in net income and may have a material adverse effect on our financial condition and results of operations.
Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments, which is effective for
annual and interim periods beginning after December 15, 2019, substantially changes the accounting for credit losses on loans
and other financial assets held by banks, financial institutions and other organizations. The standard changes the existing
incurred loss impairment methodology in GAAP with a methodology that reflects lifetime expected credit losses (CECL) and
requires consideration of a broader range of reasonable and supportable information for credit loss estimates. CECL is generally
thought to result in the earlier recognition of credit losses in financial statements. Under the incurred loss model, we
recognized losses when they were incurred. CECL represents a departure from the incurred loss model. CECL requires loans
held for investment and held-to-maturity securities to be presented at the net amount expected to be collected (net of the
allowance for credit losses). CECL also requires credit losses relating to available-for-sale debt securities to be recorded
through an allowance for credit losses. In addition, the measurement of expected credit losses takes place at the time the
financial asset is first added to the balance sheet (with periodic updates thereafter) and is based on relevant information about
past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the
collectability of the reported amount.
The CECL model materially impacts how we determine our allowance for loan losses and may require us to significantly
increase our allowance for loan losses. Furthermore, we may experience more fluctuations in our allowance for loan losses,
which may be significant. We have developed our models to estimate lifetime expected credit losses on our loans primarily
using a lifetime loss methodology. We have used these models to execute our process for estimating the allowance for credit
losses under the new standard in parallel with our existing process for estimating the allowance for credit losses based on
incurred losses and have developed an appropriate governance process for our estimate of expected credit losses under the new
standard. The adoption of this standard will be applied through a cumulative effect adjustment to retained earnings as of
January 1, 2020. We expect our allowance for credit losses may increase by approximately 5% to 15% from our allowance for
loan losses as of December 31, 2019.
Future provisions under the CECL model could have a material adverse effect on our results of operations and financial
condition. It is also possible that our ongoing lending activity will be negatively impacted in periods following adoption. The
FRB, OCC and FDIC have adopted a rule that gives a banking organization the option to phase in over a three-year period the
day-one adverse effects of CECL on its regulatory capital. We expect to adopt this phase in option during 2020.
Our business may be adversely affected by credit risk associated with residential property and declining property
values.
At December 31, 2019, $1.59 billion, or 26.7% of our total loans held-for-investment, was secured by SFR mortgage loans and
home equity lines of credit (HELOCs), as compared with $2.35 billion, or 30.5% of our total loans held-for-investment, at
December 31, 2018. This type of lending is particularly sensitive to regional and local economic conditions that significantly
impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in
residential real estate values as a result of a downturn in the California housing markets may reduce the value of the real estate
collateral securing these types of loans and increase the risk that we would incur losses if borrowers default on their loans.
Residential loans with high combined loan-to-value ratios generally will be more sensitive to declining property values than
those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of
losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale
proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely
affect our financial condition and results of operations.
Our loan portfolio possesses increased risk due to our level of adjustable rate loans.
A substantial majority of our real estate secured loans held are adjustable rate loans. Any rise in prevailing market interest rates
may result in increased payments for some borrowers who have adjustable rate mortgage loans, increasing the possibility of
defaults.
Our underwriting practices may not protect us against losses in our loan portfolio.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices, including: analyzing
a borrower’s credit history, financial statements, tax returns and cash flow projections; valuing collateral based on reports of
independent appraisers; and verifying liquid assets. Notwithstanding these practices, we have incurred losses on loans that have
met these criteria, and may continue to experience higher than expected losses depending on economic factors and borrower
behavior. In addition, our ability to assess the creditworthiness of our clients may be impaired if the models and approaches we
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use to select, manage, and underwrite our clients become less predictive of future behaviors, or in the case of borrower fraud.
During the year ended December 31, 2018, we recorded a charge-off of $13.9 million, which reflected the outstanding balance
under a $15 million dollar line of credit originated in February 2018 to a borrower that made false representations and provided
false documentation to us. In addition, during the year ended December 31, 2019, we recorded a provision for loan losses of
$36.4 million, primarily attributable to a $35.1 million line of credit originated in November 2017 to a borrower who was
purportedly the subject of a fraudulent scheme. We are actively evaluating all available sources of recovery, although no
assurance can be given that we will be successful in that regard. Finally, we may have higher credit risk, or experience higher
credit losses, to the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower
or collateral. At December 31, 2019, 74.3% of our commercial real estate loans, 82.2% of our multifamily loans and 68.7% of
our originated SFR mortgage loans were secured by collateral in southern California. Deterioration in real estate values and
underlying economic conditions in southern California could result in significantly higher credit losses to our portfolio.
Our non-traditional and interest only SFR loans expose us to increased lending risk.
Many of the residential mortgage loans we have originated for investment consist of non-traditional SFR mortgage loans that
do not conform to Fannie Mae or Freddie Mac underwriting guidelines as a result of loan-to-value ratios or debt-to-income
ratios, loan terms, loan size (exceeding agency limits) or other exceptions from agency underwriting guidelines. Moreover,
many of these loans do not meet the qualified mortgage definition established by the Consumer Financial Protection Bureau,
and therefore contain additional regulatory and legal risks. See “Rulemaking" changes by the CFPB in particular are expected
to result in higher regulatory and compliance costs that may adversely affect our financial condition and results of operations.”
In addition, the secondary market demand for nonconforming mortgage loans generally is limited, and consequently, we may
have a difficult time selling the nonconforming loans in our portfolio should we decide to do so.
In the case of interest only loans, a borrower’s monthly payment is subject to change when the loan converts to fully-amortizing
status. Since the borrower’s monthly payment may increase by a substantial amount, even without an increase in prevailing
market interest rates, the borrower might not be able to afford the increased monthly payment. In addition, interest only loans
have a large, balloon payment at the end of the loan term, which the borrower may be unable to pay. Negative amortization
involves a greater risk to us because credit risk exposure increases when the loan incurs negative amortization and the value of
the home serving as collateral for the loan does not increase proportionally. Negative amortization is only permitted up to 110%
of the original loan to value ratio during the first five years the loan is outstanding, with payments adjusting periodically as
provided in the loan documents, potentially resulting in higher payments by the borrower. The adjustment of these loans to
higher payment requirements can be a substantial factor in higher loan delinquency levels because the borrowers may not be
able to make the higher payments. Also, real estate values may decline, and credit standards may tighten in concert with the
higher payment requirement, making it difficult for borrowers to sell their homes or refinance their loans to pay off their
mortgage obligations. For these reasons, interest only loans and negative amortization loans are considered to have an increased
risk of delinquency, default and foreclosure than conforming loans and may result in higher levels of realized losses. Our
interest only loans decreased during the year ended December 31, 2019, to $545.4 million, or 9.2% of our total loans held-for-
investment from $753.1 million, or 9.8% of our total loans held-for-investment, at December 31, 2018.
If our investments in other real estate owned are not properly valued or sufficiently reserved to cover actual losses, or if
we are required to increase our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the
property is taken in as other real estate owned (OREO), and at certain other times during the asset’s holding period. Our net
book value (NBV) in the loan at the time of foreclosure and thereafter is compared to the updated market value (fair value) of
the foreclosed property less estimated selling costs. A charge-off is recorded for any excess in the asset’s NBV over its fair
value. If our valuation process is incorrect, the fair value of our investments in OREO may not be sufficient to recover our NBV
in such assets, resulting in the need for additional write-downs. Additional write-downs to our investments in OREO could have
a material adverse effect on our financial condition and results of operations. Our bank regulators periodically review our
OREO and may require us to recognize further write-downs. Any increase in our write-downs, as required by such regulator,
may have a material adverse effect on our financial condition and results of operations. As of December 31, 2019, we had no
OREO.
We are exposed to risk of environmental liabilities with respect to real properties acquired.
In prior years, due to weakness of the U.S. economy and, more specifically, the California economy, including higher levels of
unemployment than the nationwide average and declines in real estate values, certain borrowers have been unable to meet their
loan repayment obligations and, as a result, we have had to initiate foreclosure proceedings with respect to and take title to a
number of real properties that had collateralized their loans. As an owner of such properties, we could become subject to
environmental liabilities and incur substantial costs for any property damage, personal injury, investigation and clean-up that
may be required due to any environmental contamination that may be found to exist at any of those properties, even though we
did not engage in the activities that led to such contamination. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties seeking damages for environmental contamination
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emanating from the site. If we were to become subject to significant environmental liabilities or costs, our business, financial
condition, results of operations and prospects could be adversely affected.
Secondary mortgage market conditions could have a material adverse impact on our business, results of operations,
financial condition or liquidity.
In addition to being affected by interest rates, the secondary mortgage markets are subject to investor demand for mortgage
loans and mortgage-backed securities and investor yield requirements for those loans and securities. These conditions may
fluctuate or even worsen in the future.
From time to time, as part of our balance sheet management process, we may also sell single family residential loans and other
types of mortgage loans from our portfolio, including multifamily loans. We may use the proceeds of loan sales for generating
new loans or for other purposes. If secondary mortgage market conditions were to deteriorate in the future and we cannot sell
loans at our desired levels, our balance sheet management objectives might not be met. As a result, our business, results of
operations, financial condition or liquidity may be adversely affected.
Any breach of representations and warranties made by us to our residential mortgage loan purchasers or credit default
on our loan sales may require us to repurchase residential mortgage loans we have sold.
Prior to the sale of our Banc Home Loans division, we sold a majority of the residential mortgage loans we originated in the
secondary market pursuant to agreements that generally require us to repurchase loans in the event of a breach of a
representation or warranty made by us to the loan purchaser. Any fraud or misrepresentation during the mortgage loan
origination process, whether by us, the borrower, mortgage broker, or other party in the transaction, or, in some cases, upon any
early payment default on such mortgage loans, may require us to repurchase such loans.
We believe that, as a result of the increased defaults and foreclosures during the last recession resulting in increased demand for
repurchases and indemnification in the secondary market, many purchasers of residential mortgage loans are particularly
sensitive to obtaining indemnification or the requirement of originators to repurchase loans, and would benefit from enforcing
any repurchase remedies they may have. Our exposure to repurchases under our representations and warranties could include
the current unpaid balance of all loans we have sold. During the years ended December 31, 2019, 2018 and 2017, we sold
residential (multifamily and SFR) mortgage loans aggregating $1.13 billion, $14.5 million, and $1.88 billion. To recognize the
potential loan repurchase or indemnification losses on all single family and multifamily loans sold in 2019 and prior to 2019,
we maintained a total reserve of $6.2 million at December 31, 2019. Increases to this reserve as a result of the sale of loans are
a reduction in our gain on the sale of loans. Increases and decreases to this reserve subsequent to the sale are included as a
component of noninterest expense. The determination of the appropriate level of the reserve inherently involves a high degree
of subjectivity and requires us to make estimates of repurchase and indemnification risks and expected losses. The estimates
used could be inaccurate, resulting in a level of reserve that is less than actual losses.
Deterioration in the economy, an increase in interest rates or a decrease in home values could increase client defaults on loans
that were sold and increase demand for repurchases and indemnification and increase our losses from loan repurchases and
indemnification. If we are required to indemnify loan purchasers or repurchase loans and incur losses that exceed our reserve,
this could adversely affect our business, financial condition and results of operations. In addition, any claims asserted against us
in the future by loan purchasers may result in liabilities or legal expenses that could have a material adverse effect on our results
of operations and financial condition.
Other-than-temporary impairment charges in our investment securities portfolio could result in losses and adversely
affect our continuing operations.
As of December 31, 2019, we had $912.6 million of securities available-for-sale, as compared with $1.99 billion of securities
available-for-sale as of December 31, 2018.
As of December 31, 2019, securities available-for-sale that were in an unrealized loss position had a total fair value of $859.3
million with unrealized losses of $17.0 million. These unrealized losses related primarily to collateralized loan obligations.
As of December 31, 2018, securities available-for-sale that were in an unrealized loss position had a fair value of $1.84 billion
and aggregate unrealized losses of $34.3 million.
The Company monitors to ensure it has adequate credit support and, as of December 31, 2019 we believed there was no other-
than-temporary-impairment (OTTI) and did not have the intent to sell any of its securities in an unrealized loss position and it is
likely that it will not be required to sell such securities before their anticipated recovery. We previously recorded OTTI loss of
$3.3 million as of December 31, 2018 following our decision to sell our entire commercial mortgage-backed securities (CMBS)
portfolio, which was completed in January 2019. We also recorded OTTI loss of $731 thousand as of September 30, 2019 as a
result of our decision to sell its U.S. government agency and U.S. government sponsored enterprise residential mortgage-
backed securities.
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The remaining portfolio is evaluated using either OTTI guidance provided by Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 320, Investments-Debt and Equity Securities, or ASC 325, Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in
Securitized Financial Assets. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated
for OTTI under ASC 320. However, certain purchased beneficial interests, including non-agency mortgage-backed securities,
asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase below AA are
evaluated using the model outlined in ASC 325. The collateralized loan obligations in our portfolio referenced above were rated
AA or above at purchase and are not within the scope of ASC 325. For more information about ASC 320 and ASC 325, see
Note 1 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
We closely monitor our investment securities for changes in credit risk. The valuation of our investment securities also is
influenced by external market and other factors, including implementation of SEC and FASB guidance on fair value
accounting. Accordingly, if market conditions deteriorate further and we determine our holdings of other investment securities
are OTTI, our future earnings, stockholders’ equity, regulatory capital and continuing operations could be materially adversely
affected.
Collateralized loan obligations represent a significant portion of our assets.
As of December 31, 2019, based on fair value, $718.4 million, or 9.2% of our total assets, was invested in collateralized loan
obligations (CLOs). Our CLO portfolio consists entirely of variable rate securities, which we believe supports our interest rate
risk management strategy by lowering the extension risk and duration risk inherent to certain fixed rate investment securities.
However, in a decreasing interest rate environment, our interest income may be negatively impacted.
As of December 31, 2019, based on amortized cost, $24.0 million of our CLO holdings were AAA rated and $709.6 million
were AA rated. As of December 31, 2019, there were no CLOs rated below AA and none of the CLOs were subject to ratings
downgrade in 2019. All of our CLOs are floating rate, with rates set on a quarterly basis at three month LIBOR plus a spread.
As an investor in CLOs, we purchase specific tranches of debt instruments that are secured by professionally managed
portfolios of senior secured loans to corporations. CLOs are not secured by residential or commercial mortgages. CLO
managers are typically large non-bank financial institutions or banks. CLOs are typically $300 million to $1 billion in size,
contain 100 or more loans, and have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche.
Interest and principal are paid out to the AAA tranche first then move down the capital stack. Losses are borne by the equity
tranche first then move up the capital stack. CLOs typically have subordination levels that range from approximately 33% to
39% for AAA, 20% to 28% for AA, 15% to 18% for A and 10% to 14% for BBB.
The CLOs we currently hold may, from time to time, not be actively traded, and under certain market conditions may be
relatively illiquid investments, and volatility in the CLO trading market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, perceived changes in the economy, performance by the
manager and performance of the underlying loans.
Although we attempt to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of
AA or higher and by maintaining a pre-purchase due diligence and ongoing review process by a dedicated credit administration
team, no assurance can be given that these risk mitigation efforts will be successful.
We are subject to certain risks in connection with our use of technology.
Our cyber-security measures may not be sufficient to mitigate losses or exposure to cyber-attack or cyber theft.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our
client relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure
processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we
take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems,
software, and networks are vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and
other types of cyber-attacks. If one or more of these events occur, this could jeopardize our clients' confidential and other
information that we process and store, or otherwise cause interruptions in our operations or the operations of our clients or
counterparties. The occurrence of cyber-attacks may require us to expend significant additional resources to modify our
protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and
financial losses that are either not insured against or not fully covered through our current insurance policies. If a cyber-attack
succeeds in disrupting our operations or disclosing confidential data, we could also suffer significant reputational damage in
addition to possible regulatory fines or client lawsuits.
We provide internet banking services to our clients which have additional cyber risks related to our client’s personal electronic
devices. Any compromise of personal electronic device security could jeopardize the confidential information of our clients
(including user names and passwords) and expose our clients to account take-overs (ATO) and the possibility for financial
crimes such as fraud or identity theft and deter clients from using our internet banking services. We rely on industry-standard
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internet security systems to provide the security and authentication necessary to effect secure transmission of data. These
precautions may not protect our systems from future compromises or data breaches. Losses due to unauthorized account
activity could harm our reputation and may have a material adverse effect on our business, financial condition, results of
operations and prospects.
Our security measures may not protect us from systems failures or interruptions.
While we have established policies and technical controls to prevent or limit the impact of systems failures and interruptions,
there are no absolute assurances that such events will not occur or that the resulting damages will be adequately mitigated.
We rely on communications, information, operating and financial control systems technology from third party service providers,
and we may suffer an interruption in those systems.
We outsource certain aspects of our data processing and operational functions to third party providers. If our third party
providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and
account for transactions could be affected, and our business operations could be adversely impacted.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business,
could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a
material adverse effect on our financial condition and results of operations.
We rely heavily on third party service providers for much of our communications, information, operating and financial control
systems technology, including our online banking services and data processing systems.
We rely on third party providers to help ensure the confidentiality of our client information and acknowledge the additional
risks these third parties expose us to. Third party providers may experience unauthorized access to and disclosure of our
consumer or client information or result in the destruction or corruption of company information. Any failure or interruption, or
breaches in security, of these systems could result in failures or interruptions in our client relationship management, general
ledger, deposit, loan origination and servicing systems, thereby harming our business reputation, operating results and financial
condition. Additionally, interruptions in service and security breaches could lead existing clients to terminate their banking
relationships with us and could make it more difficult for us to attract new banking clients in the future.
To the extent we acquire other banks, bank branches, other assets or other businesses, we may be negatively impacted
by certain risks inherent with such acquisitions.
Acquiring other banks, bank branches, other assets or other businesses involves various risks, including the risks of incorrectly
assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks, branches
or businesses, the risk of loss of clients and/or employees of the acquired bank, branch or business, executing cost savings
measures, not achieving revenue enhancements and otherwise not realizing the transaction’s anticipated benefits. Our ability to
address these matters successfully cannot be assured. There is also the risk that the requisite regulatory approvals might not be
received and other conditions to consummation of a transaction might not be satisfied during the anticipated timeframes, or at
all. In addition, pursuing an acquisition may divert resources or management’s attention from ongoing business operations, may
require investment in integration and in development and enhancement of additional operational and reporting processes and
controls, and may subject us to additional regulatory scrutiny. To finance an acquisition, we may borrow funds, thereby
increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing
stockholders.
Our business is subject to interest rate risk and variations in interest rates may hurt our profits.
To be profitable, we have to earn more money in interest that we receive on loans and investments than we pay to our
depositors and lenders in interest. If interest rates rise, our net interest income and the value of our assets could be reduced if
interest paid on interest-bearing liabilities, such as deposits and borrowings, increases more quickly than interest received on
interest-earning assets, such as loans, and investment securities. This is most likely to occur if short-term interest rates increase
at a faster rate than long-term interest rates, which would cause our net interest income to go down. In addition, rising interest
rates may hurt our income, because that may reduce the demand for loans and the value of our securities. In a rapidly changing
interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our
financial condition and results of operations.
We face significant operational risks.
We operate many different financial service functions and rely on the ability of our employees, third party vendors and systems
to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by
employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology
errors or hacking and breaches of internal control systems.
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Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for
losses.
Our enterprise risk management framework seeks to mitigate risk and loss to us. We have established comprehensive policies
and procedures and an internal control framework designed to provide a sound operational environment for the types of risk to
which we are subject, including credit risk, market risk (interest rate and price risks), liquidity risk, operational risk, compliance
risk, strategic risk, and reputational risk. However, as with any risk management framework, there are inherent limitations to
our current and future risk management strategies, including risks that we have not appropriately anticipated or identified. In
certain instances, we rely on models to measure, monitor and predict risks. However, these models are inherently limited
because they involve techniques, including the use of historical data in some circumstances, and judgments that cannot
anticipate every economic and financial outcome in the markets in which we operate, nor can they anticipate the specifics and
timing of such outcomes. There is no assurance that these models will appropriately capture all relevant risks or accurately
predict future events or exposures. Accurate and timely enterprise-wide risk information is necessary to enhance management’s
decision-making in times of crisis. If our enterprise risk management framework proves ineffective or if our enterprise-wide
management information is incomplete or inaccurate, we could suffer unexpected losses, which could materially adversely
affect our results of operations or financial condition. In addition, our businesses and the markets in which we operate are
continuously evolving. We may fail to fully understand the implications of changes in our businesses or the financial markets or
fail to adequately or timely enhance our enterprise risk framework to address those changes. If our enterprise risk framework is
ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses,
our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find
ourselves out of compliance with applicable regulatory or contractual mandates.
Managing reputational risk is important to attracting and maintaining clients, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally,
unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies,
regulatory investigations, marketplace rumors and questionable or fraudulent activities of our clients. We have policies and
procedures in place to promote ethical conduct and protect our reputation. However, these policies and procedures may not be
fully effective and cannot adequately protect against all threats to our reputation. Negative publicity regarding our business,
employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a
decline in revenues and increased governmental oversight.
If the public perception of financial institutions remains negative, then our reputation and business may be adversely affected
by negative publicity or information regarding our business and personnel, whether or not accurate or true. Such information
may be posted on social medial or other Internet forums or published by news organizations and the speed and pervasiveness
with which information can be disseminated through these channels, in particular social media, may magnify risks relating to
negative publicity.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other
sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance
our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial
services industry or economy in general.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as
a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative
views and expectations about the prospects for the financial services industry.
We depend on our directors and key management personnel.
Our success will, to a large extent, depend on the continued service of our directors and continued employment of our key
management personnel. The unexpected loss of the services of any of these individuals could have a detrimental effect on our
business. Although we have entered into employment agreements with our Chief Executive Officer and our Chief Financial
Officer, no assurance can be given that these individuals, or any of our key management personnel, will continue to be
employed by us. The loss of any of these individuals could negatively affect our ability to achieve our business plan and could
have a material adverse effect on our results of operations and financial condition.
We rely on numerous external vendors.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the
contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial
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condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our
operations, which in turn could have a material negative impact on our financial condition and results of operations. We also
could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less
favorable to us.
We operate in a highly regulated environment and our operations and income may be affected adversely by changes in
laws, rules and regulations governing our operations.
We are subject to extensive regulation and supervision by the FRB, the OCC and the CFPB. The FRB regulates the supply of
money and credit in the United States. Its fiscal and monetary policies determine in a large part our cost of funds for lending
and investing and the return that can be earned on those loans and investments, both of which affect our net interest margin.
FRB policies can also materially affect the value of financial instruments that we hold, such as debt securities, certain mortgage
loans held-for-sale and mortgage servicing rights (MSRs). Its policies also can affect our borrowers, potentially increasing the
risk that they may fail to repay their loans or satisfy their obligations to us. Changes in policies of the FRB are beyond our
control and the impact of changes in those policies on our activities and results of operations can be difficult to predict.
The Company and the Bank are heavily regulated. This oversight is to protect depositors, the federal deposit insurance fund
(DIF) and the banking system as a whole, and not stockholders or debt holders. These regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities, including the ability to impose increased capital
requirements and restrictions on a bank’s operations, to reclassify assets, to determine the adequacy of a bank’s allowance for
loan losses and to set the level of deposit insurance premiums assessed.
Congress, state legislatures and federal and state agencies continually review banking, lending and other laws, regulations and
policies for possible changes. Any change in such regulation and oversight, whether in the form of regulatory policy, new
regulations or legislation, that applies to us or additional deposit insurance premiums could have a material adverse impact on
our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change.
Any new laws, rules and regulations including the recently enacted California Consumer Privacy Act (CCPA) could make
compliance more difficult, expensive, costly to implement or may otherwise adversely affect our business, financial condition
or growth prospects. Such changes could subject us to additional costs, limit the types of financial services and products we
may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
Rulemaking changes implemented by the CFPB in particular have resulted in higher regulatory and compliance costs
that may adversely affect our financial condition and results of operations.
The Dodd-Frank Act created the CFPB, an independent federal agency with broad rulemaking, supervisory and enforcement
powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and
certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions,
their affiliates, their service providers and certain non-depository entities such as debt collectors and consumer reporting
agencies if the assets of the institution exceed the $10 billion threshold.
The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial
products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential
mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows borrowers to
raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The
Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at
the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and
federal laws and regulations.
CFPB regulations impact nearly every aspect of the lifecycle of a residential mortgage loan. Among other things, the CFPB
rules require banks to: (i) develop and implement procedures to ensure compliance with an “ability to repay” test and identify
whether a loan meets a new definition for a “qualified mortgage,” in which case a rebuttable presumption exists that the creditor
extending the loan has satisfied the ability to repay test; (ii) implement new or revised disclosures, policies and procedures for
originating and servicing mortgages including, but not limited to, pre-loan counseling, early intervention with delinquent
borrowers and specific loss mitigation procedures for loans secured by a borrower's principal residence; (iii) comply with
additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new disclosure requirements and
standards for appraisals and certain financial products; and (v) maintain escrow accounts for higher-priced mortgage loans for a
longer period of time. These rules include the TILA-RESPA Integrated Disclosure rules, which require certain disclosure forms
to be provided to borrowers.
Compliance with the rules and policies adopted by the CFPB has limited the products we may permissibly offer to some or all
of our clients, or limited the terms on which those products may be issued, or may adversely affect our ability to conduct our
business as previously conducted. We may also be required to add compliance personnel or incur other significant compliance-
related expenses. Our business, financial condition, results of operations and/or competitive position may be adversely affected
as a result.
26
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material
penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose
nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state
agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance
under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of
sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on
merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business,
financial condition and results of operations.
Non-compliance with the Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions
or operating restrictions.
We are subject to government legislation and regulation, including but not limited to the USA PATRIOT and Bank Secrecy
Acts, which require financial institutions to develop programs to detect money laundering, terrorist financing, and other
financial crimes. If detected, financial institutions are obligated to report such activity to the Financial Crimes Enforcement
Network, a bureau of the United States Department of the Treasury. These regulations require financial institutions to establish
procedures for identifying and verifying the identity of clients seeking to establish and maintain a relationship with a financial
institution. Failure to comply with these regulations could result in fines, sanctions or restrictions that could have a material
adverse effect on our strategic initiatives and operating results, and could require us to make changes to our operations and the
clients that we serve. Several banking institutions have received large fines, or suffered limitations on their operations, for non-
compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in
compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in
detecting violations of these laws and regulations.
Our federal regulators have extensive discretion in connection with their supervisory and enforcement activities over our
operations and compliance with the USA PATRIOT and Bank Secrecy Acts. Current laws and applicable regulations are subject
to frequent change. Any new laws and regulations could make compliance more difficult or expensive or otherwise adversely
affect our business. One aspect of our business that we believe presents risks in this particular area is the conflict between
federal and state law, including but not limited to cannabis and cannabis related businesses, which are legal in the State of
California and prohibited by federal law. If our risk management and compliance programs prove to be ineffective, incomplete
or inaccurate, we could suffer unexpected losses, which could materially adversely affect our results of operations or financial
condition. As part of our federal regulators' enforcement authority, significant civil or criminal monetary penalties, consent
orders, or other regulatory actions can be assessed against the Bank. Such actions could require us to make changes to our
operations, including the clients that we serve, and may have an adverse impact on our operating results.
Our holding company relies on dividends from the Bank for substantially all of its income and as the primary source of
funds for cash dividends to our preferred and common stockholders.
Our primary source of revenue at the holding company level is dividends from the Bank and we also have previously relied on
the net proceeds of capital raising transactions as the primary source of funds for cash dividends to our preferred and common
stockholders. To the extent the holding company is limited in the amount of dividends the Bank pays to the holding company or
in its ability to raise capital in the future, the holding company's ability to pay cash dividends to its stockholders could likewise
be limited.
The OCC regulates and, in some cases, must approve the amounts the Bank pays as dividends to us. Currently, the Bank does
not have sufficient dividend-paying capacity to declare and pay such dividends to us without obtaining prior approval from the
OCC under applicable regulations, which requires prior approval if a cash dividend would exceed the sum of current period net
income and retained earnings from the past two years, after deducting dividends previously declared (among other amounts).
Further, the Bank’s ability to pay dividends can be restricted or eliminated if the Bank does not meet the capital conservation
buffer requirement or for other supervisory reasons. If the Bank is unable to pay dividends to the holding company, then we
may not be able to service our debt, including our senior notes, pay our other obligations or pay cash dividends on our preferred
and common stock. Our inability to service our debt, pay our other obligations or pay dividends to our stockholders could have
a material adverse impact on our financial condition and the value of your investment in our securities.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is
needed or on acceptable terms.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some point,
we may need to raise additional capital to support continued growth.
27
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, our
financial performance and a number of other factors, many of which are outside our control. Accordingly, we cannot assure you
of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when
needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could
be materially and adversely affected.
The Volcker Rule covered fund provisions could adversely affect us.
The so-called “Volcker Rule” provisions of the Dodd-Frank Act and its implementing regulations restrict our ability to sponsor
or invest in “covered funds” (as defined in the implementing regulations). When the implementing regulations were adopted,
banking entities such as us were required to conform our covered fund investments and activities by July 21, 2015. However,
on December 18, 2014, the FRB extended the conformance period to July 21, 2016, for investments in, and relationships with,
covered funds (including non-conforming CLOs) that were in place prior to December 31, 2013. The FRB later extended the
conformance period until July 21, 2017. The Volcker Rule excludes from the definition of “covered fund” loan securitizations
that meet specified investment criteria and do not invest in impermissible assets. Accordingly, investments in CLOs that qualify
for the loan securitization exclusion are not prohibited by the Volcker Rule. It is our practice to invest only in CLOs that meet
the Volcker Rule’s definition of permissible loan securitizations and therefore are Volcker Rule compliant. However, the
Volcker Rule and its implementing regulations are relatively new and untested, and it is possible that certain CLOs in which we
have invested may be found subsequently to be covered funds. If so, we may be required to divest our interest in
nonconforming CLOs, and we could incur losses on such divestitures.
We have a net deferred tax asset that may or may not be fully realized.
We have a net deferred tax asset (DTA) and cannot assure that it will be fully realized. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and
liabilities computed using enacted tax rates. If we determine that we will not achieve sufficient future taxable income to realize
our net deferred tax asset, we are required under generally accepted accounting principles (GAAP) to establish a full or partial
valuation allowance. If we determine that a valuation allowance is necessary, we are required to incur a charge to operations.
We regularly assess available positive and negative evidence to determine whether it is more likely than not that our net
deferred tax asset will be realized. Realization of a deferred tax asset requires us to apply significant judgment and is inherently
speculative because it requires estimates that cannot be made with certainty. At December 31, 2019, we had a net DTA of $44.9
million. For additional information, see Note 14 to Consolidated Financial Statements included in Item 8 of this Annual Report
on Form 10-K.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks,
savings institutions, mortgage brokerage firms, credit unions, finance companies, non-bank lenders, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have
substantially greater name recognition, resources and lending limits than we do and may offer certain services or prices for
services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our
markets.
In addition, our future success will depend, in part, upon our ability to address the needs of our clients by using technology to
provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not
be able to effectively implement new technology-driven products and services or be successful in marketing these products and
services to our clients.
Our business could be negatively affected as a result of actions by activist stockholders.
Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase
stockholder value through various corporate actions. In the past, we have added to our board of directors members affiliated
with two of our major stockholders, PL Capital Advisors LLC (PL Capital) and Patriot Financial Partners.
However, we may have disagreements with activist stockholders which could prove disruptive to our operations. Activist
stockholders could seek to elect their own candidates to our board of directors or could take other actions intended to challenge
our business strategy and corporate governance. Responding to actions by activist stockholders may adversely affect our
profitability or business prospects, by diverting the attention of management and our employees from executing our strategic
plan. Any perceived uncertainties as to our future direction or strategy arising from activist stockholder initiatives could also
cause increased reputational, operational, financial, regulatory and other risks, harm our ability to raise new capital, or
adversely affect the market price or increase the volatility of our securities.
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Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a
third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit
from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement
shares. Some short sellers may seek to drive down the price of shares they have sold short by disseminating negative reports
about the issuers of such shares.
During late 2016, we became aware of certain allegations posted anonymously in various financial blog posts. The authors of
the blog posts have typically disclosed that they hold a short position in our stock. Following the blog posting in late 2016, the
market price of our common stock initially dropped significantly. While the price of our common stock subsequently increased,
any additional postings and other negative publicity that have previously led to intense public scrutiny, may cause further
volatility in our stock price and a decline in the value of a stockholder’s investment us.
When the market price of a company's stock drops significantly, as ours did initially following the posting of the first blog, it is
not unusual for stockholder lawsuits to be filed or threatened against the company and its board of directors and for a company
to suffer reputational damage. Multiple lawsuits were in fact threatened and filed against us shortly following the posting of the
first blog, and as discussed under Item 3 of this report, the first of several putative class lawsuits against us was filed on January
23, 2017. These lawsuits, and any other lawsuits, have caused us to incur substantial costs and diverted the time and attention of
our board and management, and may continue to do so in the future. In addition, reputational damage to us may affect our
ability to attract and retain deposits and may cause our deposit costs to increase, which could adversely affect our liquidity and
earnings. Reputational damage may also affect our ability to attract and retain loan clients and maintain and develop other
business relationships, which could likewise adversely affect our earnings. Continued negative reports issued by short sellers
could also negatively impact our ability to attract and retain employees.
Uncertainty relating to the London Inter-Bank Offered Rate (LIBOR) calculation process and potential phasing out of
LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR,
announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the
administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot
and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide
LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United
Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR
and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans,
debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally.
Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely
affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost
of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute
indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in
effecting the transition, and may be subject to disputes or litigation with clients over the appropriateness or comparability to
LIBOR of the substitute indices, which could have a material adverse effect on our results of operations and financial condition.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other
things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended
alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar
LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not
possible to predict whether these recommendations and proposals will be broadly accepted, whether they will continue to
evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019, we conduct our operations from our main and executive offices at 3 MacArthur Place, Santa Ana,
California and 32 branch offices in Los Angeles, Orange, San Diego, Santa Barbara counties in California. For additional
information, see Note 6 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Item 3. Legal Proceedings
From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business.
29
On October 28, 2019, we entered into a Stipulation of Settlement (“Settlement Stipulation”) with the lead plaintiff to settle class
action lawsuits that were previously consolidated in the United District Court for the Central District of California (the “Court”)
under the caption In re Banc of California Securities Litigation, Case No. SACV 17-00118 AG, consolidated with SACV
17-00138 AG. Under the terms of the Settlement Stipulation, our insurance carriers will pay $19.75 million, which will be
distributed to eligible shareholders who purchased Company stock between April 15, 2016 and January 20, 2017, after payment
of attorney’s fees and costs, to be determined by the Court. We will not be required to contribute any cash to the settlement
payments. Pursuant to the settlement, the action against us will be dismissed with prejudice. Plaintiff will also dismiss with
prejudice its claims against our former Chief Executive Officer and Chairman Steven Sugarman. While we do not believe the
plaintiff’s claims are meritorious, we believe that ending the costs and distraction of the litigation is in the best interests of the
Company and our shareholders. The settlement and the dismissals are subject to approval by the Court and meeting certain
conditions, and there are no assurances that Court approval will be obtained or that those conditions will be satisfied. On
December 4, 2019 the Court preliminarily approved the settlement. Members of the class have been provided notice and will
have an opportunity to object or opt out. The Court has scheduled a fairness hearing on March 16, 2020 at which time the
Court will determine whether the settlement shall be finally approved. The foregoing description of the settlement does not
purport to be complete and is subject to, and is qualified in its entirety by reference to, the complete text of the settlement
stipulation that will be filed with the Court.
On April 2, 2019, the first of three shareholder derivative actions, Gordon v. Benett, No. 8:19-cv-621, was filed against current
and former officers and directors of Banc of California, Inc. in the United States District Court for the Central District of
California. The Gordon action asserts claims for breach of fiduciary duty against Halle J. Benett, Jonah Schnel, Jeffrey Karish,
Robert Sznewajs, Eric Holoman, Chad Brownstein, Steven Sugarman, Richard Lashley, Douglas Bowers and John Grosvenor.
On June 10, 2019, a second shareholder derivative action, Johnston v. Sznewajs, No. 8:19-cv-01152, was filed against current
and former officers and directors of Banc of California, Inc. in the United States District Court for the Central District of
California. The Johnston action asserts claims for breach of fiduciary duty and unjust enrichment against Robert Sznewajs,
Jonah Schnel, Halle Benett, Richard Lashley, Steven Sugarman, John Grosvenor, Chad Brownstein, Jeffrey Karish and Eric
Holoman. On June 18, 2019, a third shareholder derivative action, Witmer v. Sugarman, No. 19STCV21088, was filed against
current and former officers and directors of Banc of California, Inc. in Los Angeles County Superior Court. The Witmer action
asserts claims for breach of fiduciary duty, unjust enrichment and corporate waste against Steven Sugarman, Ronald Nicolas,
Jr., Robert Sznewajs, Chad Brownstein, Halle Benett, Douglas Bowers, Jeffrey Karish, Richard Lashley, Jonah Schnel, Eric
Holoman and Jeffrey Seabold. On June 24, 2019, the Witmer Action was removed to the United States District Court for the
Central District of California and assigned docket number 2:19-cv-5488. On September 23, 2019, the Court, ordered that the
Gordon, Johnston, and Witmer actions are consolidated for all purposes, including pre-trial proceedings and trial. On
November 22, 2019, plaintiffs filed a consolidated complaint.
In general, the consolidated complaint alleges that our board wrongfully refused demands that the plaintiffs made to our board
of directors that we should initiate litigation against the various current and former officers and directors based on their alleged
role in the purported concealment of the Company's alleged relationship with Jason Galanis and various statements made by the
Company alleged to be false and misleading. The plaintiffs seek an unspecified amount of damages to be paid to the Company,
adoption of corporate governance reforms, and equitable and injunctive relief. We do not believe that the demands made by
these shareholder derivative plaintiffs were wrongfully refused, and we intend to vigorously contest these actions on that basis.
Our motion to dismiss the action is scheduled to be filed on March 16, 2020 and a hearing on that motion is scheduled for June
22, 2020.
Item 4. Mine Safety Disclosures
Not applicable
30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our voting common stock (symbol BANC) has been listed on the New York Stock Exchange (NYSE) since May 29, 2014 and
prior to that date was listed on the NASDAQ Global Market. Our Class B non-voting common stock is not listed or traded on
any national securities exchange or automated quotation system, and there currently is no established trading market for such
stock. The approximate number of holders of record of our voting common stock as of December 31, 2019 was 1,328. Certain
shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or
included in the foregoing number. There were three holders of record of our Class B non-voting common stock as of
December 31, 2019. At December 31, 2019 there were 51,997,061 shares and 50,413,681 shares of voting common stock issued
and outstanding, respectively, and 477,321 shares of Class B non-voting common stock issued and outstanding.
Dividend Policy
The timing and amount of cash dividends paid to our preferred and common stockholders depends on our earnings, capital
requirements, financial condition and other relevant factors, including the discretion of the Board of Directors with respect to
common stockholder dividends. Our primary source of revenue at the holding company level is dividends from the Bank, and to
a lesser extent our ability to raise capital or debt. To the extent we are unable to access dividends from the Bank or are limited
in our ability to raise capital in the future, our ability to pay cash dividends to our stockholders would likely be limited. See
“Item 1A. Risk Factors - Our holding company relies on dividends from the Bank for substantially all of its income as the
primary source of funds for cash dividends to our preferred and common stockholders” of this Annual Report on Form 10-K.
The Bank paid dividends of $142.5 million to Banc of California, Inc. during the year ended December 31, 2019. For a
description of the regulatory restriction on the ability of the Bank to pay dividends to Banc of California, Inc., and on the ability
of Banc of California, Inc. to pay dividends to its stockholders, see “Regulation and Supervision” included in Item 1 of this
Annual Report on Form 10-K.
As of December 31, 2019, we had 197,106 shares of preferred stock issued and outstanding, consisting of 96,629 shares of
7.375% Non-Cumulative Perpetual Preferred Stock, Series D, liquidation amount $1,000 per share (Series D Preferred Stock),
and 100,477 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series E, liquidation amount $1,000 per share (Series
E Preferred Stock and together with the Series D Preferred Stock, the Preferred Stock). Each series of Preferred Stock ranks
equally (pari passu) with the other series of Preferred Stock and senior to our common stock in the payment of dividends and in
the distribution of assets on any liquidation, dissolution or winding up of Banc of California, Inc.
31
Issuer Purchases of Equity Securities
The following table presents information for the three months ended December 31, 2019 with respect to repurchases by us of
our common stock:
Period
From October 1, 2019 to October 31, 2019
From November 1, 2019 to November 30, 2019
From December 1, 2019 to December 31, 2019
Total
Purchases of Equity Securities by the Issuer
Total Number of
Shares
Purchased
Weighted-
Average Price
Paid Per Share
6,768
737
824
8,329
$
$
$
$
14.52
14.15
15.57
14.59
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans
Total Number of
Shares That
May Yet be
Purchased
Under the Plan
—
—
—
—
—
—
—
During the three months ended December 31, 2019, purchases of shares of common stock related to shares surrendered by
employees in order to pay employee tax liabilities associated with vested awards under our employee stock benefit plans.
On the Annual Shareholder Meeting held on May 31, 2018, shareholders approved the new 2018 Omnibus Stock Incentive Plan
(the “2018 Plan”) effective August 17, 2018. Under the 2018 Plan, shares tendered or withheld to pay the exercise price of an
Option and Shares tendered or withheld to satisfy tax withholding obligations with respect to any award shall not be available
for future awards under the 2018 Plan. No new equity awards are granted under the 2013 Omnibus Stock Incentive Plan (the
“2013 Plan”) effective May 31, 2018.
32
Stock Performance Graph
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant
to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the SEC (other than
as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act
or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language
contained therein, except to the extent that we specifically incorporate it by reference into a filing.
The following graph shows a comparison of stockholder total return on Banc of California, Inc.’s voting common stock with the
cumulative total returns for: (i) the NYSE Composite Index; (ii) the Standard and Poor’s (S&P) 500 Financials Index; and (iii)
the Keefe, Bruyette, and Woods, Inc.'s (KBW) Bank Index. The graph assumes an initial investment of $100 and reinvestment
of dividends. The graph is historical only and may not be indicative of possible future performance.
Annual Rate of Stockholders’ Return
n
r
u
t
e
R
s
r
e
d
l
o
h
k
c
o
t
S
f
o
e
t
a
R
l
a
u
n
n
A
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
12/31/2010
12/31/2011
12/31/2012
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Banc of California, Inc.
NYSE Composite
S&P 500 Financials
KBW Bank Index
Index
Banc of California, Inc.
NYSE Composite
S&P 500 Financials
KBW Bank Index
December 31,
2014
2015
2016
2017
2018
2019
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
132.77
93.58
98.47
98.41
$
$
$
$
163.52
102.01
120.92
123.61
$
$
$
$
200.00
118.17
147.75
143.70
$
$
$
$
132.21
104.94
128.50
115.53
$
$
$
$
174.43
128.02
169.27
152.29
33
Item 6. Selected Financial Data
The following table sets forth certain consolidated financial and other data of the Company at the dates and for the periods
indicated. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included herein at Item 7 and the Consolidated Financial Statements and Notes
thereto included herein at Item 8.
($ in thousands, except per share data)
Selected financial condition data:
Total assets
Cash and cash equivalents
Loans receivable, net
Loans held-for-sale
Other real estate owned, net
Securities available-for-sale
Securities held-to-maturity
Bank owned life insurance
FHLB and other bank stock
Assets of discontinued operations
Deposits
Total borrowings
Liabilities of discontinued operations
Total stockholders' equity
Selected operations data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Total noninterest income
Total noninterest expense
Income from continuing operations before
income taxes
Income tax expense (benefit)
Income from continuing operations
Income from discontinued operations before
income taxes
Income tax expense
Income from discontinued operations
Net income
Dividends paid on preferred stock
Less: Income allocated to participating securities
Less: Participating securities dividends
Impact of preferred stock redemption
Net income available to common stockholders
Basic earnings per total common share
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per total common share
Income from continuing operations
2019
As of or For the Year Ended December 31,
2016 (6)
2017
2018
2015
$
7,828,410
$ 10,630,067
$ 10,327,852
$ 11,029,853
$
8,235,555
373,472
5,894,236
22,642
—
391,592
7,638,681
8,116
672
387,699
6,610,074
67,069
1,796
439,510
5,994,308
298,018
2,502
912,580
1,992,500
2,575,469
2,381,488
—
109,819
59,420
—
5,427,167
1,368,421
—
—
107,027
68,094
19,490
7,916,644
1,693,174
—
—
104,851
75,654
38,900
7,292,903
1,867,941
7,819
907,245
945,534
1,012,308
884,234
102,512
67,842
482,494
9,142,150
733,300
34,480
980,239
156,124
5,148,861
293,264
1,097
833,596
962,203
100,171
59,069
420,050
6,303,085
1,191,876
20,856
652,405
$
391,111
$
422,796
$
389,190
$
369,844
$
253,807
142,948
248,163
36,387
211,776
12,116
195,914
27,978
4,219
23,759
—
—
—
23,759
15,559
—
483
5,093
2,624
136,720
286,076
30,215
255,861
23,915
232,785
46,991
4,844
42,147
4,596
1,271
3,325
45,472
19,504
—
811
2,307
22,850
85,000
304,190
13,699
290,491
44,670
308,268
26,893
(26,581)
53,474
7,164
2,929
4,235
57,709
20,451
311
811
—
59,499
310,345
5,271
305,074
98,630
303,215
100,489
13,749
86,740
48,917
20,241
28,676
115,416
19,914
—
—
—
42,621
211,186
7,469
203,717
75,748
210,299
69,166
28,048
41,118
35,100
14,146
20,954
62,072
9,823
—
—
—
36,136
95,502
52,249
$
$
$
$
0.05
$
— $
0.05
0.05
$
$
34
0.38
0.07
0.45
0.38
$
$
$
$
0.64
0.08
0.72
0.63
$
$
$
$
1.36
0.61
1.97
1.34
$
$
$
$
0.79
0.57
1.36
0.78
($ in thousands, except per share data)
2019
As of or For the Year Ended December 31,
2016 (6)
2017
2018
Income from discontinued operations
Net income
$
$
— $
0.05
$
0.07
0.45
$
$
0.08
0.71
$
$
0.60
1.94
$
$
Performance ratios of consolidated
operations: (1)
Return on average assets
Return on average equity
Return on average tangible common equity (2)
Dividend payout ratio (3)
Net interest spread
Net interest margin (4)
Noninterest expense to average total assets
Efficiency ratio (5)
Efficiency ratio as adjusted (2), (5)
Average interest-earning assets to average
interest-bearing liabilities
Asset quality ratios:
Allowance for loan losses (ALL)
Non-performing loans
Non-performing assets
Non-performing assets to total assets
ALL to non-performing loans
ALL to total loans
Capital Ratios:
Average equity to average assets
Total stockholders' equity to total assets
Tangible common equity (TCE) to tangible
assets (2)
Book value per common share
TCE per common share (2)
Banc of California, Inc.
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity tier 1 capital ratio
Tier 1 leverage ratio
Banc of California, N.A.
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity tier 1 capital ratio
Tier 1 leverage ratio
2015
0.56
1.34
0.94%
10.14%
14.22%
35.29%
3.35%
3.52%
5.02%
74.83%
74.83%
0.26%
2.51%
0.63%
0.44%
4.57%
3.76%
620.00%
115.56%
2.51%
2.89%
2.15%
75.27%
74.07%
2.67%
2.95%
2.28%
74.01%
70.87%
0.55%
5.72%
5.79%
72.22%
2.92%
3.11%
3.50%
88.52%
77.18%
1.12%
12.73%
16.97%
24.87%
3.15%
3.30%
4.28%
74.11%
67.13%
$
$
$
122.45%
119.89%
122.66%
123.80%
125.29%
$
57,649
43,354
43,354
0.55%
132.97%
0.97%
10.38%
11.59%
8.68%
14.10
13.29
$
$
15.90%
14.83%
11.56%
10.89%
17.46%
16.39%
16.39%
12.02%
$
62,192
21,585
22,727
0.21%
281.99%
0.81%
$
49,333
19,382
21,178
0.21%
254.53%
0.74%
$
40,444
14,942
17,444
0.16%
270.67%
0.67%
9.73%
8.89%
6.34%
9.58%
9.80%
6.78%
8.77%
8.89%
6.00%
14.10
13.25
$
$
14.69
13.77
$
$
14.25
13.19
$
$
13.71%
12.77%
9.53%
8.95%
15.71%
14.77%
14.77%
10.36%
14.56%
13.79%
9.92%
9.39%
16.56%
15.78%
15.78%
10.67%
13.70%
13.22%
9.44%
8.17%
14.73%
14.12%
14.12%
8.71%
35,533
45,129
46,226
0.56%
78.74%
0.69%
9.25%
7.92%
4.93%
12.14
10.60
11.18%
10.71%
7.36%
8.07%
13.45%
12.79%
12.79%
9.64%
(1) Consolidated operations include both continuing and discontinued operations for the years ended December 31, 2018, 2017, 2016
and 2015. There were no discontinued operations in 2019.
(2) Non-GAAP measure. See non-GAAP measures for reconciliation of the calculation.
(3) Ratio of dividends declared per common share to basic earnings per common share.
(4) Net interest income divided by average interest-earning assets.
(5) Efficiency ratio represents noninterest expense, excluding loss on investments in alternative energy partnerships, net, as a percentage
of net interest income plus noninterest income.
(6) Sale of The Palisades Group completed on May 5, 2016.
35
Non-GAAP Financial Measures
Under Item 10(e) of SEC Regulation S-K, public companies disclosing financial measures in filings with the SEC that are not
calculated in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional
information, including a presentation of the most directly comparable GAAP financial measure, a reconciliation of the non-
GAAP financial measure to the most directly comparable GAAP financial measure, as well as a statement of the reasons why
the company’s management believes that presentation of the non-GAAP financial measure provides useful information to
investors regarding the company’s financial condition and results of operations and, to the extent material, a statement of the
additional purposes, if any, for which the company’s management uses the non-GAAP financial measure.
Return on average tangible common equity and efficiency ratio, as adjusted, tangible common equity to tangible assets, and
tangible common equity per common share and tangible common equity per common share and per common share issuable
under purchase contracts constitute supplemental financial information determined by methods other than in accordance with
GAAP. These non-GAAP measures are used by management, investors and analysts in the analysis of our performance.
Tangible common equity is calculated by subtracting preferred stock, goodwill, and other intangible assets from stockholders’
equity. Tangible assets are calculated by subtracting goodwill and other intangible assets from total assets. Other third parties,
including banking regulators and investors, also exclude goodwill and other intangible assets from stockholders’ equity when
assessing the capital adequacy of a financial institution.
Adjusted efficiency ratio is calculated by subtracting loss on investments in alternative energy partnerships from noninterest
expense and adding total pre-tax adjustments for investments in alternative energy partnerships, which includes the loss on
investments in alternative energy partnerships, to the sum of net interest income and noninterest income (total revenue).
Management believes the presentation of these financial measures and adjusting for the impact of these items provides useful
supplemental information that is essential to a proper understanding of our financial results and operating performance.
This disclosure should not be viewed as a substitute for results determined in accordance with GAAP, nor is it necessarily
comparable to non-GAAP performance measures that may be presented by other companies.
The following tables provide reconciliations of the non-GAAP measures with financial measures defined by GAAP.
Return on Average Tangible Common Equity
($ in thousands)
Average total stockholders' equity
Less average preferred stock
Less average goodwill
Less average other intangible assets
Average tangible common equity
Net income
Less preferred stock dividends and impact of
preferred stock redemption
Add amortization of intangible assets
Add impairment on intangible assets
Less tax effect on amortization and impairment of
intangible assets (1)
Adjusted net income
Year Ended December 31,
2019
2018
2017
2016
2015
$
948,446
$
995,320
$
1,008,995
$
906,831
$
612,393
(216,304)
(257,428)
(269,071)
(267,054)
(161,288)
(37,144)
(5,246)
689,752
23,759
$
$
(37,144)
(7,799)
692,949
45,472
$
$
(37,656)
(11,375)
690,893
57,709
$
$
(39,244)
(16,654)
583,879
115,416
$
$
$
$
(21,135)
(21,811)
(20,451)
(19,914)
2,195
—
3,007
—
3,928
336
4,851
690
(461)
(631)
(1,492)
(1,939)
$
4,358
$
26,037
$
40,030
$
99,104
$
(33,541)
(22,222)
395,342
62,072
(9,823)
5,836
258
(2,133)
56,210
Return on average equity
Return on average tangible common equity
2.51%
0.63%
4.57%
3.76%
5.72%
5.79%
12.73%
16.97%
10.14%
14.22%
(1) Utilized a 21% tax rate for 2019 and 2018 and 35% tax rate for 2015 through 2017.
36
Efficiency ratio as adjusted to include the pre-tax effect of investments in alternative energy partnerships
($ in thousands)
Noninterest expense (1)
Loss on investments in alternative energy
partnerships, net
Total adjusted noninterest expense
Net interest income (1)
Noninterest income (1)
Total revenue
Tax credit from investments in alternative energy
partnerships
Tax expense from tax basis reduction on
investments in alternative energy partnerships
Tax effect on tax credit and deferred tax expense
Loss on investments in alternative energy
partnerships, net
Total pre-tax adjustments for investments in
alternative energy partnerships
Year Ended December 31,
$
$
$
2019
195,914
(1,694)
194,220
248,163
12,116
260,279
$
$
$
2018
232,921
(5,044)
227,877
286,741
27,982
314,723
$
$
$
2017
368,263
(30,786)
337,477
311,242
104,777
416,019
$
$
$
2016
442,676
(31,510)
411,166
325,473
271,880
597,353
$
$
$
2015
332,201
—
332,201
223,717
220,219
443,936
3,446
9,647
38,196
33,405
(361)
554
(1,023)
3,259
(6,684)
20,531
(5,846)
19,080
(1,694)
(5,044)
(30,786)
(31,510)
1,945
6,839
21,257
15,129
—
—
—
—
—
Total adjusted revenue
$
262,224
$
321,562
$
437,276
$
612,482
$
443,936
Efficiency ratio
Adjusted efficiency ratio
75.27%
74.07%
74.01%
70.87%
88.52%
77.18%
74.11%
67.13%
74.83%
74.83%
Effective tax rate utilized for calculating tax effect
on tax credit and deferred tax expense
15.22%
27.42%
39.45%
40.91%
—%
(1) Net interest income, noninterest income and noninterest expense includes income and expense from discontinued operations for the
years ended December 31, 2018, 2017, 2016 and 2015.
37
Tangible Common Equity to Tangible Assets and Tangible Common Equity per Common Share and per Common
Share Issuable under Purchase Contracts
($ in thousands, except per share data)
Total stockholders' equity
2019
2018
2017
2016
2015
$
907,245
$
945,534
$
1,012,308
$
980,239
$
652,405
Less goodwill
Less other intangible assets
Less preferred stock
(37,144)
(4,151)
(37,144)
(6,346)
(37,144)
(9,353)
(39,244)
(13,617)
(39,244)
(19,158)
(189,825)
(231,128)
(269,071)
(269,071)
(190,750)
Tangible common equity (TCE)
$
676,125
$
670,916
$
696,740
$
658,307
$
403,253
December 31,
Total assets
Less goodwill
Less other intangible assets
Tangible assets
$
7,828,410
$ 10,630,067
$ 10,327,852
$ 11,029,853
$
8,235,555
(37,144)
(4,151)
(37,144)
(6,346)
(37,144)
(9,353)
(39,244)
(13,617)
(39,244)
(19,158)
$
7,787,115
$ 10,586,577
$ 10,281,355
$ 10,976,992
$
8,177,153
Total stockholders' equity to total assets
Tangible common equity to tangible assets
11.59%
8.68%
8.89%
6.34%
9.80%
6.78%
8.89%
6.00%
7.92%
4.93%
Common stock outstanding
50,413,681
50,172,018
50,083,345
49,695,299
38,002,267
Class B non-voting non-convertible common stock
outstanding
Total common stock outstanding
Minimum number of shares issuable under
purchase contracts (1)
Total common stock outstanding and shares
issuable under purchase contracts
477,321
477,321
508,107
201,922
37,355
50,891,002
50,649,339
50,591,452
49,897,221
38,039,622
—
—
—
188,742
601,299
50,891,002
50,649,339
50,591,452
50,085,963
38,640,921
Book value per common share
TCE per common share
Book value per common share and per common
share issuable under purchase contracts
TCE per common share and per common share
issuable under purchase contracts
$
$
$
$
14.10
13.29
14.10
13.29
$
$
$
$
14.10
13.25
14.10
13.25
$
$
$
$
14.69
13.77
14.69
13.77
$
$
$
$
14.25
13.19
14.20
13.14
$
$
$
$
12.14
10.60
11.95
10.44
(1) Purchase contracts relating to tangible equity units
38
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
We follow accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices
generally applicable to the financial services industry, the most significant of which are described in Note 1 to Consolidated
Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and
accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses on the Consolidated
Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities. While we base
estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from
those estimates.
Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly
susceptible to significant change. Critical accounting policies are defined as those that require the most complex or subjective
judgment and are reflective of significant uncertainties, and could potentially result in materially different results under
different assumptions and conditions. Management has identified our most critical accounting policies and accounting estimates
as: investment securities, allowance for loan losses and deferred income taxes. See Note 1. Summary of Significant Accounting
Policies of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary
Data” for a description of these policies.
Recent Accounting Pronouncements
See Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in “Item
8. Financial Statements and Supplementary Data” for information on recent accounting pronouncements and their expected
impact, if any, on our consolidated financial statements.
The following recently issued accounting pronouncement is of material importance to us: In June 2016, the FASB issued ASU
2016-13, Financial Instruments-Credit Losses (Topic 326) (ASU 2016-13) which is intended to provide financial statement
users with more decision-useful information about the expected credit losses on financial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this guidance
replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses
and requires consideration of a broader range of reasonable and supportable information to credit loss estimates. This ASU will
be effective for fiscal years beginning after December 15, 2019.
We have developed our models to estimate lifetime expected credit losses on our loans primarily using a lifetime loss
methodology. We have used these models to execute our process for estimating the allowance for credit losses under the new
standard in parallel with our existing process for estimating the allowance for credit losses based on incurred losses and have
developed an appropriate governance process for our estimate of expected credit losses under the new standard. The adoption of
this standard will be applied through a cumulative effect adjustment to retained earnings as of January 1, 2020. We expect our
allowance for credit losses may increase by approximately 5% to 15% from our allowance for credit losses as of December 31,
2019.
39
Executive Overview
We are California's premier, relationship-focused, full-service business bank. Headquartered in Orange County, the Bank has
over 630 employees, 42 offices and 32 full service community banking branches, extending from San Diego to Santa Barbara.
We offer a depth of resources and financial strength that allows us to adapt quickly and thoughtfully, delivering the best
solutions to help our clients achieve their financial goals. As the 15th largest bank headquartered in California, we help all
types of businesses obtain the financing and banking solutions they need to help their businesses grow and succeed.
Financial Highlights
For the years ended December 31, 2019, 2018 and 2017, net income from continuing operations was $23.8 million, $42.1
million and $53.5 million. Diluted earnings per common share from continuing operations were $0.05, $0.38 and $0.63 for the
years ended December 31, 2019, 2018 and 2017. The decrease in net income from continuing operations for the year ended
December 31, 2019 as compared to the year ended December 31, 2018 was mainly due to lower net interest income and
noninterest income, and a higher provision for loan losses, partially offset by lower noninterest expense.
Total assets were $7.83 billion at December 31, 2019, a decrease of $2.80 billion, or 26%, from $10.63 billion at December 31,
2018. The decrease was mainly due to our continued progress towards transitioning to become a relationship-focused business
bank. As part of this transition, we continue to de-emphasize the production of lower margin commoditized loan products and
we opportunistically reduced holdings of certain investment securities.
Significant financial highlights include:
•
Securities available-for-sale were $912.6 million at December 31, 2019, a decrease of $1.08 billion, or 54.2%, from
$1.99 billion at December 31, 2018. The decrease was primarily the result of call and net sale activities between
periods. We lowered the amount of collateralized loan obligations in the investment securities portfolio and
repositioned our securities available-for-sale portfolio to navigate a volatile rate environment by reducing the overall
duration of the portfolio by selling longer-duration residential mortgage-backed securities and commercial mortgage-
backed-securities. The sales of securities helped remix overall earning assets as the proceeds were primarily used to
fund loan originations and reduce borrowings.
• Loans receivable, net of ALL, totaled $5.89 billion at December 31, 2019, a decrease of $1.74 billion, or 22.84%, from
$7.64 billion at December 31, 2018. The decrease was mainly due to sales of approximately $1.13 billion in SFR
mortgage and multifamily loans, coupled with net paydowns and payoffs within the portfolio.
• Total deposits were $5.43 billion at December 31, 2019, a decrease of $2.49 billion, or 31.45%, from $7.92 billion at
December 31, 2018. The decrease was mainly due to our strategic reduction of high-rate and high-volatility deposits,
partially offset by our continuous efforts to build core deposits across our business units, including strong growth from
the community banking and private banking channel.
• Total stockholders' equity was $907.2 million at December 31, 2019, a decrease of $38.3 million, or 4.05%, from
$945.5 million at December 31, 2018. The decrease was primarily the result of the partial redemption of our Series D
and Series E Preferred Stock for an aggregate amount of $46.0 million and cash dividends on common stock and
preferred stock of $15.6 million, partially offset by $12.2 million of other comprehensive income on securities
available-for-sale primarily due to decreases in market interest rates and net income of $23.8 million during the year
ended December 31, 2019.
For the quarters ended December 31, 2019, 2018 and 2017, net income from continuing operations was $14.3 million, $10.8
million, and $10.9 million. Diluted earnings from continuing operations per total common share were $0.20, $0.12, and $0.11
for the quarters ended December 31, 2019, 2018 and 2017.
Refer to the 2018 Form 10-K filed on March 2, 2019 for discussion related to 2018 activity compared to 2017 activity.
40
Results of Operations
The following table presents condensed statements of operations for the periods indicated:
($ in thousands, except per share data)
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income from continuing operations before income taxes
Income tax expense (benefit)
Income from continuing operations
Income from discontinued operations before income taxes
Income tax expense
Income from discontinued operations
Net income
Preferred stock dividends
Less: income allocated to participating securities
Less: participating securities dividends
Impact of preferred stock redemption
Net income available to common stockholders
Basic earnings per common share
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per common share
Income from continuing operations
Income from discontinued operations
Net income
Year Ended December 31,
2018
2019
2017
$
391,111
$
422,796
$
142,948
248,163
36,387
12,116
195,914
27,978
4,219
23,759
—
—
—
23,759
15,559
—
483
5,093
2,624
0.05
—
0.05
0.05
—
0.05
$
$
$
$
$
136,720
286,076
30,215
23,915
232,785
46,991
4,844
42,147
4,596
1,271
3,325
45,472
19,504
—
811
2,307
22,850
0.38
0.07
0.45
0.38
0.07
0.45
$
$
$
$
$
$
$
$
$
$
389,190
85,000
304,190
13,699
44,670
308,268
26,893
(26,581)
53,474
7,164
2,929
4,235
57,709
20,451
311
811
—
36,136
0.64
0.08
0.72
0.63
0.08
0.71
41
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Rate/Volume Analysis
The following table presents the changes in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. Information is provided on changes attributable to (i) changes in volume multiplied by the
prior rate and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and the change due to rate.
($ in thousands)
Interest-earning assets:
Total loans (1)
Securities
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities:
Savings
Interest-bearing checking
Money market
Certificates of deposit
FHLB advances
Securities sold under repurchase
agreements
Long-term debt and other interest-
bearing liabilities
Year Ended December 31,
2019 vs. 2018
Year Ended December 31,
2018 vs. 2017
Increase (Decrease) Due to
Volume
Rate
Net
Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Net
Increase
(Decrease)
$
(4,398) $
8,395
$
3,997
$
26,302
$
15,512
$
41,814
(38,481)
(628)
(43,507)
(1,243)
(2,843)
(2,705)
(2,463)
(8,573)
(1,054)
(12)
3,048
(286)
11,157
2,312
2,379
3,276
11,150
5,863
83
58
(35,433)
(25,518)
(914)
(32,350)
1,069
(464)
571
8,687
(2,710)
(3,010)
(2,226)
1,621
(1,822)
(12,064)
6,544
9,270
(971)
(13)
46
6,228
(1,783)
1,753
9,343
4,590
29,445
6,586
4,922
6,680
18,355
12,774
166
484
49,967
(16,175)
1,580
27,219
8,207
3,100
(5,384)
24,899
22,044
153
(1,299)
51,720
Total interest-bearing liabilities
(18,893)
25,121
Net interest income
$
(24,614) $
(13,964) $
(38,578) $
(3,979) $
(20,522) $
(24,501)
(1) Total loans includes income from discontinued operations for the years ended December 31, 2018 and 2017.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net interest income was $248.2 million for the year ended December 31, 2019, a decrease of $38.6 million, or 13.5%, from
$286.7 million for the year ended December 31, 2018. The decrease in net interest income between periods was largely due to
the net decrease in interest earning assets coupled with average cost of interest-bearing liabilities outpacing the increase in
average yield on interest-earning assets. Net interest income was impacted by increases in overall interest rates that occurred in
late 2018 and remained stable through the first half of 2019 before a series of 25 bps rate reductions in target federal funds rates
during the last half of 2019.
Interest income on total loans was $333.9 million for the year ended December 31, 2019, an increase of $4.0 million, or 1.2%,
from $329.9 million for the year ended December 31, 2018. The increase in interest income on loans was positively impacted
by $8.4 million as a result of the 12 bps increase in average yield to 4.76% primarily due to higher interest rates on new loans
and variable rate loans repricing in the higher interest rate environment through the end of 2018 and the first part of 2019.
Offsetting the positive impact of changes in the loan yield was a $4.4 million decrease in interest on loans due to the $93.3
million decrease in the average balance of total loans as loan sales and principal paydowns and payoffs outpaced new
originations.
Interest income on securities was $48.1 million for the year ended December 31, 2019, a decrease of $35.4 million, or 42.4%,
from $83.6 million for the year ended December 31, 2018. The decrease in interest income on securities was due to a $1.00
billion decrease in average balance which lowered interest income by $38.5 million, partially offset by a 14 bps increase in
average yield which increased interest income by $3.0 million. The decrease in average balance was mainly due to sales of
certain longer-duration and fixed-rate mortgage-backed securities, collateralized loan obligations and commercial mortgage-
backed securities in response to the changing interest rate environment and our effort to remix our earning assets from
investment securities to higher yielding loans. The increase in average yield was due to higher interest rates on purchased
investment securities and investment securities with variable interest rates increasing due to a higher interest rate environment
for the first half of 2019.
Dividends and interest income on other interest-earning assets was $9.0 million for the year ended December 31, 2019, a
decrease of $914 thousand, or 9.2%, from $10.0 million for the year ended December 31, 2018. The decrease in dividends and
interest income on other interest-earning assets was due to an 8 bps decrease in average yield, coupled with a $23.3 million
43
decrease in average balance. The decrease in average yield was mainly due to lower interest rates on interest-earning deposits
with financial institutions. The decrease in average balance was mainly due to reductions in asset levels, including required
FHLB stock levels and lower interest-bearing deposits in financial institutions.
Interest expense on interest-bearing deposits was $101.1 million for the year ended December 31, 2019, an increase of $9.9
million, or 10.8%, from $91.2 million for the year ended December 31, 2018. The increase in interest expense on interest-
bearing deposits was due to a 35 bps increase in average cost, partially offset by a $653.0 million decrease in average interest-
bearing balances. The increase in average cost was mainly due to depositors benefiting from the increases in overall interest
rates that occurred in late 2018 and remained stable through the first half of 2019 before a series of 25 bps rate reductions in
target federal funds rates during the last half of 2019. The decrease in average interest-bearing balances was mainly due to the
shift in our deposit strategy to focus on relationship-based clients and de-emphasize high-rate transactional clients.
Interest expense on FHLB advances was $32.3 million for the year ended December 31, 2019, a decrease of $2.7 million, or
7.7%, from $35.0 million for the year ended December 31, 2018. The decrease was due mainly to a $362.7 million decrease in
average balance, partially offset by a 40 bps increase in average cost for the year ended December 31, 2019. The decrease in
average balance was mainly due to the maturity of $125.0 million in term advances, and reductions in overnight and short-term
advances of $200.0 million based on available cash resulting from our sales of investment securities and loans during the year
ended December 31, 2019. The increase in average cost was mainly due to the impact of the rising interest rate environment
throughout 2018 and related term advances entered into during 2018 that remained outstanding throughout 2019.
Interest expense on securities sold under repurchase agreements was $62 thousand for the year ended December 31, 2019, a
decrease of $971 thousand, or 94.0%, from $1.0 million for the year ended December 31, 2018. We used a lower amount of
repurchase agreements during the year ended December 31, 2019 as a result of cash received from sales of loans and securities
over the past year used to redeem our higher yield borrowings, including securities sold under repurchase agreements.
Interest expense on long term debt and other interest-bearing liabilities was $9.5 million for the year ended December 31, 2019,
an increase of $46 thousand, or 0.5%, from $9.5 million for the year ended December 31, 2018. The average balance and
average cost remained relatively flat during the year ended December 31, 2019 as compared to the previous year.
Provision for Loan Losses
The provision for loan losses is charged to operations to adjust the allowance for loan losses to the level required to cover
estimated credit losses inherent in the loan portfolio.
We recorded a provision for loan losses of $36.4 million and $30.2 million for the years ended December 31, 2019 and 2018.
The 2019 loan loss provision of $36.4 million was primarily attributable to a previously reported $35.1 million charge-off of a
line of credit originated in November 2017 to a borrower purportedly the subject of a fraudulent scheme. On October 22, 2019,
in connection with this matter, the Bank filed a complaint in U.S. District Court for the Southern District of California (Case
CV '19 02031 GPC KSC) seeking to recover its losses and other monetary damages against Chicago Title Insurance Company
and Chicago Title Company, asserting claims under RICO, 18 U.S.C § 1962 and for RICO Conspiracy, Fraud, Aiding and
Abetting Fraud, Negligent Misrepresentation, Breach of Fiduciary Duty and Negligence. We are actively considering and
pursuing available sources of recovery and other potential means of mitigating the loss; however, no assurance can be given
that we will be successful in that regard.
During the year ended December 31, 2019, we undertook an extensive collateral review of all commercial lending relationships
$5 million and above not secured by real estate, consisting of 53 loans representing $536 million in commitments. The
collateral review focused on security and collateral documentation and confirmation of the Bank's collateral interest. The
review was performed by the Bank's internal audit department and the work was validated by an independent third party. Our
review and outside validation did not identify any other instances of apparent fraud for the credits reviewed or concerns over
the existence of collateral held by the Bank or on our behalf at third parties; however, there are no assurances that our internal
review and third party validation are sufficient to identify all such issues.
The 2018 provision for loans losses of $30.2 million includes a $13.9 million charge-off on a line of credit determined to have
been fraudulently obtained, and was otherwise a result of the 15.6% net loan portfolio growth, higher classified loans
of 97.8% and allowance methodology enhancements implemented during 2018, such as an extension of look-back period, more
granular qualitative adjustments and loan segmentations, and an annual update of the loss emergence period.
See further discussion in "Allowance for Loan Losses."
44
Noninterest Income
The following table presents noninterest income for the periods indicated:
($ in thousands)
Customer service fees
Loan servicing income
Income from bank owned life insurance
Impairment loss on investment securities
Net (loss) gain on sale of securities available-for-sale
Net gain on sale of loans
Net loss on sale of mortgage servicing rights
Other income
Total noninterest income
Year Ended December 31,
2019
2018
2017
$
5,982
$
6,315
$
679
2,292
(731)
(4,852)
7,872
—
874
3,720
2,176
(3,252)
5,532
1,932
(2,260)
9,752
$
12,116
$
23,915
$
6,492
1,025
2,339
—
14,768
11,942
—
8,104
44,670
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Noninterest income was $12.1 million for the year ended December 31, 2019, a decrease of $11.8 million, or 49.3%, from
$23.9 million for the year ended December 31, 2018. The decrease in noninterest income was mainly due to lower loan
servicing income of $3.0 million, higher net loss on the sale of investment securities of $10.4 million, and lower other income
of $8.9 million, partially offset by lower impairment losses on investment securities of $2.5 million and higher net gain on sale
of loans of $5.9 million.
Loan servicing income was $679 thousand for the year ended December 31, 2019, a decrease of $3.0 million, or 81.7%, from
$3.7 million for the year ended December 31, 2018. The decrease between periods was attributable to the sale during the year
ended December 31, 2018 of $28.5 million of mortgage servicing rights on $3.55 billion in unpaid principal balances of
conventional mortgage loans. Servicing fees were $1.3 million and $5.0 million for the years ended December 31, 2019 and
2018. Servicing fees were offset by losses on fair value changes and runoff of servicing assets of $612 thousand and $1.3
million for the years ended December 31, 2019 and 2018.
Net (loss) gain on sale of securities available-for-sale was $(4.9) million for the year ended December 31, 2019, compared to
$5.5 million for the year ended December 31, 2018. We sold securities available-for-sale of $1.20 billion and $406.8 million
during the years ended December 31, 2019 and 2018. During the year ended December 31, 2019, we sold non-agency
commercial mortgage-backed securities of $132.2 million for a gain of $9 thousand, agency mortgage-backed securities of
$423.6 million for a loss of $5.0 million and collateralized loan obligations of $644.0 million for a net gain of $143 thousand.
During the year ended December 31, 2019, we recognized $731 thousand of other-than-temporary impairment on the MBS
portfolio, which is reflected in impairment loss on investment securities in the accompanying Consolidated Statements of
Operations. During the year ended December 31, 2018, we changed our intent to sell our non-agency commercial mortgage-
backed securities which were in an unrealized loss position and recognized $3.3 million of OTTI losses.
Net gain on sale of loans was $7.9 million for the year ended December 31, 2019, compared to $1.9 million for the year ended
December 31, 2018. During the year ended December 31, 2019, we sold jumbo SFR mortgage loans of $382.8 million resulting
in a gain of $787 thousand and multifamily residential loans of $751.6 million resulting in a gain of $11.7 million. Offsetting
these gains was $4.4 million related to establishing reserves for expected loan repurchases associated with our multifamily
securitization. During the year ended December 31, 2018, we sold SFR mortgage loans of $293.6 million with a gain of $1.2
million, SBA loans of $6.3 million with a gain of $480 thousand and multifamily and other consumer loans of $86.6
million with a gain of $207 thousand.
Net loss on sale of mortgage servicing rights (MSRs) was zero for the year ended December 31, 2019, compared to $2.3
million for the year ended December 31, 2018. During the year ended December 31, 2018, we sold $28.5 million of MSRs
on $3.55 billion in unpaid principal balances of conventional mortgage loans. These transactions resulted in a net loss on sale of
MSRs of $2.3 million, primarily related to transaction costs, provision for early repayments of loans and expected repurchase
obligations under standard representations and warranties. There were no sales of MSRs during the year ended December 31,
2019.
Other income was $874 thousand for the year ended December 31, 2019, compared to $9.8 million for the year ended
December 31, 2018. The $8.9 million decrease is primarily attributable to a $9.6 million realized loss on interest rate swaps
related to the securitization of $573.5 million in multifamily loans which was completed during the third quarter of 2019. In
connection with the securitization, during the second quarter of 2019, we entered into interest rate swap agreements with a
combined notional value of $543.4 million to offset variability in the fair value of the related loans as a result of changes in
45
market interest rates. During the year ended December 31, 2019, we realized a loss of $9.0 million related to these swap
agreements due to a decline in interest rates since their execution and was offset by the $8.9 million gross gain realized on the
loans sold into the securitization, which is included in net gain on sale of loans. The swap agreements were closed at the time
the loans were sold into the securitization.
Noninterest Expense
The following table presents noninterest expense for the periods indicated:
Year Ended December 31,
2019
2018
2017
($ in thousands)
Salaries and employee benefits
Occupancy and equipment
Professional fees
Outside service fees
Data processing
Advertising
Regulatory assessments
Reversal of provision for loan repurchases
Amortization of intangible assets
Impairment on intangible assets
Restructuring expense
All other expense
Noninterest expense before loss on investments in alternative energy
partnerships, net
Loss on investments in alternative energy partnerships, net
$
105,915
$
109,974
$
31,308
12,212
1,697
6,420
8,422
7,711
(660)
2,195
—
4,263
14,737
194,220
1,694
31,847
33,652
4,667
6,951
12,664
7,678
(2,488)
3,007
—
4,431
15,358
227,741
5,044
Total noninterest expense
$
195,914
$
232,785
$
129,153
38,391
42,417
5,840
7,888
5,313
8,105
(1,812)
3,928
336
5,326
32,597
277,482
30,786
308,268
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Noninterest expense was $195.9 million for the year ended December 31, 2019, a decrease of $36.9 million, or 15.8%, from
$232.8 million for the year ended December 31, 2018. The decrease was mainly due to decreases in salaries and employee
benefits, professional fees, outside services, advertising, amortization of intangible assets, restructuring expense, all other
expense and loss on investments in alternative energy partnerships, partially offset by a reduction in reversal of provision for
loan repurchases.
Salaries and employee benefits expense was $105.9 million for the year ended December 31, 2019, a decrease of $4.1 million,
or 3.7%, from $110.0 million for the year ended December 31, 2018. The decrease was mainly due to decreases in number of
employees, commissions, and temporary staff expenses, offset by annual pay increases.
Professional fees were $12.2 million for the year ended December 31, 2019, a decrease of $21.4 million, or 63.7%, from $33.7
million for the year ended December 31, 2018. The decrease in professional fees was due in part to overall decreases in
professional fees as we continue to focus on managing our noninterest expense. Professional fees also included $28.3 million
of insurance recoveries related to securities litigation, indemnification, investigation and other legal expenses during the 2019
period, compared to $18.0 million during 2018.
Outside service fees were $1.7 million for the year ended December 31, 2019, a decrease of $3.0 million, or 63.6%, from $4.7
million for the year ended December 31, 2018. The decrease was primarily due to lower loan subservicing costs incurred during
the year ended December 31, 2019 as a result of the aforementioned sale of mortgage servicing rights on $3.55 billion in unpaid
principal balances of conventional mortgage loans during the comparable 2018 period.
Advertising costs were $8.4 million for the year ended December 31, 2019, a decrease of $4.2 million, or 33.5%, from $12.7
million for the year ended December 31, 2018. The decrease was mainly due to a focus on digital rather than traditional
marketing resulting in overall reductions in advertising expense. Advertising costs include $6.7 million of the LAFC naming
rights commitment during both of the years ended December 31, 2019 and 2018.
Reversal of provision for loan repurchases was $660 thousand and $2.5 million for the years ended December 31, 2019 and
2018. The decrease was mainly due to the aforementioned sale of mortgage servicing rights on $3.55 billion in unpaid
principal balances of conventional mortgage loans and reduced loan repurchase settlement activities.
46
Restructuring expense was $4.3 million for the year ended December 31, 2019 and consisted of severance and retention costs
associated with the exit from our third-party mortgage origination and brokered single family lending business and CEO and
CFO transitions during 2019. For the year ended December 31, 2018, restructuring expense was $4.4 million and consisted of
severance-related costs as a result of the reduction in workforce that was previously implemented in 2018 to reduce our
workforce by approximately 9% of total staff.
All other expenses were $14.7 million for the year ended December 31, 2019, a decrease of $621 thousand, or 4.0%,
from $15.4 million for the year ended December 31, 2018. The decrease was mainly due to lower provision for unfunded loan
commitments and overall expense reductions.
Loss on investments in alternative energy partnerships was $1.7 million for the year ended December 31, 2019, a decrease of
$3.4 million from $5.0 million for the year ended December 31, 2018. The decrease in loss was mainly due to decreased loss
sharing allocations resulting in lower Hypothetical Liquidation at Book Value (HLBV) losses.
Income Tax Expense
For the years ended December 31, 2019, 2018 and 2017, income tax expense (benefit) from continuing operations was $4.2
million, $4.8 million and $(26.6) million, respectively, and the effective tax rate was 15.1 percent, 10.3 percent and (98.8)
percent, respectively.
Our effective tax rate of continuing operations for the year ended December 31, 2019 was higher than the effective tax rate of
continuing operations for the year ended December 31, 2018 mainly due to the reduction in the recognition of tax credits on
investments in alternative energy partnerships, which were $3.4 million for the year ended December 31, 2019, compared to
$9.6 million for the year ended December 31, 2018. The reduction in tax credits received by the Bank is due to fewer
investments in alternative energy partnerships. We use the flow-through income statement method to account for the tax credits
earned on investments in alternative energy partnerships. Under this method, the tax credits are recognized as a reduction to
income tax expense and the initial book-tax difference in the basis of the investments is recognized as additional tax expense in
the year they are earned.
For additional information, see Note 14 to Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K.
47
Financial Condition
Investment Securities
Investment securities that we have the ability and the intent to hold to maturity are classified as held-to-maturity. All
other securities are classified as available-for-sale. Investment securities classified as available-for-sale are carried at their
estimated fair values with the changes in fair values recorded in accumulated other comprehensive income, net of tax, as a
component of stockholders’ equity. At December 31, 2019, 2018 and 2017, all of our investment securities were classified as
available-for-sale.
The primary goal of our investment securities portfolio is to provide a relatively stable source of interest income while
satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. Certain investment
securities provide a source of liquidity as collateral for FHLB advances, Federal Reserve Discount Window capacity,
repurchase agreements and for certain public deposits.
The following table presents the amortized cost and fair value of the investment securities portfolio and the corresponding
amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates
indicated:
($ in thousands)
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Municipal securities
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Total securities available-for-sale
December 31, 2018
Securities available-for-sale:
SBA loan pool securities
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
$
37,613
$
— $
(1,157) $
36,456
91,543
52,997
191
733,605
13,500
16
51
5
—
79
(260)
(359)
—
(15,244)
—
91,299
52,689
196
718,361
13,579
929,449
$
151
$
(17,020) $
912,580
911
$
— $
(1) $
910
$
$
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Collateralized loan obligations
461,987
418
132,199
1,431,171
Total securities available-for-sale
$
2,026,686
$
—
9
—
141
150
(24,545)
437,442
—
—
427
132,199
(9,790)
1,421,522
$
(34,336) $
1,992,500
December 31, 2017
Securities available-for-sale:
SBA loan pool securities
$
1,056
$
2
$
— $
1,058
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
492,255
741
305,172
1,691,455
76,714
10
16
5,339
11,129
7,183
(15,336)
476,929
(1)
—
(266)
—
756
310,511
1,702,318
83,897
Total securities available-for-sale
$
2,567,393
$
23,679
$
(15,603) $
2,575,469
Securities available-for-sale were $912.6 million at December 31, 2019, a decrease of $1.08 billion, or 54.2%, from $1.99
billion at December 31, 2018. The decrease was mainly due to sales of $1.20 billion, principal payments of $36.5 million, and
calls and pay-offs of $53.1 million, partially offset by purchases of $195.3 million during the year ended December 31, 2019.
Securities available-for-sale had a net unrealized loss of $16.9 million and $34.2 million at December 31, 2019 and 2018.
48
During the year ended December 31, 2019, in response to a changing interest rate environment we repositioned our securities
available-for-sale portfolio by reducing the overall duration through sales of certain longer-duration and fixed-rate mortgage-
backed securities. Additionally, we continued to strategically reduce our collateralized loan obligations exposure. A portion of
the funds from sales of investment securities during 2019 and other available cash balances were reinvested into a mix of
security classes, resulting in an overall shorter duration for the securities portfolio. As of December 31, 2019, our securities
portfolio included $718.4 million of CLOs, $91.3 million of agency collateralized mortgage obligations, $36.5 million of
agency mortgage-backed securities, $52.7 million of municipal securities, and $13.6 million of corporate debt securities.
CLOs totaled $718.4 million and $1.42 billion at December 31, 2019 and 2018. The $703.2 million decrease between periods
was due primarily to call and sale activities. CLOs are floating rate debt securities backed by pools of senior secured
commercial loans to a diverse group of companies across a broad spectrum of industries. Underlying loans are generally
secured by a company’s assets such as inventory, equipment, property, and/or real estate. CLOs are structured to diversify
exposure to a broad sector of industries. The payments on these commercial loans support interest and principal on the CLOs
across classes that range from AAA rated to equity tranches. We believe that our CLO portfolio, consisting entirely of variable
rate securities, supports our interest rate risk management strategy by lowering the extension risk and duration risk inherent to
certain fixed rate investment securities. At December 31, 2019, we owned AAA and AA rated CLOs and did not own CLOs
rated below AA. As all CLOs are also rated above investment grade credit ratings and were diversified across issuers, we
believe that these CLOs enhance our liquidity position. We also maintain pre-purchase due diligence and ongoing review
processes by a dedicated credit administration team. The ongoing review process includes monitoring of performance factors
including external credit ratings, collateralization levels, collateral concentration levels and other performance factors. We only
acquire CLOs that it believes are Volcker Rule compliant.
During the year ended December 31, 2019, we changed our intent to sell our U.S. government agency and U.S. government
sponsored enterprise residential mortgage-backed securities due to our strategy to reposition the securities profile and shorten
the duration of certain securities within the portfolio. As a result, we recognized $731 thousand of OTTI for the year ended
December 31, 2019. As of December 31, 2018, we changed our intent to sell our non-agency commercial mortgage-backed
securities in an unrealized loss position due to our strategy to reposition our securities profile and recognized $3.3 million of
OTTI for the year ended December 31, 2018. As of December 31, 2019, all of our investment securities in an unrealized loss
position had received an investment grade credit rating.
49
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Loans Held-for-Sale
As of December 31, 2019 and 2018, loans held-for-sale carried at fair value are mainly repurchased conforming SFR mortgage
loans that were previously sold. Loans held-for-sale carried at fair value on a consolidated operations basis were $22.6 million
and $27.2 million at December 31, 2019 and 2018. The $4.5 million, or 16.7%, decrease was primarily due to sales of $6.2
million, partially offset by loan repurchases of $1.9 million.
Loans held-for-sale carried at fair value included in assets of discontinued operations related to the Banc Home Loans division
which was sold in 2017 and totaled zero and $19.5 million at December 31, 2019 and 2018.
Loans held-for-sale carried at the lower of cost or fair value on a consolidated operations basis were zero and $426 thousand at
December 31, 2019 and 2018. Loans held-for-sale carried at the lower of cost or fair value are mainly non-conforming jumbo
mortgage loans and SBA loans. The change in balance between periods was due to payoffs.
51
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53
The following table presents the interest rate profile of the loan portfolio due after one year at December 31, 2019:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total
Due After One Year
Fixed Rate
Variable Rate
Total
$
274,212
$
414,508
$
433,987
20,739
27,111
—
33,630
4,804
370,148
1,453,882
43,221
114,634
1,555,561
38,152
688,720
804,135
1,474,621
70,332
114,634
1,589,191
42,956
$
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$
3,990,106
$
4,784,589
Loan Originations, Purchases, Sales and Repayments
The following table presents loan originations, purchases, sales, and repayment activities excluding loans originated for sale,
for the periods indicated:
($ in thousands)
Origination by rate type:
Variable rate:
Commercial and industrial
Commercial real estate and multifamily
SBA
Construction
Single family residential mortgage
Other consumer
Total floating rate
Fixed rate:
Commercial and industrial
Commercial real estate and multifamily
SBA
Construction
Total fixed rate
Total loans originated
Purchases:
Single family residential mortgage
Total loans purchased
Transferred to loans held-for-sale
Repayments:
Principal repayments
Increase in other items, net
Net increase
Year Ended December 31,
2019
2018
2017
$
356,052
$
257,735
$
831,821
1,964
22,281
1,013,087
7,204
2,134,092
178,663
159,726
350
90,675
429,414
396,298
749,549
9,669
29,490
900,412
8,931
2,094,349
160,860
62,388
—
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258,976
583,902
15,313
12,792
315,920
1,350
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93,583
23,355
11,148
—
128,086
1,413,415
2,563,506
2,353,325
—
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59,481
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10,924,497
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(10,194,770)
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9,060,077
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$
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The decreases in changes from principal repayments and other items were mainly due to decreased advances and repayments in
commercial lines of credit and warehouse lines of credit during the year ended December 31, 2019.
54
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56
Green Loans
We discontinued the origination of Green Loan products in 2011. Green Loans are SFR first and second mortgage
lines of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. The loans are
generally interest only with a 15-year balloon payment due at maturity. We initiated the Green Loan products in
2005 and proactively refined underwriting and credit management practices and credit guidelines in response to changing
economic environments, competitive conditions and portfolio performance. We continue to manage credit risk, to
the extent possible, throughout the borrower’s credit cycle.
At December 31, 2019, Green Loans totaled $52.3 million, a decrease of $17.9 million, or 25.5% from $70.1 million at
December 31, 2018, primarily due to reductions in principal balance and payoffs. As of December 31, 2019 and 2018, $1.5
million and zero of our 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 our
loan terms and underwriting standards, including our policies on loan-to-value ratios and our contractual ability to curtail loans
when the value of underlying collateral declines.
Green Loans are similar to HELOCs in that they are collateralized primarily by the equity in the borrower's home. However,
some Green Loans differ from HELOCs relating to certain characteristics including one-action laws. Similar to Green Loans,
HELOCs allow the borrower to draw down on the credit line based on an established loan amount for a period of time, typically
10 years, requiring an interest only payment with an option to pay principal at any time. A typical HELOC provides that at the
end of the term the borrower can continue to make monthly principal and interest payments based on the loan balance until the
maturity date. The Green Loan is an interest only loan with a maturity of 15 years, at which time the loan becomes due and
payable with a balloon payment at maturity. The unique payment structure also differs from a traditional HELOC in that
payments are made through the direct linkage of a personal checking account to the loan through a nightly sweep of funds into
the Green Loan Account. This reduces any outstanding balance on the loan by the total amount deposited into the checking
account. As a result, every time a deposit is made, effectively a payment to the Green Loan is made. HELOCs typically do not
cause the loan to be paid down by a borrower’s depositing of funds into their checking account at the same bank.
Credit guidelines for Green Loans were established based on borrower FICO scores, property type, occupancy type, loan
amount, and geography. Property types include single family residences and second trust deeds where we held the first liens,
owner occupied as well as non-owner occupied properties. We utilized our underwriting guidelines for first liens to underwrite
the Green Loan secured by second trust deeds as if the combined loans were a single Green Loan. For all Green Loans, the loan
income was underwritten using either full income documentation or alternative income documentation.
Interest Only Loans
Interest only loans are primarily SFR mortgage loans with payment features that allow interest only payment in initial periods
before converting to a fully amortizing loan. Interest only loans totaled $545.4 million at December 31, 2019, a decrease of
$207.7 million, or 27.6%, from $753.1 million at December 31, 2018. The decrease between periods was primarily due to
paydowns and amortization. As of December 31, 2019 and 2018, $11.5 million and zero of the interest only loans were non-
performing.
Loans with the Potential for Negative Amortization
Negative amortization loans totaled $3.0 million at December 31, 2019, a decrease of $501 thousand, or 14.2%, from $3.5
million as of December 31, 2018. We discontinued origination of negative amortization loans in 2007. At December 31, 2019
and 2018, none of the loans with the potential for negative amortization were non-performing. These loans pose a potentially
higher credit risk because of the lack of principal amortization and potential for negative amortization. However, management
believes the risk is mitigated through the loan terms and underwriting standards, including our policies on LTV ratios.
57
Non-Traditional Mortgage Loan Credit Risk Management
We perform detailed reviews of collateral values on loans collateralized by residential real property included in our NTM
portfolio based on appraisals or estimates from third party AVMs to analyze property value trends periodically. AVMs are used
to identify loans that may have experienced potential collateral deterioration. Once a loan has been identified that may have
experienced collateral deterioration, we will obtain updated drive by or full appraisals in order to confirm the valuation. This
information is used to update key monitoring metrics such as LTV ratios. Additionally, FICO scores are obtained in conjunction
with the collateral analysis. In addition to LTV ratios and FICO scores, we evaluate the portfolio on a specific loan basis
through delinquency and portfolio charge-offs to determine whether any risk mitigation or portfolio management actions are
warranted. The borrowers may be contacted as necessary to discuss material changes in loan performance or credit metrics.
Our risk management policy and credit monitoring includes reviewing delinquency, FICO scores, and LTV ratios on the NTM
loan portfolio. We also continuously monitor market conditions for our geographic lending areas. We have determined that the
most significant performance indicators for NTM are LTV ratios and FICO scores. The loan review provides an effective
method of identifying borrowers who may be experiencing financial difficulty before they fail to make a loan payment. Upon
receipt of the updated FICO scores, an exception report is run to identify loans with a decrease in FICO score of 10% or more
and a resulting FICO score of 620 or less. The loans are then further analyzed to determine if the risk rating should be
downgraded, which may require an increase in the ALL we need to establish for potential losses. A report is prepared and
regularly monitored.
We proactively manage the portfolio by performing a detailed analysis with emphasis on the non-traditional mortgage portfolio.
We conduct regular meetings to review the loans classified as special mention, substandard, or doubtful and determine 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. During the year ended December 31, 2019, we made no curtailment in available commitments on Green Loans.
On the interest only loans, we project future payment changes to determine if there will be an increase in payment of 3.50% or
greater and then monitor the loans for possible delinquencies. The individual loans are monitored for possible downgrading of
risk rating, and trends within the portfolio are identified that could affect other interest only loans scheduled for payment
changes in the near future.
NTM loans may entail greater risk than do traditional SFR mortgage loans. For additional information regarding NTMs, see
"Non-Traditional Mortgage Loans" under Note 5 to Consolidated Financial Statements included Item 8 of this Annual Report
on Form 10-K.
58
Asset Quality
Past Due Loans
The following table presents a summary of total loans that were past due at least 30 days but less than 90 days as of the dates
indicated:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Lease financing
Consumer:
Single family residential mortgage
Other consumer
Total
2019
2018
2017
2016
2015
December 31,
$
6,450
$
1,946
$
3,731
$
875
$
5,007
—
—
1,428
—
—
24,756
239
582
356
628
939
—
18,528
3,705
—
—
3,578
—
—
21,171
3,607
—
—
549
1,529
—
31,309
10,956
—
223
711
—
3,046
71,239
11
$
32,873
$
26,684
$
32,087
$
45,218
$
80,237
The following table presents a summary of traditional loans that were past due at least 30 days but less than 90 days as of the
dates indicated:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Lease financing
Consumer:
Single family residential mortgage
Other consumer
Total
2019
2018
2017
2016
2015
December 31,
$
6,450
$
1,946
$
3,731
$
875
$
5,007
—
—
1,428
—
—
17,248
239
582
356
628
939
—
10,481
3,705
—
—
3,578
—
—
10,232
3,607
—
—
17
1,529
—
12,570
10,956
—
223
162
—
3,046
19,649
11
$
25,365
$
18,637
$
21,148
$
25,947
$
28,098
Traditional loans that were past due at least 30 days but less than 90 days totaled $25.4 million at December 31, 2019, an
increase of $6.7 million, or 36.1%, from $18.6 million at December 31, 2018. The increase was mainly due to increases in
commercial and industrial, SBA and SFR loans, partially offset by decreases in commercial real estate, multifamily,
construction and other consumer loans.
The increase in commercial and industrial loans for the year ended December 31, 2019 as compared to the year ended
December 31, 2018 was a result of the addition of one loan with a real estate developer totaling $5.0 million. The increase in
single family residential mortgage for the year ended December 31, 2019 as compared to the year ended December 31, 2018
was a result of fluctuations in the timing of borrower payments between periods.
59
The following table presents a summary of NTM loans that were past due at least 30 days but less than 90 days as of the dates
indicated:
($ in thousands)
Green Loans (HELOC) - first liens
Interest only - first liens
Negative amortization
Total NTM - first liens
Green Loans (HELOC) - second liens
Total NTM - second liens
Total NTM loans
2019
2018
2017
2016
2015
December 31,
$
4,438
$
4,099
$
5,999
$
— $
3,070
—
7,508
—
—
3,948
—
8,047
—
—
4,940
—
10,939
—
—
4,193
—
4,193
—
—
7,913
3,935
—
11,848
—
—
$
7,508
$
8,047
$
10,939
$
4,193
$
11,848
There were 5 Green Loans that were past due at least 30 days but less than 90 days at December 31, 2019.
The following table presents a summary of purchased credit impaired (PCI) loans that were past due at least 30 days but less
than 90 days as of the dates indicated:
($ in thousands)
Commercial:
SBA
Consumer:
Single family residential mortgage
Total
$
$
2019
2018
2017
2016
2015
December 31,
— $
— $
— $
532
$
549
—
— $
—
— $
—
14,546
— $
15,078
$
39,742
40,291
We did not have any outstanding PCI loans at December 31, 2019, 2018 or 2017.
Non-Performing Assets
The following table presents a summary of non-performing assets, excluding loans held-for-sale, as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Lease financing
Consumer:
Single family residential mortgage
Other consumer
Total non-accrual loans
Loans past due over 90 days or more and still on
accrual
Other real estate owned
Total non-performing assets
Performing troubled debt restructured loans
2019
2018
2017
2016
2015
December 31,
$
19,114
$
5,455
$
3,723
$
3,544
$
—
—
5,230
—
18,625
385
43,354
—
—
—
—
2,574
—
12,929
627
21,585
470
672
$
$
43,354
6,621
$
$
22,727
5,745
$
$
—
—
1,781
—
9,347
4,531
19,382
—
1,796
21,178
5,646
$
$
—
—
619
109
10,287
383
14,942
—
2,502
17,444
4,827
$
$
4,383
1,552
642
422
598
37,318
214
45,129
—
1,097
46,226
7,842
The increase in non-accrual commercial and industrial loans in 2019 was mainly due to the addition of one shared national
credit totaling $14.3 million at December 31, 2019. The increase in single family residential mortgage loans in 2019 was
mainly due to the addition one $9.1 million loan, with an LTV of 38%, at December 31, 2019.
With respect to loans that were on non-accrual status as of December 31, 2019, the gross interest income that would have been
recorded during the year ended December 31, 2019 had such loans been current in accordance with their original terms and
been outstanding throughout the year ended December 31, 2019 (or since origination, if held for part of the year ended
60
December 31, 2019), was $1.8 million. The amount of interest income on such loans that was included in net income for the
year ended December 31, 2019 was $132 thousand.
The following table presents a summary of non-performing NTM loans that are included in the above table as of the dates
indicated:
($ in thousands)
Green Loans (HELOC) - first liens
Interest only - first liens
Negative amortization
Total NTM - first liens
Green Loans (HELOC) - second liens
Total NTM - second liens
Total NTM loans
Troubled Debt Restructured Loans
2019
2018
2017
2016
2015
December 31,
$
1,539
$
— $
— $
— $
11,480
—
13,019
—
—
—
—
—
—
—
1,171
—
1,171
—
—
467
—
467
—
—
10,088
4,615
—
14,703
—
—
$
13,019
$
— $
1,171
$
467
$
14,703
Loans that we modify or restructure where the debtor is experiencing financial difficulties and make a concession to the
borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only
payments and, in limited cases, reductions in the outstanding loan balances are classified as troubled debt restructurings
(TDRs). TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. A
workout plan between a borrower and us is designed to provide a bridge for the cash flow shortfalls in the near term. If the
borrower works through the near-term issues, in most cases, the original contractual terms of the loan will be reinstated.
At December 31, 2019 and 2018, we had 25 and 13 loans with an aggregate balance of $21.8 million and $8.0 million classified
as TDRs. When a loan becomes a TDR we cease accruing interest, and classify it as non-accrual until the borrower
demonstrates that the loan is again performing.
At December 31, 2019, of the 25 loans classified as TDRs, 14 loans totaling $6.6 million were making payments according to
their modified terms and were less than 90-days delinquent under the modified terms and were in accruing status. At
December 31, 2018, of the 13 loans classified as TDRs, 12 loans totaling $5.7 million were making payments according to their
modified terms and were less than 90-days delinquent under the modified terms and were in accruing status.
Risk Ratings
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of
lesser quality, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized
by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified
as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve or charge-off is not warranted.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allocation
allowances for loan losses in an amount deemed prudent by management and approved by the Board of Directors. General
allocation allowances represent loss allowances which have been established to recognize the inherent risk associated with
lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured
institution classifies problem assets as loss, it is required either to establish a specific allocation allowance for losses equal to
100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the
classification of our assets and the amount of our specific allocation allowances is subject to review by the OCC, which may
order the establishment of additional general or specific loss allocation allowances.
In connection with the filing of the Bank’s periodic reports with the OCC and in accordance with policies for the Bank's
classification of assets, the Bank regularly reviews the problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of management’s review of assets, at December 31, 2019
and 2018, we had classified assets (including OREO) totaling $102.0 million and $84.5 million. The total amount classified
represented 1.30% and 0.79% of our total assets at December 31, 2019 and 2018.
61
Allowance for Loan Losses (ALL)
We maintain an ALL to absorb probable incurred losses inherent in the loan portfolio at the balance sheet date. The ALL is
based on ongoing assessment of the estimated probable losses presently inherent in the loan portfolio. In evaluating the level of
the ALL, management considers the types of loans and the amount of loans in the portfolio, peer group information, historical
loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral,
and prevailing economic conditions. This methodology takes into account many factors, including our own historical and peer
loss trends, loan-level credit quality ratings, loan specific attributes along with a review of various credit metrics and trends.
The process involves subjective as well as complex judgments. In addition, we use adjustments for numerous factors including
those found in the federal banking agencies' joint Interagency Policy Statement on ALL, which include current economic
conditions, loan seasoning, underwriting experience, and collateral value changes among others. We evaluate all impaired loans
individually using guidance from ASC 310 primarily through the evaluation of cash flows or collateral values.
At December 31, 2019, our ALL was $57.6 million, or 0.97 percent of total loans, as compared to $62.2 million, or 0.81 percent
of total loans, at December 31, 2018. We recorded provision for loan losses of $36.4 million, $30.2 million and $13.7 million,
for the years ended December 31, 2019, 2018 and 2017.
The increase in ALL and provision for loan losses for the year ended December 31, 2019 as compared to the year ended
December 31, 2018 was primarily attributable to a $35.1 million charge-off of a line of credit originated in November 2017 to a
borrower purportedly the subject of a fraudulent scheme. In addition, the charge-off increased the loss factor used in our
allowance for loan loss for commercial and industrial loans, resulting in an additional loan loss provision of $3.0 million. On
October 22, 2019, in connection with this matter, the Bank filed a complaint in U.S. District Court for the Southern District of
California (Case CV '19 02031 GPC KSC) seeking to recover its losses and other monetary damages against Chicago Title
Insurance Company and Chicago Title Company, asserting claims under RICO, 18 U.S.C § 1962 and for RICO Conspiracy,
Fraud, Aiding and Abetting Fraud, Negligent Misrepresentation, Breach of Fiduciary Duty and Negligence. We are actively
considering and pursuing available sources of recovery and other potential means of mitigating the loss; however, no assurance
can be given that we will be successful in that regard. During the third quarter of 2019, we undertook an extensive collateral
review of all commercial lending relationships $5 million and above not secured by real estate, consisting of 53 loans
representing $536 million in commitments. The collateral review focused on security and collateral documentation and
confirmation of the Bank's collateral interest. The review was performed within the Bank's Internal Audit department and the
work was validated by an independent third party. Our review and outside validation have not identified any other instances of
apparent fraud for the credits reviewed or concerns over the existence of collateral held by the Bank or on our behalf at third
parties; however, there are no assurances that our internal review and third party validation will be sufficient to identify all such
issues. Excluding this charge-off, during the year ended December 31, 2019, the provision for loan losses and ALL were
positively impacted by the $1.75 billion reduction in loan balances, partially offset by an increase in classified loans which
increased from $80.8 million at December 31, 2018 to $102.0 million at December 31, 2019. In particular, a $24.9 million
commercial and industrial loan was downgraded during the fourth quarter of 2019.
For the comparable 2018 period, $30.2 million of loan loss provisions were recorded, inclusive of a $13.9 million charge-off,
which reflected the outstanding balance under a $15.0 million line of credit that was originated during the first quarter of 2018.
Subsequent to the granting of the line of credit, representations from the borrower in applying for the line of credit were
determined by the Bank to be false, and third party bank account statements provided by the borrower to secure the line of
credit were found to be fraudulent. The line of credit was granted after the borrower appeared to have satisfied a pre-condition
that the line of credit be fully cash collateralized and secured by a bank account at a third party financial institution pledged to
the Bank. As part of the Bank’s credit review and portfolio management process, the line of credit and disbursements were
reviewed subsequent to closing and compliance with the borrower’s covenants was monitored. As part of this process, on
March 9, 2018, the Bank received information that caused it to believe the existence of the pledged bank account had been
misrepresented by the borrower and that the account had previously been closed. The Bank filed an action in federal court
pursuing the borrower and other parties and is also pursuing other available sources of collection and other potential means of
mitigating the loss; however, no assurance can be given that it will be successful in this regard.
62
The following table presents the risk categories for total loans as of December 31, 2019:
($ in thousands)
NTM loans:
December 31, 2019
Pass
Special Mention
Substandard
Doubtful
Total
Single family residential mortgage
$
579,548
$
5,790
$
13,019
$
— $
Other consumer
Total NTM loans
Traditional loans:
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total traditional loans
Total loans
2,299
581,847
1,580,269
813,846
1,484,931
60,982
229,771
979,705
51,032
5,200,536
—
5,790
45,323
2,532
4,256
2,760
1,579
4,945
346
61,741
—
13,019
65,678
2,439
5,341
5,621
—
7,250
488
86,817
—
—
—
—
—
1,618
—
517
—
2,135
$
5,782,383
$
67,531
$
99,836
$
2,135
$
5,951,885
The following table presents the risk categories for total loans as of December 31, 2018:
($ in thousands)
NTM loans:
December 31, 2018
Pass
Special Mention
Substandard
Doubtful
Total
Single family residential mortgage
$
811,056
$
10,966
$
2,296
$
— $
Other consumer
Total NTM loans
Traditional loans:
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total traditional loans
Total loans
2,413
813,469
1,859,569
851,604
2,239,301
53,433
197,851
1,461,721
66,228
6,729,707
—
10,966
41,302
11,376
—
6,114
3,606
2,602
979
65,979
—
2,296
43,271
4,033
1,945
8,340
2,519
16,849
645
77,602
$
7,543,176
$
76,945
$
79,898
$
—
—
—
—
—
854
—
—
—
854
854
63
598,357
2,299
600,656
1,691,270
818,817
1,494,528
70,981
231,350
992,417
51,866
5,351,229
824,318
2,413
826,731
1,944,142
867,013
2,241,246
68,741
203,976
1,481,172
67,852
6,874,142
$
7,700,873
The following table presents information regarding non-performing assets and activity in the ALL for the periods indicated:
($ in thousands)
Loans past due over 90 days or more still on
accrual
Non-accrual loans
Total non-performing loans
Other real estate owned
Total non-performing assets
Allowance for loan losses
Balance at beginning of year
Charge-offs
Recoveries
Net charge-offs
Provision for loan losses
Balance at end of year
Non-performing loans to total loans
Non-performing assets to total assets
Non-performing loans to ALL
ALL to non-performing loans
ALL to total loans
Net charge-offs to average total loans
2019
2018
2017
2016
2015
December 31,
$
$
$
$
— $
470
$
— $
— $
$
$
$
43,354
43,354
—
43,354
62,192
(41,766)
836
(40,930)
36,387
57,649
0.73%
0.55%
75.20%
132.97%
0.97%
$
$
$
21,585
22,055
672
22,727
49,333
(18,499)
1,143
(17,356)
30,215
62,192
0.29%
0.21%
35.46%
281.99%
0.81%
19,382
19,382
1,796
21,178
40,444
(5,581)
771
(4,810)
13,699
49,333
0.29%
0.21%
39.29%
254.53%
0.74%
$
$
$
$
14,942
14,942
2,502
17,444
35,533
(2,618)
2,258
(360)
5,271
$
40,444
$
0.25%
0.16%
36.94%
270.67%
0.67%
—
45,129
45,129
1,097
46,226
29,480
(1,942)
526
(1,416)
7,469
35,533
0.87%
0.56%
127.01%
78.74%
0.69%
0.59%
0.25%
0.07%
0.01%
0.03%
The following table presents the ALL allocation among loan origination types as of the dates indicated:
($ in thousands)
Loan breakdown by origination type:
2019
2018
2017
2016
2015
December 31,
Originated loans
$
5,510,242
$
7,105,171
$
5,988,101
$
4,943,549
$
3,148,182
Acquired loans not impaired at acquisition
Non-impaired seasoned SFR mortgage loan
pools
Acquired with deteriorated credit quality
441,643
595,702
671,306
927,422
1,128,503
—
—
—
—
—
—
21,955
141,826
194,978
712,731
Total loans
$
5,951,885
$
7,700,873
$
6,659,407
$
6,034,752
$
5,184,394
ALL breakdown by origination type:
Originated loans
$
56,175
$
61,255
$
48,110
$
38,531
$
Acquired loans not impaired at acquisition
Non-impaired seasoned SFR mortgage loan
pools
Acquired with deteriorated credit quality
Total ALL
Discount on purchased/acquired Loans:
Acquired loans not impaired at acquisition
Non-impaired seasoned SFR mortgage loan
pools
Acquired with deteriorated credit quality
Total discount
Percentage of ALL to:
Originated loans
Total loans:
1,474
—
—
57,649
8,071
—
—
937
—
—
$
$
62,192
11,645
$
$
—
—
1,223
—
—
49,333
14,943
—
—
$
$
8,071
$
11,645
$
14,943
$
1,703
106
104
40,444
17,820
1,280
22,454
41,554
$
$
$
$
$
33,082
2,245
—
206
35,533
21,366
12,545
68,372
$
102,283
1.02%
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Servicing Rights
We retain servicing rights from certain sales of SFR mortgage loans and SBA loans.
Mortgage servicing rights (MSRs). MSRs are accounted for at fair value and totaled $1.2 million and $1.8 million at
December 31, 2019 and 2018. The aggregate principal balance of the loans underlying MSRs was $150.6 million and $204.0
million at December 31, 2019 and 2018. The recorded amount of MSRs as a percentage of the unpaid principal balance of the
loans we are servicing were 0.77% and 0.87% at December 31, 2019 and 2018.
During the first half of 2018, we sold $28.5 million of MSRs on approximately $3.55 billion in unpaid principal
balances of conventional agency mortgage loans for cash consideration of $30.1 million, subject to prepayment protection
provision and standard representations and warranties. The sale of MSRs resulted in a net loss of $2.3 million for the year
ended December 31, 2018, primarily related to transaction costs, provision for early repayments of loans, and expected
repurchase obligations under standard representations and warranties.
We sold $37.8 million of MSRs as a part of discontinued operations during the year ended December 31, 2017.
SBA servicing rights. SBA servicing rights are accounted for at lower of cost or fair value and totaled $1.1 million and $1.7
million at December 31, 2019 and 2018. The aggregate principal balance of the loans underlying SBA servicing rights was
$75.2 million and $96.4 million at December 31, 2019 and 2018. The recorded amount of SBA servicing rights as a percentage
of the unpaid principal balance of the loans we are servicing were 1.52% and 1.72% at December 31, 2019 and 2018.
For additional information, see Note 8 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.
Goodwill and other intangible assets
We had goodwill of $37.1 million at December 31, 2019 and 2018. During the year ended December 31, 2017, we wrote off
goodwill of $2.1 million.
We conduct our evaluation of goodwill impairment as of August 31 each year, and more frequently if events or circumstances
indicate that there may be impairment. We completed our annual goodwill impairment test as of August 31, 2019 and
determined that no goodwill impairment existed.
We had core deposit intangibles of $4.2 million and $6.3 million at December 31, 2019 and 2018. Core deposit intangibles are
amortized over their useful lives ranging from 4 to 10 years. As of December 31, 2019, the weighted-average remaining
amortization period for core deposit intangibles was approximately 4.7 years.
We recorded impairment on intangible assets of zero, zero, and $336 thousand for the years ended December 31, 2019, 2018,
and 2017. During the year ended December 31, 2017, we also wrote off a client relationship intangible of $246 thousand and a
trade name intangible of $90 thousand.
For additional information, see Note 10 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.
Alternative Energy Partnerships
The following table presents the activity related to our investment in alternative energy partnerships for the years ended
December 31, 2019 and 2018:
($ in thousands)
Balance at beginning of period
New funding
Return of unused capital
Change in unfunded equity commitments
Cash distribution from investments
Loss on investments using HLBV method
Balance at end of period
Unfunded equity commitments
Year Ended December 31,
2018
2019
$
28,988
$
806
—
3,225
(2,025)
(1,694)
$
$
29,300
3,225
$
$
48,826
—
(1,027)
—
(13,767)
(5,044)
28,988
—
Our investments in alternative energy partnerships are primarily returned through the realization of energy tax credits and other
tax benefits rather than through distributions or through the sale of the investment. During the year ended December 31, 2019,
the recognition of tax credits on investments in alternative energy partnerships was $3.4 million, partially offset by tax expense
from tax basis reduction of $362 thousand, compared to $9.6 million of tax credits recognized, partially offset by tax expense
66
from tax basis reduction of $1.0 million for the year ended December 31, 2018. The reduction in tax credits received by us is
due to fewer investments in alternative energy partnerships. The HLBV loss for the period is largely driven by accelerated tax
depreciation on equipment and the recognition of energy tax credits which reduces the amount distributable by the investee in a
hypothetical liquidation under the contractual liquidation provisions.
For additional information, see Note 21 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.
Deposits
Total deposits were $5.43 billion at December 31, 2019, a decrease of $2.49 billion, or 31.4%, from $7.92 billion at
December 31, 2018. The decrease was mainly due to controlled run-off of higher costing deposits, including matured
certificates of deposit that were not renewed and other non-maturity accounts. During 2019, we continued efforts to build core
deposits across our business units, including strong growth from the community banking and private banking channel, as well
as reductions in brokered deposits. Brokered deposits were $10.0 million at December 31, 2019, a decrease of $1.70 billion, or
99.4%, from $1.71 billion at December 31, 2018. Brokered deposits represented 0.2% and 21.6% of total deposits at
December 31, 2019 and 2018. During 2019, noninterest-bearing deposits increased by $65.2 million to $1.09 billion, or 20.1%
of total deposits, at December 31, 2019. The following table presents the composition of deposits as of December 31, 2019 and
2018:
($ in thousands)
Noninterest-bearing deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
Total deposits
December 31,
Change
2019
2018
Amount
Percentage
$
1,088,516
$
1,023,360
$
1,533,882
715,479
885,246
582,772
621,272
1,556,410
873,153
1,265,847
2,388,592
809,282
65,156
(22,528)
(157,674)
(380,601)
(1,805,820)
(188,010)
$
5,427,167
$
7,916,644
$
(2,489,477)
6.4 %
(1.4 )%
(18.1 )%
(30.1 )%
(75.6 )%
(23.2 )%
(31.4)%
The following table presents the scheduled maturities of certificates of deposit as of December 31, 2019:
($ in thousands)
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
Total certificates of deposit
Three
Months
or Less
Over Three
Months
Through
Six Months
Over Six
Months
Through
Twelve
Months
Over
One Year
$
$
171,807
368,510
540,317
$
$
160,703
125,506
286,209
$
$
195,410
84,567
279,977
$
$
54,852
42,689
97,541
$
$
Total
582,772
621,272
1,204,044
For additional information, see Note 10 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.
Borrowings
Although deposits are our primary source of funds, we may utilize borrowings when they are a less costly source of funds and
can be invested at a positive interest rate spread, when we desire additional capacity to fund loan demand, or when they meet
our asset/liability management goals to diversify funding sources and enhance the interest rate risk management.
We utilize FHLB advances and securities sold under repurchase agreements to leverage our capital base, to provide funds for
our lending activities, to provide a source of liquidity, and to enhance our interest rate risk management. We also have the
ability to borrow from the Federal Reserve Bank, as well as through unsecured federal funds lines with correspondent banks.
We may obtain advances from the FHLB by collateralizing the advances with certain of our loans and investment securities.
These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of
maturities and call features.
FHLB advances totaled $1.20 billion and $1.52 billion at December 31, 2019 and 2018. At December 31, 2019, $730.0 million
of the Bank's advances from FHLB were fixed rate and had interest rates ranging from 1.82% to 3.32% with a weighted-
average interest rate of 2.66%, and $465.0 million of the Bank's advances from FHLB were variable rate and had a weighted-
average interest rate of 1.66%. At December 31, 2019 and 2018, the Bank’s advances from the FHLB were collateralized by
certain real estate loans with an aggregate unpaid principal balance of $3.05 billion and $4.05 billion. The Bank’s investment in
67
capital stock of the FHLB of San Francisco totaled $32.3 million and $41.0 million at December 31, 2019 and 2018. Based on
this collateral, the Bank was eligible to borrow an additional $1.02 billion at December 31, 2019.
We did not have any outstanding securities sold under agreements to repurchase at December 31, 2019 or 2018.
For additional information, see Note 12 to Consolidated Financial Statements included Item 8 of this Annual Report on Form
10-K.
Long-Term Debt
The following table presents our long-term debt as of the dates indicated:
($ in thousands)
5.25% senior notes due April 15, 2025
Total
December 31,
2019
2018
Unamortized
Debt Issuance
Cost and
Discount
Par Value
Unamortized
Debt Issuance
Cost and
Discount
Par Value
$
$
175,000
175,000
$
$
(1,579) $
(1,579) $
175,000
175,000
$
$
(1,826)
(1,826)
For additional information, see Note 13 to Consolidated Financial Statements included Item 8 of this Annual Report on Form
10-K.
Reserve for Unfunded Loan Commitments
We maintain 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 are determined based on
outstanding loans that share similar credit risk exposure. As of December 31, 2019 and December 31, 2018, the reserve for
unfunded loan commitments was $4.1 million and $4.6 million and included in other liabilities in the accompanying
consolidated balance sheets. Changes in the reserve for unfunded commitments are recorded in other noninterest expense in the
accompany Consolidated Statements of Operations. The decrease during the year ended December 31, 2019 was mainly due to
a reduction in the amount of unfunded loan commitments outstanding as of December 31, 2019.
The following table presents a summary of activity in the reserve for unfunded loan commitments for the periods indicated:
($ in thousands)
Balance at beginning of period
(Reversal of) provision for unfunded loan commitments
Balance at end of period
Reserve for Loss on Repurchased Loans
Year Ended December 31,
2019
2018
2017
$
$
4,622
(558)
4,064
$
$
3,716
906
4,622
$
$
2,385
1,331
3,716
When we sell residential mortgage loans into the secondary mortgage market, we make customary representations and
warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent
of underwriting standards applied and the types of documentation being provided. Typically, these representations and
warranties are in place for the life of the loan. If a defect in the origination process is identified, we may be required to either
repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, generally we have
no liability to the purchaser for losses it may incur on such loan. In addition, we had the option to buy out severely delinquent
loans at par from GNMA pools for which we were the servicer and issuer of the pool. We maintain a reserve for losses on
repurchased loans to account for the expected losses related to loans we might be required to repurchase (or the indemnity
payments we may have to make to purchasers). The reserve takes into account both the estimate of expected losses on loans
sold during the current accounting period, as well as adjustments to the previous estimates of expected losses on loans sold. In
each case, these estimates are based on the most recent data available, including data from third parties, regarding demand for
loan repurchases, actual loan repurchases, and actual credit losses on repurchased loans, among other factors.
Reserve for loss on repurchased loans totaled $6.2 million at December 31, 2019, an increase of $3.7 million, or 147.4%, from
$2.5 million at December 31, 2018. Approximately $4.6 million of the change was due to the establishment of new reserves,
including $4.4 million associated with our multifamily securitization during the year ended December 31, 2019. Offsetting the
increase was a $868 thousand decrease due to portfolio run-off and repurchase settlement activities.
Provisions added to the reserve for loss on repurchased loans are initially recorded against noninterest income at the time of
sale, and any subsequent increase or decrease in the provision is then recorded under noninterest expense on the Consolidated
68
Statements of Operations as an increase or decrease to provision for loan repurchases. Initial provisions for loan repurchases
were $4.6 million, $126 thousand and $1.6 million, respectively, and subsequent reversals in the provision were $(660)
thousand, $(2.5) million and $(1.8) million, respectively, for the years ended December 31, 2019, 2018 and 2017.
We believe that all repurchase demands received were adequately reserved for at December 31, 2019. For additional
information, see Note 15 to Consolidated Financial Statements included Item 8 of this Annual Report on Form 10-K.
Liquidity Management
We are required to maintain sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease
depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, we
have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including
potential deposit outflows, and dividend payments. Cash flow projections are regularly reviewed and updated to ensure that
adequate liquidity is maintained.
Banc of California, N.A.
The Bank's liquidity, represented by cash and cash equivalents and securities available-for-sale, is a product of its operating,
investing, and financing activities. The Bank's primary sources of funds are deposits; payments (including interest and
principal) on outstanding loans and investment securities; sales of loans, investment securities and other short-term
investments; and funds provided from operations. While scheduled payments from the amortization of loans and investment
securities, and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition,
the Bank invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. The
Bank also generates cash through borrowings. The Bank mainly utilizes FHLB advances and securities sold under repurchase
agreements to leverage its capital base, to provide funds for its lending activities, as a source of liquidity, and to enhance its
interest rate risk management. The Bank also has the ability to obtain brokered deposits and collect deposits through its
wholesale and treasury operations. Liquidity management is both a daily and long-term function of business management. Any
excess liquidity is typically invested in federal funds or investment securities. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products. The Bank uses its sources of funds primarily to meet its ongoing loan and
other commitments, and to pay maturing certificates of deposit and savings withdrawals.
Banc of California, Inc.
The primary sources of funds for Banc of California, Inc., on a stand-alone holding company basis, are dividends and
intercompany tax payments from the Bank, outside borrowing, and its ability to raise capital and issue debt securities.
Dividends from the Bank are largely dependent upon the Bank's earnings and are subject to restrictions under certain
regulations that limit its ability to transfer funds to the holding company. OCC regulations impose various restrictions on the
ability of a bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other
items. Generally, a well-capitalized bank may make capital distributions during any calendar year equal to up to 100% of year-
to-date net income plus retained net income for the two preceding years without prior OCC approval. However, any dividend
paid by the Bank would be limited by the need to maintain its well capitalized status plus the capital buffer in order to avoid
additional dividend restrictions (Refer to Capital - Dividend Restrictions below for additional information). Currently, the Bank
does not have sufficient dividend-paying capacity to declare and pay such dividends to the holding company without obtaining
prior approval from the OCC under the applicable regulations. During the year ended December 31, 2019, the Bank paid
dividends of $142.5 million to Banc of California, Inc. At December 31, 2019, Banc of California, Inc. had $74.0 million in
cash, all of which was on deposit at the Bank. During the year ended December 31, 2019, we completed a partial tender offer
for depositary shares representing shares of our Series D and Series E preferred stock. The total consideration for each Series E
Depositary Share tendered and accepted for purchase pursuant to the offer equaled $27.13. The total consideration for each
Series D Depositary Share tendered and accepted for purchase pursuant to the offer equaled $26.39. The aggregate total
consideration paid by us for the preferred stock accepted for purchase was $46.0 million inclusive of premium to par and
accrued dividends ($19.4 million of series D and $26.6 million series E depository shares). The completed partial tender offer
resulted in a $5.1 million reduction to net income available to common shareholders.
On a consolidated basis, we maintained $373.5 million of cash and cash equivalents, which was 4.8% of total assets at
December 31, 2019. Our cash and cash equivalents decreased by $18.1 million, or 4.6%, from $391.6 million, or 3.7% of total
assets, at December 31, 2018. The decrease was mainly due to reductions in deposits and FHLB advances, offset by cash
received from sales of investment securities and loans. We have benefited from completion during late 2018 of our exit from
high-rate and high-volatility institutional deposits and reduced the reliance on brokered deposits by replacing them with core
deposits to fund new loan originations. During the year ended December 31, 2019, we also strategically decreased our securities
portfolio to navigate a volatile rate environment by completing the sale of our entire commercial mortgage-backed securities
portfolio and reducing our collateralized loan obligations and mortgage-back securities exposure by selling $1.20 billion of
these investments. All of these strategic actions were taken in order to expand core lending activities across the organization
69
and reduce our reliance on higher costing brokered certificates of deposit, while attempting to reduce risk on our consolidated
balance sheet.
At December 31, 2019, we had available unused secured borrowing capacities of $1.02 billion from FHLB and $16.7 million
from Federal Reserve Discount Window, as well as $185.0 million from unused unsecured federal funds lines of credit. We also
maintained repurchase agreements and had no outstanding securities sold under repurchase agreements at December 31, 2019.
Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and pledging additional
investment securities. We also had unpledged securities available-for-sale of $868.5 million at December 31, 2019.
We believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements. As of
December 31, 2019, we believe that there are no events, uncertainties, material commitments, or capital expenditures that were
reasonably likely to have a material effect on our liquidity position.
Commitments
The following table presents information as of December 31, 2019 regarding our commitments and contractual obligations:
($ in thousands)
Commitments to extend credit
Unused lines of credit
Standby letters of credit
Total commitments
FHLB advances
Long-term debt
Operating and capital lease obligations
Certificates of deposit
Commitments and Contractual Obligations
Total Amount
Committed
Less Than
One Year
One to Three
Years
Over Three
Years to Five
Years
More than
Five Years
$
$
$
129,968
$
43,707
$
73,356
$
2,371
$
1,050,335
5,450
1,185,753
1,195,000
$
$
175,000
27,053
837,251
5,159
886,117
639,000
—
7,181
1,204,044
1,106,503
77,701
180
$
$
151,237
191,000
$
$
—
8,394
92,361
80,053
91
82,515
65,000
$
$
—
4,304
5,180
10,534
55,330
20
65,884
300,000
175,000
7,174
—
Total contractual obligations
$
2,601,097
$
1,752,684
$
291,755
$
74,484
$
482,174
During the three months ended March 31, 2017, the Bank entered into certain definitive agreements which grant the Bank the
exclusive naming rights to the Banc of California Stadium, a soccer stadium of The Los Angeles Football Club (LAFC) as well
as the right to be the official bank of LAFC. In exchange for the Bank’s rights as set forth in the agreements, the Bank agreed to
pay LAFC $100.0 million over a period of 15 years, beginning in 2017 and ending in 2032. The advertising benefits of such
rights are amortized on a straight-line basis and recorded as advertising and promotion expense beginning in 2018. As of
December 31, 2019, the Bank has paid $20.8 million of the $100.0 million commitment. The prepaid commitment balance, net
of amortization, was $7.4 million as of December 31, 2019, which was recognized as a prepaid asset and included in Other
Assets in the Consolidated Statements of Financial Condition.
We had unfunded commitments of $22.4 million, $7.6 million, and $501 thousand for Affordable Housing Fund Investment,
SBIC, and Other Investments at December 31, 2019.
Stockholders’ Equity
Stockholders’ equity totaled $907.2 million at December 31, 2019, a decrease of $38.3 million, or 4.0%, from $945.5 million at
December 31, 2018. The decrease was primarily the result of the partial redemption of our Series D Preferred Stock and Series
E Preferred Stock for an aggregate amount of $46.0 million, cash dividends for common stock of $15.7 million and cash
dividends for preferred stock of $15.6 million, partially offset by net income of $23.8 million and $12.2 million of other
comprehensive income on securities available-for-sale due primarily to decreases in market interest rates during the year ended
December 31, 2019. For additional information, see Note 19 to Consolidated Financial Statements included Item 8 of this
Annual Report on Form 10-K.
In order to maintain adequate levels of capital, we continuously assess projected sources and uses of capital to support projected
asset growth, operating needs and credit risk. We consider, among other things, earnings generated from operations and access
to capital from financial markets. In addition, we perform capital stress tests on an annual basis to assess the impact of adverse
changes in the economy on our capital base.
70
Regulatory Capital
The Company and the Bank are subject to the regulatory capital adequacy guidelines that are established by the Federal banking
regulators. In July 2013, the Federal banking regulators approved a rule to implement the revised capital adequacy standards of
the Basel III and to address relevant provisions of the Dodd-Frank Act. The final rule strengthened the definition of regulatory
capital, increased risk-based capital requirements, made selected changes to the calculation of risk-weighted assets, and adjusts
the prompt corrective action thresholds. The Company and the Bank became subject to the new rule on January 1, 2015 and
certain provisions of the new rule were phased in through January 1, 2019. Inclusive of the fully phased-in capital conservation
buffer, the common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5%
and 10.5%, respectively. For additional information on Basel III capital rules, see Note 20 to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K.
The following table presents the regulatory capital ratios for the Company and the Bank as of dates indicated:
December 31, 2019
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity tier 1 capital ratio
Tier 1 leverage ratio
December 31, 2018
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity tier 1 capital ratio
Tier 1 leverage ratio
Banc of California,
Inc.
Banc of California,
NA
Minimum
Regulatory
Requirements
Well-Capitalized
Requirements
(Bank)
15.90%
14.83%
11.56%
10.89%
13.71%
12.77%
9.53%
8.95%
17.46%
16.39%
16.39%
12.02%
15.71%
14.77%
14.77%
10.36%
8.00%
6.00%
4.50%
4.00%
8.00%
6.00%
4.50%
4.00%
10.00%
8.00%
6.50%
5.00%
10.00%
8.00%
6.50%
5.00%
71
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established
contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of
other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities.
The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is
our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest
rates and comply with applicable regulations, we have established an asset/liability committee (ALCO) to monitor our interest
rate risk. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes
in market interest rates.
We maintain both a management ALCO (Management ALCO), comprised of select members of senior management, and an
ALCO of our Board of Directors (Board ALCO, together with Management ALCO, ALCOs). In order to manage the risk of
potential adverse effects of material and prolonged changes in interest rates on our results of operations, we have adopted asset/
liability management policies to align maturities and repricing terms of interest-earning assets to interest-bearing liabilities. The
asset/liability management policies establish guidelines for the volume and mix of assets and funding sources taking into
account relative costs and spreads, interest rate sensitivity and liquidity needs, while the ALCOs monitor adherence to those
guidelines. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital
adequacy, growth, risk, and profitability goals. The ALCOs meet periodically to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the
volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to our net
present value of equity analysis.
In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and
capital targets, we evaluate various strategies including:
• Originating and purchasing adjustable rate mortgage loans,
• Originating shorter-term consumer loans,
• Managing the duration of investment securities,
• Managing our deposits to establish stable deposit relationships,
• Using FHLB advances and/or certain derivatives such as swaps to align maturities and repricing terms, and
• Managing the percentage of fixed rate loans in our portfolio.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market
conditions and competitive factors, the ALCOs may decide to increase our interest rate risk position within the asset/liability
tolerance set forth by our Board of Directors.
As part of their procedures, the ALCOs regularly review interest rate risk by forecasting the impact of alternative interest rate
environments on net interest income and market value of portfolio equity, which is defined as the net present value of an
institution’s existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity.
72
Interest Rate Sensitivity of Economic Value of Equity and Net Interest Income
Interest rate risk results from our banking activities and is the primary market risk for us. Interest rate risk is caused by the
following factors:
• Repricing risk - timing differences in the repricing and maturity of interest-earning assets and interest-bearing
liabilities;
• Option risk - changes in the expected maturities of assets and liabilities, such as borrowers’ ability to prepay loans and
depositors’ ability to redeem certificates of deposit before maturity;
• Yield curve risk - changes in the yield curve where interest rates increase or decrease in a nonparallel fashion; and
• Basis risk - changes in spread relationships between different yield curves, such as U.S. Treasuries, U.S. Prime Rate
and London Interbank Offered Rate.
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and
managing the effects of adverse changes in interest rates on our net interest income. Management of our interest rate risk is
overseen by the Board ALCO. Board ALCO delegates the day to day management of interest rate risk to the Management
ALCO. Management ALCO ensures that the Bank is following the appropriate and current regulatory guidance in the
formulation and implementation of our interest rate risk program. Board ALCO reviews the results of our interest rate risk
modeling quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately
and any residual risk is acceptable. In addition to our annual review of this policy, our Board of Directors periodically reviews
the interest rate risk policy limits.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by
investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic repricing
characteristics of our assets and liabilities and determining the appropriate interest rate risk posture given business forecasts,
management objectives, market expectations, and policy constraints.
Our interest rate risk exposure is measured and monitored through various risk management tools, including a simulation model
that performs interest rate sensitivity analysis under multiple scenarios. The simulation model is based on the actual maturities
and re-pricing characteristics of the Bank’s interest-rate sensitive assets and liabilities. The simulated interest rate scenarios
include an instantaneous parallel shift in the yield curve (Rate Shock). We then evaluate the simulation results using two
approaches: Net Interest Income at Risk (NII at Risk), and Economic Value of Equity (EVE). Under NII at Risk, the impact on
net interest income from changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled utilizing
various assumptions for assets, liabilities, and derivatives.
EVE measures the period end market value of assets minus the market value of liabilities. Asset liability management uses this
value to measure the changes in the economic value of the Bank under various interest rate scenarios. In some ways, the
economic value approach provides a broader scope than net income volatility approach since it captures all anticipated cash
flows.
The balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net
interest margin, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-
bearing liabilities. Conversely, the balance sheet is considered “liability sensitive” when an increase in short-term interest rates
is expected to compress our net interest margin, as rates paid on our interest-bearing liabilities reprice higher at a pace faster
than rates earned on our interest-earning assets.
At December 31, 2019, our interest rate risk profile reflects an “asset sensitive” position. We are naturally asset sensitive due to
our large portfolio of rate-sensitive assets. Given the uncertainty of the magnitude, timing and direction of future interest rate
movements, as well as the shape of the yield curve, actual results may vary from those predicted by our model.
73
The following table presents the projected change in the Bank’s net portfolio value at December 31, 2019 that would occur
upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that
management might take to counteract that change:
($ in thousands)
December 31, 2019
+200 bps
+100 bps
0 bp
-100 bps
Change in Interest Rates in Basis Points (bps) (1)
Economic Value of Equity
Net Interest Income
Amount
Amount
Change
Percentage
Change
Amount
Amount
Change
Percentage
Change
$ 1,002,011
$
981,512
949,378
915,782
52,633
32,134
5.5 % $
228,972
$
3.4 %
224,614
220,636
217,301
8,336
3,978
3.8 %
1.8 %
(3,335)
(1.5)%
(33,596)
(3.5)%
(1) Assumes an instantaneous uniform change in interest rates at all maturities
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans
and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.
Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency exchange
risk and commodity price risk, do not arise in the normal course of our business activities and operations.
74
Item 8. Financial Statements and Supplementary Data
BANC OF CALIFORNIA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Contents
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
78
79
80
82
83
85
87
75
Report of Ernst & Young, LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Banc of California, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial condition of Banc of California, Inc. (the “Company”)
as of December 31, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and
cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated March 2, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the account and the disclosure to which it relates.
76
Description of
the Matter
Allowance for Loan Losses
The Company’s loan portfolio totaled $5.95 billion as of December 31, 2019 and the associated
allowance for loan losses (ALL) was $57.6 million. As discussed in Note 1 to the consolidated financial
statements, the ALL is established through a provision for loan losses and represents management’s best
estimate of probable losses that may be incurred within the existing loan portfolio. Management’s
estimate for the ALL consists of a specific allowance established for probable losses on individually
identified impaired loans, quantitative allowance calculated using historical loss experience adjusted as
necessary to reflect current conditions, and qualitative allowance to capture economic, underwriting,
process, credit, and other factors and trends that are not adequately reflected in the historical loss rates.
Management estimates the allowance using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic
conditions, and other factors.
Auditing management’s estimate of the allowance is complex due to the highly judgmental nature of the
qualitative allowance. Management’s identification and measurement of the qualitative allowance is
highly judgmental and could have a significant effect on the ALL.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of related
controls over the calculation and recording of the ALL. This included testing controls over the
underlying data and inputs to the qualitative adjustments, management’s review of significant
assumptions, and the Company’s ALL governance process, including management’s review of whether
qualitative adjustments are warranted, calculated appropriately, and whether the ALL appropriately
reflects losses incurred in the loan portfolio as of the balance sheet date. This included observing key
management meetings where such items were discussed.
To test the reasonableness of the qualitative allowance, our audit procedures included, among others,
assessing the methodology used by the Company to estimate the qualitative allowance and testing the
completeness and accuracy of the underlying data used by the Company in its calculation of the
qualitative allowance. We evaluated the accuracy of management’s inputs by comparing the inputs to
the Company’s historical loan performance data, third-party macroeconomic data, peer bank data, and
tested the mathematical accuracy of the calculation of the qualitative allowance. We analyzed changes
in the qualitative allowance by comparing to prior periods, macroeconomic trends and changes in the
Company’s loan portfolio. In addition, we evaluated the overall ALL, inclusive of the qualitative
allowance, and whether the amount appropriately reflects losses incurred in the loan portfolio as of the
balance sheet date.
We have served as the Company’s auditor since 2019.
Irvine, California
March 2, 2020
/s/ Ernst & Young LLP
77
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Banc of California, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement of financial condition of Banc of California, Inc. and subsidiaries
(the Company) as of December 31, 2018, the related consolidated statements of operations, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
KPMG LLP
We served as the Company’s auditor from 2012 to 2019.
Irvine, California
February 28, 2019
78
ITEM 1 – FINANCIAL STATEMENTS
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
($ in thousands, except share and per share data)
ASSETS
Cash and due from banks
Interest-earning deposits in financial institutions
Total cash and cash equivalents
Securities available-for-sale, carried at fair value
Loans held-for-sale, carried at fair value
Loans held-for-sale, carried at lower of cost or fair value
Loans receivable
Allowance for loan losses
Loans receivable, net
Federal Home Loan Bank and other bank stock, at cost
Premises and equipment, net
Bank owned life insurance
Operating lease right-of-use assets
Goodwill
Investments in alternative energy partnerships, net
Deferred income taxes, net
Income tax receivable
Other intangible assets, net
Other assets
Assets of discontinued operations
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Federal Home Loan Bank advances
Long-term debt, net
Reserve for loss on repurchased loans
Operating lease liabilities
Accrued expenses and other liabilities
Total liabilities
Commitments and contingent liabilities (Note 23)
Preferred stock
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 51,997,061 shares issued
and 50,413,681 shares outstanding at December 31, 2019; 51,755,398 shares issued and
50,172,018 shares outstanding at December 31, 2018
Class B non-voting non-convertible common stock, $0.01 par value per share, 3,136,156 shares
authorized; 477,321 shares issued and outstanding at December 31, 2019 and at December 31,
2018
Additional paid-in capital
Retained earnings
Treasury stock, at cost (1,583,380 shares at December 31, 2019 and December 31, 2018)
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
$
$
$
28,890
344,582
373,472
912,580
22,642
—
5,951,885
(57,649)
5,894,236
59,420
128,021
109,819
22,540
37,144
29,300
44,906
4,233
4,151
185,946
—
7,828,410
1,088,516
4,338,651
5,427,167
1,195,000
173,421
6,201
23,692
95,684
6,921,165
—
189,825
21,875
369,717
391,592
1,992,500
7,690
426
7,700,873
(62,192)
7,638,681
68,094
129,394
107,027
—
37,144
28,988
49,404
2,695
6,346
150,596
19,490
10,630,067
1,023,360
6,893,284
7,916,644
1,520,000
173,174
2,506
—
72,209
9,684,533
—
231,128
520
518
5
629,848
127,733
(28,786)
(11,900)
907,245
7,828,410
$
5
625,834
140,952
(28,786)
(24,117)
945,534
10,630,067
$
$
$
$
See accompanying notes to consolidated financial statements.
79
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
Year Ended December 31,
2019
2018
2017
Interest and dividend income
Loans, including fees
Securities
Other interest-earning assets
Total interest and dividend income
Interest expense
Deposits
Federal Home Loan Bank advances
Securities sold under repurchase agreements
Long-term debt and other interest-bearing liabilities
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Customer service fees
Loan servicing income
Income from bank owned life insurance
Impairment loss on investment securities
Net (loss) gain on sale of securities available-for-sale
Net gain on sale of loans
Net loss on sale of mortgage servicing rights
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Outside service fees
Data processing
Advertising
Regulatory assessments
Loss on investments in alternative energy partnerships, net
Reversal of provision for loan repurchases
Amortization of intangible assets
Impairment on intangible assets
Restructuring expense
All other expense
Total noninterest expense
Income from continuing operations before income taxes
Income tax expense (benefit)
Income from continuing operations
Income from discontinued operations before income taxes (including net gain on
disposal of $0, $1,439 and $13,796 for the year ended December 31, 2019, 2018 and
2017)
Income tax expense
Income from discontinued operations
Net income
Preferred stock dividends
Less: Income allocated to participating securities
80
$
333,934
$
329,272
$
48,134
9,043
391,111
101,099
32,285
62
9,502
142,948
248,163
36,387
211,776
5,982
679
2,292
(731)
(4,852)
7,872
—
874
12,116
105,915
31,308
12,212
1,697
6,420
8,422
7,711
1,694
(660)
2,195
—
4,263
14,737
195,914
27,978
4,219
23,759
—
—
—
23,759
15,559
—
83,567
9,957
422,796
91,236
34,995
1,033
9,456
136,720
286,076
30,215
255,861
6,315
3,720
2,176
(3,252)
5,532
1,932
(2,260)
9,752
23,915
109,974
31,847
33,652
4,667
6,951
12,664
7,678
5,044
(2,488)
3,007
—
4,431
15,358
232,785
46,991
4,844
42,147
4,596
1,271
3,325
45,472
19,504
—
281,071
99,742
8,377
389,190
60,414
12,951
880
10,755
85,000
304,190
13,699
290,491
6,492
1,025
2,339
—
14,768
11,942
—
8,104
44,670
129,153
38,391
42,417
5,840
7,888
5,313
8,105
30,786
(1,812)
3,928
336
5,326
32,597
308,268
26,893
(26,581)
53,474
7,164
2,929
4,235
57,709
20,451
311
Less participating securities dividends
Impact of preferred stock redemption
Net income available to common stockholders
Basic earnings per common share
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per common share
Income from continuing operations
Income from discontinued operations
Net income
Basic earnings per class B common share
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per class B common share
Income from continuing operations
Income from discontinued operations
Net income
Year Ended December 31,
2019
2018
2017
483
5,093
2,624
0.05
—
0.05
0.05
—
0.05
0.05
—
0.05
0.05
—
0.05
$
$
$
$
$
$
$
$
$
811
2,307
22,850
0.38
0.07
0.45
0.38
0.07
0.45
0.38
0.07
0.45
0.38
0.07
0.45
$
$
$
$
$
$
$
$
$
811
—
36,136
0.64
0.08
0.72
0.63
0.08
0.71
0.64
0.08
0.72
0.64
0.08
0.72
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
81
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Net income
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available-for-sale:
Unrealized gain (loss) arising during the period
Unrealized gain arising from the reclassification of securities held-to-
maturity to securities available-for-sale
Reclassification adjustment for loss (gain) included in net income
Reclassification adjustment for OTTI loss included in net income
Total other comprehensive income (loss)
Comprehensive income
Year Ended December 31,
2019
2018
2017
$
23,759
$
45,472
$
57,709
8,285
—
3,426
506
12,217
(28,230)
—
(3,906)
2,296
(29,840)
$
35,976
$
15,632
$
10,068
12,845
(8,644)
—
14,269
71,978
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
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lease right-of-use assets
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Share-based compensation expense
Loss on interest rate swaps
Loss on investments in alternative energy partnerships and affordable
housing investments
Impairment on intangible assets
Impairment on capitalized software projects
Net revenue on mortgage banking activities
Net gain on sale of loans
Net loss (gain) on sale of securities available for sale
Loss from change of fair value on mortgage servicing rights
Loss (gain) on sale or disposal of property and equipment
Loss on sale of mortgage servicing rights
Net gain on disposal of discontinued operations
Repurchase of mortgage loans
Originations of loans held-for-sale from mortgage banking
Originations of other loans held-for-sale
Proceeds from sales of and principal collected on loans held-for-sale from
mortgage (1)
Proceeds from sales of and principal collected on other loans held-for-sale
Change in accrued interest receivable and other assets
Change in accrued interest payable and other liabilities (1)
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
Proceeds from maturities and calls of securities available-for-sale
Proceeds from principal repayments of securities available-for-sale
Proceeds from maturities and calls of securities held-to-maturity
Purchases of securities available-for-sale
Purchases of bank owned life insurance
Net cash provided by disposal of discontinued operations
85
Year Ended December 31,
2019
2018
2017
$
23,759
$
45,472
$
57,709
36,387
(558)
(660)
16,427
2,195
247
783
731
916
(365)
(622)
(2,292)
5,039
8,964
5,214
—
1,481
—
(7,872)
4,852
—
67
—
—
(1,929)
—
—
6,210
426
(15,447)
(3,698)
80,255
1,196,498
53,090
36,541
—
30,215
906
(2,488)
10,878
3,007
233
1,213
3,252
(612)
(637)
(5,911)
(2,176)
6,565
—
5,044
—
1,975
(428)
(1,932)
(5,532)
1,533
(1,741)
2,260
(1,439)
(12,666)
—
(5,839)
25,216
7,037
24,860
(5,262)
123,003
417,870
607,601
43,378
—
13,699
1,331
(1,812)
12,425
3,928
247
(2,432)
—
(1,318)
(4,808)
(30,372)
(2,339)
12,134
—
30,786
336
1,957
(42,889)
(11,942)
(14,768)
17,051
1,070
—
(13,796)
(31,913)
(1,533,889)
(97,156)
1,961,275
302,695
2,604
(66,802)
563,011
981,481
518,978
43,936
143,505
(195,258)
(521,575)
(962,390)
(500)
—
—
—
—
56,123
Year Ended December 31,
2019
2018
2017
573,490
(1,374,702)
(1,128,172)
Loan originations and principal collections, net
Purchase of loans
Redemption of Federal Home Loan Bank stock
Purchase of Federal Home Loan Bank and other bank stocks
Proceeds from sale of loans held-for-sale/held-for-investment
Net change in time deposits in financial institutions
Proceeds from sale of other real estate owned
Proceeds from sale of mortgage servicing rights
Proceeds from sale of premises and equipment
Additions to premises and equipment
Payments of capital lease obligations
Funding of equity investment
Net decrease (increase) in investments in alternative energy partnerships
—
82,835
(74,161)
1,146,562
—
843
—
—
(10,478)
(574)
(14,800)
1,219
(59,481)
66,710
(59,150)
376,837
—
1,795
30,056
4,193
(9,001)
(463)
(6,361)
12,547
Net cash provided by (used in) investing activities
2,795,307
(469,746)
Cash flows from financing activities:
Net (decrease) increase in deposits
Net (decrease) increase in short-term Federal Home Loan Bank advances
Repayment of long-term Federal Home Loan Bank advances
Proceeds from long-term Federal Home Loan Bank advances
Net decrease in other short-term borrowings
Redemption of preferred stock
Payment of junior subordinated amortizing notes
Proceeds from exercise of stock options
Restricted stock surrendered due to employee tax liability
Dividend equivalents paid on stock appreciation rights
Dividends paid on preferred stock
Dividends paid on common stock
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Interest paid on deposits and borrowed funds
Income taxes paid
Income taxes refunds received
Supplemental disclosure of non-cash activities
Transfer from loans to other real estate owned, net
Transfer of loans held-for-investment to loans held-for-sale
Transfer of loans held-for-sale to loans held-for-investment
Reclassification of securities held-to-maturity to securities available-for-
sale
Equipment acquired under capital leases
Reclassification of stranded tax effects to retained earnings
Receivable on unsettled securities sales
Operating lease right of use assets recognized
Operating lease liabilities recognized
Loans sold to Ginnie Mae that are subject to a repurchase option
(2,489,477)
(200,000)
(125,000)
—
—
(46,396)
—
—
(1,023)
(483)
(15,559)
(15,744)
$
$
(2,893,682)
(18,120)
391,592
373,472
151,508
2,924
202
276
1,139,597
—
—
76
—
—
28,664
30,065
—
$
$
623,741
(430,000)
(125,000)
380,000
—
(40,250)
—
—
(2,366)
(810)
(21,954)
(32,725)
350,636
3,893
387,699
391,592
130,793
8,324
4,532
672
376,995
—
—
82
496
—
—
—
$
$
—
29,612
(37,424)
605,502
1,000
3,508
1,496
2,663
(15,323)
(1,434)
(35,826)
(55,377)
151,858
(1,849,247)
805,000
(100,000)
500,000
(68,000)
—
(2,684)
2,043
(6,824)
(810)
(20,451)
(25,707)
(766,680)
(51,811)
439,510
387,699
81,805
11,318
14,119
3,086
593,977
88,591
740,863
1,452
—
5,559
—
—
65,998
(1) We made certain immaterial reclassification adjustments within operating activities during the year ended December 31, 2017.
See accompanying notes to consolidated financial statements.
86
BANC OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Banc of California, Inc., a Maryland corporation, was incorporated in March 2002 and serves as the
holding company for its wholly owned subsidiary, Banc of California National Association (the Bank), a California-based bank.
When we refer to the “parent” or the “holding company", we are referring to Banc of California, Inc., the parent company, on a
stand-alone basis. When we refer to “we,” “us,” “our,” or the “Company”, we are referring to Banc of California, Inc., its
consolidated subsidiaries and the Bank, collectively. We are regulated as a bank holding company by the Board of Governors of
the Federal Reserve System (FRB) and the Bank is regulated by the Office of the Comptroller of the Currency (the OCC).
The Bank offers a variety of financial services to meet the commercial banking and financial needs of the communities it
serves, with operations conducted through 32 banking offices, serving Los Angeles, Orange, San Diego and Santa Barbara
counties in California as of December 31, 2019.
Basis of Presentation: The consolidated financial statements include the accounts of the Company and all other entities in
which we have a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in
consolidation. Unless the context requires otherwise, all references to the "Company" or "us" include our wholly owned
subsidiaries. The accounting and reporting policies of the Company are based upon U.S. generally accepted accounting
principles, which we may refer to as "GAAP," and conform to predominant practices within the financial services industry.
Significant accounting policies followed by the Company are presented below.
Use of Estimates in the Preparation of Financial Statements: The preparation of consolidated 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 consolidated financial statements and disclosures provided, and
actual results could differ. The allowance for loan losses, reserve for loss on repurchased loans, reserve for unfunded loan
commitments, realization of deferred tax assets, the valuation of goodwill and other intangible assets, hypothetical liquidation at
book value (HLBV) of investments in alternative energy partnerships, fair value of assets and liabilities acquired in business
combinations, and the fair value measurement of financial instruments are particularly subject to change and such change could
have a material effect on the consolidated financial statements.
Discontinued Operations: During the year ended December 31, 2017, we completed the sale of the Banc Home Loans division,
which largely represented our previous Mortgage Banking segment. In accordance with ASC 205-20, we determined that the
sale of the Banc Home Loans division and certain other mortgage banking related assets and liabilities that were sold or settled
separately within one year met the criteria to be classified as a discontinued operation and the related operating results and
financial condition have been presented as discontinued operations on the consolidated financial statements. See Note 2 for
additional information. Unless otherwise indicated, information included in these notes to consolidated financial statements is
presented on a consolidated operations basis, which includes results from both continuing and discontinued operations, for all
periods presented. There were no assets, liabilities or operating income as of and for the year ended December 31, 2019 related
to discontinued operations.
Segment Reporting: In connection with the sale of our Banc Home Loans division, which largely represented our Mortgage
Banking segment, we reassessed our reportable operating segments. Based on this internal evaluation, we determined that all
three of our previously disclosed reportable segments, Commercial Banking, Mortgage Banking, and Corporate/Other, are no
longer applicable. Accordingly, to better reflect how we are now managed and how information is reviewed by the chief
operating decision maker, our chief executive officer, we determined that all services we offer relate to Commercial Banking.
As a result, our only reportable segment is Commercial Banking.
87
Variable Interest Entities: We hold ownership interests in certain special purpose entities. We evaluate our interest in these
entities to determine whether they meet the definition of a variable interest entity (VIE) and whether we meet the criteria as
their primary beneficiary and are therefore required to consolidate these entities. A primary beneficiary of a VIE is defined as,
the party that has both the power to direct the activities that most significantly impact the VIE and a variable interest that could
be significant to the VIE. A variable interest is a contractual, ownership or other interest that changes with changes in the fair
value of the VIE’s net assets. To determine whether or not a variable interest we hold could be significant to the VIE, we
consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE. We
analyze whether we are the primary beneficiary of a VIE on an ongoing basis. Changes in facts and circumstances occurring
since the previous primary beneficiary determination are considered as part of this ongoing assessment. See Note 21 for
additional information.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, cash items in transit, cash due from the Federal
Reserve Bank and other financial institutions, and federal funds sold with original maturities less than 90 days. Banking
regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve
Bank (FRB). The reserve requirement at December 31, 2019 was $65.2 million. We were in compliance with our reserve
requirements as of December 31, 2019.
Time Deposits in Financial Institutions: Time deposits in financial institutions have original maturities over 90 days and are
carried at cost.
Investment Securities: Investment securities are classified at the time of purchase as available-for-sale, held-to-maturity or
trading. We had no investment securities classified as held-to-maturity or trading at December 31, 2019 and 2018. Debt
securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are carried at
fair value with unrealized holding gains and losses, net of taxes, and other-than-temporary impairment (OTTI), net of taxes,
reported in accumulated other comprehensive income (AOCI) on the Consolidated Statements of Financial Condition.
During the year ended December 31, 2017, we evaluated our securities held-to-maturity and determined that certain securities
no longer adhered to our strategic focus and could be sold or reinvested to potentially improve our liquidity position or duration
profile. Accordingly, we were no longer able to assert that we had the intent to hold these securities until maturity. As a result,
we transferred all $740.9 million of our held-to-maturity securities to available-for-sale, which resulted in a pre-tax increase to
AOCI of $22.0 million at the time of the transfer, June 30, 2017.
Accreted discounts and amortized premiums are included in interest income using the level yield method, and realized gains or
losses from sales of securities are calculated using the specific identification method.
Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic conditions warrant
such an evaluation. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI
under ASC 320, Accounting for Certain Investments in Debt and Equity Securities. In determining OTTI under the ASC 320
model, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects
of the issuer. Management also considers whether the market decline was affected by macroeconomic conditions, and assesses
whether we intend to sell, or it is more likely than not we will be required to sell, a security in an unrealized loss position before
recovery of its amortized cost basis. The assessment of whether OTTI exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in time.
When OTTI occurs the amount of the impairment recognized in earnings depends on our intent to sell the security or if it is
more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the
criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized
as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is
split into two components as follows: (i) OTTI related to credit loss, which must be recognized in the income statement and (ii)
OTTI related to other factors, which is recognized in other comprehensive income (OCI). The credit loss is defined as the
difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity
securities the entire amount of impairment is recognized through earnings.
Loans Held-For-Sale, Carried at Fair Value: Loans held-for-sale, carried at fair value, are conforming SFR mortgage loans
that are originated and intended for sale in the secondary market, repurchased loans that were previously sold to Ginnie Mae
and other GSEs, and loans sold to Ginnie Mae that are delinquent more than 90 days and subject to a unilateral purchase option
by us. The fair value of loans held-for-sale is based on commitments outstanding from investors as well as what secondary
market investors are currently offering for portfolios with similar characteristics.
Loans Held-for-Sale, Carried at Lower of Cost or Fair Value: We record non-conforming jumbo mortgage loans held-for-sale
and certain commercial loans held-for-sale at the lower of cost or fair value, on an aggregate basis. Deferred loan origination
fees and costs or purchase discounts or premiums included in the carrying value of the loans are not amortized and are included
in the determination of gains or losses from the sale of the related loans. A valuation allowance is established if the fair value of
such loans is lower than their cost, with a corresponding charge to noninterest income. When we change our intent to hold loans
88
for investment, the loans are transferred to held-for-sale at the lower of cost or fair value on the transfer date and amortization
of deferred fees and costs or purchase discounts or premiums is ceased. If a determination is made that a loan held-for-sale
cannot be sold in the foreseeable future, it is transferred to held-for-investment at the lower of cost or fair value on the transfer
date and amortization of origination fees and costs or purchase discounts or premiums are resumed.
Loans: When a determination is made at the time of commitment to originate or purchase loans as held-for-investment, it is our
intent to hold these loans to maturity or for the foreseeable future, subject to periodic review under our management evaluation
processes, including asset/liability management. Loans, excluding purchase credit impaired (PCI) loans, that management has
the intent and ability to hold for the foreseeable future, or until maturity or payoff, are recorded at the principal balance
outstanding, net of charge-offs, unamortized purchase premiums and discounts, and deferred loan fees and costs.
Amortization of deferred loan origination fees and costs or purchase premiums and discounts are recognized in interest income
as an adjustment to yield over the terms of loans using the effective interest method. Deferred loan origination fees and costs on
revolving lines of credit are amortized using the straight line method. Interest on loans is credited to interest income as earned
based on the interest rate applied to principal amounts outstanding. Interest income is accrued on the unpaid principal balance
and is discontinued when management believes, after considering economic and business conditions and collection efforts, that
the borrower’s financial condition is such that full collection of principal or interest becomes doubtful, regardless of the length
of past due status.
Generally, loans are placed on non-accrual status when scheduled payments become past due for 90 days or more. When
accrual of interest is discontinued, any unpaid accrued interest receivable is reversed against interest income. Interest received
on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments
are reasonably assured.
A charge-off is generally recorded at 180 days past due for SFR mortgage loans if the unpaid principal balance exceeds the fair
value of the collateral less costs to sell. Commercial and industrial and commercial real estate loans financings are subject to a
detailed review when 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is
made to put a loan on non-accrual status. A charge-off for commercial and industrial and commercial real estate loans is
recorded when a loss is confirmed. Consumer loans, other than those secured by real estate, are typically charged off no later
than 120 days past due.
Allowance for Loan Losses (ALL): The ALL is a reserve established through a provision for loan losses, and represents
management’s best estimate of probable losses that may be incurred within the existing loan portfolio as of the date of the
consolidated statements of financial condition. Prior to 2018, we had lease financing receivables; however, since there are no
lease financing receivables during the two most recent years, we refer to the allowance for loan losses as the allowance for loan
losses. Confirmed losses are charged against the ALL. Subsequent recoveries, if any, are credited to the ALL. We perform an
analysis of the adequacy of the ALL at least quarterly. Management estimates the required ALL balance using past loan loss
experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. The ALL consists of three elements; (i) a specific allowance established for
probable losses on individually identified impaired loans, (ii) a quantitative allowance calculated using historical loss
experience adjusted as necessary to reflect current conditions; and (iii) a qualitative allowance to capture economic,
underwriting, process, credit, and other factors and trends that are not adequately reflected in the historical loss rates.
A loan is deemed impaired when, based on current information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement. We measure expected credit losses on all impaired loans
individually under the guidance of ASC 310, Receivables, primarily through the evaluation of collateral values and estimated
cash flows expected to be collected. Cash receipts on impaired loans for which the accrual of interest has been discontinued are
applied first to principal and then to interest income. Loans for which the terms have been modified by granting a concession
that normally would not be provided and where the borrower is experiencing financial difficulties are considered TDRs and
classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. The impairment amount on a collateral dependent loan is generally
charged-off to the ALL, and the impairment amount on a loan that is not collateral dependent is set-up as a specific reserve.
TDRs are also measured at the present value of estimated future cash flows using the loan’s effective rate at inception or at the
fair value of collateral, less costs to sell, if repayment is expected solely from the collateral. For TDRs that subsequently
default, we determine the amount of reserve in accordance with the accounting policy for the ALL.
89
At December 31, 2019, the following loan portfolio segments have been identified:
• Commercial and industrial (general commercial and industrial, warehouse lending, and indirect/direct leveraged
lending)
• Commercial real estate
• Multifamily
•
SBA
• Construction
•
SFR - 1st deeds of trust (general SFR mortgage and other)
• Other consumer (HELOC and other)
We categorize loans into risk categories based on relevant information about the ability of borrowers and lessees (also referred
to as borrowers) to service their obligations such as: current financial information, historical payment experience, credit
documentation, public information, and current economic trends, among other factors. We analyze loans individually by
classifying the loans as to credit risk.
Loans secured by multifamily and commercial real estate properties generally involve a greater degree of credit risk than SFR
mortgage loans. Because payments on loans secured by multifamily and commercial real estate properties are often dependent
on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in
the real estate market or the economy. Commercial and industrial loans are also considered to have a greater degree of credit
risk than SFR mortgage loans due to the fact commercial and industrial loans are typically made on the basis of the borrower’s
ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment
of commercial and industrial loans may be substantially dependent on the success of the business itself (which, in turn, is often
dependent in part upon general economic conditions). SBA loans are similar to commercial and industrial loans, but have
additional credit enhancement provided by the U.S. Small Business Administration, for up to 85% of the loan amount for loans
up to $150 thousand and 75% of the loan amount for loans of more than $150 thousand. As a result, the availability of funds for
the repayment of lease financing may be substantially dependent on the success of the business itself (which, in turn, is often
dependent in part upon general economic conditions). Consumer loans may entail greater risk than SFR mortgage loans given
that collection of these loans is dependent on the borrower’s continuing financial stability and, thus, are more likely to be
adversely affected by job loss, divorce, illness, or personal bankruptcy.
Green Loans are also considered to carry a higher degree of credit risk due to their unique cash flows. Credit risk on this asset
class is also managed through the completion of regular third party automated valuation models (AVMs) of the underlying
collateral and monitoring of the borrower’s usage of this account to determine if the borrower is making monthly payments
from external sources or “drawdowns” on their line. In cases where the property values have declined to levels less than the
original LTV ratios, or other levels deemed prudent by us, we may curtail the line and/or require monthly payments or principal
reductions to bring the loan in balance.
On the interest only loans, we project future payment changes to determine if there will be a material increase in the required
payment and then monitors the loans for possible delinquency. Individual loans are monitored for possible downgrading of risk
rating.
Troubled Debt Restructurings: A loan is identified as a TDR when a borrower is experiencing financial difficulties and for
economic or legal reasons related to these difficulties, we grant a concession to the borrower in the restructuring that it would
not otherwise consider. We have granted a concession when, as a result of the restructuring to a troubled borrower, it does not
expect to collect all amounts due, including principal and/or interest accrued at the original terms of the loan. The concessions
may be granted in various forms, including a below-market change in the stated interest rate, a reduction in the loan balance or
accrued interest, an extension of the maturity date, or a note split with principal forgiveness. Loans for which the borrower has
been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs, impaired at the date of discharge, and
charged down to the fair value of collateral less cost to sell. A restructuring executed at an interest rate that is at market interest
rates based on the current credit characteristics of the borrower is not a TDR.
Our policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual status for a
minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to
place them on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance under the
restructured terms of the loan for a minimum of 6 months. Initially, all TDRs are reported as impaired. Generally, TDRs are
classified as impaired loans and reported as TDRs for the remaining life of the loan. Impaired and TDR classification may be
removed if the borrower demonstrates compliance with the modified terms for a minimum of 6 months and through one fiscal
year-end and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower
with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification, it is
our policy to continue to base our measure of loan impairment on the contractual terms specified by the loan agreement.
90
Fair Values of Financial Instruments: We measure certain assets and liabilities on a fair value basis, in accordance with ASC
Topic 820, "Fair Value Measurement." Fair value is used on a recurring basis for certain assets and liabilities in which fair value
is the primary basis of accounting. Examples of these include derivative instruments and available-for-sale securities.
Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment in accordance with ASC
Topic 825, "Financial Instruments." Examples of these include impaired loans, long-lived assets, OREO, goodwill, and core
deposit intangible assets as well as loans held-for-sale accounted for at the lower of cost or fair value.
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants. When observable market prices are not available, fair value is estimated using modeling
techniques such as discounted cash flow analysis. These modeling techniques utilize assumptions that market participants
would use in pricing the asset or the liability, including assumptions about the risk inherent in a particular valuation technique,
the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Depending on the nature of the asset or
liability, we use various valuation techniques and assumptions when estimating the instrument’s fair value. Considerable
judgment may be involved in determining the amount that is most representative of fair value.
To increase consistency and comparability of fair value measures, ASC Topic 820, "Fair Value Measurement" established a
three-level hierarchy to prioritize the inputs used in valuation techniques between observable inputs among (i) observable
inputs that reflect quoted prices in active markets, (ii) inputs other than quoted prices with observable market data, and (iii)
unobservable data such as our own data or single dealer non-binding pricing quotes. We assess the valuation hierarchy for each
asset or liability measured at the end of each quarter; as a result, assets or liabilities may be transferred within hierarchy levels
due to changes in availability of observable market inputs to measure fair value at the measurement date.
Federal Home Loan Bank and Federal Reserve Bank Stock: The Bank is a member of the FHLB and FRB system. Members
are required to own a certain amount of FHLB and FRB stock based on the level of borrowings and other factors, and may
invest in additional amounts. FHLB and FRB stock are carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported on the
Consolidated Statements of Operations under Interest and Dividend Income from Other Interest-Earning Assets.
Other Real Estate Owned: OREO, which represents real estate acquired through foreclosure in satisfaction of commercial and
real estate loans, is initially recorded at fair value less estimated selling costs of the real estate, based on current independent
appraisals obtained at the time of acquisition, less costs to sell when acquired, establishing a new cost basis. Loan balances in
excess of fair value of the real estate acquired at the date of acquisition are charged off against the ALL. A valuation allowance
is established for any subsequent declines in fair value less estimated selling costs and adjusted as applicable. Gains and losses
on the sale of OREO and reductions in fair value subsequent to foreclosure, and any subsequent operating expenses or income
of such properties are included in All Other Expense on the Consolidated Statements of Operations.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key employees. BOLI is recorded at
the amount that can be realized under the insurance contract, which is the cash surrender value.
Premises, Equipment, and Capital Leases: Land is carried at cost. Premises and equipment are recorded at cost less
accumulated depreciation. The straight-line method is used for depreciation with the following estimated useful lives: building -
40 years and leasehold improvements - life of lease, and furniture, fixtures, and equipment - 3 to 7 years. Maintenance and
repairs are expensed as incurred and improvements that extend the useful lives of assets are capitalized.
Servicing Rights - Mortgage (Carried at Fair Value): A servicing asset or liability is recognized when undertaking an
obligation to service a financial asset under a mortgage servicing contract, as a result of the transfer of our financial assets that
meet the requirements for sale accounting. Such servicing asset or liability is initially measured at fair value based on either
market prices for comparable servicing contracts or alternatively is based on a valuation model that is based on the present
value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate
based on the related loan rate and is recorded on the Consolidated Statements of Financial Condition.
We measure servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings
in the period in which the changes occur, and such changes are included within Noninterest Income. The fair values of servicing
rights are subject to significant fluctuations as a result of changes in estimates and actual prepayment speeds and default rates
and losses. Currently, we do not hedge the effects of changes in fair value of our servicing assets.
Servicing fee income, which is reported in Loan Servicing Income on the Consolidated Statements of Operations, is recorded
for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material.
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Servicing Rights - SBA Loans (Carried at Lower of Cost or Fair Value): The Bank originates and sells the guaranteed portion
of our SBA loans. To calculate the gain (loss) on sales of SBA loans, the Bank’s investment in the loan is allocated among the
retained portion of the loan, the servicing retained, the interest-only strip and the sold portion of the loan, based on the relative
fair market value of each portion. The gain (loss) on the sold portion of the loan is recognized at the time of sale based on the
difference between sale proceeds and the amount of the allocated investment to the sold portion of the loan.
The portion of the servicing fees that represent contractually specified servicing fees (contractual servicing) is reflected as a
servicing asset and is amortized over the estimated life of the servicing. In the event future prepayments exceed management’s
estimates and future expected cash flows are inadequate to cover the servicing asset, impairment is recognized. The portion of
servicing fees in excess of contractual servicing fees is reflected as interest-only strip receivables.
Goodwill and Other Intangible Assets: Goodwill represents the excess purchase price of businesses acquired over the fair
value of the identifiable net assets acquired and is assigned to specific reporting units. Goodwill is not subject to amortization
and is evaluated for impairment at least annually, normally during the third fiscal quarter, or more frequently in the interim if
events occur or circumstances change indicating it would more likely than not result in a reduction of the fair value of a
reporting unit below its carrying value. Goodwill is evaluated for impairment by either performing a qualitative evaluation or a
quantitative test. The impairment losses recognized related to intangible assets are recorded in Impairment on Intangible Assets
on the Consolidated Statements of Operations.
The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If it is more likely than not that the fair value of a reporting unit is below its
carrying value, we perform a quantitative test whereby the fair value of a reporting unit is compared to its carrying amount,
including goodwill. We determine the estimated fair value of each reporting unit using a discounted cash flow analysis and
comparable public company market values. Discounted cash flow estimates include significant management assumptions
relating to revenue growth rates, net interest margins, weighted-average cost of capital, and future economic and market
conditions. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered
impaired. Otherwise, if a reporting unit's carrying value exceeds fair value, the difference is charged to noninterest expense.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because
of contractual or other legal rights, or because the asset is capable of being sold or exchanged either separately or in
combination with a related contract, asset or liability. Other intangible assets with finite useful lives are amortized to noninterest
expense over their estimated useful lives and are evaluated for impairment whenever events occur or circumstances change
indicating the carrying amount of the asset may not be recoverable.
Alternative Energy Partnerships: We invest in certain alternative energy partnerships (limited liability companies) formed to
provide sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits
(energy tax credits) and other tax credits. We are a limited partner in these partnerships, which were formed to invest in newly
installed residential and commercial solar leases and power purchase agreements.
As our respective investments in these entities are more than minor, we have significant influence, but not control, over the
investee’s activities that most significantly impact its economic performance. As a result, we are required to apply the equity
method of accounting, which generally prescribes applying the percentage ownership interest to the investee’s GAAP net
income in order to determine the investor’s earnings or losses in a given period. However, because the liquidation rights, tax
credit allocations and other benefits to investors can change upon the occurrence of specified events, application of the equity
method based on the underlying ownership percentages would not accurately represent our investment. As a result, we apply
the Hypothetical Liquidation at Book Value (HLBV) method of the equity method of accounting. The HLBV method is a
balance sheet approach where a calculation is prepared at each balance sheet date to estimate the amount that we would receive
if the equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to
the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation
distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and
distributions, is our share of the earnings or losses from the equity investment for the period.
To account for the tax credits earned on investments in alternative energy partnerships, we use the flow-through income
statement method. Under this method, the tax credits are recognized as a reduction to income tax expense and the initial book-
tax differences in the basis of the investments are recognized as additional tax expense in the year they are earned. We do not
believe the investments in alternative energy partnerships are impaired by the lower corporate income tax rate from the Tax
Cuts and Jobs Act of 2017 due to the protective provision built into the partnership agreements; however, we expect to take
longer to utilize the investment tax credits generated from these investments.
Affordable Housing Fund Investment: We have invested in limited partnerships that were formed to develop and operate
several apartment complexes designed as high-quality affordable housing for lower income tenants throughout the State of
California and other states. We account for these investments under the proportional amortization method. Our ownership in
each limited partnership varies from 8% to 23%. Each of the partnerships must meet the regulatory minimum requirements for
92
affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify
during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of
the credit previously taken is subject to recapture with interest.
As part of the 2017 Tax Cuts and Jobs Act, investments accounted for under the proportional amortization method are required
to be tested for impairment when events or changes in circumstances indicate that it is more-likely-than-not that the carrying
amount of the investment will not be realized. Impairment is measured as the difference between the investment’s carrying
amount and its fair value.
Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value,
less selling costs. For impairment purposes, fair value is determined utilizing market values of similar assets or replacement
cost as applicable.
Reserve for Loss on Repurchased Loans: In the ordinary course of business, as loans are sold, the Bank makes standard
industry representations and warranties about the loans. The Bank may have to subsequently repurchase certain loans or
reimburse certain investor losses that may have occurred due to defects in the origination of the loans. Such defects include
documentation or underwriting errors. In addition, certain investor contracts require the Bank to repurchase loans from previous
whole loan sales transactions that experience early payment defaults. If no losses are sustained due to such defects or early
payment defaults, the Bank has no obligation to repurchase the loans. In addition, we have the option to buy out severely
delinquent loans at par from Ginnie Mae pools for which we are the servicer and issuer of the pool. When such loans are
repurchased, they are recorded initially at fair value at the time of repurchase. The resulting loss is charged against the
repurchase reserve, typically the difference between unpaid principal balance plus accrued interest and the fair value at the time
of repurchase. Any subsequent change in the reserve is recorded on the Consolidated Statements of Operations as an increase or
decrease to the provision for loan repurchases (noninterest expense). The reserve for loss on repurchased loans is an estimate
that requires management judgment. The Bank’s reserve is based on expected future repurchase trends for loans already sold,
and the expected loss recognized when such loans are repurchased, which include first and second trust deed loans. If loss
reimbursements are made directly to the investor, the reserve for loss on repurchased loans is charged for the reimbursement
losses incurred.
Reserve for Unfunded Loan Commitments: The reserve for unfunded loan commitments provides for probable losses inherent
with funding the unused portion of legal commitments to lend. The reserve for unfunded loan commitments includes factors
that are consistent with ALL methodology using the expected loss factors and a draw down factor applied to the underlying
borrower risk and facility grades. Changes in the reserve for unfunded loan commitments are reported as a component of All
Other Expense on the Consolidated Statements of Operations.
Deferred Financing Costs: Deferred financing costs associated with our senior notes are included in Long-Term Debt, Net on
the Consolidated Statements of Financial Condition. The deferred financing costs are being amortized on a basis that
approximates a level yield method over the 8 year term of the senior notes.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial letters of credit, issued to meet client financing needs. The face amount for
these items represents the exposure to loss, before considering client collateral or ability to repay. Such financial instruments
are recorded when they are funded.
Stock-Based Compensation: Compensation cost is recognized for stock options, restricted stock awards and units, and stock
appreciation rights issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-
Scholes model is utilized to estimate the fair value of stock options and stock appreciation rights, while the market price of our
voting common stock at the date of grant is used for restricted stock awards and units. Generally, compensation cost is
recognized over the required service period, defined as meeting performance goals and the vesting period. For awards with
graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Compensation cost reflects estimated forfeitures, adjusted as necessary for actual forfeitures.
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 income tax assets and liabilities are computed for differences between the financial statement and
tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also
recognized for operating loss and tax credit carryforwards. Accounting guidance requires that companies assess whether a
valuation allowance should be established against the deferred tax assets based on the consideration of all available evidence
using a “more likely than not” standard.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that
some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets,
management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four
93
possible sources of future taxable income, such as future reversal of existing taxable temporary differences, future taxable
income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future
tax planning strategies.
We and our subsidiaries are subject to U.S. Federal income tax as well as income tax in multiple state jurisdictions. We are no
longer subject to examination by U.S. Federal taxing authorities for years before 2016. The statute of limitations for the
assessment of California Franchise taxes has expired for tax years before 2014; other state income and franchise tax statutes of
limitations vary by state.
Tax positions that are uncertain but meet a more-likely-than-not recognition threshold are initially and subsequently measured
as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. The determination of whether or not a tax position meets the more
likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is
subject to management's judgment.
We early adopted ASU 2018-02 effective January 1, 2018. As a result of the adoption, we reclassified stranded tax effects from
accumulated other comprehensive income to retained earnings in which the effect of changes in corporate income tax rates
related to Tax Cuts and Jobs Act of 2017 was recorded.
Earnings Per Common Share: Earnings per common share is computed under the two-class method. Basic EPS is computed
by dividing net income allocated to common stockholders by the weighted-average number of shares outstanding. Diluted EPS
is computed by dividing net income allocated to common stockholders by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of the restricted stock units and outstanding stock options. Net income allocated to common
stockholders is computed by subtracting income allocated to participating securities, participating securities dividends,
preferred stock dividend and preferred stock redemption from net income. Participating securities are instruments granted in
stock-based payment transactions that contain rights to receive non-forfeitable dividends or dividend equivalents, which
includes the Stock Appreciation Rights to the extent they confer dividend equivalent rights.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss includes unrealized gains and losses on securities available-for-sale, net of tax, which are
recognized as a separate component of stockholders’ equity.
Derivative Instruments: We record our derivative instruments at fair value as either assets or liabilities on the Consolidated
Statements of Financial Condition in Other Assets and Accrued Expenses and Other Liabilities, respectively, and have elected
to present all derivatives with counterparties on a gross basis. For hedged derivatives, we record changes in fair value in AOCI
on the Consolidated Statements of Financial Condition and record any hedge ineffectiveness in Other Income on the
Consolidated Statements of Operations. For non-hedged derivatives, we record changes in fair value in Other Income on the
Consolidated Statements of Operations.
Interest Rate Swaps and Caps. We offer interest rate swap and cap products to certain loan clients to allow them to hedge the
risk of rising interest rates on their variable rate loans. When such products are issued, we also enter into an offsetting swap
with institutional counterparties to eliminate the interest rate risk. These back-to-back derivative agreements, which generate
fee income for us, are intended to offset each other. We retain the credit risk of the original loan. The net cash flow for us is
equal to the interest income received from a variable rate loan originated with the client plus a fee. These swaps and caps are
not designated as accounting hedges and are recorded at fair value in Other Assets and Accrued Expenses and Other Liabilities
in the Consolidated Statements of Financial Condition. The changes in fair value are recorded in Other Income in the
Consolidated Statements of Operations.
Interest Rate Swaps and Caps on Mortgage-backed Securities: During the third quarter, we partially hedged the fair value of the
MBS portfolio using interest rate swaps. At the end of the third quarter of 2019, we took advantage of the decline in long term
interest rates and sold the majority of the MBS portfolio and unwound the majority of the interest rate swaps. The remaining
balance of the MBS portfolio and the related interest rate swap were sold and unwound in the fourth quarter 2019. The unsold
portion of the MBS portfolio has been deemed other–than–temporarily impaired and, along with the fair value adjustment on
the swap, has been recorded as a loss in noninterest income with a net impact of $731 thousand for the year ended December
31, 2019 and is included in the carrying value of MBS.
Foreign Exchange Contracts. We offer short-term foreign exchange contracts to our clients to purchase and/or sell foreign
currencies at set rates in the future. These products allow clients to hedge the foreign exchange rate risk of their deposits and
loans denominated in foreign currencies. In conjunction with these products we also enter into offsetting contracts with
institutional counterparties to hedge our foreign exchange rate risk. These back-to-back contracts allow us to offer our clients
foreign exchange products while minimizing our exposure to foreign exchange rate fluctuations. These foreign exchange
contracts are not designated as hedging instruments and are recorded at fair value in Other Assets and Accrued Expenses and
Other Liabilities on the Consolidated Statements of Financial Condition.
94
Transfer of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is generally considered to have been surrendered when (i) the transferred assets are
legally isolated from us or our consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee has the right
to pledge or exchange the assets with no conditions that constrain the transferee or provide more than a trivial benefit to us, and
(iii) we do not maintain an obligation or the unilateral ability to reclaim or repurchase the assets.
We have sold financial assets in the normal course of business, the majority of which are residential mortgage loan sales
primarily to GSEs through our mortgage banking activities and other individual or portfolio loans and securities sales. In
accordance with accounting guidance for asset transfers, we consider any ongoing involvement with transferred assets in
determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and certain
performance-based guarantees, our continuing involvement with financial assets sold is minimal and generally limited to
market customary representation and warranty clauses.
When we sell financial assets, we may retain servicing rights and/or other interests in the financial assets. The gain or loss on
sale depends on the previous carrying amount of the transferred financial assets and the fair value of the consideration received,
including cash, originated mortgage servicing rights and other interests in the sold assets, and any liabilities incurred in
exchange for the transferred assets. Upon transfer, any servicing assets and other interests retained by us are carried at fair value
or the lower of cost or fair value.
Loss Contingencies: Loss contingencies, including claims and legal actions, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such
matters that will have a material effect on the consolidated financial statements that are not currently accrued for.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the
Bank to us or by us to our stockholders.
Fee Revenue: Generally, fee revenue from deposit service charges and loans is recognized when earned, except where
collection is uncertain, in which case revenue is recognized when received. On January 1, 2018, we adopted Accounting
Standard Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, and all subsequent amendments. The
scope of this guidance explicitly excludes net interest income, as well as other revenues from transactions involving financial
instruments such as loans, leases, and securities. Certain noninterest income items such as service charges on deposits accounts,
gain and loss on other real estate owned sales, and other income items are within the scope of this guidance. We identified and
reviewed revenue streams within the scope of this guidance, including escrow fees, trust and fiduciary fees, deposit service
fees, debit card fees, investment commissions, and gains on sales of OREO, which represent a significant portion of our
noninterest income that falls into the scope of this guidance. Based on our review, we determined that this guidance did not
require significant changes to the manner in which income from those revenue streams within the scope of ASC 606 was
previously recognized. The implementation of the new standard did not have a material impact on the measurement, timing, or
recognition of revenue. Accordingly, no cumulative effect adjustment to opening retained earnings was deemed necessary.
Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were
not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In
addition, certain noninterest income streams such as gain or loss associated with mortgage servicing rights, financial
guarantees, derivatives, and income from bank owned life insurance are also not within the scope of the new guidance. Topic
606 is applicable to noninterest income such as trust and asset management income, deposit related fees, interchange fees,
merchant related income, and annuity and insurance commissions. However, the recognition of these revenue streams did not
change significantly upon adoption of Topic 606.
Advertising Costs: Advertising costs are expensed as incurred.
Adopted Accounting Pronouncements: During the year ended December 31, 2019, the following pronouncements applicable
to us were adopted:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-02
Topic 842, “Leases” which increases transparency and comparability among organizations by requiring the recognition of right
of use (ROU) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the
recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard,
disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and
uncertainty of cash flows arising from leases. We adopted Topic 842 and related updates effective January 1, 2019 and used the
effective date as the date of initial application, and therefore, periods prior to January 1, 2019 were not restated. We elected the
package of practical expedients, which permits us not to reassess prior conclusions about lease identifications, lease
classification and initial direct costs under the new standard. We did not elect to apply the hindsight practical expedient
pertaining to using hindsight knowledge as of the effective date when determining lease terms and impairment. We also have
elected the short-term lease recognition exemption (leases with terms 12 months or less) for all leases that qualify, and thus will
95
not recognize ROU assets or lease liabilities for those leases. In addition, we elected the practical expedient to not separate
lease and non-lease components for all of our leases. Upon adoption, we recognized on our consolidated balance sheet ROU
assets of approximately $23.3 million (inclusive of an adjustment to remove our existing deferred rent liability of
approximately $1.4 million) with a corresponding operating lease liability of approximately $24.7 million. The standard did
not have an impact on our Consolidated Statements of Operations. In addition, our accounting for finance leases remained
substantially unchanged.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which amended ASC 350
"Intangibles-Goodwill and Other." The amendments in this ASU simplify how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by
comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the
amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value
of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting
unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption was permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. We have early adopted this guidance prospectively
as of August 31, 2019, and the adoption did not have a material impact on our financial statements.
96
Recent Accounting Guidance Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) (ASU 2016-13). This guidance
is intended to provide financial statement users with more decision-useful information about the expected credit losses on
financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this
objective, the amendments in this guidance replace the incurred loss impairment methodology in current US GAAP with a
methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable
information to credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019.
We have developed our models to estimate lifetime expected credit losses on our loans primarily using a lifetime loss
methodology. We have used these models to execute our process for estimating the allowance for credit losses under the new
standard in parallel with our existing process for estimating the allowance for credit losses based on incurred losses and have
developed an appropriate governance process for our estimate of expected credit losses under the new standard. The adoption of
this standard will be applied through a cumulative effect adjustment to retained earnings as of January 1, 2020.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to
the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The primary objective of ASU 2018-13 is to
improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 is effective for interim and annual
reporting periods beginning after December 15, 2019, although early adoption is permitted. We plan to adopt the ASU on
January 1, 2020. The adoption of ASU 2018-13 is not expected to significantly impact our consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-04). This guidance clarifies certain
aspects of Topic 326 guidance issued in ASU 2016-13 including the scope of the credit losses standard and issues related to
accrued interest receivable balances, recoveries, variable interest rates and prepayments. The other amendments in this update
clarify certain aspects of Topic 815 and Topic 825. This ASU will be effective for fiscal years after December, 31, 2019. We
will adopt this guidance on January 1, 2020. The impact of adopting the Topic 326 amendments is included within the impact
of adoption of ASU 2016-13. We do not expect that the adoption of these amendments will have a material effect on our
consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instrument (ASU 2019-05). The amendments in this Update provide entities with transition relief upon the
adoption of ASU 2016-13 by providing an option to elect the fair value option on certain financial instruments measured at
amortized cost. This ASU will be effective for fiscal years after December, 31, 2019. We will adopt this guidance on January 1,
2020. We do not expect that the adoption of these amendments will have a material effect on our consolidated financial
statements.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic
326) (ASU 2019-11). The amendments in this Update clarify certain aspects of Topic 326 guidance issued in ASU 2016-13
including guidance providing transition relief for TDRs. This ASU will be effective for fiscal years after December, 31, 2019.
We will adopt this guidance on January 1, 2020. The impact of adopting the Topic 326 amendments is included within the
impact of adoption of ASU 2016-13.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
(ASU 2019-12). The amendments in this Update simplify the accounting for income taxes by removing certain exceptions for
investments, intraperiod allocations, and interim calculations, and add guidance to reduce the complexity of applying Topic
740. This ASU will be effective for fiscal years after December, 31, 2020. We will adopt this guidance on January 1, 2021. We
do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements.
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NOTE 2 – SALES OF BRANCH, SUBSIDIARY AND BUSINESS UNITS
Banc Home Loans Sale
On March 30, 2017, we completed the sale of specific assets and activities related to our Banc Home Loans division to Caliber
Home Loans, Inc. (Caliber). The Banc Home Loans division largely represented our Mortgage Banking segment, the activities
of which related to originating, servicing, underwriting, funding and selling single family residential (SFR) mortgage loans.
Assets sold to Caliber included mortgage servicing rights (MSRs) on certain conventional agency SFR mortgage loans. The
Banc Home Loans division, along with certain other mortgage banking related assets and liabilities that were sold or settled
separately within one year, were classified as discontinued operations in the accompanying consolidated financial statements.
Certain components of our Mortgage Banking segment, including MSRs on certain conventional agency SFR mortgage loans
that were not sold as part of the Banc Home Loans sale and repurchase reserves related to previously sold loans, have been
classified as continuing operations in the consolidated financial statements as they remain part of our ongoing operations.
The specific assets acquired by Caliber include, among other things, the leases relating to our dedicated mortgage loan
origination offices and rights to certain portions of our unlocked pipeline of residential mortgage loan applications. Caliber has
assumed certain obligations and liabilities of the Company under the acquired leases, and with respect to the employment of
transferred employees. We received a $25.0 million cash premium payment, in addition to the net book value of certain assets
acquired by Caliber, totaling $2.5 million, upon the closing of the transaction. Additionally, we are entitled to receive an earn-
out, payable quarterly, based on future performance over the 38 months following completion of the transaction. Caliber retains
an option to buy out the future earn-out payable to us for cash consideration of $35.0 million, less the aggregate amount of all
earn-out payments made prior to the date on which Caliber pays the buyout amount.
Caliber also purchased the MSRs of $37.8 million on approximately $3.86 billion in unpaid balances of conventional agency
mortgage loans, subject to adjustment under certain circumstances. During the years ended December 31, 2019, 2018 and 2017,
we recorded $0, $1.4 million and $13.8 million to net gain on disposal of discontinued operations. Net gain on disposal of
discontinued operations recognized in the first half of 2018 was primarily the result of the release of $1.0 million in liability for
estimated discretionary incentive compensation payments to certain employees transferred to Caliber as the amount paid was
less than the accrued liability. Since the completion of the transaction, we have recognized a net gain on disposal of $15.2
million.
The Banc Home Loans division originated conforming SFR mortgage loans and sold these loans in the secondary market. The
amount of net revenue on mortgage banking activities was a function of mortgage loans originated for sale and the fair values
of these loans and related derivatives. Net revenue on mortgage banking activities included mark to market pricing adjustments
on loan commitments and forward sales contracts, and initial capitalized value of MSRs.
The following table summarizes the calculation of the net gain on disposal of discontinued operations:
($ in thousands)
Proceeds from the transaction
Compensation expense related to the transaction
Other transaction costs
Net cash proceeds
Book value of certain assets sold
Book value of MSRs sold
Goodwill
Net gain on disposal
Year Ended December, 31
2019
2018
2017
Total Net Gain
on Disposal
After
Completion of
Sale
— $
— $
63,054
$
—
—
—
—
—
—
1,003
436
1,439
—
—
—
(3,500)
(3,431)
56,123
(2,455)
(37,772)
(2,100)
— $
1,439
$
13,796
$
63,054
(2,497)
(2,995)
57,562
(2,455)
(37,772)
(2,100)
15,235
$
$
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The following tables present the financial information of discontinued operations as of the dates and for the periods indicated:
Statements of Financial Condition of Discontinued Operations
($ in thousands)
Loans held-for-sale, carried at fair value
Assets of discontinued operations
ASSETS
LIABILITIES
Liabilities of discontinued operations
Statements of Operations of Discontinued Operations
($ in thousands)
Interest income
Loans, including fees
Total interest income
Noninterest income
Net gain on disposal
Loan servicing income
Net revenue on mortgage banking activities
All other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Outside Service Fees
Data processing
Advertising
Restructuring expense
All other expenses
Total noninterest expense
Income from discontinued operations before income taxes
Income tax expense
Income from discontinued operations
Statements of Cash Flows of Discontinued Operations
($ in thousands)
Net cash provided by operating activities
Net cash provided by investing activities
Net cash provided by discontinued operations
December 31,
2019
2018
$
$
$
— $
— $
— $
19,490
19,490
—
Year Ended December 31,
2019
2018
2017
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
665
665
1,439
—
428
2,200
4,067
20
—
—
—
8
—
—
108
136
4,596
1,271
— $
3,325
$
7,052
7,052
13,796
1,551
42,889
1,871
60,107
38,374
3,964
2,546
5,625
687
1,357
3,794
3,648
59,995
7,164
2,929
4,235
Year Ended December 31,
2019
2018
2017
— $
—
— $
14,916
—
14,916
$
$
365,045
56,123
421,168
$
$
$
99
NOTE 3 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Value Hierarchy
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to
measure fair value:
• Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date.
• Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
• Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
Assets and Liabilities Measured on a Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale are generally determined by quoted market prices
in active markets, if available (Level 1). If quoted market prices are not available, we primarily employ independent pricing
services that utilize pricing models to calculate fair value. Such fair value measurements consider observable data such as
dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment
speeds, credit information, and respective terms and conditions for debt instruments. We employ procedures to monitor the
pricing service's assumptions and establish processes to challenge the pricing service's valuations that appear unusual or
unexpected. Multiple quotes or prices may be obtained in this process and we determine which fair value is most appropriate
based on market information and analysis. Quotes obtained through this process are generally non-binding. We follow
established procedures to ensure that assets and liabilities are properly classified in the fair value hierarchy. Level 2 securities
include SBA loan pool securities, U.S. government agency and U.S. government sponsored enterprise residential mortgage-
backed securities, non-agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities,
collateralized loan obligations, and corporate debt securities. When a market is illiquid or there is a lack of transparency around
the inputs to valuation, including at least one unobservable input, the securities are classified as Level 3 and reliance is placed
upon internally developed models, and management judgment and evaluation for valuation. We had no securities available-for-
sale classified as Level 3 at December 31, 2019 and 2018.
Loans Held-for-Sale, Carried at Fair Value: The fair value of loans held-for-sale is based on commitments outstanding from
investors and current offerings in the secondary market for portfolios with similar characteristics, except for loans that are
repurchased out of GNMA loan pools that become severely delinquent which are valued based on an internal model. Loans
held-for-sale subject to recurring fair value adjustments are classified as Level 2, or in the case of loans repurchased, Level 3.
The fair value includes the servicing value of the loans and any accrued interest.
Derivative Assets and Liabilities:
Interest Rate Swaps and Caps. We offer interest rate swaps and caps products to certain loan clients to allow them to hedge the
risk of rising interest rates on their variable rate loans. We originate a variable rate loan and enter into a variable-to-fixed
interest rate swap with the client. We also enter into an offsetting swap with a correspondent bank. These back-to-back
agreements are intended to offset each other and allow us to originate a variable rate loan, while providing a contract for fixed
interest payments for the client. The net cash flow for us is equal to the interest income received from a variable rate loan
originated with the client plus a fee. The fair value of these derivatives is based on a discounted cash flow approach. Due to the
observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps
is classified as Level 2.
Mortgage Servicing Rights: We retain servicing on some of our mortgage loans sold and elected the fair value option for these
MSRs. Generally, the value is estimated based on a valuation from 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.
100
The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of December 31,
2019:
($ in thousands)
December 31, 2019
Assets
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Municipal securities
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Loans held-for-sale, carried at fair value
Mortgage servicing rights (1)
Derivative assets:
Interest rate swaps and caps (1)
Foreign exchange contracts (1)
Liabilities
Derivative liabilities:
Interest rate swaps and caps (2)
Foreign exchange contracts(2)
Fair Value Measurement Level
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
$
36,456 $
— $
36,456 $
91,299
52,689
196
718,361
13,579
22,642
1,157
3,445
138
3,717
136
—
—
—
—
—
—
—
—
—
—
—
91,299
52,689
196
718,361
13,579
3,409
—
3,445
138
3,717
136
—
—
—
—
—
—
19,233
1,157
—
—
—
—
(1) Included in Other Assets on the Consolidated Statements of Financial Condition
(2) Included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition
The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of December 31,
2018:
Fair Value Measurement Level
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
($ in thousands)
December 31, 2018
Assets
Securities available-for-sale:
SBA loan pools securities
$
910 $
— $
910 $
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Collateralized loan obligations
Loans held-for-sale, carried at fair value (1)
Mortgage servicing rights (2)
Derivative assets - Interest rate swaps and caps (2)
Liabilities
Derivative liabilities - Interest rate swaps and caps (3)
437,442
427
132,199
1,421,522
27,180
1,770
1,534
1,600
—
—
—
—
—
—
—
—
437,442
427
132,199
1,421,522
2,140
—
1,534
1,600
—
—
—
—
—
25,040
1,770
—
—
(1) Includes loans held-for-sale carried at fair value of $19.5 million ($2.1 million at Level 2 and $17.4 million at Level 3) of discontinued
operations, which are included in Assets of Discontinued Operations on the Consolidated Statements of Financial Condition.
(2) Included in Other Assets in the Consolidated Statements of Financial Condition.
(3) Included in Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition.
101
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3), on a consolidated operations basis, for the periods indicated:
($ in thousands)
Mortgage servicing rights
Balance at beginning of period (1)
Total gains or losses (realized/unrealized):
Included in earnings—fair value adjustment (4)
Additions
Sales, paydowns, and other (2)
Balance at end of period
Loans repurchased or eligible to be repurchased from Ginnie Mae
Loan Pools (3)
Balance at beginning of period
Total gains or losses (realized/unrealized):
Included in earnings—fair value adjustment (5)
Additions
Sales, settlements, and other (6)
Balance at end of period
Year Ended December 31,
2019
2018
2017
$
$
$
$
1,770
$
31,852
$
76,121
(264)
—
(349)
(1,155)
—
(28,927)
1,157
$
1,770
$
(10,240)
12,127
(46,156)
31,852
25,040
$
98,940
$
58,260
(16)
406
(6,197)
(1,378)
23,678
(96,200)
19,233
$
25,040
$
(781)
117,215
(75,754)
98,940
(1) Includes MSRs of discontinued operations, which is included in Assets of Discontinued Operations on the Consolidated Statements of
Financial Condition, of $0, $0, and $37.7 million for the years ended December 31, 2019, 2018 and 2017 in balance at beginning of
period.
(2) Includes $37.8 million of MSRs sold as a part of discontinued operations for the year ended December 31, 2017.
(3) Includes loans repurchased from GNMA loan pools of discontinued operations, which is included in Assets of Discontinued Operations
on the Consolidated Statements of Financial Condition, of $17.3 million, $32.3 million and $58.3 million in balance at beginning of
period, and $0, $17.3 million and $32.3 million in balance at end of period for the years ended December 31, 2019, 2018 and 2017.
(4) Included in Loan Servicing Income in the Consolidated Statements of Operations.
(5) Included in Net Gain on Sale of Loans in the Consolidated Statements of Operations.
(6) Included in sales, settlements and other are $66.0 million of GNMA loans subject to repurchase option that were derecognized when the
associated mortgage servicing rights were sold during the year ended December 31, 2018.
Loans repurchased or eligible to be repurchased from GNMA loan pools had aggregate unpaid principal balances of $19.8
million and $25.5 million at December 31, 2019 and 2018. The significant unobservable inputs used in the fair value
measurement of our servicing rights include the discount rate and prepayment rate. The significant unobservable inputs used in
the fair value measurement of our loans repurchased from GNMA pools at December 31, 2019 and 2018 included an expected
loss rate of 1.55 percent for insured loans and 20.00 percent for uninsured loans. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash
flows, could significantly affect the results.
The following table presents, as of the dates indicated, quantitative information about Level 3 fair value measurements on a
recurring basis, other than loans that become severely delinquent and are repurchased out of GNMA loan pools that were
valued based on an estimate of the expected loss we will incur on these loans at December 31, 2019 and 2018:
($ in thousands)
December 31, 2019
Mortgage servicing rights
December 31, 2018
Mortgage servicing rights
$
$
Fair Value Option
Fair Value
Valuation Technique(s)
Unobservable Input(s)
Range (Weighted-Average)
2,323 Discounted cash flow
Discount rate
8.75% to 13.00% (11.55%)
Prepayment rate
8.00% to 66.34% (15.22%)
3,362 Discounted cash flow
Discount rate
9.50% to 13.00% (11.27%)
Prepayment rate
8.00% to 66.34% (12.67%)
Loans Held-for-Sale, Carried at Fair Value: We elected the fair value option for certain SFR mortgage loans held-for-sale.
Electing to measure SFR mortgage loans held-for-sale at fair value reduces certain timing differences and better matches
102
changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. We also
elected to record loans repurchased from GNMA at fair value, as we intend to sell them after curing any defects and,
accordingly, they are classified as held-for-sale.
The following table presents the fair value and aggregate principal balance of certain assets, on a consolidated operations basis,
under the fair value option as of the dates indicated:
($ in thousands)
Loans held-for-sale, carried at fair value
in continuing operations:
Total loans
Non-accrual loans (1)
Loans past due 90 days or more and
still accruing
Loans held-for-sale, carried at fair value
in discontinued operations:
Total loans
Non-accrual loans (2)
Loans past due 90 days or more and
still accruing
December 31,
2019
Unpaid
Principal
Balance
Fair Value
Difference
Fair Value
2018
Unpaid
Principal
Balance
Difference
$
22,642
$
23,455
$
(813) $
7,690
$
7,906
$
8,125
8,370
(245)
2,427
2,538
—
—
—
—
—
$
— $
— $
— $
19,490
$
20,027
$
—
—
—
—
—
—
8,430
8,496
—
—
(216)
(111)
—
(537)
(66)
—
(1) Includes loans guaranteed by the U.S. government of $6.7 million and $1.6 million at December 31, 2019 and 2018.
(2) Includes loans guaranteed by the U.S. government of $0 and $7.6 million, at December 31, 2019 and 2018.
The assets and liabilities accounted for under the fair value option are initially measured at fair value. Gains and losses from
initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents changes in
fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets and liabilities
measured at fair value for the periods indicated:
($ in thousands)
Net gains (losses) from fair value changes
Year Ended December 31,
2019
2018
2017
Net gain (loss) on sale of loans (continuing operations)
$
Net revenue on mortgage banking activities (discontinued operations)
106
$
—
$
204
159
(170)
(288)
Changes in fair value due to instrument-specific credit risk were insignificant for the years ended December 31, 2019, 2018 and
2017. Interest income on loans held-for-sale under the fair value option is measured based on the contractual interest rate and
reported in Loans, including Fees under Interest and Dividend Income and Income from Discontinued Operations on the
Consolidated Statements of Operations.
103
Assets and Liabilities Measured on a Non-Recurring Basis
Impaired Loans: The fair value of impaired loans with specific allocations of the ALL based on collateral values is generally
based on recent real estate appraisals and AVMs. 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
deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification.
Other Real Estate Owned Assets: OREO assets initially are recorded at fair value at the time of foreclosure. Thereafter, they are
recorded at the lower of cost or fair value. The fair value of OREO 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 the income approach. Such adjustments may be significant and result
in a Level 3 classification due to the unobservable inputs used for determining fair value. We recorded valuation allowance
expense for OREO assets of $145 thousand, $53 thousand and $236 thousand for the years ended December 31, 2019, 2018 and
2017 in All Other Expense on the Consolidated Statements of Operations.
The following table presents our financial assets and liabilities measured at fair value on a non-recurring basis as of the dates
indicated:
($ in thousands)
December 31, 2019
Assets
Impaired loans:
Single family residential mortgage
Commercial and industrial
SBA
December 31, 2018
Assets
Impaired loans:
SBA
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)
$
$
$
3,678
$
15,409
1,711
226
— $
—
—
—
— $
—
— $
3,678
15,409
1,711
— $
226
The following table presents the gains and (losses) recognized on assets measured at fair value on a non-recurring basis for the
periods indicated:
($ in thousands)
Impaired loans:
Year Ended December 31,
2019
2018
2017
Single family residential mortgage
$
(490) $
(115) $
Commercial real estate
SBA
Other consumer
Other real estate owned:
Single family residential
—
(46)
(88)
(1,752)
(1,048)
(141)
(104)
229
(164)
—
(200)
(29)
(284)
104
Estimated Fair Values of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates
indicated:
($ in thousands)
December 31, 2019
Financial assets
Cash and cash equivalents
Securities available-for-sale
Federal Home Loan Bank and other bank stock
Loans held-for-sale
Loans receivable, net of allowance
Accrued interest receivable
Derivative assets
Financial liabilities
Deposits
Advances from Federal Home Loan Bank
Long-term debt
Derivative liabilities
Accrued interest payable
December 31, 2018
Financial assets
Cash and cash equivalents
Securities available-for-sale
Federal Home Loan Bank and other bank stock
Loans held-for-sale (1)
Loans receivable, net of allowance
Accrued interest receivable
Derivative assets
Financial liabilities
Deposits
Advances from Federal Home Loan Bank
Long-term debt
Derivative liabilities
Accrued interest payable
Carrying
Amount
Fair Value Measurement Level
Level 1
Level 2
Level 3
Total
$
373,472
$
373,472
$
— $
— $
912,580
59,420
22,642
5,894,236
24,523
3,583
5,427,167
1,195,000
173,421
3,853
4,687
—
—
—
—
24,523
—
—
—
—
—
4,687
912,580
59,420
3,409
—
—
3,583
—
—
19,233
373,472
912,580
59,420
22,642
5,894,732
5,894,732
—
—
24,523
3,583
—
5,430,536
1,222,709
180,213
3,853
—
—
—
—
—
5,430,536
1,222,709
180,213
3,853
4,687
$
391,592
$
391,592
$
— $
— $
391,592
1,992,500
68,094
27,606
7,638,681
38,807
1,534
7,916,644
1,520,000
173,174
1,600
13,253
—
—
—
—
38,807
—
—
—
—
—
13,253
1,992,500
68,094
2,566
—
—
1,534
—
—
25,040
1,992,500
68,094
27,606
7,513,910
7,513,910
—
—
38,807
1,534
—
7,689,324
1,517,761
174,059
1,600
—
—
—
—
—
7,689,324
1,517,761
174,059
1,600
13,253
(1) Includes loans held-for-sale carried at fair value of $19.5 million ($2.1 million at Level 2 and $17.4 million at Level 3) of
discontinued operations.
105
The methods and assumptions used to estimate fair value for our financial instruments recorded at fair value on a recurring or
non-recurring basis are described as follows:
Cash and Cash Equivalents and Time Deposits in Financial Institutions: The carrying amounts of cash and cash equivalents
and time deposits in financial institutions approximate fair value due to the short-term nature of these instruments (Level 1).
Federal Home Loan Bank and Other Bank Stock: Federal Home Loan Bank and other bank stock are recorded at cost, which
approximates fair value. Ownership of FHLB stock is restricted to member banks, and purchases and sales of these securities
are at par value with the issuer (Level 2).
Loans Receivable, Net of ALL: The fair value of loans receivable, which is based on an exit price notion, is estimated based on
the discounted cash flow approach. The discount rate was derived from the associated market yield curve plus appropriate
spreads. The resulting fair value reflects market price for loans with similar financial characteristics. Yield curves are
constructed by product and payment types. Additionally, the fair value of our loans may differ significantly from the values that
would have been used had a ready market existed for such loans and may differ materially from the values that we may
ultimately realize (Level 3).
Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Deposits: The fair values of deposits with no stated maturity, including noninterest bearing deposits, interest-bearing demand
deposits, money market and savings accounts are equal to the amount payable on demand as of the balance sheet date (Level 3).
The fair value of certificates of deposit is estimated based on discounted cash flows utilizing interest rates currently being
offered by the Bank on comparable deposits as to amount and term (Level 3).
Advances from Federal Home Loan Bank and Other Borrowings: The fair values of advances from FHLB and other borrowings
are estimated based on a discounted cash flow approach. The discount rate was derived from the current market rates for
borrowings with similar remaining maturities (Level 2).
Long-Term Debt: Fair value of long-term debt is determined by observable data such as market spreads, cash flows, yield
curves, credit information, and respective terms and conditions for debt instruments (Level 2).
Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value (Level 1).
106
NOTE 4 – INVESTMENT SECURITIES
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
($ in thousands)
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
U.S. government agency and U.S. government sponsored
enterprise collateralized mortgage obligations
Municipal securities
Non-agency residential mortgage-backed securities
Collateralized loan obligations
Corporate debt securities
Total securities available-for-sale
December 31, 2018
Securities available-for-sale:
SBA loan pool securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
37,613
$
— $
(1,157) $
36,456
91,543
52,997
191
733,605
13,500
16
51
5
—
79
(260)
(359)
—
(15,244)
—
929,449
$
151
$
(17,020) $
91,299
52,689
196
718,361
13,579
912,580
911
$
— $
(1) $
910
$
$
U.S. government agency and U.S. government sponsored
enterprise residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Collateralized loan obligations
461,987
418
132,199
1,431,171
Total securities available-for-sale
$
2,026,686
$
—
9
—
141
150
(24,545)
—
—
(9,790)
437,442
427
132,199
1,421,522
$
(34,336) $
1,992,500
During the year ended December 31, 2019, in response to a changing interest rate environment we repositioned our securities
available-for-sale portfolio by reducing the overall duration through sales of certain longer-duration and fixed-rate mortgage-
backed securities. Additionally, we continued to strategically reduce our collateralized loan obligations exposure. As a result,
we recognized $731 thousand of OTTI for the year ended December 31, 2019. As of December 31, 2018, we changed our
intent and decided to sell our non-agency commercial mortgage-backed securities in an unrealized loss position due to our
strategy to reposition our securities profile and recognized $3.3 million of other-than-temporary impairment (OTTI) losses
during the fourth quarter of 2018.
At December 31, 2019, our investment securities portfolio included collateralized loan obligations, agency securities, municipal
securities, corporate debt securities and mortgage-backed securities. The expected maturities of the collateralized loan
obligations, agency securities and mortgage-backed securities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties. The expected maturities of municipal
securities and corporate debt securities may also differ from contractual maturities as the issuer may have the ability to redeem
these securities prior to the contractual maturity dates.
At December 31, 2019 and December 31, 2018, there were no holdings of any one issuer, other than the U.S. Government and
its agencies, in an amount greater than 10% of our stockholders’ equity.
The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and
losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
($ in thousands)
Gross realized gains on sales and calls of securities available-for-sale
Gross realized losses on sales and calls of securities available-for-sale
Net realized (losses) gains on sales and calls of securities available-for-
sale
Proceeds from sales and calls of securities available-for-sale
Year Ended December 31,
2019
2018
2017
556
$
5,532
$
(5,408)
—
14,768
—
(4,852) $
5,532
1,249,588
$
1,025,471
$
$
14,768
1,500,459
$
$
$
Investment securities with carrying values of $44.0 million and $163.0 million as of December 31, 2019 and December 31,
2018 were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
107
The following table summarizes the investment securities with unrealized losses by security type and length of time in a
continuous unrealized loss position as of the dates indicated:
($ in thousands)
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S.
government sponsored enterprise
residential mortgage-backed
securities
U.S. government agency and U.S.
government sponsored enterprise
collateralized mortgage obligations
Municipal securities
Collateralized loan obligations
Corporate debt securities
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
35,872
$
(1,157) $
— $
— $
35,872
$
(1,157)
73,379
31,723
49,553
—
(260)
(359)
(447)
—
—
—
—
—
73,379
31,723
(260)
(359)
668,808
(14,797)
718,361
(15,244)
—
—
—
—
Total securities available-for-sale
$
190,527
$
(2,223) $
668,808
$
(14,797) $
859,335
$
(17,020)
December 31, 2018
Securities available-for-sale:
SBA loan pool securities
$
— $
— $
910
$
(1) $
910
$
(1)
U.S. government agency and U.S.
government sponsored enterprise
residential mortgage-backed
securities
Non-agency residential mortgage-
backed securities
Collateralized loan obligations
13,494
(133)
423,916
(24,412)
437,410
(24,545)
90
1,364,317
—
(9,480)
16
32,790
—
106
(310)
1,397,107
—
(9,790)
Total securities available-for-sale
$ 1,377,901
$
(9,613) $
457,632
$
(24,723) $ 1,835,533
$
(34,336)
At December 31, 2019, our securities available-for-sale portfolio consisted of 70 securities, 60 of which were in an unrealized
loss position. At December 31, 2018, our securities available-for-sale portfolio consisted of 145 securities, 118 of which were in
an unrealized loss position.
We monitor our securities portfolio to ensure it has adequate credit support. The majority of unrealized losses are related to our
collateralized loan obligations. We also consider the lowest credit rating for identification of potential OTTI for other securities.
As of December 31, 2019, nearly all of our non-agency mortgage-backed securities and collateralized loan obligations
investment securities in an unrealized loss position received an investment grade credit rating. The decline in fair value is
attributable to changes in interest rates, and not credit quality. We do not have the intent to sell the remaining 60 securities in an
unrealized loss position and further believe it is not likely that we will be required to sell these securities before their anticipated
recovery.
108
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(
NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table presents the balances in our loan portfolio as of the dates indicated:
($ in thousands)
December 31, 2019
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans (1)
Percentage to total loans
Allowance for loan losses
Loans receivable, net
December 31, 2018
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total loans (1)
Percentage to total loans
Allowance for loan losses
Loans receivable, net
Traditional
Loans
NTM
Loans
Total Loans
Receivable
$
1,691,270
$
— $
1,691,270
818,817
1,494,528
70,981
231,350
—
—
—
—
818,817
1,494,528
70,981
231,350
992,417
51,866
598,357
2,299
1,590,774
54,165
$
5,351,229
$
600,656
$
5,951,885
89.9%
10.1%
100.0%
(57,649)
$
5,894,236
$
1,944,142
$
— $
1,944,142
867,013
2,241,246
68,741
203,976
1,481,172
67,852
—
—
—
—
867,013
2,241,246
68,741
203,976
824,318
2,413
2,305,490
70,265
$
6,874,142
$
826,731
$
7,700,873
89.3%
10.7%
100.0%
(62,192)
$
7,638,681
(1) Total loans includes deferred loan origination costs/(fees) and premiums/(discounts), net of $14.3 million and $17.7 million at
December 31, 2019 and 2018.
Credit Quality Indicators
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such
as: current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. We perform historical loss analysis that is combined with a comprehensive loan to value
analysis to analyze the associated risks in the current loan portfolio. We analyze loans individually by classifying the loans as to
credit risk. This analysis includes all loans delinquent over 60 days and non-homogeneous loans such as commercial and
commercial real estate loans. We use the following definitions for risk ratings:
Pass: Loans classified as pass are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and
do not exhibit any potential or defined weakness as defined under “Special Mention”, “Substandard” or “Doubtful”.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit
position at some future date.
110
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
pass rated loans.
The following table presents the risk categories for total loans as of December 31, 2019:
($ in thousands)
NTM loans:
December 31, 2019
Pass
Special Mention
Substandard
Doubtful
Total
Single family residential mortgage
$
579,548
$
5,790
$
13,019
$
— $
Other consumer
Total NTM loans
Traditional loans:
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total traditional loans
Total loans
2,299
581,847
1,580,269
813,846
1,484,931
60,982
229,771
979,705
51,032
5,200,536
—
5,790
45,323
2,532
4,256
2,760
1,579
4,945
346
61,741
—
13,019
65,678
2,439
5,341
5,621
—
7,250
488
86,817
—
—
—
—
—
1,618
—
517
—
2,135
$
5,782,383
$
67,531
$
99,836
$
2,135
$
5,951,885
The following table presents the risk categories for total loans as of December 31, 2018:
($ in thousands)
NTM loans:
December 31, 2018
Pass
Special Mention
Substandard
Doubtful
Total
Single family residential mortgage
$
811,056
$
10,966
$
2,296
$
— $
Other consumer
Total NTM loans
Traditional loans:
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total traditional loans
Total loans
2,413
813,469
1,859,569
851,604
2,239,301
53,433
197,851
1,461,721
66,228
6,729,707
—
10,966
41,302
11,376
—
6,114
3,606
2,602
979
65,979
—
2,296
43,271
4,033
1,945
8,340
2,519
16,849
645
77,602
$
7,543,176
$
76,945
$
79,898
$
111
—
—
—
—
—
854
—
—
—
854
854
598,357
2,299
600,656
1,691,270
818,817
1,494,528
70,981
231,350
992,417
51,866
5,351,229
824,318
2,413
826,731
1,944,142
867,013
2,241,246
68,741
203,976
1,481,172
67,852
6,874,142
$
7,700,873
Past Due Loans
The following table presents the aging of the recorded investment in past due loans as of December 31, 2019, excluding
accrued interest receivable (which is not considered to be material), by class of loans:
December 31, 2019
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
than 89
Days
Past due
Total
Past Due
Current
Total
($ in thousands)
NTM loans:
Single family residential mortgage
$
3,973
$
3,535
$
13,019
$
20,527
$
577,830
$
598,357
Other consumer
Total NTM loans
Traditional loans:
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total traditional loans
Total loans
—
3,973
—
3,535
—
13,019
—
20,527
2,299
580,129
2,299
600,656
780
—
—
586
—
13,752
199
15,317
5,670
3,862
10,312
1,680,958
1,691,270
—
—
842
—
3,496
40
10,048
—
—
2,152
—
5,606
95
11,715
—
—
3,580
—
22,854
334
818,817
818,817
1,494,528
1,494,528
67,401
231,350
969,563
51,532
70,981
231,350
992,417
51,866
37,080
5,314,149
5,351,229
$
19,290
$
13,583
$
24,734
$
57,607
$ 5,894,278
$ 5,951,885
The following table presents the aging of the recorded investment in past due loans as of December 31, 2018, excluding
accrued interest receivable (which is not considered to be material), by class of loans:
December 31, 2018
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
than 89
Days
Past due
Total
Past Due
Current
Total
($ in thousands)
NTM loans:
Single family residential mortgage
$
7,430
$
617
$
— $
8,047
$
816,271
$
824,318
Other consumer
Total NTM loans
Traditional loans:
Commercial:
Commercial and industrial
Commercial real estate
Multifamily
SBA
Construction
Consumer:
Single family residential mortgage
Other consumer
Total traditional loans
Total loans
—
7,430
350
—
356
551
—
7,321
3,132
11,710
—
617
1,596
582
—
77
939
3,160
573
6,927
—
—
—
8,047
2,413
818,684
2,413
826,731
3,340
5,286
1,938,856
1,944,142
—
—
862
—
9,198
446
13,846
582
356
1,490
939
19,679
4,151
32,483
866,431
867,013
2,240,890
2,241,246
67,251
203,037
68,741
203,976
1,461,493
1,481,172
63,701
67,852
6,841,659
6,874,142
$
19,140
$
7,544
$
13,846
$
40,530
$ 7,660,343
$ 7,700,873
112
Non-accrual Loans
The following table presents the composition of non-accrual loans as of the dates indicated:
December 31,
2019
2018
NTM
Loans
Traditional
Loans
Total
NTM
Loans
Traditional
Loans
Total
($ in thousands)
Commercial:
Commercial and industrial
$
— $
19,114
$
19,114
$
— $
5,455
$
SBA
Consumer:
Single family residential mortgage
Other consumer
Total
—
5,230
5,230
13,019
—
5,606
385
18,625
385
—
—
—
2,574
12,929
627
5,455
2,574
12,929
627
$
13,019
$
30,335
$
43,354
$
— $
21,585
$
21,585
At December 31, 2019 and 2018, $0 and $470 thousand of loans were past due 90 days or more and still accruing.
Loans in Process of Foreclosure
At December 31, 2019 and 2018, consumer mortgage loans of $15.7 million and $5.1 million were secured by residential real
estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable
jurisdiction.
Allowance for Loan Losses
We have established credit risk management processes that include regular management review of the loan portfolio to identify
problem loans. During the ordinary course of business, management becomes aware of borrowers who may not be able to fulfill
the contractual payment requirements of the loan agreements. Such loans are subject to increased monitoring. Consideration is
given to placing the loan on non-accrual status, assessing the need for additional ALL, and partial or full charge-off of the
principal balance. We maintain the ALL at a level that is considered adequate to cover the estimated incurred loss in the loan
portfolio.
We also maintain a separate reserve for unfunded loan commitments at a level that is considered adequate to cover the
estimated incurred loss. The estimated funding of the loan commitments and credit risk factors determined based on
outstanding loans that share similar credit risk exposure are used to determine the adequacy of the reserve. At December 31,
2019 and 2018, the reserve for unfunded loan commitments was $4.1 million and $4.6 million and is reported in Accrued
Expenses and Other Liabilities on the Consolidated Statements of Financial Condition.
The credit risk monitoring system is designed to identify impaired and potential problem loans, and to perform periodic
evaluation of impairment and the adequacy of the allowance for credit losses in a timely manner. In addition, the Board of
Directors of the Bank has adopted a credit policy that includes a credit review and control system that it believes should be
effective in ensuring that we maintain an adequate allowance for loan losses. The Board of Directors also provides oversight
and guidance for management’s allowance evaluation process. Management concluded these products represented unique credit
and risk characteristics to warrant separate segmentation. Additionally, management enhanced the methodology in the areas of
qualitative adjustments, and performed an annual update of the loss emergence period. These updates were designed to be
systematic, transparent, and repeatable. None of the updates and enhancements made to the ALL methodology had a material
impact on the reserve.
The following table presents a summary of activity in the ALL for the periods indicated:
($ in thousands)
Balance at beginning of year
Loans charged-off
Recoveries of loans previously charged off
Net charge-offs
Provision for loan losses
Balance at end of year
Year Ended December 31,
2019
2018
2017
$
$
62,192
$
49,333
$
(41,766)
836
(40,930)
36,387
(18,499)
1,143
(17,356)
30,215
57,649
$
62,192
$
40,444
(5,581)
771
(4,810)
13,699
49,333
113
During 2019 we recorded $41.8 million in charge-offs including a $35.1 million charge-off of a line of credit originated in
November 2017 to a borrower purportedly the subject of a fraudulent scheme. This charge-off increased the loss factor used in
our allowance for loan loss for commercial and industrial loans, resulting in an additional loan loss provision of $3.0 million
based on the composition of the loan portfolio. On October 22, 2019, in connection with this matter, the Bank filed a complaint
in U.S. District Court for the Southern District of California (Case CV '19 02031 GPC KSC) seeking to recover its losses and
other monetary damages against Chicago Title Insurance Company and Chicago Title Company, asserting claims under RICO,
18 U.S.C § 1962 and for RICO Conspiracy, Fraud, Aiding and Abetting Fraud, Negligent Misrepresentation, Breach of
Fiduciary Duty and Negligence. We are actively considering and pursuing available sources of recovery and other potential
means of mitigating the loss; however, no assurance can be given that we will be successful in that regard.
During the three months ended March 31, 2018, we recorded a charge-off of $13.9 million, which reflected the outstanding
balance under a $15.0 million line of credit that was originated during the three months ended March 31, 2018. Subsequent to
the granting of the line of credit, representations from the borrower in applying for the line of credit were determined by the
Bank to be false, and third party bank account statements provided by the borrower to secure the line of credit were found to be
fraudulent. The line of credit was granted after the borrower appeared to have satisfied a pre-condition that the line of credit be
fully cash collateralized and secured by a bank account at a third party financial institution pledged to the Bank. As part of the
Bank’s credit review and portfolio management process, the line of credit and disbursements were reviewed subsequent to
closing and compliance with the borrower’s covenants was monitored. As part of this process, on March 9, 2018, the Bank
received information that caused it to believe the existence of the pledged bank account had been misrepresented by the
borrower and that the account had previously been closed. The Bank filed an action in federal court pursuing the borrower and
other parties and is also pursuing other available sources of collection and other potential means of mitigating the loss;
however, no assurance can be given that it will be successful in this regard.
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The following table presents loans individually evaluated for impairment by class of loans as of the dates indicated. The
recorded investment, excluding accrued interest, presents client balances net of any partial charge-offs recognized on the loans
and net of any deferred fees and costs and any purchase premium or discount.
December 31,
2019
2018
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for Loan
Losses
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for Loan
Losses
($ in thousands)
With no related allowance recorded:
Commercial:
Commercial and industrial
$
1,471
$
1,460
$
— $
5,491
$
5,455
$
SBA
Consumer:
Single family residential mortgage
Other consumer
With an allowance recorded:
Commercial:
Commercial and industrial
SBA
Consumer:
1,439
1,379
19,319
671
19,405
675
18,776
3,921
18,776
3,757
Single family residential mortgage
Other consumer
Total
4,213
4
49,814
$
4,252
4
49,708
$
$
—
—
—
3,367
2,045
574
4
5,990
1,668
1,588
12,115
469
12,161
469
—
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—
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5,993
468
27,027
$
6,032
452
26,945
$
$
—
—
—
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161
106
829
Troubled Debt Restructurings (TDRs)
A modification of a loan constitutes a TDR when we, for economic or legal reasons related to a borrower’s financial difficulties,
grant a concession to the borrower that we would not otherwise consider. The concessions may be granted in various forms,
including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of the
loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing
financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt
in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.
Troubled debt restructured loans consisted of the following as of the dates indicated:
($ in thousands)
Commercial:
Commercial and industrial
SBA
Consumer:
Single family residential mortgage
Other consumer
Total
$
$
NTM
Loans
2019
Traditional
Loans
December 31,
Total
NTM
Loans
2018
Traditional
Loans
Total
— $
16,245
$
16,245
$
— $
2,276
$
—
266
266
—
187
2,638
294
2,932
$
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—
18,905
$
5,032
294
21,837
$
2,668
294
2,962
$
2,596
—
5,059
$
2,276
187
5,264
294
8,021
We had $135 thousand and $0 in commitments to lend to clients with outstanding loans that were classified as TDRs as of
December 31, 2019 and 2018. Accruing TDRs were $6.6 million and non-accrual TDRs were $15.2 million at December 31,
2019, compared to accruing TDRs of $5.7 million and non-accrual TDRs of $2.3 million at December 31, 2018.
117
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Purchases and Sales
The following table presents loans purchased and/or sold by portfolio segment, excluding loans held-for-sale, loans acquired in
business combinations or sold in sales of branches and business units, and PCI loans for the periods indicated:
($ in thousands)
Consumer:
Year Ended December 31,
2019
2018
2017
Purchases
Sales
Purchases
Sales
Purchases
Sales
Single family residential mortgage
Other consumer
Total
—
—
— $
—
—
— $
59,481
—
59,481
$
—
—
— $
—
—
— $
—
—
—
$
Loan purchases during the year ended December 31, 2018 were made at a net premium of $2.3 million. For the purchased loans
disclosed above, we did not incur any specific allowances for loan losses during the years ended December 31, 2019, 2018, and
2017. We determined that it was probable at acquisition that all contractually required payments would be collected.
The following table presents loans transferred from (to) loans held-for-sale by portfolio segment, excluding loans transferred in
connection with sales of branches and business units, and PCI loans for the periods indicated:
Year Ended December 31,
2019
2018
2017
Transfers
from Held-
For-Sale
Transfers to
Held-For-
Sale
Transfers
from Held-
For-Sale
Transfers to
Held-For-
Sale
Transfers
from Held-
For-Sale
Transfers to
Held-For-
Sale
($ in thousands)
Commercial:
Commercial and industrial
$
— $
— $
— $
(1,133) $
— $
Commercial real estate
Multifamily
SBA
Construction
Consumer:
—
—
—
—
(573)
(752,087)
(559)
(2,519)
—
—
—
—
—
(81,449)
—
(434)
—
—
—
—
(3,924)
(1,329)
(6,583)
(1,865)
(1,528)
Single family residential mortgage
Other consumer
Total
$
(383,859)
—
—
—
— $ (1,139,597) $
—
—
— $
(289,617)
(4,362)
(376,995) $
88,591
—
88,591
$
(450,625)
—
(465,854)
Included in transfers to loans held for sale for the year ended December 31, 2019 is $573.9 million in multifamily loans from
loans held-for-investment related to our completed Freddie Mac multifamily securitization which closed during the third quarter
of 2019. The loans included in the securitization had a weighted average coupon of 3.79% and a weighted average term to
initial reset of 3.5 years. The related mortgage servicing rights were also sold.
In connection with the securitization, during the second quarter of 2019, we entered into interest rate swap agreements with a
combined notional value of $543.4 million to offset variability in the fair value of the related loans as a result of changes in
market interest rates. During the year ended December 31, 2019, we realized a loss of $9.0 million related to these swap
agreements due to a decline in interest rates since their execution and this was offset by the $8.9 million gross gain realized on
the loans sold into the securitization. The swap agreements were closed at the time the loans were sold into the securitization.
119
Non-Traditional Mortgage (NTM) Loans
Our NTM portfolio is comprised of three interest only products: Green Loans, Interest Only loans and a small number of
additional loans with the potential for negative amortization. As of December 31, 2019 and 2018, the NTM loans totaled $600.7
million, or 10.1% of total loans, and $826.7 million, or 10.7% of total loans, respectively. The total NTM portfolio decreased by
$226.1 million, or 27.3%, during the year ended December 31, 2019.
The following table presents the composition of the NTM portfolio as of the dates indicated:
($ in thousands)
Green Loans (HELOC) - first liens
Interest only - first liens
Negative amortization
Total NTM - first liens
Green Loans (HELOC) - second liens
Total NTM - second liens
Total NTM loans
Total loans
Percentage to total loans
Green Loans
December 31,
2019
2018
Count
Amount
Percent
Count
Amount
Percent
69
$
49,959
376
9
454
7
7
461
545,371
3,027
598,357
2,299
2,299
$
$
600,656
5,951,885
10.1%
8.3 %
90.8 %
0.5 %
99.6 %
0.4 %
0.4 %
100.0%
88
$
67,729
519
11
618
10
10
628
753,061
3,528
824,318
2,413
2,413
$
$
826,731
7,700,873
10.7%
8.2 %
91.1 %
0.4 %
99.7 %
0.3 %
0.3 %
100.0%
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 for a 15-year term with a balloon
payment due at maturity. At December 31, 2019 and 2018, Green Loans totaled $52.3 million and $70.1 million. At
December 31, 2019 and 2018, $1.5 million and $0 of our Green Loans were non-performing. As a result of their unique
payment feature, Green Loans possess higher credit risk due to the potential for negative amortization; however, management
believes the risk is mitigated through our loan terms and underwriting standards, including our policies on LTV ratios and our
contractual ability to curtail loans when the value of the underlying collateral declines. We discontinued origination of the
Green Loans products in 2011.
Interest Only Loans
Interest Only loans are primarily single family residential first mortgage loans with payment features that allow interest only
payments in initial periods before converting to a fully amortizing loan. At December 31, 2019 and 2018, Interest Only loans
totaled $545.4 million and $753.1 million. At December 31, 2019 and 2018, $11.5 million and $0 of the Interest Only loans
were non-performing.
Loans with the Potential for Negative Amortization
Negative amortization loans totaled $3.0 million and $3.5 million at December 31, 2019 and 2018. We discontinued origination
of negative amortization loans in 2007. At December 31, 2019 and 2018, none of the loans with the potential for negative
amortization were non-performing. These loans pose a potentially higher credit risk because of the lack of principal
amortization and potential for negative amortization; however, management believes the risk is mitigated through the loan
terms and underwriting standards, including our policies on LTV ratios.
120
Risk Management of Non-Traditional Mortgages
We proactively manage the NTM portfolio by performing detailed analyses on the portfolio. We have determined that
significant performance indicators for NTMs are loan to value (LTV) ratios and FICO scores. Accordingly, we manage credit
risk in the NTM portfolio through periodic review of the loan portfolio that includes refreshing FICO scores on the Green
Loans and HELOCs, as needed in conjunction with portfolio management, and ordering third party automated valuation models
(AVMs). The loan review is designed to provide a method of identifying borrowers who may be experiencing financial
difficulty before they actually fail to make a loan payment. Upon receipt of the updated FICO scores, an exception report is run
to identify loans with a decrease in FICO score of 10% or more and/or a resulting FICO score of 620 or less. The loans are then
further analyzed to determine if the risk rating should be downgraded, which will increase the reserves established for potential
losses.
For revolving lines of credit, we, 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 we reasonably believe that
the borrower will be unable to fulfill their repayment obligations under the agreement or certain other conditions are met. In
many cases, the decrease in FICO score is the first indication that the borrower may have difficulty in making their future
payment obligations.
Our management meets at least quarterly to review the loans classified as special mention, substandard, or doubtful and
determines whether a suspension or reduction in credit limit is warranted. If a line has been suspended and the borrower would
like to have their credit privileges reinstated, they would need to provide updated financials showing their ability to meet their
payment obligations.
On the Interest Only loans, we project future payment changes to determine if there will be a material increase in the required
payment and then monitors the loans for possible delinquency. Individual loans are monitored for possible downgrading of risk
rating.
Non-Traditional Mortgage Performance Indicators
The following table presents our Green Loans first lien portfolio at December 31, 2019 by FICO scores that were obtained
during the quarter ended December 31, 2019, comparing to the FICO scores for those same loans that were obtained during the
quarter ended December 31, 2018:
($ in thousands)
FICO score
800+
700-799
600-699
<600
No FICO score
Total
By FICO Scores Obtained
During the Quarter Ended
December 31, 2019
By FICO Scores Obtained
During the Quarter Ended
December 31, 2018
Change
Count
Amount
Percent
Count
Amount
Percent
Count
Amount
Percent
$
13
38
10
5
3
3,509
27,011
12,400
3,286
3,753
7.0 %
54.1 %
24.8 %
6.6 %
7.5 %
$
16
50
16
3
3
10,617
34,888
14,098
4,347
3,779
15.7 %
51.5 %
20.8 %
6.4 %
5.6 %
(3) $
(7,108)
(66.9 )%
(12)
(6)
2
—
(7,877)
(22.6 )%
(1,698)
(12.0 )%
(1,061)
(24.4 )%
(26)
(0.7 )%
69
$
49,959
100.0%
88
$
67,729
100.0%
(19) $
(17,770)
(26.2)%
121
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122
NOTE 6 – PREMISES AND EQUIPMENT, NET
The following table summarizes premises and equipment, net, as of the dates indicated:
($ in thousands)
Land
Building and improvement
Furniture, fixtures, and equipment
Leasehold improvements
Construction in process
Total
Less accumulated depreciation
Premises and equipment, net
December 31,
2019
2018
$
9,020
$
109,450
48,923
15,052
221
182,666
(54,645)
$
128,021
$
9,020
109,228
41,576
13,531
1,043
174,398
(45,004)
129,394
During the years ended December 31, 2019, 2018, and 2017, we recorded an impairment loss of $1.5 million, $2.0 million, and
$2.0 million on abandoned capitalized software projects. This impairment charge is included in All Other Expense on the
Consolidated Statements of Operations.
We recognized depreciation expense of $10.3 million, $10.9 million and $12.4 million for the years ended December 31, 2019,
2018, and 2017.
NOTE 7 – LEASES
We have operating leases for corporate offices, branches and loan production offices. Our leases have remaining lease terms of
one month to twenty years, some of which include options to extend the leases generally for periods of three years to five years.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expense were as follows:
($ in thousands)
Operating Lease Expense
Variable Lease Expense
Sublease Income
Total Lease Expense
Supplemental cash flow information related to leases was as follows:
($ in thousands)
Cash paid for amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows
ROU assets obtained in the exchange for lease liabilities:
ROU assets obtained in exchange for lease liabilities
ROU assets recognized upon adoption of new lease standard
Supplemental balance sheet information related to leases was as follows:
($ in thousands)
Operating Leases:
Operating lease right-of-use assets
Operating lease liabilities
Year Ended December 31,
2019
6,622
356
(250)
6,728
Year Ended December 31,
2019
6,989
5,332
23,332
$
$
$
$
$
December 31, 2019
$
22,540
23,692
123
Weighted-average remaining lease term (in years):
Operating leases
Weighted-average discount rate:
Operating leases
Maturities of operating lease liabilities at December 31, 2019 were as follows:
($ in thousands)
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: present value discount
Total Lease Liability
December 31, 2019
6.69 years
2.92%
Operating
Leases
6,727
4,965
3,387
2,578
1,710
7,046
26,413
(2,721)
23,692
$
$
We lease certain equipment under finance leases. Finance lease obligations totaled $585 thousand and $1.1 million at
December 31, 2019 and 2018. The finance lease arrangements require monthly payments through 2023.
NOTE 8 – SERVICING RIGHTS
The following table presents a composition of total income from servicing rights, which is reported in Loan Servicing Income
on the Consolidated Statements of Operations for the periods indicated:
($ in thousands)
Servicing fees for sold loans with servicing retained
Losses on the fair value and amortization of servicing rights
Total income from servicing rights(1)
Year Ended December 31,
2019
2018
2017
$
$
1,291
(612)
679
$
$
5,048
(1,328)
3,720
$
$
19,642
(17,066)
2,576
(1) Includes $0, $0 and $1.6 million in income from discontinued operations for the years ended December 31, 2019, 2018 and 2017.
The following table presents a composition of servicing rights as of the dates indicated:
($ in thousands)
Mortgage servicing rights, at fair value
SBA servicing rights, at cost
Total
December 31,
2019
2018
$
$
1,157
1,142
2,299
$
$
1,770
1,658
3,428
Mortgage loans sold with servicing retained are subserviced by a third party vendor. The unpaid principal balance of these loans
at December 31, 2019 and 2018 was $150.6 million and $204.0 million and are not reported as assets. Custodial escrow
balances maintained in connection with serviced loans were $198 thousand and $300 thousand at December 31, 2019 and 2018.
The unpaid principal balance of the loans underlying our SBA servicing rights at December 31, 2019 and 2018 was $75.2
million and $96.4 million.
Mortgage Servicing Rights
The value of retained MSRs is generally estimated based on a valuation from a third party provider that calculates the present
value of the expected net servicing income from the portfolio based on key factors that include interest rates, prepayment
assumptions, discount rate and estimated cash flows. The following table presents the key characteristics, inputs and economic
assumptions used to estimate the fair value of the MSRs as of the dates indicated:
124
($ in thousands)
Fair value of retained MSRs
Discount rate
Constant prepayment rate
Weighted-average life (in years)
December 31,
2019
2018
$
1,157
$
13.00%
18.96%
4.41
1,704
13.00%
17.21%
4.93
The following table presents activity in the MSRs for the periods indicated:
($ in thousands)
Balance at beginning of year
Additions
Changes in fair value resulting from valuation inputs or assumptions
Sales of servicing rights (1)
Other—loans paid off
Balance at end of year
Year Ended December 31,
2019
2018
2017
$
$
1,770
$
31,852
$
—
(265)
—
(348)
—
(1,155)
(28,549)
(378)
1,157
$
1,770
$
76,121
12,127
(10,240)
(39,345)
(6,811)
31,852
(1) Includes $37.8 million of MSRs sold as a part of discontinued operations for the year ended December 31, 2017.
During the first half of 2018, we sold $28.5 million of MSRs on approximately $3.55 billion in unpaid principal
balances of conventional agency mortgage loans for cash consideration of $30.1 million, subject to a prepayment protection
provision and standard representations and warranties. The sale of MSRs resulted in a net loss of $2.3 million for the year
ended December 31, 2018, primarily related to transaction costs, provision for early repayments of loans, and expected
repurchase obligations under standard representations and warranties.
SBA Servicing Rights
The value of SBA servicing rights is estimated based on a present value of the expected net servicing income from the portfolio
based on key factors that include interest rates, prepayment assumptions, discount rate and estimated cash flows. The following
table presents the key characteristics, inputs and economic assumptions used to estimate the fair value of the SBA servicing
rights as of the dates indicated:
($ in thousands)
Servicing rights
Discount rate
Constant prepayment rate
Weighted-average life (in years)
December 31,
2019
2018
$
1,142
$
1,658
8.75%
8.00%
3.75
9.50%
8.00%
4.29
1,496
761
(318)
(83)
1,856
The following table presents activity in the SBA servicing rights for the periods indicated:
($ in thousands)
Balance at beginning of year
Additions
Amortization, including prepayments
Impairment
Balance at end of year
Year Ended December 31,
2019
2018
2017
1,658
$
1,856
$
—
(493)
(23)
127
(298)
(27)
1,142
$
1,658
$
$
$
125
NOTE 9 – OTHER REAL ESTATE OWNED
The following table presents the activity in other real estate owned for the periods indicated:
($ in thousands)
Balance at beginning of year
Additions
Sales and net direct write-downs
Net change in valuation allowance
Balance at end of year
$
$
Year Ended December 31,
2019
2018
2017
$
1,796
$
672
276
(803)
(145)
— $
672
(2,038)
242
672
$
2,502
3,086
(3,556)
(236)
1,796
The following table presents the activity in the other real estate owned valuation allowance for the periods indicated:
($ in thousands)
Balance at beginning of year
Additions
Recoveries
Net direct write-downs and removals from sale
Balance at end of year
Year Ended December 31,
2019
2018
2017
$
$
— $
145
—
(145)
$
242
143
(90)
(295)
— $
— $
The following table presents expenses related to foreclosed assets included in All Other Expense on the Consolidated
Statements of Operations for the periods indicated:
($ in thousands)
Net loss on sales
Operating expenses, net of rental income
Total
Year Ended December 31,
2019
2018
2017
$
$
40
—
40
$
$
(13) $
(134)
(147) $
6
242
—
(6)
242
(48)
(51)
(99)
We did not provide loans to finance the purchase of our OREO properties during the years ended December 31, 2019, 2018 or
2017.
126
NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
At December 31, 2019 and 2018, goodwill totaled $37.1 million. The following table presents changes in the carrying amount
of goodwill for the periods indicated:
($ in thousands)
Goodwill balance at beginning of the year
Goodwill adjustments for discontinued operations
Goodwill balance at end of year
Accumulated impairment losses at end of year
Year Ended December 31,
2019
2018
2017
$
$
$
37,144
—
37,144
2,100
$
$
$
37,144
—
37,144
2,100
$
$
$
39,244
(2,100)
37,144
2,100
During the year ended December 31, 2017, we discontinued our mortgage banking operations following the sale of our Banc
Home Loans division and wrote off goodwill of $2.1 million against the gain on disposal of discontinued operations.
We evaluate goodwill impairment as of August 31 each year, and more frequently if events or circumstances indicate that there
may be impairment. We completed our annual goodwill impairment test as of August 31, 2019 and determined that no goodwill
impairment existed.
Core deposit intangibles are amortized over their useful lives ranging from four to ten years. As of December 31, 2019, the
weighted-average remaining amortization period for core deposit intangibles was approximately 4.7 years. The following table
presents a summary of other intangible assets as of the dates indicated:
($ in thousands)
December 31, 2019
Core deposit intangibles
December 31, 2018
Core deposit intangibles
Gross
Carrying Value
Accumulated
Amortization
Net
Carrying Value
$
$
30,904
30,904
$
$
26,753
24,558
$
$
4,151
6,346
We recorded impairment on intangible assets of $0, $0, and $336 thousand for the years ended December 31, 2019, 2018, and
2017. During the year ended December 31, 2017, we also wrote off a client relationship intangible of $246 thousand and a trade
name intangible of $90 thousand.
Aggregate amortization of intangible assets was $2.2 million, $3.0 million and $3.9 million for the years ended December 31,
2019, 2018, and 2017. The following table presents estimated future amortization expenses as of December 31, 2019:
($ in thousands)
2020
2021
2022
2023
2024
2025 and After
Total
Estimated
Future
Amortization
Expense
$
1,518
1,082
799
517
235
—
$
4,151
127
NOTE 11 – DEPOSITS
The following table presents the components of deposits as of the dates indicated:
($ in thousands)
Noninterest-bearing deposits
Interest-bearing deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
Total interest-bearing deposits
Total deposits
December 31,
2019
2018
$
1,088,516
$
1,023,360
1,533,882
715,479
885,246
582,772
621,272
4,338,651
$
5,427,167
$
1,556,410
873,153
1,265,847
2,388,592
809,282
6,893,284
7,916,644
The aggregate amount of deposits reclassified as loans, such as overdrafts, was $300 thousand and $477 thousand at
December 31, 2019 and 2018.
We had California State Treasurer’s deposits of $300.0 million, and accrued interest on these deposits, in certificates of deposit
of more than $250,000 at both December 31, 2019 and 2018. The California State Treasurer’s deposits are subject to
withdrawal based on the State’s periodic evaluations. At December 31, 2019 and 2018, we provided letters of credit of $300.0
million and $330.0 million through the FHLB of San Francisco as collateral for the California State Treasurer’s deposits. In
addition, we had other public deposits of $23.3 million and $18.6 million at December 31, 2019 and 2018. As of December 31,
2019, we provided an additional $30.0 million letter of credit through the FHLB of San Fransisco as collateral for the remaining
public deposits. Securities with carrying values of zero and $57.8 million were pledged as collateral for these deposits at
December 31, 2019 and 2018.
The following table presents a summary of brokered deposits as of the dates indicated:
($ in thousands)
Interest-bearing demand deposits
Money market accounts
Certificates of deposit of $250,000 or less
Certificates of deposit of more than $250,000
Total brokered deposits
December 31,
2019
2018
— $
10,000
—
—
770
164,505
1,543,269
—
10,000
$
1,708,544
$
$
The following table presents scheduled maturities of certificates of deposit as of December 31, 2019:
($ in thousands)
Certificates of deposit of $250,000
or less
Certificates of deposit of more than
$250,000
2020
2021
2022
2023
2024
Total
$
527,920
$
46,186
$
4,300
$
2,795
$
1,571
$
582,772
578,583
15,433
26,442
814
—
621,272
Total certificates of deposit
$ 1,106,503
$
61,619
$
30,742
$
3,609
$
1,571
$ 1,204,044
128
NOTE 12 – FEDERAL HOME LOAN BANK ADVANCES AND SHORT-TERM BORROWINGS
The following table presents the advances from the FHLB as of the dates indicated:
($ in thousands)
Fixed rate:
Outstanding balance
Interest rates ranging from
Interest rates ranging to
Weighted average interest rate
Variable rate:
Outstanding balance
Weighted average interest rate
December 31,
2019
December 31,
2018
$
730,000
$
805,000
1.82%
3.32%
2.66%
1.61%
3.32%
2.58%
465,000
1.66%
715,000
2.56%
The following table presents contractual maturities by year of the FHLB advances as of December 31, 2019:
($ in thousands)
Fixed rate
Variable rate
Total
2020
2021
2022
2023
2024 and
After
Total
$
$
174,000
465,000
639,000
$
$
145,000
—
145,000
$
$
46,000
—
46,000
$
$
45,000
—
45,000
$
$
320,000
$
730,000
—
465,000
320,000
$ 1,195,000
Each advance is payable at its maturity date. Advances paid early are subject to a prepayment penalty. At December 31, 2019
and December 31, 2018, the Bank’s advances from the FHLB were collateralized by certain real estate loans with an aggregate
unpaid principal balance of $3.05 billion and $4.05 billion. The Bank’s investment in capital stock of the FHLB of San
Francisco totaled $32.3 million and $41.0 million at December 31, 2019 and December 31, 2018. Based on this collateral the
Bank was eligible to borrow an additional $1.02 billion at December 31, 2019.
The following table presents financial data of FHLB advances as of the dates or for the periods indicated:
($ in thousands)
Weighted-average interest rate at end of year
Average interest rate during the year
Average balance
Maximum amount outstanding at any month-end
Balance at end of year
As of or For the Year Ended December 31,
2019
2018
2017
2.27%
2.55%
2.57%
2.15%
1.60%
1.23%
$
$
$
1,264,945
1,850,000
1,195,000
$
$
$
1,627,608
2,030,000
1,520,000
$
$
$
1,054,978
1,695,000
1,695,000
The Bank maintained a line of credit of $16.7 million from the Federal Reserve Discount Window, to which the Bank pledged
securities with a carrying value of $23.9 million, with no outstanding borrowings at December 31, 2019. The Bank maintained
available unsecured federal funds lines with correspondent banks totaling $185.0 million, with no outstanding borrowings at
December 31, 2019.
The Bank also maintained repurchase agreements and had no outstanding securities sold under agreements to repurchase at
December 31, 2019 and December 31, 2018. Availabilities and terms on repurchase agreements are subject to the
counterparties' discretion and the pledging of additional investment securities.
On June 30, 2017, we voluntarily terminated a line of credit of $75.0 million that was maintained at Banc of California, Inc.
with an unaffiliated financial institution. The line had a maturity date of July 17, 2017 and a floating interest rate equal to a
LIBOR rate plus 2.25% or the Prime Rate. We had $50.0 million of borrowings outstanding under the line, which were repaid
in connection with the termination of the line. The proceeds of the line were used for working capital purposes.
129
NOTE 13 – LONG-TERM DEBT
The following table presents our long-term debt as of the dates indicated:
($ in thousands)
5.25% senior notes due April 15, 2025
Total
Senior Notes
December 31,
2019
2018
Unamortized
Debt Issuance
Cost and
Discount
Par Value
Unamortized
Debt Issuance
Cost and
Discount
Par Value
$
$
175,000
175,000
$
$
(1,579) $
(1,579) $
175,000
175,000
$
$
(1,826)
(1,826)
On April 6, 2015, we completed the issuance and sale of $175.0 million aggregate principal amount of our 5.25% senior notes
due April 15, 2025 (the Senior Notes). Net proceeds after discount were approximately $172.8 million.
The Senior Notes are our senior unsecured debt obligations and rank equally with all of our other present and future unsecured
unsubordinated obligations. We make interest payments on the Senior Notes semi-annually in arrears.
We may, at our option, on or after January 15, 2025 (i.e., 90 days prior to the maturity date of the Senior Notes), redeem the
Senior Notes in whole at any time or in part from time to time, in each case on not less than 30 nor more than 60 days’ prior
notice. The Senior Notes will be redeemable at a redemption price equal to 100% of the principal amount of the Senior Notes to
be redeemed plus accrued and unpaid interest to the date of redemption.
The Senior Notes were issued under the Senior Debt Securities Indenture, dated as of April 23, 2012 (the Base Indenture), as
supplemented by the Second Supplemental Indenture dated as of April 6, 2015 (the Supplemental Indenture and together with
the Base Indenture, the Indenture). The Indenture contains several covenants which, among other things, restrict our ability and
the ability of our subsidiaries to dispose of or incur liens on the voting stock of certain subsidiaries and also contains customary
events of default. We were in compliance with all covenants under the Indenture at December 31, 2019.
NOTE 14 – INCOME TAXES
The following table presents the components of income tax expense (benefit) of continuing operations for the periods indicated:
($ in thousands)
Current income taxes:
Federal
State
Total current income tax expense
Deferred income taxes:
Federal
State
Total deferred income tax expense
Income tax expense (benefit)
Year Ended December 31,
2019
2018
2017
$
3,900
$
5,720
$
941
4,841
(1,492)
870
(622)
5,035
10,755
(4,418)
(1,493)
(5,911)
$
4,219
$
4,844
$
(2,215)
6,006
3,791
(25,938)
(4,434)
(30,372)
(26,581)
130
The following table presents a reconciliation of the recorded income tax expense (benefit) of continuing operations to the
amount of taxes computed by applying the applicable statutory Federal income tax rate of 21.0% to income from continuing
operations before income taxes for the year ended December 31, 2019 and 2018, and 35.0% for the year ended December 31,
2017:
Computed expected income tax expense (benefit) at Federal statutory rate
21.0 %
21.0 %
35.0 %
Year Ended December 31,
2019
2018
2017
Increase (decrease) resulting from:
Proportional amortization
Other permanent book-tax differences
State tax expense, net of federal benefit
Income tax credits (investment tax credits and other)
Basis reduction in investment in alternative energy partnership
Write-off of Goodwill for discontinued operations
Bank owned life insurance policies
Equity compensation shortfall (windfall) tax impact
Remeasurement from the Tax Cuts and Jobs Act
Reserve for uncertain tax positions
Other, net
Effective tax rates
12.6 %
(2.4)%
5.1 %
(21.3)%
1.3 %
— %
(1.7)%
0.6 %
— %
(1.0)%
0.9 %
15.1 %
4.3 %
0.4 %
5.9 %
(25.4)%
2.2 %
— %
(1.0)%
(0.5)%
— %
0.1 %
3.3 %
10.3 %
5.1 %
(2.1 )%
3.7 %
(149.5 )%
24.9 %
2.7 %
(3.0 )%
(7.0 )%
(7.8 )%
1.9 %
(2.7 )%
(98.8)%
Our effective tax rate of continuing operations for the year ended December 31, 2019 was higher than the effective tax rate of
continuing operations for the year ended December 31, 2018 mainly due to the reduction in the recognition of tax credits on
investments in alternative energy partnerships of $3.4 million, partially offset by tax expense from tax basis reduction of $362
thousand related to investments in alternative energy partnerships for the year ended December 31, 2019, compared to $9.6
million of tax credits recognized, partially offset by tax expense from tax basis reduction of $1.0 million for the year ended
December 31, 2018. The reduction in tax credits received by the Bank is due to fewer investments in alternative energy
partnerships.
Our effective tax rate of continuing operations for the year ended December 31, 2018 was higher than the effective tax rate of
continuing operations for the year ended December 31, 2017 mainly due to the reduction in the recognition of tax credits on
investments in alternative energy partnerships of $9.6 million, partially offset by tax expense from tax basis reduction of $1.0
million related to investments in alternative energy partnerships for the year ended December 31, 2018, compared to $38.2
million of tax credits recognized, partially offset by tax expense from tax basis reduction of $6.7 million for the year ended
December 31, 2017. The reduction in tax credits received by the Bank on the investments in alternative energy partnerships is
due to less new equipment being placed into service by the investments. The higher effective tax rate was also partially offset
by the decrease in the federal statutory tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act, which became
effective on January 1, 2018. We use the flow-through income statement method to account for the tax credits earned on
investments in alternative energy partnership. Under this method, the tax credits are recognized as a reduction to income tax
expense and the initial book-tax difference in the basis of the investments are recognized as additional tax expense in the year
they are earned.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the United States. The legislation
provides for significant changes to the IRC that impact corporate taxation requirements, such as the reduction of the federal
income tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions. As of
December 31, 2017, we remeasured our deferred tax assets and liabilities based on the reduced federal corporate
income tax rate of 21% which resulted in an income tax benefit of $2.1 million to continuing operations. At December 31,
2017, we were able to make reasonable estimates of the tax effects on enactment of the Tax Cuts and Jobs Act and
completed our analysis for the tax effects of enactment of the Tax Act on all items.
At December 31, 2019, we had $1.8 million of available unused federal net operating loss (NOL) carryforwards that may be
applied against future taxable income through 2031. We had available at December 31, 2019, $8.6 million of unused state NOL
carryforwards that may be applied against future taxable income through 2031. Utilization of these NOL carryforwards are
subject to annual limitations set forth in Section 382 of the U.S. Internal Revenue Code (IRC). The tax attributes acquired in the
Gateway Bancorp acquisition are subject to an annual IRC Section 382 limitation of $474 thousand.
In addition, as of December 31, 2019 and 2018, we had income tax credit carryforwards of $30.5 million and $26.9 million.
The tax credits, if unused, will expire in 2037.
131
The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets
and deferred tax liabilities as of the dates indicated:
($ in thousands)
Deferred tax assets:
Allowance for loan losses
Stock-based compensation expense
Accrued expenses
Reserve for loss on repurchased loans
Federal net operating losses
State net operating losses
Federal income tax credits
Unrealized loss on securities available-for-sale
Deferred loan fees
Amortization of intangible assets
Prior year state tax deduction
Lease liability
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Investments in partnerships
Mortgage servicing rights
Deferred loan costs
Depreciation on premises and equipment
Right of use asset
Other deferred tax liabilities
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
December 31,
2019
2018
$
15,874
$
2,222
3,831
1,826
372
725
30,661
4,968
2,104
1,248
85
6,978
2,835
73,729
(7,455)
(341)
(6,623)
(5,796)
(6,638)
(1,970)
(28,823)
—
$
44,906
$
18,813
2,249
2,678
736
471
759
27,087
10,046
2,446
1,101
1,272
—
3,456
71,114
(5,317)
(520)
(8,528)
(4,710)
—
(2,635)
(21,710)
—
49,404
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that
some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets,
management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four
possible sources of future taxable income, such as future reversal of existing taxable temporary differences, future taxable
income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future
tax planning strategies. Based on this analysis, management determined that it was more likely than not that all of the deferred
tax assets would be realized. Therefore, we recorded no valuation allowance against net deferred tax assets at December 31,
2019 and 2018.
During the year ended December 31, 2019, estimated taxable income before utilization of NOLs of $12.2 million allowed us to
utilize $474 thousand of both federal and state NOLs (representing approximately 9.2% of the total NOLs included in our
deferred tax assets), $1.9 million of federal low income housing tax credits, $350 thousand of state research credits, $369
thousand of state film tax credits, and $151 thousand of state low income housing tax credits. We believe that the utilization of
tax credits in 2019, along with our projection of future taxable income should be considered significant positive evidence that
the deferred tax assets for income tax credits will be realized in future periods prior to its expiration dates.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.
ASC 740-10-25 prescribes a threshold and a measurement process for recognizing in the financial statements a tax position
taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We had unrecognized tax benefits of $977 thousand and $1.2 million at
December 31, 2019 and 2018. We do not believe that the unrecognized tax benefits will change materially within the next
twelve months. As of December 31, 2019, the total unrecognized tax benefit that, if recognized, would impact the effective tax
rate was $767 thousand.
132
At December 31, 2019 and 2018, we had no accrued interest or penalties, respectively. The table below summarizes the activity
related to our unrecognized tax benefits for the periods indicated:
($ in thousands)
Beginning balance
Increase related to prior year tax positions
Decrease related to prior year tax positions
Increase in current year tax positions
Decrease related to lapsing of statute of limitations
Ending balance
Year Ended December 31,
2019
2018
2017
1,227
$
1,047
$
—
(101)
120
(269)
—
—
180
—
—
867
—
180
—
977
$
1,227
$
1,047
$
$
In the event we are assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified on the
consolidated financial statements as income tax expense.
We are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. We are no longer subject to
examination by U.S. federal taxing authorities for years before 2016. The statute of limitations for the assessment of California
franchise taxes has expired for tax years before 2014 (other state income and franchise tax statutes of limitations vary by state).
We account for qualified affordable housing investments under the proportional amortization method. The gross investments in
these limited partnerships amounted to $49.3 million and the unfunded portion was $22.4 million at December 31, 2019. The
balances of these investments were $36.5 million and $20.0 million as of December 31, 2019 and 2018. We utilized $6.2
million of tax deductions from these investments in 2019, but $400 thousand of low income housing tax credits generated in
2019 were limited and not utilized in 2019. Thus, there were $3.1 million and $2.7 million of unused tax credit carryforwards as
of December 31, 2019 and 2018. Investment book proportional amortization amounted to $3.5 million, $2.0 million and $1.4
million for the years ended December 31, 2019, 2018 and 2017.
NOTE 15 – RESERVE FOR LOSS ON REPURCHASED LOANS
The following table presents a summary of activity in the reserve for losses on repurchased loans for the periods indicated:
($ in thousands)
Balance at beginning of year
Initial provision for loan repurchases
Subsequent change in the reserve
Utilization of reserve for loan repurchases
Other adjustments
Balance at end of year
Year Ended December 31,
2019
2018
2017
$
$
2,506
$
6,306
$
4,563
(660)
(208)
—
126
(2,488)
(1,438)
—
6,201
$
2,506
$
7,974
1,622
(1,812)
(2,238)
760
6,306
During the year ended December 31, 2019, reserve for loss on repurchased loans increased by $3.7 million, including a $4.4
million initial provision for loan repurchases related to the Freddie Mac multifamily loan securitization completed in the third
quarter of 2019. Refer to Note 21 for additional information. During the year ended December 31, 2018, approximately $1.5
million of the decrease was due to portfolio run-off and repurchase settlement activities.
We believe that our obligations for mortgage loan repurchases or loss reimbursements were adequately reserved for
at December 31, 2019.
NOTE 16 – DERIVATIVE INSTRUMENTS
We use derivative instruments and other risk management techniques to reduce our exposure to adverse fluctuations in interest
rates and foreign currency exchange rates in accordance with our risk management policies. Refer to Note 1 for additional
information on our derivative instruments.
The net gains (losses) relating to derivative instruments used for mortgage banking activities, which were included in Net
Revenue on Mortgage Banking Activities in the Statement of Operations of discontinued operations, were $0, $0 and $(12.4)
million for the years ended December 31, 2019, 2018 and 2017. At December 31, 2019 and 2018, we had no outstanding
derivative instruments related to mortgage banking activities.
133
During the years ended December 31, 2019, 2018 and 2017, changes in fair value on interest rate swaps and caps on loans,
recorded through Other Income on the Consolidated Statements of Operations, were insignificant.
The following table presents the notional amount and fair value of derivative instruments included in other assets and other
liabilities on the Consolidated Statements of Financial Condition as of the dates indicated. Note 3 contains further disclosures
pertaining to the fair value of derivatives.
($ in thousands)
Included in assets:
Interest rate swaps and cap on loans
Foreign exchange contracts
Total included in assets
Included in liabilities:
Interest rate swaps and caps on loans
Foreign exchange contracts
Total included in liabilities
December 31,
2019
2018
Notional
Amount
Fair Value (1)
Notional
Amount
Fair Value (1)
$
$
$
$
70,674
4,643
75,317
70,674
4,643
75,317
$
$
$
$
3,445
138
3,583
3,717
136
3,853
$
$
$
$
103,812
—
103,812
103,812
—
103,812
$
$
$
$
1,534
—
1,534
1,600
—
1,600
(1) The fair value of interest rate swaps and cap on loans are included in other assets and accrued expenses and other
liabilities, respectively, in the accompanying consolidated balance sheets. The fair value of interest rate swaps on
mortgage-backed securities are include in the carrying value of mortgage-backed securities in the accompanying
consolidated balance sheets.
We have entered into agreements with counterparty financial institutions, which include master netting agreements that provide
for the net settlement of all contracts with a single counterparty in the event of default. However, we elected to account for all
derivatives with counterparty institutions on a gross basis.
NOTE 17 – EMPLOYEE STOCK COMPENSATION
On May 31, 2018 (the Effective Date), our stockholders approved our 2018 Omnibus Stock Incentive Plan (2018 Omnibus
Plan). As of the Effective Date, we discontinued granting awards under our 2013 Omnibus Incentive Plan (2013 Omnibus Plan)
or any prior equity incentive plans and future stock-based compensation awards to our directors and employees will be made
pursuant to the 2018 Omnibus Plan. The 2018 Omnibus Plan provides that the maximum number of shares that will be
available for awards is 4,417,882, which represents the number of shares that were available for new awards under the 2013
Omnibus Plan immediately prior to the Effective Date. As of December 31, 2019, 3,674,033 shares were available for future
awards under the 2018 Omnibus Plan.
The Banc of California Capital and Liquidity Enhancement Employee Compensation Trust, a Maryland statutory trust (the
SECT) was terminated in 2018. See Note 19 for additional information.
Stock-based Compensation Expense
The following table presents stock-based compensation expense and the related tax benefits for the periods indicated:
($ in thousands)
Stock options
Restricted stock awards and units
Stock appreciation rights
Total stock-based compensation expense
Related tax benefits
Year Ended December 31,
2019
2018
2017
$
$
$
(8) $
174
$
5,047
—
5,039
1,481
$
$
6,391
—
6,565
1,929
$
$
360
11,732
42
12,134
5,078
134
The following table presents unrecognized stock-based compensation expense as of December 31, 2019:
($ in thousands)
Stock option awards
Restricted stock awards and restricted stock units
Total
Stock Options
Weighted-
Average
Remaining
Expected
Recognition
Period
0.5 years
2.2 years
2.2 years
Unrecognized
Expense
$
$
4
9,087
9,091
We have issued stock options to certain employees, officers and directors. Stock options are issued at the closing market price
immediately before the grant date, and generally have a three to five year vesting period and contractual terms of seven to ten
years. We recognize an income tax deduction upon exercise of a stock option to the extent taxable income is recognized by the
option holder. In the case of a non-qualified stock option, the option holder recognizes taxable income based on the fair market
value of the shares acquired at the time of exercise less the exercise price.
The weighted-average estimated fair value per share options granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions.
($ in thousands, except per share data)
Grant date fair value of options granted
Fair value of options vested
Total intrinsic value of options exercised
Cash received from options exercised
Weighted-average estimated fair value per share of options granted
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
— $
67
87
$
$
— $
— $
— $
160
96
$
$
— $
— $
—
611
3,747
2,043
—
The following table represents stock option activity and weighted-average exercise price per share at and for the periods
indicated:
Year Ended December 31,
2019
2018
2017
Weighted-
Average
Exercise
Price per
Share
13.54
13.41
13.34
—
13.85
13.86
Number
of Shares
186,973
$
(74,836) $
(49,616) $
— $
62,521
60,273
$
$
Weighted-
Average
Exercise
Price per
Share
13.99
17.50
—
—
13.54
13.67
Number
of Shares
210,973
$
(24,000) $
— $
— $
186,973
123,125
$
$
Weighted-
Average
Exercise
Price per
Share
13.95
12.53
16.49
—
13.99
14.68
Number
of Shares
968,591
$
(488,281) $
(269,337) $
— $
210,973
105,541
$
$
Outstanding at beginning of year
Exercised
Forfeited
Expired
Outstanding at end of year
Exercisable at end of year
135
The following table represents changes in unvested stock options and related information at and for the periods indicated:
Year Ended December 31,
2019
2018
2017
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
63,848
$
— $
(17,600) $
(44,000) $
2,248
$
13.30
—
13.26
13.29
13.75
Weighted-
Average
Exercise
Price per
Share
13.31
—
13.32
—
13.30
Number
of Shares
105,432
$
— $
(41,584) $
— $
63,848
$
Weighted-
Average
Exercise
Price per
Share
15.04
—
14.10
16.50
13.31
Number
of Shares
518,936
$
— $
(174,833) $
(238,671) $
105,432
$
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
The following table presents a summary of stock options outstanding as of December 31, 2019:
Options Outstanding
Options Exercisable
Number
of Shares
Intrinsic
Value
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Remaining
Contractual
Life
Number
of Shares
Intrinsic
Value
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Remaining
Contractual
Life
5,508
$
—
40,848
—
16,165
62,521
$
22
$
— $
58
$
— $
— $
80
$
10.90
—
13.48
—
15.81
13.85
4.5 years
0.0 years
5.4 years
0.0 years
1.5 years
5,508
$
—
38,600
—
16,165
4.3 years
60,273
$
22
$
— $
55
$
— $
— $
77
$
10.90
—
13.46
—
15.81
13.86
4.5 years
0.0 years
5.4 years
0.0 years
1.5 years
4.3 years
($ in thousands)
$10.90 to $11.87
$11.88 to $12.85
$12.86 to $13.83
$13.84 to $14.81
$14.82 to $15.82
Total
136
Restricted Stock Awards and Restricted Stock Units
We also have granted restricted stock awards and restricted stock units to certain employees, officers and directors. The
restricted stock awards and units are valued at the closing price of our stock on the measurement date. The restricted stock
awards and units fully vest after a specified period (generally ranging from one to five years) of continued service from the date
of grant plus, in some cases, the satisfaction of performance conditions. These performance targets include conditions relating
to our profitability and regulatory standing. The actual amounts of stock released upon vesting will be determined by the
Compensation Committee of our Board of Directors upon the Committee's certification of the satisfaction of the target level of
performance. We recognize an income tax deduction in an amount equal to the taxable income reported by the holders of the
restricted stock, generally upon vesting or, in the case of restricted stock units, when settled. The following table presents
unvested restricted stock awards and restricted stock units activity for the periods indicated:
Year Ended December 31,
2019
2018
2017
Number
of Shares
833,601
796,547
$
$
(273,904) $
(432,762) $
923,482
$
Weighted-
Average
Price per
Share
18.96
14.40
18.37
17.93
15.74
Number
of Shares
911,633
650,676
$
$
(415,994) $
(312,714) $
833,601
$
Weighted-
Average
Price per
Share
18.73
18.89
18.65
18.54
18.96
Number
of Shares
1,417,144
859,722
$
$
(854,031) $
(511,202) $
911,633
$
Weighted-
Average
Price per
Share
16.16
20.81
15.95
17.80
18.73
Outstanding at beginning of year
Granted (1)
Vested (2)
Forfeited (3)
Outstanding at end of year
(1) The number of granted shares includes aggregate performance-based shares/units of 174,935, 306,801 and 152,709 for the years
ended December 31, 2019, 2018 and 2017.
(2) The number of vested shares includes aggregate performance-based shares/units of 37,572, 44,817 and 10,000 for the years ended
December 31, 2019, 2018 and 2017
(3) The number of forfeited shares includes aggregate performance-based shares/units of 233,999, 86,936 and 107,545 for the years
ended December 31, 2019, 2018 and 2017.
Stock Appreciation Rights
On August 21, 2012, we granted to Steven A. Sugarman, our then- (now former) chief executive officer a ten-year stock
appreciation right (SAR) for 500,000 shares (Initial SAR) of our common stock with a base price of $12.12 per share with one-
third of the Initial SAR vesting on the grant date and the remaining amount vesting over a period of 2 years. The Initial SAR
entitles Mr. Sugarman to dividend equivalent rights and originally contained an anti-dilution provision pursuant to which
additional SARs (Additional SARs) were issued to Mr. Sugarman upon certain stock issuances by us, as described below. On
March 24, 2016, concurrent with entering into a new employment agreement with us, Mr. Sugarman entered into a letter
agreement that eliminated this anti-dilution provision of the Initial SAR. Under the terms of the March 24, 2016 letter
agreement, in consideration of the removal of the anti-dilution provision of the Initial SAR, we granted Mr. Sugarman a
onetime performance based restricted stock award with an aggregate grant date fair market value of $5.0 million, which would
vest in full on March 24, 2017, but was also subject to restrictions on sale or transfer through March 24, 2021. In connection
with Mr. Sugarman’s resignation as our chief executive officer on January 23, 2017, all unvested equity awards (including any
unvested SARs) immediately vested and became free of all restrictions. In addition, the SARs continued (and continue) to
remain exercisable for their full terms, with dividend equivalent rights of the SARs also continuing in effect during their full
terms.
As described more fully in the SAR agreement, the original anti-dilution provision of the Initial SAR did not apply to certain
issuances of our common stock for compensatory purposes, but did apply to certain other issuances of our common stock,
including the issuances of common stock to raise capital. Pursuant to this anti-dilution provision, we issued Additional SARs to
the former chief executive officer with a base price determined as of each date of issuance, but otherwise with the same terms
and conditions as the Initial SAR, except for an Additional SAR granted relating to a public offering of our tangible equity units
(TEUs) on May 21, 2014 that has different terms (Additional TEU SAR).
Regarding the Additional TEU SAR, each TEU contained a Purchase Contract that could be settled in shares of our voting
common stock based on a maximum settlement rate (subject to adjustment) and a minimum settlement rate (subject to
adjustment). The Additional TEU SAR was calculated using the initial maximum settlement rate and, therefore, the number of
shares underlying the Additional TEU SAR was subject to adjustment and forfeiture if the aggregate number of shares of stock
issued in settlement of any single Purchase Contract was less than the initial maximum settlement rate.
137
By its original terms, the Additional TEU SAR was to vest in full on May 15, 2017 or accelerate in vesting upon early
settlement of a Purchase Contract at the holders' option, and until it vested, the Additional TEU SAR was to have no dividend
equivalent rights and the shares underlying the Additional TEU SAR were subject to forfeiture.
The following table represents SARs activity and the weighted-average exercise price per share for the periods indicated:
Year Ended December 31,
2019
2018
2017
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Outstanding at beginning of year
1,559,012
$
11.60
1,559,012
$
11.60
1,559,047
$
11.60
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
— $
— $
— $
1,559,012
1,559,012
$
$
—
—
—
11.60
11.60
— $
— $
— $
1,559,012
1,559,012
$
$
—
—
—
11.60
11.60
— $
— $
(35) $
1,559,012
1,559,012
$
$
—
—
10.09
11.60
11.60
The following table represents changes in unvested SARs and related information as of and for the periods indicated:
Year Ended December 31,
2019
2018
2017
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
— $
— $
— $
— $
— $
—
—
—
—
—
— $
— $
— $
— $
— $
—
—
—
—
—
8,069
$
— $
(8,034) $
(35) $
— $
10.09
—
10.09
10.09
—
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
138
NOTE 18 – EMPLOYEE BENEFIT PLANS
We have a 401(k) plan (the 401(k) Plan) whereby all employees generally can participate in the 401(k) Plan. Employees may
contribute up to 100% of their compensation subject to certain limits based on federal tax laws. We make an enhanced safe-
harbor matching contribution equal to 100% of the first 4% of the employee’s deferral rate not to exceed 4% of the employee’s
compensation. The safe-harbor matching contribution is fully vested by the participant when made.
For the years ended December 31, 2019, 2018 and 2017, expense attributable to 401(k) plans amounted to $2.1 million, $2.1
million and $3.1 million.
We have adopted a deferred compensation plan (the DC Plan) under Section 401 of the IRC. The purpose of this DC Plan is to
provide specified benefits to a select group of management and highly compensated employees. Participants may elect to defer
compensation, which accrues interest quarterly at the Prime Rate as of the last business day of the prior quarter. We do not
make contributions to the DC Plan.
Employee Equity Ownership Plan
We established the Employee Equity Ownership Plan (EEOP) effective October 15, 2013 for the benefit of employees. The
EEOP is administered under our 2013 Omnibus Stock Incentive Plan and the awards thereunder were issued upon the terms and
conditions and subject to the restrictions of our 2013 Omnibus Stock Incentive Plan. The EEOP provided that employees
eligible to receive restricted stock awards or units under the EEOP are any employees who are not otherwise given shares
pursuant to any other Company-sponsored equity program, with grants generally vesting in five equal annual installments
beginning on the first anniversary of the date of grant. After evaluation of all then-current equity plans, we discontinued the
EEOP effective January 1, 2018. On April 2, 2018, all final stock awards due under the EEOP were granted to eligible
employees, including employees who were eligible for a five-year service award during 2018 calendar year. We issued 72,561
and 35,016 shares with respect to restricted stock awards and units under the EEOP for the years ended December 31, 2018 and
2017. At December 31, 2019, there were 36,588 unvested shares of restricted stock and restricted stock units with an
unrecognized stock-based compensation expense of $691 thousand.
NOTE 19 – STOCKHOLDERS’ EQUITY
Warrants
On November 1, 2010, we issued warrants to COR Advisors LLC (COR Advisors), an entity controlled by Steven A.
Sugarman, who became a director of ours on that date and later became our President and Chief Executive Officer (and
resigned from those and all other positions with us and the Bank on January 23, 2017). The warrants entitled COR Advisors to
purchase up to 1,395,000 shares of non-voting common stock at an exercise price of $11.00 per share, subject to certain
adjustments to the number of shares underlying the warrants as well as certain adjustments to the warrant exercise price as
applicable. On August 3, 2011, COR Advisors transferred warrants for the right to purchase 960,000 shares of non-voting
common stock to COR Capital Holdings LLC (COR Capital Holdings), an entity controlled by Steven A. Sugarman, and
transferred warrants for the right to purchase the remaining 435,000 shares of non-voting common stock to Jeffrey T. Seabold,
our then- (now former) Executive Vice President and Management Vice-Chair.
On August 22, 2012, COR Capital Holdings transferred its warrants for the right to purchase 960,000 shares of non-voting
common stock to a living trust for Steven A. Sugarman and his spouse. These warrants vested in tranches, with each tranche
being exercisable for 5 years after the tranche's vesting date. With respect to the warrants transferred by COR Capital Holdings
to the living trust for Steven A. Sugarman and his spouse, warrants to purchase 50,000 shares vested on October 1, 2011 and the
remainder vested in seven equal quarterly installments beginning January 1, 2012 and ending on July 1, 2013. With respect to
the warrants transferred by COR Advisors to Mr. Seabold, warrants to purchase 95,000 shares vested on January 1, 2011;
warrants to acquire 130,000 shares vested on each of April 1 and July 1, 2011, and warrants to purchase 80,000 shares vested on
October 1, 2011.
On August 17, 2016, the living trust for Steven A. Sugarman and his spouse transferred warrants to purchase 480,000 shares to
Steven A. Sugarman's brother, Jason Sugarman. These transferred warrants were last exercisable on September 30, 2016,
December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017 for 50,000, 130,000, 130,000, 130,000, and
40,000 shares. On August 17, 2016, Jason Sugarman irrevocably elected to fully exercise each tranche of the transferred
warrants. Under his irrevocable election, Jason Sugarman directed that each such exercise would occur on the last exercisable
date for each tranche using a cashless (net) exercise method and also directed that each exercise be for either non-voting
common stock, or, if allowed under the terms of the warrant, for voting common stock. At September 30, 2016, December 31,
2016, March 31, 2017, June 30, 2017 and September 30, 2017, in accordance with Jason Sugarman’s irrevocable election,
warrants to purchase 50,000, 130,000, 130,000,130,000, and 40,000 shares have been exercised, resulting in issuances of
25,051 and 64,962 shares of our voting common stock and 75,875, 77,376 and 23,237 shares of our non-voting common stock.
Based on automatic adjustments to the original $11.00 exercise price, the exercise price at the time of exercise was $8.80,
$8.72, $8.66, $8.61 and $8.55 per share. As a result of these exercises, Jason Sugarman no longer holds any warrants to
139
purchase shares of our stock. During the three months ended June 30, 2018, based on additional documentation received from
Jason Sugarman, it was determined that Jason Sugarman was eligible to receive voting common stock under the terms of the
transferred warrant for the exercises that previously occurred on March 31, 2017, June 30, 2017 and September 30, 2017.
Accordingly, on June 6, 2018, an aggregate of 176,488 shares of our non-voting common stock owned by Jason Sugarman were
canceled and he was issued 176,488 shares of our voting common stock in lieu thereof.
On August 16, 2016, the living trust for Steven A. Sugarman and his spouse irrevocably elected to exercise its warrants to
purchase 480,000 shares. Under its irrevocable election, the living trust for Steven A. Sugarman and his spouse directed that
each such exercise would occur on the last exercisable date for each tranche of such warrants (September 30, 2017,
December 31, 2017, March 31, 2018 and June 30, 2018 with respect to 90,000, 130,000, 130,000, and 130,000 shares) using a
cashless net exercise method and also directed that each exercise be for non-voting common stock. On September 30, 2017, in
accordance with its irrevocable election, warrants to purchase 90,000 shares were exercised by the living trust for Steven A.
Sugarman and his spouse, resulting in the issuance of 52,284 shares of our non-voting common stock. Based on an automatic
adjustment to the original $11.00 exercise price, the exercise price at the time of exercise was $8.55 per share.
On each of December 27, 2017, March 30, 2018 and June 29, 2018, we were notified that the living trust for Steven A.
Sugarman and his spouse purportedly transferred warrants with respect to 130,000 shares, with a last exercisable date of
December 31, 2017, 130,000 shares with a last exercisable date of March 31, 2018 and 130,000 shares with a last exercisable
date of June 30, 2018, to a separate entity, Sugarman Family Partners. In accordance with the irrevocable election to exercise
previously submitted by the living trust for Steven A. Sugarman and his spouse, we considered these transferred warrants to
have been exercised with respect to 130,000 shares on December 31, 2017, 130,000 shares on March 31, 2018 and 130,000
shares on June 30, 2018, resulting in the issuance of 77,413, 72,159, and 73,543 shares of our non-voting common stock,
respectively, on December 31, 2017, April 2, 2018 and July 2, 2018. Based on an automatic adjustment to the original $11.00
exercise price, the exercise price at the time of exercise was $8.49 per share, $8.44 per share and $8.38 per share. As a result of
these exercises, none of these warrants remain outstanding.
On December 8, 2015, March 9, 2016, June 17, 2016, and September 30, 2016, Mr. Seabold exercised his warrants with respect
to 95,000, 130,000, 130,000, and 80,000 shares, using cashless (net) exercises, resulting in a net number of shares of non-voting
common stock issued in the aggregate of 37,355, 53,711, 70,775, and 40,081. Based on automatic adjustments to the original
$11.00 exercise price, the exercise price at the time of exercise was $9.04, $8.90, $8.84, and $8.80 per share. As a result of
these exercises, Mr. Seabold no longer holds any warrants to purchase shares of our stock.
Under the terms of the respective warrants, the warrants were exercisable for voting common stock in lieu of non-voting
common stock following a transfer of the warrants under certain circumstances described in the terms of the warrants. The
terms and issuance of the foregoing warrants were approved by our stockholders at a special meeting held on October 25, 2010.
Preferred Stock
We are authorized to issue 50,000,000 shares of preferred stock with par value of $0.01 per share. Preferred shares outstanding
rank senior to common shares both as to dividends and liquidation preference but generally have no voting rights. All of our
outstanding shares of preferred stock have a $1,000 per share liquidation preference. The following table presents our total
outstanding preferred stock as of dates indicated:
December 31,
2019
2018
Shares
Authorized
and
Outstanding
Liquidation
Preference
Carrying
Value
Shares
Authorized
and
Outstanding
Liquidation
Preference
Carrying
Value
96,629
$
96,629
$
93,162
115,000
$
115,000
$
110,873
100,477
100,477
96,663
125,000
125,000
120,255
197,106
$
197,106
$
189,825
240,000
$
240,000
$
231,128
($ in thousands)
Series D
7.375% non-cumulative perpetual
Series E
7.00% non-cumulative perpetual
Total
On August 23, 2019, we completed a partial tender offer for depositary shares (Series D Depositary Shares), each representing a
1/40th interest in a share of Series D Preferred Stock, liquidation amount of $1,000 per share of Series D Preferred Stock,
resulting in the repurchase of 734,823 outstanding Series D Depository Shares and the related retirement of 18,371 outstanding
shares of Series D Preferred Stock. The repurchase price aggregated to $19.4 million. The $1.7 million difference between the
consideration paid and the carrying value of the Series D Preferred Stock was reclassified to retained earnings and resulted in a
reduction to net income allocated to common stockholders.
140
On August 23, 2019, we completed a partial tender offer for depositary shares (Series E Depositary Shares), each representing a
1/40th interest in a share of Series E Preferred Stock, liquidation amount of $1,000 per share of Series E Preferred Stock,
resulting in the repurchase of 980,928 outstanding Series E Depository Shares and the related retirement of 24,523 outstanding
shares of Series E Preferred Stock. The repurchase price aggregated $26.6 million. The $3.4 million difference between the
consideration paid and the carrying value of the Series E Preferred Stock was reclassified to retained earnings and resulted in a
reduction to net income allocated to common stockholders.
On September 17, 2018, we completed the redemption of all 40,250 outstanding shares of our 8.00 percent Series C Non-
Cumulative Perpetual Preferred Stock (Series C Preferred Stock), which resulted in the simultaneous redemption of all
1,610,000 of the outstanding related depositary shares (Series C Depository Shares), each representing a 1/40th interest in a
share of Series C Preferred Stock, at a redemption price of the liquidation amount of $1,000 per share of Series C Preferred
Stock (equivalent to $25 per Series C Depository Share). The redemption price represented an aggregate amount of $40.3
million and did not accrue interest on or after the regularly scheduled dividend payment date of September 15, 2018. Deferred
stock issuance costs of $2.3 million originally recorded as a reduction to preferred stock upon issuance of the Series C Preferred
Stock were reclassified to retained earnings and resulted in a reduction to net income allocated to common stockholders.
Stock Employee Compensation Trust
On August 3, 2016, we established the SECT pursuant to the Trust Agreement, dated as of August 3, 2016 (the SECT Trust
Agreement), between us and Newport Trust Company, as trustee (as successor trustee to Evercore Trust Company, N.A.) (the
SECT Trustee) to fund employee compensation and benefit obligations of ours using shares of our common stock. On August 3,
2016, we sold 2,500,000 shares of voting common stock to the SECT at a purchase price of $21.45 per share (the closing price
of the voting common stock on August 2, 2016), or $53.6 million in the aggregate, in exchange for a cash amount equal to the
aggregate par value of the shares and a promissory note for the balance of the purchase price. The SECT was to terminate on
January 1, 2032 unless terminated earlier in accordance with the SECT Trust Agreement, including by our Board of Directors.
On December 28, 2017, in order to effectuate the early termination of the SECT, as authorized by our Board of Directors, we
purchased from the SECT all 2,500,000 shares of voting common stock held by the SECT at a purchase price of $21.00 per
share (the closing price per share of the voting common stock on December 27, 2017), or $52.5 million in the aggregate (the
SECT Termination Sale). Following the SECT Termination Sale, such shares of voting common stock were canceled. Of the
proceeds from the SECT Termination Sale, $2.7 million was to be utilized for the purpose of funding obligations under certain
of our benefit plans to which 126,517 shares of voting common stock had been allocated prior to the SECT Termination Sale,
and $49.8 million was remitted by the SECT Trustee to us, which was deemed to be in satisfaction and termination of all
remaining obligations of the SECT under the promissory note, which had an outstanding principal balance of $50.9 million plus
accrued interest. During the quarter ended September 30, 2018, the remaining cash balance in the SECT, including the
aforementioned proceeds of $2.7 million from the SECT Termination Sale, was disbursed from the SECT to us to fund our
401(k) plan as well as health and welfare plans. The termination of the SECT was completed upon the filing of a certificate of
cancellation with the Maryland Department of Assessments and Taxation on September 24, 2018.
Change in Accumulated Other Comprehensive Income (Loss)
Our AOCI includes unrealized gain (loss) on securities available-for-sale. Changes to AOCI are presented net of the tax effect
as a component of stockholders' equity. Reclassifications from AOCI are recorded on the Consolidated Statements of
Operations either as a gain or loss. The following table presents changes to AOCI for the periods indicated:
($ in thousands)
Unrealized (loss) gain on securities available-for -sale
Balance at beginning of period
Unrealized (loss) gain arising during the period
Unrealized gain arising from the reclassification of securities held-to-maturity to securities
available-for-sale
Reclassification adjustment from other comprehensive income
Amounts reclassified from accumulated other comprehensive income (loss) to net income
Tax effect of current period changes
Total changes, net of taxes
Reclassification of stranded tax effects to retained earnings
Balance at end of period
Year Ended December 31,
2019
2018
2017
$
(24,117) $
5,227
$
(9,042)
11,734
(40,476)
16,334
—
4,852
731
(5,100)
12,217
—
—
(5,532)
3,252
12,916
(29,840)
496
21,990
(14,768)
—
(9,287)
14,269
—
$
(11,900) $
(24,117) $
5,227
141
NOTE 20 – REGULATORY CAPITAL MATTERS
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital
adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain
off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as
of December 31, 2019, the Company and the Bank met all capital adequacy requirements to which they were then subject. With
respect to the Bank, prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent
overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and expansion, and a capital restoration plan is required.
At December 31, 2019, the most recent regulatory notification categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since that notification that management believes
have changed the institution’s category.
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Company and the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses. Inclusive of the fully phased-in capital conservation buffer, the common equity Tier 1 capital, Tier 1
risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively.
The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
Minimum Capital
Requirements
Minimum Required to Be Well-
Capitalized Under Prompt
Corrective Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
921,892
15.90% $
463,950
860,179
670,355
860,179
14.83%
11.56%
10.89%
347,963
260,972
315,825
8.00%
6.00%
4.50%
4.00%
$ 1,007,762
17.46% $
461,843
8.00% $
946,049
946,049
946,049
16.39%
16.39%
12.02%
346,382
259,787
314,707
$
977,342
13.71% $
570,368
910,528
679,400
910,528
12.77%
9.53%
8.95%
427,776
320,832
407,145
6.00%
4.50%
4.00%
8.00%
6.00%
4.50%
4.00%
$ 1,120,122
15.71% $
570,382
8.00% $
1,053,308
1,053,308
1,053,308
14.77%
14.77%
10.36%
427,786
320,840
406,694
6.00%
4.50%
4.00%
N/A
N/A
N/A
N/A
577,304
461,843
375,247
393,383
N/A
N/A
N/A
N/A
712,977
570,382
463,435
508,368
N/A
N/A
N/A
N/A
10.00%
8.00%
6.50%
5.00%
N/A
N/A
N/A
N/A
10.00%
8.00%
6.50%
5.00%
($ in thousands)
December 31, 2019
Banc of California, Inc.
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
Banc of California, NA
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
December 31, 2018
Banc of California, Inc.
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
Banc of California, NA
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
Dividend Restrictions
The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal banking laws and
regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these
regulations, in the case of the Bank, the amount of dividends that may be paid in any calendar year is limited to the current
year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements
described above. However, any dividend granted by the Bank would be limited by the need to maintain its well capitalized
142
status plus the capital conservation buffer in order to avoid additional dividend restrictions. In addition to dividends on our
preferred stock, we declared and paid dividends on our common stock of $0.13, $0.06, $0.06 and $0.06 per share for the
quarters ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019. During April 2019, our Board of
Directors approved a plan to reduce the quarterly dividend from $0.13 to $0.06 per common share. The Bank paid dividends
of $142.5 million to Banc of California, Inc. during the year ended December 31, 2019. On August 23, 2019, we completed the
repurchase of Series D and E Series preferred stock for total consideration of $19.4 million and $26.6 million, respectively. In
connection with these repurchases, the Bank paid a dividend of $88.5 million to Banc of California, Inc. Because the dividend
exceeded the Bank’s eligible amount pursuant to applicable law, the dividend required OCC approval. Any other dividends
from the Bank to the holding company in excess of the statutory eligible amount will require prior OCC approval.
NOTE 21 – VARIABLE INTEREST ENTITIES
We hold ownership interests in alternative energy partnerships and qualified affordable housing partnerships, and held an
interest in the SECT prior to the termination of the SECT. Refer to Note 1 for additional detail on variable interest entities.
Unconsolidated VIEs
Multifamily Securitization
During the third quarter of 2019, we transferred $573.5 million of multifamily loans, through a two-step process, to a third-
party depositor which placed the multifamily loans into a third-party trust (a VIE) that issued structured pass-through
certificates to investors. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance
with ASC 860. We determined that we are not the primary beneficiary of this VIE as we do not have the power to direct the
activities that will have the most significant economic impact on the entity. Our continuing involvement in this securitization is
limited to customary obligations associated with the securitization of loans, including the obligation to cure, repurchase or
substitute loans in the event of a material breach in representations. Additionally, we have the obligation to guarantee credit
losses up to 12 percent of the aggregate unpaid principal balances at cut-off date of the securitization. This obligation is
supported by a $68.8 million letter of credit between Freddie Mac and the FHLB.
The maximum loss exposure that would be absorbed by us in the event that all of the assets in the securitization trust are
deemed worthless is $68.8 million, which represents the aforementioned obligation to guarantee credit losses up to 12 percent.
We believe that the loss exposure on our multifamily securitization is reduced by both loan-to-value ratios of the underlying
collateral balances and the overcollateralization that exists within the securitization trust. At December 31, 2019, we have a
$4.4 million repurchase liability related to this VIE which is available to absorb losses.
Alternative Energy Partnerships
We invest in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects
that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits). These entities
were formed to invest in newly installed residential and commercial solar leases and power purchase agreements. As a result of
our investments, we have the right to certain investment tax credits and tax depreciation benefits (recognized on the flow
through and income statement method in accordance with ASC 740), and to a lesser extent, cash flows generated from the
installed solar systems leased to individual consumers for a fixed period of time.
While our interest in the alternative energy partnerships meets the definition of a VIE in accordance with ASC 810, we have
determined that we are not the primary beneficiary because we do not have the power to direct the activities that most
significantly impact the economic performance of the entities including operational and credit risk management activities. As
we are not the primary beneficiary, we did not consolidate the entities. We use the Hypothetical Liquidation at Book Value
(HLBV) method to account for these investments in energy tax credits as an equity investment under ASC 970-323-25-17.
Under the HLBV method, an equity method investor determines its share of an investee's earnings by comparing its claim on
the investee's book value at the beginning and end of the period, assuming the investee were to liquidate all assets at their U.S.
GAAP amounts and distribute the resulting cash to creditors and investors under their respective priorities. The difference
between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for
capital contributions and distributions, is our share of the earnings or losses from the equity investment for the period. To
account for the tax credits earned on investments in alternative energy partnerships, we use the flow-through income statement
method. Under this method, the tax credits are recognized as a reduction to income tax expense and the initial book-tax
differences in the basis of the investments are recognized as additional tax expense in the year they are earned.
During the years ended December 31, 2019, 2018 and 2017, we funded $806 thousand, $0 and $55.4 million, respectively, and
recognized a loss on investment of $1.7 million, $5.0 million and $30.8 million, respectively, through our HLBV application.
As a result, the balance of our investments was $29.3 million and $29.0 million at December 31, 2019 and 2018.
143
During the year ended December 31, 2017, we completed the funding on one of our investments. While we had committed
$100.0 million to the investment, the amount that was drawn down and funded by us was $62.8 million and the remaining $37.2
million of the commitment was canceled. During the three months ended June 30, 2018, we reached the completion deadline of
a second investment. While we had committed $100.0 million to that investment, the amount that was drawn down and funded
by us was $49.9 million, of which $1.0 million was unused and returned to us, and the remaining $50.1 million of commitment
was canceled. During the year ended 2019, we funded $806 thousand of our $4.0 million aggregate funding commitment into a
third alternative energy partnership.
From an income tax benefit perspective, we recognized investment tax credits of $3.4 million, $9.6 million and $38.2 million,
as well as income tax benefits relating to the recognition of our loss through our HLBV application during the years ended
December 31, 2019, 2018 and 2017, respectively.
The following table represents the carrying value of the associated assets and liabilities and the associated maximum loss
exposure for the alternative energy partnerships as of the dates indicated:
($ in thousands)
Cash
Equipment, net of depreciation
Other assets
Total unconsolidated assets
Total unconsolidated liabilities
Maximum loss exposure
December 31,
2019
2018
$
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6,301
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The maximum loss exposure that would be absorbed by us in the event that all of the assets in the alternative energy
partnerships are deemed worthless is $32.5 million, which is our recorded investment amount at December 31, 2019.
We believe that the loss exposure on our investments is reduced considering our return on our investment is provided not only
by the cash flows of the underlying client leases and power purchase agreements, but also through the significant tax benefits,
including federal tax credits generated from the investments. In addition, the arrangements include a transition manager to
support any transition of the solar company sponsor whose role includes that of the servicer and operation and maintenance
provider, in the event the sponsor would be required to be removed from its responsibilities (e.g., bankruptcy, breach of
contract, etc.), thereby further limiting our exposure.
Qualified Affordable Housing Partnerships
We invest in limited partnerships that operate qualified affordable housing projects. The returns on these investments are
generated primarily through allocated Federal tax credits and other tax benefits. In addition, these investments contribute to our
compliance with the Community Reinvestment Act. These limited partnerships are considered to be VIEs, because either (i)
they do not have sufficient equity investment at risk or (ii) the limited partners with equity at risk do not have substantive kick-
out rights through voting rights or substantive participating rights over the general partner. As a limited partner, we are not the
primary beneficiary because the general partner has the ability to direct the activities of the VIEs that most significantly impact
their economic performance. Therefore, we do not consolidate these partnerships.
We funded $9.1 million, $4.1 million and $4.5 million into these partnerships during the years ended December 31, 2019, 2018
and 2017 and recognized proportional amortization expense of $3.5 million, $2.0 million and $1.4 million during the years
ended December 31, 2019, 2018 and 2017. As a result, the balance of these investments was $36.5 million and $20.0 million at
December 31, 2019 and 2018. As of December 31, 2019, we had funded $26.9 million of our $49.3 million aggregated funding
commitments. We had an unfunded commitment of $22.4 million at December 31, 2019. From an income tax benefit
perspective, we recognized low income housing tax credits of $2.4 million, $1.9 million and $849 thousand during the years
ended December 31, 2019, 2018 and 2017. The maximum loss exposure that would be absorbed by us in the event that all of
the assets in this investment are deemed worthless is $36.5 million, which is our recorded investment amount at December 31,
2019. The recorded investment amount is included in Other Assets on the Consolidated Statements of Financial Condition and
the proportional amortization expense is recorded in Income Tax (Benefit) Expense on the Consolidated Statements of
Operations.
As the investments in alternative energy partnerships and qualified affordable housing partnerships represent unconsolidated
VIEs to us, the assets and liabilities of the investments themselves are not recorded on our statements of financial condition.
144
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N
R
A
E
–
2
2
E
T
O
N
NOTE 23 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet
client financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions
established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Risk of
credit loss exists up to the face amount of these instruments. The same credit policies are used to make such commitments as
are used for loans, including obtaining collateral at exercise of the commitment. Commitments to extend credit are generally
made for periods of 30 days or less.
The contractual amount of financial instruments with off-balance sheet risk was as follows for the dates indicated:
($ in thousands)
Commitments to extend credit (1)
Unused lines of credit
Letters of credit
December 31,
2019
2018
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
$
473
703
134
$
129,495
$
2,167
$
288,770
1,049,632
5,316
1,514
1,266
1,119,158
8,561
(1) Included no commitments to extend credit related to discontinued operations at December 31, 2019 and 2018.
Other Commitments
During the three months ended March 31, 2017, the Bank entered into certain definitive agreements which grant the Bank the
exclusive naming rights to the Banc of California Stadium, a soccer stadium of Los Angeles Football Club (LAFC), as well as
the right to be the official bank of LAFC. In exchange for the Bank’s rights as set forth in the agreements, the Bank agreed to
pay LAFC $100.0 million over a period of 15 years, beginning in 2017 and ending in 2032. The advertising benefits of such
rights are amortized on a straight-line basis and recorded as advertising and promotion expense and totaled $6.7 million for
each of the years ended December 31, 2019 and 2018. As of December 31, 2019, the Bank has paid $20.8 million of the $100.0
million commitment. The prepaid commitment balance, net of amortization, was $7.4 million as of December 31, 2019, which
was recognized as a prepaid asset and included in Other Assets in the Consolidated Statements of Financial Condition.
We had unfunded commitments of $22.4 million, $7.6 million, and $501 thousand for Affordable Housing Fund Investment,
SBIC, and Other Investments at December 31, 2019.
NOTE 24 – RESTRUCTURING
During fiscal year 2019, we continued to implement our strategic objective to de-emphasize the production of low margin loan
products through our exit from the third-party mortgage origination ("TPMO") and brokered single family lending business. We
recognized restructuring costs of $4.3 million for the year ended December 31, 2019 associated with the exit from the TPMO
and brokered single family lending business and CEO and CFO transition.
On June 26, 2018, we announced a 9 percent reduction in force to our workforce. In addition to reducing total staffing, we
reduced the use of third party advisors during the third and fourth quarters of 2018, with each of these actions intended to align
our cost structure with our focused commercial banking platform. The plan was fully completed during the fourth quarter of
2018. We incurred severance-related costs in 2018 of $4.4 million, pre-tax, related to this reduction in force.
In connection with the sale of our Banc Home Loans division in 2017, we restructured certain aspects of our infrastructure and
back office operations by realigning back office staffing resulting in certain severance and other employee related costs
including accelerated vesting of equity awards, and amending certain system contracts in order to improve our efficiency. These
employees and systems primarily supported our mortgage banking activities. We recognized $9.1 million of total restructuring
expense during the year ended December 31, 2017.
We had outstanding unpaid accrued liabilities of $1.2 million and $117 thousand at December 31, 2019 and 2018. The
following table presents activities in accrued liabilities and related expenses for the restructuring as of and for the years ended
December 31, 2019, 2018 and 2017:
146
($ in thousands)
As of or For the Year Ended December 31, 2019
Balance at beginning of period
Accrual:
Severance and other employee related costs
Other restructuring expense
Total
Payments:
Severance and other employee related costs
Other restructuring expense
Total
Balance at end of period
As of or For the Year Ended December 31, 2018
Balance at beginning of period
Accrual:
Severance and other employee related costs
Other restructuring expense
Total
Payments:
Severance and other employee related costs
Other restructuring expense
Total
Balance at end of period
As of or For the Year Ended December 31, 2017
Balance at beginning of period
Accrual:
Severance and other employee related costs
Other restructuring expense
Total
Payments:
Severance and other employee related costs
Other restructuring expense
Total
Balance at end of period
Expense
Continuing
Operations
Discontinued
Operations
Total
Accrued
Liabilities
$
117
4,263
—
4,263
$
$
— $
—
— $
4,263
—
4,263
4,431
—
4,431
$
$
— $
—
— $
4,431
—
4,431
5,326
—
5,326
$
$
2,899
895
3,794
$
$
8,225
895
9,120
4,263
—
4,263
(3,176)
—
(3,176)
1,204
202
4,431
—
4,431
(4,516)
—
(4,516)
117
—
8,225
895
9,120
(8,023)
(895)
(8,918)
202
$
$
$
$
$
$
$
$
$
$
$
$
$
$
147
NOTE 25 - REVENUE RECOGNITION
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the
periods indicated.
($ in thousands)
Noninterest Income
In scope of Topic 606
Deposit Service Fees
Debit Card Fees
Investment Commissions
Other
Noninterest Income (in-scope of Topic 606)
Noninterest Income (out-of-scope of Topic 606)
Total Noninterest Income
Year Ended December 31,
2018
2017
2019
$
$
2,414
533
685
340
3,972
8,144
12,116
$
$
3,000
659
1,625
320
5,604
18,311
23,915
$
$
2,947
1,698
1,893
31
6,569
38,101
44,670
Noninterest income and expense considered to be within the scope of Topic 606 is discussed below.
Debit Card Fees
When clients use their debit cards to pay merchants for goods or services, we retain a fee from the funds collected from the
related deposit account and transfer the remaining funds to the payment network for remittance to the merchant. The
performance obligation to the merchant is satisfied and the fee is recognized at the point in time when the funds are collected
and transferred to the payment network.
Investment Commissions
We act as an agent for a third party vendor that provides investment services and products to clients. Upon completion of a sale
of investment services or products to a client, we receive a commission from the third party vendor. The performance
obligation to the third party vendor is satisfied and the commission income is recognized at that point in time.
Deposit Service Fees
Service charges on deposit accounts consist of account analysis fees, monthly service fees, check orders, and other deposit
related fees. Our performance obligation for account analysis fees and monthly service fees is generally satisfied, and the
related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related
fees are largely transactional based, and therefore, our performance obligation is satisfied, and related revenue recognized, at a
point in time as incurred.
Other
Other noninterest income primarily consists of other recurring revenue streams from merchant referral commissions. Our
performance obligation for merchant referral commissions is satisfied with the successful sale of services to those referred
merchants, which is when the commission is received and the income is recognized.
Gains and Losses on Sales of OREO
All other noninterest expense includes gains or losses on sales of OREO. Our performance obligation for sale of OREO is the
transfer of title and ownership rights of the OREO to the buyer, which occurs at the settlement date when the sale proceeds are
received and income is recognized. Gains or losses on sales of OREO are presented in Note 9 - Other Real Estate Owned.
We do not typically enter into long-term revenue contracts with clients. As of December 31, 2019 and 2018, we did not have
any significant contract balances. As of December 31, 2019 and 2018, we did not capitalize any contract acquisition costs.
NOTE 26 – PARENT COMPANY FINANCIAL STATEMENTS
The parent company only condensed statements of financial condition as of December 31, 2019 and 2018, and the related
condensed statements of operations and condensed statements of cash flows for the years ended December 31, 2019, 2018, and
2017 are presented below:
148
Condensed Statements of Financial Condition
($ in thousands)
Cash and cash equivalents
Other assets
Investment in subsidiaries
Total assets
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable, net
Accrued expenses and other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Operations
($ in thousands)
Income
Dividends from subsidiaries
Other operating income
Total income
Expenses
Interest expense for notes payable and other borrowings
Provision for loan losses
Loss on investments in alternative energy partnerships, net
Other operating expense
Total expenses
Income (loss) before income taxes and (excess dividends) retained equity in
undistributed earnings of subsidiaries
Income tax benefit
Income (loss) before (excess dividends) retained equity in undistributed
earnings of subsidiaries
(Excess dividends) retained equity in undistributed earnings of subsidiaries
December 31,
2019
2018
$
$
$
$
73,971
$
42,243
994,600
1,110,814
173,421
30,148
907,245
$
$
25,256
13,746
1,088,658
1,127,660
173,174
8,952
945,534
1,110,814
$
1,127,660
Year Ended December 31,
2019
2018
2017
$
142,467
$
94,250
$
62
142,529
9,480
—
—
3,311
12,791
129,738
(3,670)
133,408
(109,649)
76
94,326
9,421
—
—
19,507
28,928
65,398
(9,017)
74,415
(28,943)
18,000
2,285
20,285
10,764
13
8,493
37,201
56,471
(36,186)
(31,453)
(4,733)
62,442
57,709
Net income
$
23,759
$
45,472
$
149
Condensed Statements of Cash Flows
($ in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
(Excess dividends) retained equity in undistributed earnings of
subsidiaries
Stock-based compensation expense
Amortization of debt issuance cost
Deferred income tax (benefit) expense
Loss on investments in alternative energy partnerships, net
Net change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investments
Investments in alternative energy partnerships
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in other borrowings
Redemption of preferred stock
Payment of junior subordinated amortizing notes
Proceeds from exercise of stock options
Restricted stock surrendered due to employee tax liability
Dividend equivalents paid on stock appreciation rights
Dividends paid on common stock
Dividends paid on preferred stock
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of noncash activities:
Reclassification of stranded tax effects to retained earnings
Year Ended December 31,
2019
2018
2017
$
23,759
$
45,472
$
57,709
109,649
1,446
247
(86)
—
(2,095)
132,920
(5,000)
—
(5,000)
—
(46,396)
—
—
(1,023)
(483)
(15,744)
(15,559)
(79,205)
48,715
25,256
73,971
$
28,943
2,814
233
(30,188)
—
35,591
82,865
—
—
—
—
(40,250)
—
—
(2,366)
(810)
(32,725)
(21,954)
(98,105)
(15,240)
40,496
25,256
— $
496
$
$
(62,442)
2,520
247
14,604
8,493
(12,957)
8,174
—
(3,712)
(3,712)
(68,000)
—
(2,684)
2,043
(6,824)
(810)
(25,707)
(20,451)
(122,433)
(117,971)
158,467
40,496
—
$
$
150
NOTE 27 – RELATED-PARTY TRANSACTIONS
General.
Certain of our executive officers and directors, and their related interests, are clients of, or have had transactions with, the Bank
in the ordinary course of business, including deposits, loans and other financial services-related transactions. From time to time,
the Bank may make loans to executive officers and directors, and their related interests, in the ordinary course of business and
on substantially the same terms and conditions, including interest rates and collateral, as those of comparable transactions with
non-insiders prevailing at the time, in accordance with the Bank’s underwriting guidelines, and do not involve more than the
normal risk of collectability or present other unfavorable features. As of December 31, 2019, no related party loans were
categorized as nonaccrual, past due, restructured or potential problem loans.
The Bank also has an Employee Loan Program which is available to all employees and offers executive officers, directors and
principal stockholders that meet the eligibility requirements the opportunity to participate on the same terms as employees
generally, provided that any loan to an executive officer, director or principal stockholder must be approved by the Bank’s
Board of Directors. The sole benefit provided under the Employee Loan Program is a reduction in loan fees.
Deposits from related parties and their affiliates amounted to $11.6 million and $11.1 million at December 31, 2019 and 2018.
There are certain deposits described below, which are not included in the foregoing amounts.
Indemnification for Costs of Counsel for Current and Former Executive Officers and Directors in Connection with Special
Committee Investigation, SEC Investigation and Related Matters. On November 3, 2016, in connection with an investigation by
the Special Committee of our Board of Directors, our Board authorized and directed us to provide indemnification,
advancement and/or reimbursement for the costs of separate independent counsel retained by any then-current officer or
director, in their individual capacity, with respect to matters related to the investigation, and to advise them on their rights and
obligations with respect to the investigation. At the direction of our Board, this indemnification, advancement and/or
reimbursement is, to the extent applicable, subject to the indemnification agreement that each officer and director previously
entered into with us, which includes an undertaking to repay any expenses advanced if it is ultimately determined that the
officer or director was not entitled to indemnification under such agreements and applicable law. In addition, we are providing
indemnification, advancement and/or reimbursement for costs related to (i) a formal order of investigation issued by the SEC on
January 4, 2017 directed primarily at certain of the issues that the Special Committee reviewed and (ii) any related civil or
administrative proceedings against the Company as well as officers currently or previously associated with the Company. On
December 19, 2019, we were informed by SEC staff that they have concluded their investigation as to the Company, and they
do not intend to recommend an enforcement action against the Company to the SEC.
During the year ended December 31, 2019, indemnification costs paid by us included $11.9 million incurred by our former
Chair, President and Chief Executive Officer Steven A. Sugarman; $795 thousand jointly incurred by our former Interim Chief
Financial Officer and Chief Strategy Officer J. Francisco A. Turner and our former Chief Financial Officer James J. McKinney;
$879 thousand incurred by our former General Counsel Emeritus John C. Grosvenor; and $180 thousand incurred by former
Bank director Cynthia Abercrombie. Indemnification costs were paid on behalf of other current and former executive officers
and directors in lesser amounts during the year ended December 31, 2019.
During the year ended December 31, 2018, indemnification costs paid by us included $854 thousand incurred by Company
director Jonah F. Schnel and $854 thousand incurred by Company director Robert D. Sznewajs. Such costs also included $8.5
million incurred by Mr. Sugarman; $497 thousand incurred by our former Management Vice Chair Jeffrey T. Seabold; $400
thousand jointly incurred by Messrs. Turner and McKinney; $415 thousand incurred by Mr. Grosvenor; $292 thousand incurred
by Ms. Abercrombie; $854 thousand incurred by former Company director Halle J. Benett and $854 thousand incurred by
former Company director Jeffrey Karish. Indemnification costs were paid on behalf of other current and former executive
officers and directors in lesser amounts during the year ended December 31, 2018.
During the year ended December 31, 2017 (excluding indemnification costs paid in January 2017), indemnification costs paid
by us included $3.0 million incurred by Mr. Sugarman; $1.4 million incurred by Mr. Seabold; $631 thousand jointly incurred by
Messrs. Turner and McKinney; $501 thousand incurred by Mr. Grosvenor; and $509 thousand incurred by former Company
director Chad Brownstein. Indemnification costs were paid on behalf of other current and former executive officers and
directors in lesser amounts during the year ended December 31, 2017.
151
NOTE 28 – LITIGATION
From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In
accordance with applicable accounting guidance, we establish an accrued liability when those matters present loss
contingencies that are both probable and estimable. We continue to monitor the matters for further developments that could
affect the amount of the accrued liability that has been previously established. As of December 31, 2019, we accrued $20.2
million for various litigation filed against the Company and the Bank, including an accrual for $19.75 million related to the
settlement of the securities litigation previously announced by us and described below. There is no expected impact to earnings
as a result of the settlement, as the settlement payments will be paid directly by our insurance carriers and we have recorded an
insurance receivable for $19.75 million related to this matter.
On October 28, 2019, we entered into a Stipulation of Settlement (“Settlement Stipulation”) with the lead plaintiff to settle class
action lawsuits that were previously consolidated in the United District Court for the Central District of California (the “Court”)
under the caption In re Banc of California Securities Litigation, Case No. SACV 17-00118 AG, consolidated with SACV
17-00138 AG. Under the terms of the Settlement Stipulation, our insurance carriers will pay $19.75 million, which will be
distributed to shareholders who purchased our stock between April 15, 2016 and January 20, 2017, after payment of attorney’s
fees and costs, to be determined by the Court. We will not be required to contribute any cash to the settlement payments.
Pursuant to the settlement, the action against the Company will be dismissed with prejudice. Plaintiff will also dismiss with
prejudice its claims against our former Chief Executive Officer and Chairman Steven Sugarman. While we do not believe the
plaintiff’s claims are meritorious, we believe that ending the costs and distraction of the litigation is in the best interests of the
Company and our shareholders. The settlement and the dismissals are subject to approval by the Court and meeting certain
conditions, and there are no assurances that Court approval will be obtained or that those conditions will be satisfied. On
December 4, 2019 the Court preliminarily approved the settlement. Members of the class have been provided notice and will
have an opportunity to object or opt out. The Court has scheduled a fairness hearing on March 16, 2020 at which time the Court
will determine whether the settlement shall be finally approved. The foregoing description of the settlement does not purport to
be complete and is subject to, and is qualified in its entirety by reference to, the complete text of the settlement stipulation that
will be filed with the Court.
152
NOTE 29 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the unaudited quarterly results of operations for the year ended December 31, 2019:
Three Months Ended,
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
$
110,712
$
104,040
$
92,657
$
($ in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for (reversal of) loan losses
Noninterest income
Noninterest expense
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Net income (loss)
Dividends on preferred stock
Income allocated to participating securities
Participating securities dividends
Impact of preferred stock redemption
Net income (loss) available to common stockholders
Basic earnings per common share
Net income (loss)
Diluted earnings per common share
Net income (loss)
Basic earnings per class B common share
Net income (loss)
Diluted earnings per class B common share
Net income (loss)
$
$
$
$
$
33,742
58,915
38,540
3,181
43,307
(19,751)
(5,619)
(14,132)
3,403
—
94
5,093
83,702
27,042
56,660
(2,678)
4,930
47,185
17,083
2,811
14,272
3,540
224
93
—
(22,722) $
10,415
(0.45) $
(0.45) $
(0.45) $
(0.45) $
0.21
0.20
0.21
0.21
42,904
67,808
2,512
6,295
61,835
9,756
2,719
7,037
4,308
—
202
—
2,527
0.05
0.05
0.05
0.05
$
$
$
$
$
39,260
64,780
(1,987)
(2,290)
43,587
20,890
4,308
16,582
4,308
271
94
—
11,909
0.23
0.23
0.23
0.23
$
$
$
$
$
153
The following table presents the unaudited quarterly results of operations for the year ended December 31, 2018:
($ in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income from continuing operations before income taxes
Income tax (benefit) expense
Income from continuing operations
Income from discontinued operations before income taxes
Income tax expense
Income from discontinued operations
Net income
Dividends on preferred stock
Income allocated to participating securities
Participating securities dividends
Impact of preferred stock redemption
Net income available to common stockholders
Basic earnings per common share
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per common share
Income from continuing operations
Income from discontinued operations
Net income
Basic earnings per class B common share
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per class B common share
Income from continuing operations
Income from discontinued operations
Net income
NOTE 30 – SUBSEQUENT EVENTS
Three Months Ended,
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
$
98,707
$
105,185
$
107,774
$
111,130
27,269
71,438
19,499
8,582
59,800
721
(6,353)
7,074
2,044
560
1,484
8,558
5,113
203
—
—
3,242
0.03
0.03
0.06
0.03
0.03
0.06
0.03
0.03
0.06
0.03
0.03
0.06
$
$
$
$
$
$
$
$
$
32,421
72,764
2,653
8,061
62,539
15,633
1,779
13,854
1,281
355
926
14,780
5,113
203
86
—
9,378
0.17
0.02
0.19
0.16
0.02
0.18
0.17
0.02
0.19
0.17
0.02
0.19
$
$
$
$
$
$
$
$
$
36,582
71,192
1,410
4,824
60,877
13,729
3,301
10,428
924
256
668
11,096
4,970
202
—
2,307
3,617
0.06
0.01
0.07
0.06
0.01
0.07
0.06
0.01
0.07
0.06
0.01
0.07
$
$
$
$
$
$
$
$
$
40,448
70,682
6,653
2,448
49,569
16,908
6,117
10,791
347
100
247
11,038
4,308
203
—
—
6,527
0.12
0.01
0.13
0.12
0.01
0.13
0.12
0.01
0.13
0.12
0.01
0.13
$
$
$
$
$
$
$
$
$
On February 10, 2020, we announced that our Board of Directors had declared a quarterly cash dividend of $0.06 per share on
its outstanding common stock. The dividend will be payable on April 1, 2020 to stockholders of record as of March 16, 2020.
We also announced that our Board of Directors has authorized the repurchase of up to $45 million of the Company’s common
stock.
We evaluated subsequent events through the date of issuance of the financial data included herein. Other than the event
discussed above, there have been no subsequent events occurred during such period that would require disclosure in this report
or would be required to be recognized on the Consolidated Financial Statements as of December 31, 2019.
154
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the Act)) as of December 31, 2019 was carried out under the supervision and with the participation of our Chief
Executive Officer, Chief Financial Officer and other members of our senior management. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as of December 31, 2019, our disclosure controls and procedures
were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Act is (i)
accumulated and communicated to our management (including the Principal Executive Officer and Principal Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.
Our Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of ours; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and expenditures of ours are being made only in
accordance with authorizations of management and directors of ours; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All
internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and
the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can only provide
reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of
compliance with the policies or procedures may deteriorate.
We have assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the
framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013). Based on that assessment, management concluded that our internal control over financial
reporting was effective as of December 31, 2019 based on the criteria established in our Internal Control-Integrated Framework
(2013).
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Ernst & Young
LLP (EY), an independent registered public accounting firm, as stated in their report entitled "Report of Independent Registered
Public Accounting Firm" which appears herein under "Item 8. Financial Statements and Supplementary Data."
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the three months ended December 31, 2019 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Ernst & Young
LLP, an independent registered public accounting firm.
155
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Banc of California, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Banc of California, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Banc of California, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2019 consolidated financial statements of the Company and our report dated March 2, 2020 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Our Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Irvine, California
March 2, 2020
156
Item 9B. Other Information
None.
157
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers. The information concerning our directors and executive officers required by this item is
incorporated herein by reference from our definitive proxy statement for our 2020 Annual Meeting of Stockholders, a copy of
which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Audit Committee and Audit Committee Financial Experts. Information concerning the audit committee of our Board of
Directors required by this item, including information regarding the audit committee financial experts serving on the audit
committee, is incorporated herein by reference from our definitive proxy statement for our 2020 Annual Meeting of
Stockholders, except for information contained under the heading “Report of the Audit Committee,” a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Code of Ethics. We adopted a written Code of Business Conduct and Ethics based upon the standards set forth under Item 406
of Regulation S-K of the Securities Exchange Act. The Code of Business Conduct and Ethics applies to all of our directors,
officers and employees. A full text of the Code is available on our website at www.bancofcal.com, by clicking "About Us," then
"Investor Relations," then "Corporate Overview" and then "Governance Documents."
Section 16(a) Beneficial Ownership Reporting Compliance. The information concerning compliance with the reporting
requirements of Section 16(a) of the Securities Exchange Act of 1934 by our directors, officers and ten percent stockholders
required by this item is incorporated herein by reference from our definitive proxy statement for our 2020 Annual Meeting of
Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end
of our fiscal year.
Nomination Procedures. There have been no material changes to the procedures by which stockholders may recommend
nominees to our Board of Directors.
Item 11. Executive Compensation
The information concerning compensation and other matters required by this item is incorporated herein by reference from our
definitive proxy statement for oir 2020 Annual Meeting of Stockholders, except for information contained under the headings
“Compensation Committee report on Executive Compensation” a copy of which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information concerning security ownership of certain beneficial owners and management required by this item is
incorporated herein by reference from our definitive proxy statement for our 2020 Annual Meeting of Stockholders, a copy of
which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
The following table summarizes our equity compensation plans as of December 31, 2019:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Number of Securities
to be issued upon
exercise of
outstanding options
and rights
Weighted-average
exercise price of
outstanding options
and rights
Number of Securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected in
first column)(1)
1,621,533
$
— $
11.69
—
3,674,033
—
(1) The 2018 Omnibus Plan, which is the only equity compensation plan approved by our stockholders under which awards could be
made as of December 31, 2019, provides that the maximum number of shares that are available for awards is 4,417,882.
158
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions and director independence required by this item is
incorporated herein by reference from our definitive proxy statement for our 2020 Annual Meeting of Stockholders, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 14. Principal Accounting Fees and Services
Information concerning principal accounting fees and services is incorporated herein by reference from our definitive proxy
statement for our 2020 Annual Meeting of Stockholders, a copy of which will be filed no later than 120 days after the close of
the fiscal year.
159
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: See Part II—Item 8. Financial Statements and Supplementary Data
(a)(2) Financial Statement Schedule: All financial statement schedules have been omitted as the information is not required
under the related instructions or is not applicable.
(a)(3) Exhibits
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
Asset Purchase Agreement, dated February 28, 2017, by and between Banc of California, N. A. and Caliber Home Loans, Inc., filed
as an exhibit to the Registrant's Current Report on Form 8-K filed on April 5, 2017 and incorporated herein by reference.
Bulk Servicing Rights Purchase and Sale Agreement, dated February 28, 2017, by and between Banc of California, N. A. and Caliber
Home Loans, Inc., filed as an exhibit to the Registrant's Current Report on Form 8-K filed on April 5, 2017 and incorporated herein
by reference.
Second Articles of Restatement of the charter of the Registrant, filed as an exhibit to the Registrant’s Current Report on Form 8-K
filed on June 5, 2018 and incorporated herein by reference.
Fifth Amended and Restated Bylaws of the Registrant, filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on
June 30, 2017 and incorporated herein by reference.
Warrant to purchase up to 1,395,000 shares of the Registrant common stock originally issued on November 1, 2010, filed as an exhibit
to the Registrant’s Current Report on Form 8-K/A filed on November 16, 2010 and incorporated herein by reference.
Senior Debt Securities Indenture, dated as of April 23, 2012, between the Registrant and U.S. Bank National Association, as Trustee,
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 23, 2012 and incorporated herein by reference.
Second Supplemental Indenture, dated as of April 6, 2015, between the Registrant and U.S. Bank National Association, as Trustee,
relating to the Registrant’s 5.25% Senior Notes due April 15, 2025 and form of 5.25% Senior Notes due April 15, 2025, filed as an
exhibit to the Registrant's Current Report on Form 8-K filed on April 6, 2015 and incorporated herein by reference.
Deposit Agreement, dated as of April 8, 2015, among the Registrant, Computershare Inc. and Computershare Trust Company, N.A.,
collectively as Depositary, and the holders from time to time of the depositary receipts described therein, filed as an exhibit to the
Registrant's Current Report on Form 8-K filed on April 8, 2015 and incorporated herein by reference.
Deposit Agreement, dated as of February 8, 2016, among the Registrant, Computershare Inc. and Computershare Trust Company,
N.A., collectively as Depositary, and the holders from time to time of the depositary receipts described therein, filed as an exhibit to
the Registrant's Current Report on Form 8-K filed on February 8, 2016 and incorporated herein by reference.
Description of the Registrant's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934
Employment Agreement, dated as of March 4, 2019, by and among the Registrant, Banc of California, N.A. and Jared Wolff, filed
as an exhibit to the Registrant's Current Report on Form 8-K filed on March 6, 2019 and incorporated herein by reference.
Employment Agreement, dated as of November 13, 2019, by and among the Registrant, Banc of California, N.A. and Lynn Hopkins
Employment Agreement, dated as of April 24, 2017, by and among the Registrant, Banc of California, N.A. and Douglas H. Bowers,
filed as an exhibit to the Registrant's Current Report on Form 8-K filed on April 27, 2017 and incorporated herein by reference.
10.3A Separation Agreement and General Release, dated as of March 4, 2019, by and between the Registrant and Douglas H. Bowers, filed
as an exhibit to the Registrant’s Current Report on Form 8-K filed on March 6, 2019 and incorporated herein by reference.
10.4
10.5
10.6
Employment Agreement, dated as of August 30 2017, by and between the Registrant and John A. Bogler, filed as an exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and incorporated herein by reference.
Separation Agreement, dated as of May 1. 2019, by and among the Registrant, Banc of California, N.A. and Angelee Harris, filed as
an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by
reference.
Employment Agreement, dated as of September 17, 2013, by and among the Registrant and Hugh F. Boyle, filed as an exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference.
10.6A First Amendment to Employment Agreement, dated as of January 1, 2016 by and between Registrant and Hugh F. Boyle, filed as an
exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.
10.6B
Compensation arrangement, dated March 8, 2018, by and among Registrant, Banc of California, National Association, and Hugh F.
Boyle, filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and incorporated
herein by reference.
10.7
Registrant’s 2011 Omnibus Incentive Plan, filed as an appendix to the Registrant’s definitive proxy statement filed on April 25, 2011
and incorporated herein by reference.
10.7A Form of Non-Qualified Stock Option Agreement under 2011 Omnibus Incentive Plan, filed as an exhibit to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference.
160
10.16
Registrant’s 2013 Omnibus Stock Incentive Plan, filed as an appendix to the Registrant’s definitive proxy statement filed on June 11,
2013 and incorporated herein by reference.
10.16A Form of Non-Qualified Stock Option Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s
Registration Statement on Form S-8 filed on July 31, 2013 and incorporated herein by reference.
10.16B Form of Restricted Stock Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 filed on July 31, 2013 and incorporated herein by reference.
10.16C Form of Restricted Stock Unit Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.
10.16D Form of Restricted Stock Unit Agreement for Employee Equity Ownership Program under 2013 Omnibus Stock Incentive Plan, filed
as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by
reference.
10.16E Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under 2013 Omnibus Stock Incentive Plan, filed as an
exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference.
10.16F Form of Restricted Stock Agreement for Non-Employee Directors under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference.
10.16G Form of Performance Unit Agreement under 2013 Omnibus Stock Incentive Plan, filed as an exhibit to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference.
10.16H Form of Performance-Based Non-Qualified Stock Option Agreement under the 2013 Omnibus Stock Incentive Plan, filed as an exhibit
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference.
10.17
Registrant’s 2018 Omnibus Stock Incentive Plan, included as an appendix to the Registrant’s definitive proxy statement filed on April
19, 2018 and incorporated herein by reference.
10.17A Form of Incentive Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration Statement
on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17B Form of Performance-Based Incentive Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s
Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17C Form of Non-Qualified Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17D Form of Performance-Based Non-Qualified Stock Option Agreement under the 2018 Omnibus Plan, filed as an exhibit to the
Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17E Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the 2018 Omnibus Plan, filed as an exhibit to
the Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17F Form of Restricted Stock Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration Statement on
Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17G Form of Performance-Based Restricted Stock Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s
Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17H Form of Restricted Stock Agreement for Non-Employee Directors under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s
Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17I
Form of Restricted Stock Unit Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration Statement
on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17J
Form of Performance Unit Agreement under the 2018 Omnibus Plan, filed as an exhibit to the Registrant’s Registration Statement
on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.17K Form of Restricted Stock Unit Agreement for Non-Employee Directors under the 2018 Omnibus Plan, filed as an exhibit to the
Registrant’s Registration Statement on Form S-8 filed on August 17, 2018 and incorporated herein by reference.
10.18
10.19
Form Director and Executive Officer Indemnification Agreement, filed as an exhibit to the Registrant’s Annual Report on Form 10-
K for the year ended December 31, 2015 and incorporated herein by reference.
Common Stock Purchase Agreement, dated as of August 3, 2016, by and between the Registrant and Banc of California Capital and
Liquidity Enhancement Employee Compensation Trust, filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2016 and incorporated herein by reference.
10.20
Cooperation Agreement, dated as of February 8, 2017, by and between the Registrant and PL Capital Advisors, LLC, filed as an
exhibit to the Registrant's Current Report on Form 8-K filed on February 8, 2017 and incorporated herein by reference.
161
10.21
21.0
23.0
23.1
24.0
31.1
31.2
32.0
101.0
Cooperation Agreement, dated as of March 13, 2017, by and between the Registrant and Legion Partners Asset Management, LLC,
Legion Partners, L.P. I, Legion Partners, L.P. II, Legion Partners Special Opportunities, L.P. I, Legion Partners Special Opportunities,
L.P. V, Legion Partners, LLC, Legion Partners Holdings, LLC, Bradley S. Vizi, Christopher S. Kiper and Raymond White, filed as
an exhibit to the Registrant's Current Report on Form 8-K filed on March 14, 2017 and incorporated herein by reference.
Subsidiaries of the Registrant
Consent of Ernst & Young LLP
Consent of KPMG LLP
Power of Attorney, included on signatory pages of this report.
Rule 13a-14(a) Certification (Principal Executive Officer)
Rule 13a-14(a) Certification (Principal Financial Officer)
Rule 13a-14(b) and 18 U.S.C. 1350 Certification
The following financial statements and footnotes from the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2019 formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii)
Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements
of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.
104.0
Cover Page Interactive Data File formatted in Inline XBRL (contained in Exhibit 101).
162
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, and hereunto duly authorized.
SIGNATURES
Date: March 2, 2020
BANC OF CALIFORNIA, INC.
/s/ Jared Wolff
Jared Wolff
President/Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned officers and directors of BANC OF CALIFORNIA, INC., hereby severally and individually constitute and
appoint Jared Wolff and Lynn Hopkins, and each of them, the true and lawful attorneys and agents of each of us to execute in
the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual
Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities
and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have
full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever
necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or
could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or
each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
Date: March 2, 2020
/s/ Jared Wolff
Jared Wolff
President/Chief Executive Officer/Director
(Principal Executive Officer)
/s/ Lynn Hopkins
Lynn Hopkins
Executive Vice President/Chief Financial Officer
(Principal Financial Officer)
/s/ Mike Smith
Mike Smith
Senior Vice President/Chief Accounting Officer and Director of Treasury
(Principal Accounting Officer)
/s/ Robert D. Sznewajs
Robert D. Sznewajs, Chairman of the Board of Directors
/s/ James A. "Conan" Barker
James A. "Conan" Barker, Director
/s/ Mary A. Curran
Mary A. Curran, Director
/s/ Barbara Fallon-Walsh
Barbara Fallon-Walsh, Director
/s/ Bonnie G. Hill
Bonnie G. Hill, Director
/s/ Richard J. Lashley
Richard J. Lashley, Director
/s/ Jonah F. Schnel
Jonah F. Schnel, Director
/s/ Andrew Thau
Andrew Thau, Director
/s/ W. Kirk Wycoff
W. Kirk Wycoff, Director
163
WE ARE CALIFORNIA’S
BUSINESS
BANK
Banc of California is California’s premier, relationship-focused, full-service
business bank. Our depth of resources and financial strength allow us to adapt
quickly and thoughtfully, delivering solutions to help our clients achieve their
financial goals. As one of the largest banks headquartered in California, we have
the depth of resources to help your business grow and succeed.
For nearly 80 years, Banc of California has served small and medium-size businesses and their principals
throughout California. Headquartered in the heart of Orange County, the Bank has 40 offices and over
30 full-service community banking branches, extending from San Diego to Santa Barbara.
Banc of California provides entrepreneurs and growing businesses with customized financial solutions and sound advice.
We understand success depends on optimizing cash flow, maintaining adequate liquidity and managing risk, and have
developed a comprehensive suite of products and services designed to help businesses maximize their operating
efficiency.
Banc of California helps all types of businesses obtain the financing they need to keep their company moving forward.
With extensive experience in manufacturing, healthcare, commercial real estate, entertainment, and nonprofit sectors,
Banc of California is strategically positioned to support industries integral to California’s economy. Our teams know our
clients’ businesses, believe in their goals and work collaboratively with our clients to achieve their goals.
At Banc of California, we take great pride in supporting organizations and activities that enhance the quality of life in the
communities where our customers and employees work, live and do business. By developing meaningful partnerships
with a broad array of organizations, we serve our diverse population and make a positive impact through at-risk
youth programs, affordable housing, veteran services, community revitalization, financial education and workforce
development. We believe our greatest strength lies in what we can accomplish together, and our employees play an
active role in supporting many community programs and events.
Banc of California has established a reputation as a relationship-focused bank committed to excellence in execution
and innovation. Our ability to anticipate, move quickly and consistently exceed client expectations has made Banc
of California one of the most respected banking franchises in California. Banc of California has the financial strength,
industry knowledge and depth of resources to help our clients achieve their financial goals.
TOGETHER WE WINTM
+
30CALIFORNIA
BRANCHES
LEARN MORE ABOUT US:
For more information about banking with us, visit www.bancofcal.com.
For investor information, visit www.bancofcal.com/investor.
© 2020 Banc of California, N.A. All rights reserved. Member FDIC.
3 MacArthur Place, Santa Ana, CA 92707
www.bancofcal.com
(855) 361-2262